PENNSYLVANIA REAL ESTATE INVESTMENT TRUST - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2019

☐	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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of Exchange on which registered
Shares of Beneficial Interest	PEI	New York Stock Exchange
Preferred Shares	PEIPrB	New York Stock Exchange
Preferred Shares	PEIPrC	New York Stock Exchange
Preferred Shares	PEIPrD	New York Stock Exchange

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. On October 30, 2019, 77,591,841 shares of beneficial interest, par value $1.00 per share, of the Registrant were outstanding.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONTENTS


			Page
	PART I—FINANCIAL INFORMATION

Item 1.		Financial Statements (Unaudited):	1

		Consolidated Balance Sheets—September 30, 2019 and December 31, 2018	1

		Consolidated Statements of Operations—Three and Nine Months Ended September 30, 2019 and 2018	2

		Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2019 and 2018	4

		Consolidated Statements of Equity—Three and Nine Months Ended September 30, 2019 and 2018	5

		Consolidated Statements of Cash Flows— Nine Months Ended September 30, 2019 and 2018	7

		Notes to Unaudited Consolidated Financial Statements	8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.		Quantitative and Qualitative Disclosures About Market Risk	43

Item 4.		Controls and Procedures	44

		PART II—OTHER INFORMATION

Item 1.		Legal Proceedings	45

Item 1A.		Risk Factors	45

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds	46

Item 3.		Not Applicable

Item 4.		Not Applicable

Item 5.		Not Applicable

Item 6.		Exhibits	47

Signatures			48

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.

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Item 1. FINANCIAL STATEMENTS

PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
(in thousands, except per share amounts)	(unaudited)
ASSETS:
INVESTMENTS IN REAL ESTATE, at cost:
Operating properties	$	3,043,937		$	3,063,531
Construction in progress		151,787			115,182
Land held for development		5,881			5,881
Total investments in real estate		3,201,605			3,184,594
Accumulated depreciation		(1,181,848	)		(1,118,582	)
Net investments in real estate		2,019,757			2,066,012
INVESTMENTS IN PARTNERSHIPS, at equity:		143,440			131,124
OTHER ASSETS:
Cash and cash equivalents		11,709			18,084
Tenant and other receivables, net		35,374			38,914
Intangible assets (net of accumulated amortization of $18,125 and $15,543 at September 30, 2019 and December 31, 2018, respectively)		15,286			17,868
Deferred costs and other assets, net		99,017			110,805
Assets held for sale		9,463			22,307
Total assets	$	2,334,046		$	2,405,114
LIABILITIES:
Mortgage loans payable, net	$	904,641		$	1,047,906
Term Loans, net		547,834			547,289
Revolving Facilities		213,000			65,000
Tenants’ deposits and deferred rent		11,296			15,400
Distributions in excess of partnership investments		87,554			92,057
Fair value of derivative liabilities		16,324			3,010
Accrued expenses and other liabilities		90,907			87,901
Total liabilities		1,871,556			1,858,563
COMMITMENTS AND CONTINGENCIES (Note 6):
EQUITY:
Series B Preferred Shares, $.01 par value per share; 25,000 shares authorized; 3,450 shares issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference of $86,250		35			35
Series C Preferred Shares, $.01 par value per share; 25,000 shares authorized; 6,900 shares issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference of $172,500		69			69
Series D Preferred Shares, $.01 par value per share; 25,000 shares authorized; 5,000 shares issued and outstanding at September 30, 2019 and December 31, 2018; liquidation preference of $125,000		50			50
Shares of beneficial interest, $1.00 par value per share; 200,000 shares authorized; 77,602 shares issued and outstanding at September 30, 2019 and 70,495 shares issued and outstanding at December 31, 2018		77,602			70,495
Capital contributed in excess of par		1,765,900			1,671,042
Accumulated other comprehensive (loss) income		(15,388	)		5,408
Distributions in excess of net income		(1,370,365	)		(1,306,318	)
Total equity—Pennsylvania Real Estate Investment Trust		457,903			440,781
Noncontrolling interest		4,587			105,770
Total equity		462,490			546,551
Total liabilities and equity	$	2,334,046		$	2,405,114

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
REVENUE:
Real estate revenue:
Lease revenue	$	73,310		$	78,219		$	223,668		$	239,669
Expense reimbursements		5,364			5,677			15,342			16,307
Other real estate revenue		2,202			2,493			7,619			6,928
Total real estate revenue		80,876			86,389			246,629			262,904
Other income		498			1,714			1,440			3,454
Total revenue		81,374			88,103			248,069			266,358
EXPENSES:
Operating expenses:
Property operating expenses:
CAM and real estate taxes		(28,320	)		(27,826	)		(85,891	)		(84,569	)
Utilities		(4,009	)		(4,430	)		(11,350	)		(12,143	)
Other property operating expenses		(1,836	)		(2,444	)		(5,815	)		(8,752	)
Total property operating expenses		(34,165	)		(34,700	)		(103,056	)		(105,464	)
Depreciation and amortization		(31,236	)		(33,119	)		(98,085	)		(100,505	)
General and administrative expenses		(10,605	)		(8,441	)		(33,419	)		(27,969	)
Provision for employee separation expenses		(218	)		(561	)		(1,078	)		(956	)
Insurance recoveries, net		2,878			-			4,494			-
Project costs and other expenses		(80	)		(214	)		(267	)		(465	)
Total operating expenses		(73,426	)		(77,035	)		(231,411	)		(235,359	)
Interest expense, net		(15,534	)		(15,181	)		(46,986	)		(46,064	)
Gain on debt extinguishment, net		29,600			-			24,832			-
Impairment of assets		-			-			-			(34,286	)
Impairment of development land parcel		-			-			(1,464	)		-
Total expenses		(59,360	)		(92,216	)		(255,029	)		(315,709	)
Income (loss) before equity in income of partnerships, gain on sales of real estate by equity method investee, gain on sales of real estate, net, and adjustment to gain on sales of interests in non operating real estate		22,014			(4,113	)		(6,960	)		(49,351	)
Equity in income of partnerships		1,531			2,477			6,136			8,186
Gain on sales of real estate by equity method investee		-			-			553			2,773
Gain on sales of real estate, net		1,171			-			2,684			748
Adjustment to gain on sales of interests in non operating real estate		-			-			-			(25	)
Net income (loss)		24,716			(1,636	)		2,413			(37,669	)
Less: net (income) loss attributable to noncontrolling interest		(454	)		891			1,563			6,122
Net income (loss) attributable to PREIT		24,262			(745	)		3,976			(31,547	)
Less: preferred share dividends		(6,843	)		(6,843	)		(20,531	)		(20,531	)
Net income (loss) attributable to PREIT common shareholders	$	17,419		$	(7,588	)	$	(16,555	)	$	(52,078	)

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019			2018			2019			2018
Net income (loss)	$	24,716		$	(1,636	)	$	2,413		$	(37,669	)
Noncontrolling interest		(454	)		891			1,563			6,122
Preferred share dividends		(6,843	)		(6,843	)		(20,531	)		(20,531	)
Dividends on unvested restricted shares		(222	)		(136	)		(663	)		(412	)
Net income (loss) used to calculate loss per share—basic and diluted	$	17,197		$	(7,724	)	$	(17,218	)	$	(52,490	)
Basic and diluted income (loss) per share:	$	0.22		$	(0.11	)	$	(0.23	)	$	(0.75	)

(in thousands of shares)
Weighted average shares outstanding—basic		76,492			69,803			74,771			69,718
Effect of common share equivalents⁽¹⁾		332			-			-			-
Weighted average shares outstanding—diluted		76,824			69,803			74,771			69,718

⁽¹⁾

The Company had net losses used to calculate earnings per share for the three months ended September 30, 2018, and for the nine months ended September 30, 2019 and 2018. Therefore, the effects of common share equivalents of 38 for the three months ended September 30, 2018, and 375 and 272 for the nine months ended September 30, 2019 and 2018, 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.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Comprehensive income (loss):
Net income (loss)	$	24,716		$	(1,636	)	$	2,413		$	(37,669	)
Unrealized (loss) gain on derivatives		(3,607	)		1,905			(21,838	)		9,662
Amortization of settled swaps		3			180			82			719
Total comprehensive income (loss)		21,112			449			(19,343	)		(27,288	)
Less: comprehensive (income) loss attributable to noncontrolling interest		(363	)		669			2,524			5,020
Comprehensive income (loss) attributable to PREIT	$	20,749		$	1,118		$	(16,819	)	$	(22,268	)

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENT OF EQUITY

Three and Nine Months Ended

September 30, 2019

(Unaudited)

				PREIT Shareholders
				Preferred Shares $.01 par						Shares of Beneficial		Capital Contributed			Accumulated Other			Distributions			Non-
(in thousands of dollars, except per share amounts)	Total Equity			Series B		Series C		Series D		Interest, $1.00 Par		in Excess of Par			Comprehensive Income (Loss)			in Excess of Net Income			controlling interest
Balance January 1, 2019	$	546,551		$	35	$	69	$	50	$	70,495	$	1,671,042		$	5,408		$	(1,306,318	)	$	105,770
Net loss		(16,223	)		—		—		—		—		—			—			(14,535	)		(1,688	)
Other comprehensive loss		(6,506	)		—		—		—		—		—			(5,941	)		—			(565	)
Shares issued upon redemption of Operating Partnership units		—			—		—		—		6,250		89,736			—			—			(95,986	)
Shares issued under employee compensation plans, net of shares retired		(326	)		—		—		—		638		(964	)		—			—			—
Amortization of deferred compensation		1,922			—		—		—		—		1,922			—			—			—
Dividends paid to common shareholders ($0.21 per share)		(14,930	)		—		—		—		—		—			—			(14,930	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,590	)		—		—		—		—		—			—			(1,590	)		—
Dividends paid to Series C preferred shareholders ($0.45 per share)		(3,105	)		—		—		—		—		—			—			(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,148	)		—		—		—		—		—			—			(2,148	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(1,698	)		—		—		—		—		—			—			—			(1,698	)
Balance March 31, 2019	$	501,947		$	35	$	69	$	50	$	77,383	$	1,761,736		$	(533	)	$	(1,342,626	)	$	5,833
Net loss		(6,080	)		—		—		—		—		—			—			(5,751	)		(329	)
Other comprehensive loss		(11,647	)		—		—		—		—		—			(11,342	)		—			(305	)
Shares issued under employee compensation plans, net of shares retired		337			—		—		—		164		173			—			—			—
Amortization of deferred compensation		1,889			—		—		—		—		1,889			—			—			—
Dividends paid to common shareholders ($0.21 per share)		(16,278	)		—		—		—		—		—			—			(16,278	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,591	)		—		—		—		—		—			—			(1,591	)		—
Dividends paid to Series C preferred shareholders ($0.45 per share)		(3,105	)		—		—		—		—		—			—			(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,148	)		—		—		—		—		—			—			(2,148	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(464	)		—		—		—		—		—			—			—			(464	)
Other changes in noncontrolling interest, net		(10	)		—		—		—		—		—			—			—			(10	)
Balance June 30, 2019	$	462,850		$	35	$	69	$	50	$	77,547	$	1,763,798		$	(11,875	)	$	(1,371,499	)	$	4,725
Net income		24,716			—		—		—		—		—			—			24,262			454
Other comprehensive loss		(3,604	)		—		—		—		—		—			(3,513	)		—			(91	)
Shares issued under employee compensation plans, net of shares retired		335			—		—		—		55		280			—			—			—
Amortization of deferred compensation		1,822			—		—		—		—		1,822			—			—			—
Dividends paid to common shareholders ($0.21 per share)		(16,284	)		—		—		—		—		—			—			(16,284	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,591	)		—		—		—		—		—			—			(1,591	)		—
Dividends paid to Series C preferred shareholders ($0.45 per share)		(3,105	)		—		—		—		—		—			—			(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,148	)		—		—		—		—		—			—			(2,148	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(425	)		—		—		—		—		—			—			—			(425	)
Other changes in noncontrolling interest, net		(76	)		—		—		—		—		—			—			—			(76	)
Balance September 30, 2019	$	462,490		$	35	$	69	$	50	$	77,602	$	1,765,900		$	(15,388	)	$	(1,370,365	)	$	4,587

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENT OF EQUITY

Three and Nine Months Ended

September 30, 2018

(Unaudited)

				PREIT Shareholders
				Preferred Shares $.01 par						Shares of Beneficial		Capital Contributed			Accumulated Other		Distributions			Non-
(in thousands of dollars, except per share amounts)	Total Equity			Series B		Series C		Series D		Interest, $1.00 Par		in Excess of Par			Comprehensive Income		in Excess of Net Income			controlling interest
Balance January 1, 2018	$	760,991		$	35	$	69	$	50	$	69,983	$	1,663,966		$	7,226	$	(1,109,469	)	$	129,131
Net loss		(3,712	)		—		—		—		—		—			—		(2,601	)		(1,111	)
Other comprehensive income		5,103			—		—				—		—			4,562		—			541
Shares issued under employee compensation plans, net of shares retired		(195	)		—		—		—		370		(565	)		—		—			—
Amortization of deferred compensation		1,924			—		—		—		—		1,924			—		—			—
Dividends paid to common shareholders ($0.21 per share)		(14,766	)		—		—		—		—		—			—		(14,766	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,590	)		—		—		—		—		—			—		(1,590	)		—
Dividends paid to Series C preferred shareholders ($0.4500 per share)		(3,105	)		—		—		—		—		—			—		(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,149	)		—		—		—		—		—			—		(2,149	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(1,737	)		—		—		—		—		—			—		—			(1,737	)
Balance March 31, 2018	$	740,764		$	35	$	69	$	50	$	70,353	$	1,665,325		$	11,788	$	(1,133,680	)	$	126,824
Net loss		(32,321	)		—		—		—		—		—			—		(28,202	)		(4,119	)
Other comprehensive income		3,193			—		—		—		—		—			2,854		—			339
Shares issued under employee compensation plans, net of shares retired		363			—		—		—		97		266			—		—			—
Amortization of deferred compensation		1,711			—		—		—		—		1,711			—		—			—
Dividends paid to common shareholders ($0.21 per share)		(14,787	)		—		—		—		—		—			—		(14,787	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,590	)		—		—		—		—		—			—		(1,590	)		—
Dividends paid to Series C preferred shareholders ($0.4500 per share)		(3,105	)		—		—		—		—		—			—		(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,149	)		—		—		—		—		—			—		(2,149	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(1,737	)		—		—		—		—		—			—		—			(1,737	)
Balance June 30, 2018	$	690,342		$	35	$	69	$	50	$	70,450	$	1,667,302		$	14,642	$	(1,183,513	)	$	121,307
Net loss		(1,636	)		—		—		—		—		—			—		(744	)		(892	)
Other comprehensive income		2,085			—		—		—		—		—			1,863		—			222
Shares issued under employee compensation plans, net of shares retired		203			—		—		—		23		180			—		—			—
Amortization of deferred compensation		1,757			—		—		—		—		1,757			—		—			—
Dividends paid to common shareholders ($0.21 per share)		(14,796	)		—		—		—		—		—			—		(14,796	)		—
Dividends paid to Series B preferred shareholders ($0.4609 per share)		(1,592	)		—		—		—		—		—			—		(1,592	)		—
Dividends paid to Series C preferred shareholders ($0.4500 per share)		(3,105	)		—		—		—		—		—			—		(3,105	)		—
Dividends paid to Series D preferred shareholders ($0.4297 per share)		(2,146	)		—		—		—		—		—			—		(2,146	)		—
Noncontrolling interests:
Distributions paid to Operating Partnership unit holders ($0.21 per unit)		(1,738	)		—		—		—		—		—			—		—			(1,738	)
Balance September 30, 2018	$	669,374		$	35	$	69	$	50	$	70,473	$	1,669,239		$	16,505	$	(1,205,896	)	$	118,899

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

	Nine Months Ended September 30,
(in thousands of dollars)	2019			2018
Cash flows from operating activities:
Net income (loss)	$	2,413		$	(37,669	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		89,736			92,063
Amortization		12,152			10,776
Straight-line rent adjustments		(2,084	)		(1,753	)
Provision for doubtful accounts		—			2,054
Non-cash lease termination revenue		—			(4,200	)
Amortization of deferred compensation		5,633			5,392
Gain on debt extinguishment, net		(24,832	)		—
Insurance recoveries in excess of property loss		(3,994	)		—
Gain on sale of interests in real estate, net		(2,684	)		(723	)
Equity in income of partnerships		(6,136	)		(8,186	)
Gain on sale of real estate by equity method investee		(553	)		(2,773	)
Cash distributions from partnerships		19,223			6,029
Amortization of historic tax credits		—			(810	)
Impairment of assets		1,464			34,286
Change in assets and liabilities:
Net change in other assets		(5,248	)		(1,904	)
Net change in other liabilities		(5,417	)		1,632
Net cash provided by operating activities		79,673			94,214
Cash flows from investing activities:
Investments in consolidated real estate acquisitions		—			(11,400	)
Distribution of financing proceeds from equity method investee		25,000			123,000
Cash proceeds from sales of real estate		35,351			1,636
Cash proceeds from sale of mortgage		8,000			—
Cash distributions from partnerships of proceeds from real estate sold		879			19,727
Proceeds from insurance claims related to damage to real estate assets		6,977			—
Investments in partnerships		(55,221	)		(47,074	)
Investments in real estate improvements		(21,487	)		(23,918	)
Additions to construction in progress		(86,118	)		(51,349	)
Capitalized leasing costs		(413	)		(10,423	)
Additions to leasehold improvements and corporate fixed assets		(819	)		(67	)
Net cash (used in) provided by investing activities		(87,851	)		132
Cash flows from financing activities:
(Repayments of) proceeds from mortgage loans and finance lease liabilities		(71,210	)		10,185
Net borrowings (repayments) under revolving facility		148,000			(16,000	)
Dividends paid to common shareholders		(47,492	)		(44,349	)
Dividends paid to preferred shareholders		(20,531	)		(20,531	)
Distributions paid to Operating Partnership unit holders and noncontrolling interest		(2,587	)		(5,212	)
Principal installments on mortgage loans		(12,806	)		(14,217	)
Payment of deferred financing costs		(95	)		(6,522	)
Value of shares of beneficial interest issued		978			1,118
Value of shares retired under equity incentive plans, net of shares issued		(632	)		(747	)
Net cash used in financing activities		(6,375	)		(96,275	)
Net change in cash, cash equivalents, and restricted cash		(14,553	)		(1,929	)
Cash, cash equivalents, and restricted cash, beginning of period		32,445			33,953
Cash, cash equivalents, and restricted cash, end of period	$	17,892		$	32,024

See accompanying notes to the unaudited consolidated financial statements.

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PENNSYLVANIA REAL ESTATE INVESTMENT TRUST

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

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, 2018. 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, 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 26 properties operating in nine states, including 21 shopping malls, four other retail properties and one development property. The property in our portfolio that is classified as under development does not currently have any activity occurring. We also have one undeveloped land parcel located in Gainesville, Florida, a portion of which was sold in March 2019 and the remaining portion of which was classified as held for sale as of September 30, 2019.

We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of September 30, 2019, we held a 97.5% controlling interest in the Operating Partnership (after the redemption of 6,250,000 OP Units (as defined below) during the first quarter of 2019, which is discussed in more detail in Note 5), 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 September 30, 2019, the total amount that would have been distributed would have been $11.6 million, which is calculated using our September 30, 2019 closing price on the New York Stock Exchange of $5.72 per share multiplied by the number of outstanding OP Units held by limited partners, which was 2,022,635 as of September 30, 2019.

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.

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).

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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

Lease accounting related

•

We have elected the package of practical expedients that allows us to not reassess (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, and (iii) initial direct costs for any existing leases.

•

For leases under which we are the lessor, we also have elected to not separate non-lease components such as common area maintenance (“CAM”) and real estate reimbursements from the associated lease component (minimum rent). Instead, we account for the lease and non-lease components as a single component because such non-lease components would otherwise be accounted for under the new revenue guidance (ASC 606) and both (1) the timing and pattern of transfer are the same for the non-lease components and associated lease component, and (2) the lease component, if accounted for separately, would be classified as an operating lease. Utility reimbursements are presented separately and not in the single component as the pattern of transfer is not aligned with the use of the property and therefore the criteria for use of the practical expedient are not met.

The adoption of this standard had the following effects on our financial statements as of September 30, 2019 and for the three and nine months ended September 30, 2019:

As of January 1, 2019, for leases under which the Company is a lessee, we recorded a right-of-use (“ROU”) asset of $24.6 million and corresponding lease liability for all leases previously accounted for as operating leases under ASC 840. The Company also derecognized an unfavorable ground lease liability of $5.5 million and reduced the corresponding ROU asset by the same amount. As of September 30, 2019, the ROU asset was $17.1 million and is included in deferred costs and other assets, net and the lease liability was $23.2 million and is included in accrued expenses and other liabilities in the accompanying consolidated balance sheet.

Effective January 1, 2019, we changed our fixed CAM revenue recognition to be recognized prospectively on a straight-line basis. In the three and nine months ended September 30, 2019, $0.7 million and $2.0 million, respectively, of such revenues were recognized and are included within lease revenue in the accompanying consolidated statements of operations; previously, such amounts were recognized as billed in accordance with the terms of the respective leases.

We review the collectability of both billed and unbilled lease revenues each reporting period, taking into consideration the tenant’s payment history, credit profile and other factors, including its operating performance. For any tenant receivable balances deemed to be uncollectible, under ASC 842 we record an offset for credit losses directly to Lease revenue in the consolidated statement of operations. Previously, under ASC 840, uncollectible tenants’ receivables were reported in Other property operating expenses in the consolidated statement of operations.

For leases under which the Company is a lessor, certain internal leasing and legal costs that were previously capitalized under ASC 840 are now recorded as period costs under ASC 842. For the three and nine months ended September 30, 2018, we capitalized $1.2 million and $3.9 million of internal leasing and legal salaries and benefits, respectively. No such costs were capitalized for the three and nine months ended September 30, 2019. We will continue to amortize previously capitalized initial direct costs over the remaining terms of the associated leases.

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Other accounting

In October 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) as a Benchmark Interest Rate for Hedge Accounting. This ASU adds the OIS rate based on SOFR as a U.S. benchmark interest rate to facilitate the LIBOR to SOFR transition and provide sufficient lead time for entities to prepare for changes to interest rate hedging strategies for both risk management and hedge accounting purposes. Because we adopted ASU 2017-12, this guidance became effective January 1, 2019. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, and subsequently issued amendments to the initial and transitional guidance within ASU 2018-19, ASU 2019-04 and ASU 2019-05 between November 2018 and May 2019. ASU 2016-13 introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments, and will affect our accounting for trade receivables and notes receivable. We will adopt this new standard on January 1, 2020. We are currently evaluating the impact that the adoption of the new standard will have on our consolidated financial statements.

2. REAL ESTATE ACTIVITIES

Investments in real estate as of September 30, 2019 and December 31, 2018 were comprised of the following:

(in thousands of dollars)	September 30, 2019			December 31, 2018
Buildings, improvements and construction in progress	$	2,735,348		$	2,719,400
Land, including land held for development		466,257			465,194
Total investments in real estate		3,201,605			3,184,594
Accumulated depreciation		(1,181,848	)		(1,118,582	)
Net investments in real estate	$	2,019,757		$	2,066,012

Capitalization of Costs

The following table summarizes our capitalized interest, compensation, including commissions, and real estate taxes for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands of dollars)	2019		2018		2019		2018
Development/Redevelopment Activities:
Interest ⁽¹⁾	$	2,683	$	1,821	$	7,012	$	4,728
Compensation		281		352		969		1,067
Real estate taxes		524		430		945		810
Leasing Activities:
Compensation, including commissions ⁽²⁾		108		1,482		413		5,423

⁽¹⁾	Includes interest capitalized on investments in partnerships under development.

⁽²⁾

The definition of initial direct costs under ASC 842 includes only those incremental costs of a lease that would not have been incurred if the lease had not been obtained. As discussed above, certain internal leasing and legal costs that were previously capitalized under ASC 840 are now recorded as period costs under ASC 842. Commissions paid for successful leasing transactions will continue to be capitalized.

Dispositions

In March 2019, we entered into an agreement of sale with a buyer to sell an undeveloped land parcel located in Gainesville, Florida for total consideration of $15.0 million and the sale transaction was split into two parcels. The first parcel was sold in March 2019 for $5.0 million. We currently expect the transaction with respect to the remaining parcel to close before the end of 2019. In connection with these transactions, we recorded losses on impairment of assets of $1.5 million. The remaining land parcel was classified as held for sale in our consolidated balance sheet as of September 30, 2019.

In April 2019, we sold an undeveloped land parcel located in New Garden Township, Pennsylvania, for total consideration of $11.0 million, consisting of $8.25 million in cash and $2.75 million of preferred stock. We ascribed no value for accounting purposes to the preferred shares as they are not tradeable, cannot be transferred or sold and have no redemption feature. Up to $1.25 million of the cash consideration received is subject to claw-back if the buyer does not receive entitlements for a stipulated number of housing units, which has been recorded as a liability in our consolidated balance sheet. In connection with this sale, we recorded a gain of $0.2 million.

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In April 2019, we sold a Whole Foods store located on a parcel adjacent to Exton Square Mall for total consideration of $22.1 million. In connection with this sale, we recorded a gain of $1.3 million.

In July 2019, we sold an outparcel located at Valley View Mall in La Crosse, Wisconsin for total consideration of $1.4 million. In connection with this sale, we recorded a gain of $1.2 million.

In September 2019, we conveyed Wyoming Valley Mall to the lender of the mortgage loan secured by the property. The loan had a balance of approximately $72.8 million as of the conveyance on September 26, 2019. As a result of the transfer, having previously recognized an asset impairment loss of approximately $32.2 million on the value of the property, we wrote off the remaining carrying value of the property of $43.2 million and recorded a net gain on extinguishment of debt of $29.6 million in the three months ended September 30, 2019.

3. INVESTMENTS IN PARTNERSHIPS

The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of September 30, 2019 and December 31, 2018:

(in thousands of dollars)	September 30, 2019			December 31, 2018
ASSETS:
Investments in real estate, at cost:
Operating properties	$	739,199		$	575,149
Construction in progress		362,928			420,771
Total investments in real estate		1,102,127			995,920
Accumulated depreciation		(223,790	)		(212,574	)
Net investments in real estate		878,337			783,346
Cash and cash equivalents		33,895			20,446
Deferred costs and other assets, net		41,441			30,549
Total assets		953,673			834,341
LIABILITIES AND PARTNERS’ INVESTMENT:
Mortgage loans payable, net		501,095			507,090
FDP Term Loan, net		298,960			247,901
Other liabilities		82,450			34,463
Total liabilities		882,505			789,454
Net investment	$	71,168		$	44,887
Partners’ share		33,661			21,583
PREIT’s share		37,507			23,304
Excess investment⁽¹⁾		18,379			15,763
Net investments and advances	$	55,886		$	39,067
Reconciliation to comparable GAAP balance sheet item:
Investment in partnerships, at equity	$	143,440		$	131,124
Distributions in excess of partnership investments		(87,554	)		(92,057	)
Net investment	$	55,886		$	39,067

_____________________

⁽¹⁾

Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.”

We record distributions from our equity investments using the nature of the distribution approach.

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The following table summarizes our share of equity in income of partnerships for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Real estate revenue	$	23,742		$	23,848		$	70,636		$	73,826
Operating expenses:
Property operating and other expenses		(8,805	)		(7,659	)		(24,331	)		(23,512	)
Interest expense⁽¹⁾		(5,771	)		(5,872	)		(17,428	)		(17,440	)
Depreciation and amortization		(5,317	)		(4,763	)		(14,675	)		(14,715	)
Total expenses		(19,893	)		(18,294	)		(56,434	)		(55,667	)
Net income		3,849			5,554			14,202			18,159
Partners’ share		(2,191	)		(3,057	)		(7,777	)		(9,971	)
PREIT’s share		1,658			2,497			6,425			8,188
Amortization of and adjustments to excess investment, net		(127	)		(20	)		(289	)		(2	)
Equity in income of partnerships	$	1,531		$	2,477		$	6,136		$	8,186
(1) Net of capitalized interest expense of $1,602 and $1,371 for the three months ended September 30, 2019 and 2018, respectively, and $4,554 and $3,292 for the nine months ended September 30, 2019 and 2018, respectively.

Dispositions

In March 2019, a partnership in which we hold a 25% interest sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was $0.6 million, which is recorded in gain on sale of real estate by equity method investee in the accompanying consolidated statement of operations.

In February 2018, a partnership in which we hold a 50% ownership share sold its office condominium interest in 907 Market Street in Philadelphia, Pennsylvania for $41.8 million. The partnership recorded a gain on sale of $5.5 million, of which our share was $2.8 million. The partnership distributed to us proceeds of $19.7 million in connection with this transaction in February 2018.

Term Loan

In January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $250.0 million term loan (the “FDP Term Loan”). We and our partner in the project, The Macerich Company (“Macerich”), each own a 50% partnership interest in Fashion District Philadelphia. The FDP Term Loan matures in January 2023, and bears interest at a variable rate of LIBOR plus 2.00%. PREIT and Macerich secured the FDP Term Loan by pledging their respective equity interests in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate $123.0 million as a distribution of our share of the draws in 2018. In July 2019, the FDP Term Loan was modified to increase the total potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.

Significant Unconsolidated Subsidiary

We have a 50% ownership interest in Lehigh Valley Associates L.P. (“LVA”) and Fashion District Philadelphia (“FDP”). The financial information of LVA and FDP are included in the amounts above. Summarized balance sheet information as of September 30, 2019 and December 31, 2018, and summarized statement of operations information for the three and nine months ended September 30, 2019 and 2018 for these entities, which are accounted for using the equity method, are as follows:

LVA

(in thousands of dollars)	September 30, 2019		December 31, 2018
Summarized balance sheet information
Total assets	$	58,139	$	52,255
Mortgage loan payable, net		192,873		196,328

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	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Summarized statement of operations information
Revenue	$	8,006		$	8,871		$	24,589		$	26,474
Property operating expenses		(2,138	)		(2,249	)		(6,351	)		(6,778	)
Interest expense		(2,027	)		(2,062	)		(6,055	)		(6,158	)
Net income		3,059			3,853			9,768			11,495
PREIT’s share of equity in income of partnership		1,529			1,927			4,884			5,748

FDP

(in thousands of dollars)	September 30, 2019		December 31, 2018
Summarized balance sheet information
Total assets	$	614,958	$	497,419
FDP Term Loan, net		298,960		247,901

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Summarized statement of operations information
Revenue	$	1,271		$	653		$	2,667		$	3,404
Property operating expenses		(1,901	)		(913	)		(3,100	)		(3,044	)
Interest expense		(2	)		(32	)		(2	)		(95	)
Net income		(2,553	)		(1,562	)		(4,879	)		(4,012	)
PREIT’s share of equity in income of partnership		(1,262	)		(687	)		(2,299	)		(1,746	)

4. FINANCING ACTIVITY

Credit Agreements

As of September 30, 2019, we have entered into two credit agreements (collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit Agreement, which, as described in more detail below, includes (a) the $400 million 2018 Revolving Facility, and (b) the $300 million 2018 Term Loan Facility, and (2) the $250 million 2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year Term Loan are collectively referred to as the “Term Loans.”

As of September 30, 2019, we had borrowed the full $550.0 million available under the Term Loans in the aggregate, and $213.0 million was borrowed under the 2018 Revolving Facility. The carrying value of the Term Loans on our consolidated balance sheet as of September 30, 2019 is net of $2.0 million of unamortized debt issuance costs. Following recent property sales, the net operating income (“NOI”) from our remaining unencumbered properties is at a level such that pursuant to the Unencumbered Debt Yield covenant (as described below), the maximum unsecured amount that was available for us to borrow under the 2018 Revolving Facility as of September 30, 2019 was $80.7 million.

Amounts borrowed under the Credit Agreements, either under the 2018 Revolving Facility or the Term Loans, which may be either LIBOR Loans or Base Rate Loans, bear interest at the rate specified below per annum, depending on our leverage, unless and until we receive an investment grade credit rating and provide notice to the Administrative Agent, as defined therein (the “Rating Date”), after which alternative rates would apply, as described in the Credit Agreements. In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a) 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 2018 Revolving Facility is subject to a facility fee, which depends on leverage and was 0.55% as of September 30, 2019, which is recorded in interest expense in the consolidated statements of operations.

		Applicable Margin
Level	Ratio of Total Liabilities to Gross Asset Value	Revolving Loans that are LIBOR Loans			Revolving Loans that are Base Rate Loans			Term Loans that are LIBOR Loans			Term Loans that are Base Rate Loans
1	Less than 0.450 to 1.00		1.20	%		0.20	%		1.35	%		0.35	%
2	Equal to or greater than 0.450 to 1.00 but less than 0.500 to 1.00		1.25	%		0.25	%		1.45	%		0.45	%
3	Equal to or greater than 0.500 to 1.00 but less than 0.550 to 1.00		1.30	%		0.30	%		1.60	%		0.60	%
4	Equal to or greater than 0.550 to 1.00 ⁽¹⁾		1.55	%		0.55	%		1.90	%		0.90	%

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⁽¹⁾	The rates in effect under the Credit Agreements were based upon the Level 4 Ratio of Total Liabilities to Gross Asset Value as of September 30, 2019.

The Credit Agreements contain certain affirmative and negative covenants, including, without limitation, requirements that PREIT maintain, on a consolidated basis: (1) Minimum Tangible Net Worth of $1,463.2 million, plus 75% of the Net Proceeds of all Equity Issuances effected at any time after March 31, 2018; (2) maximum ratio of Total Liabilities to Gross Asset Value of 0.60:1, provided that it will not be a Default if the ratio exceeds 0.60:1 but does not exceed 0.625:1 for more than two consecutive quarters on more than two occasions during the term; (3) minimum ratio of Adjusted EBITDA to Fixed Charges of 1.50:1; (4) minimum Unencumbered Debt Yield of (a) 11.0% through and including June 30, 2020, (b) 11.25% any time after June 30, 2020 through and including June 30, 2021, and (c) 11.50% any time thereafter; (5) minimum Unencumbered NOI to Unsecured Interest Expense of 1.75:1; (6) maximum ratio of Secured Indebtedness to Gross Asset Value of 0.60:1; and (7) Distributions may not exceed (a) with respect to our preferred shares, the amounts required by the terms of the preferred shares, and (b) with respect to our common shares, the greater of (i) 95.0% of Funds From Operations (FFO), and (ii) 110% of REIT taxable income for a fiscal year. The covenants and restrictions in the Credit Agreements limit our ability to incur additional indebtedness, grant liens on assets and enter into negative pledge agreements, merge, consolidate or sell all or substantially all of its assets, and enter into transactions with affiliates. The Credit Agreements are subject to customary events of default and are cross-defaulted with one another.

As of September 30, 2019, the Borrower was in compliance with all financial covenants in the Credit Agreements.

We may prepay the amounts due under the Credit Agreements at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings.

Upon the expiration of any applicable cure period following an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of the obligations in connection with the Credit Agreements immediately due and payable.

Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PALP, PRI, any material subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts would automatically become immediately due and payable.

Interest expense, deferred financing fee amortization and accelerated financing costs, if any, related to the Credit Agreements for the three and nine months ended September 30, 2019 and 2018 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands of dollars)	2019		2018		2019		2018
Revolving Facilities⁽¹⁾
Interest expense	$	2,082	$	392	$	5,143	$	1,006
Deferred financing amortization		274		274		822		778
Term Loans⁽²⁾
Interest expense		5,212		4,525		15,477		13,310
Deferred financing amortization		191		188		570		569
Accelerated financing costs		-		-		-		363

⁽¹⁾	Includes the 2018 Revolving Facility and the 2013 Revolving Facility (collectively, the “Revolving Facilities”). The 2013 Revolving Facility was replaced by the 2018 Revolving Facility in May 2018.

⁽²⁾	Includes the 2018 Term Loan Facility, the 2014 7-Year Term Loan, the 2014 5-Year Term Loan and the 2015 5-Year Term Loan. The 2014 5-Year Term Loan and the 2015 5-Year Term Loan were replaced by the 2018 Term Loan Facility in May 2018.

The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at September 30, 2019 and December 31, 2018 were as follows:

	September 30, 2019				December 31, 2018
(in millions of dollars)	Carrying Value		Fair Value		Carrying Value		Fair Value
Mortgage loans⁽¹⁾	$	904.6	$	890.1	$	1,047.9	$	1,002.3

⁽¹⁾	The carrying value of mortgage loans is net of unamortized debt issuance costs of $2.0 million and $3.1 million as of September 30, 2019 and December 31, 2018, respectively.

The mortgage loans contain various customary default provisions.

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Mortgage Loan Activity

In March 2019, we defeased a $58.5 million mortgage loan including accrued interest, secured by Capital City Mall in Camp Hill, Pennsylvania using funds from our 2018 Revolving Facility and the balance from available working capital. We recorded a loss on debt extinguishment of $4.8 million in March 2019 in connection with this defeasance.

As discussed in Note 2, in September 2019, we conveyed Wyoming Valley Mall to the lender of the mortgage loan secured by the property. The loan had a balance of approximately $72.8 million as of the conveyance on September 26, 2019. In connection with the conveyance, $7.5 million of cash and escrow balances were transferred to the lender.

In April 2019, we received a notice from the servicer of the Cumberland Mall mortgage of a cash sweep event due to the failure of an anchor tenant to renew for a full term. We satisfied this requirement in August 2019.

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.

5. CASH FLOW INFORMATION

Cash paid for interest was $41.9 million (net of capitalized interest of $7.0 million) and $43.2 million (net of capitalized interest of $4.7 million) for the nine months ended September 30, 2019 and 2018, respectively.

In our statement of cash flows, we show cash flows on our Revolving Facilities on a net basis. Aggregate borrowings on our Revolving Facilities were $181.0 million and $37.0 million for the nine months ended September 30, 2019 and 2018, respectively. Aggregate paydowns were $33.0 million and $53.0 million for the nine months ended September 30, 2019 and 2018, respectively.

Accrued construction costs decreased by $15.7 million in the nine months ended September 30, 2019 and increased by $1.5 million in the nine months ended September 30, 2018, representing non-cash changes in investment in real estate and construction in progress.

In the first quarter of 2019, we issued 6,250,000 common shares of beneficial interest in the Company in exchange for a like number of OP Units in our Operating Partnership. The shares were issued to Vornado Investments LLC, an affiliate of Franconia Two, L.P., the holder of the OP Units.

The following table provides a summary of cash, cash equivalents, and restricted cash reported within the statement of cash flows as of September 30, 2019 and 2018.

	September 30,
(in thousands of dollars)	2019		2018
Cash and cash equivalents	$	11,709	$	19,294
Restricted cash included in other assets		6,183		12,730
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows	$	17,892	$	32,024

Our restricted cash consists of cash held in escrow by banks for real estate taxes and other purposes.

6. COMMITMENTS AND CONTINGENCIES

Contractual Obligations

As of September 30, 2019, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $105.1 million, including $30.1 million of commitments related to the redevelopment of Fashion District Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers. For purposes of this disclosure, the contractual obligations and other commitments related to Fashion District Philadelphia are included at 100% of the obligation and not at our 50% ownership share. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. As of September 30, 2019, we believe we have satisfied this obligation.

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Provision for Employee Separation Expenses

In 2019, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $0.2 and $1.1 million of employee separation expense in the three and nine months ended September 30, 2019, respectively, compared to $0.6 million and $1.0 million for the three and nine months ended September 30, 2018, respectively. As of September 30, 2019, we had $0.8 million of severance accrued and unpaid related to activities related to the termination of employment of employees.

Property Damage from Natural Disaster

During September 2018, Jacksonville Mall in Jacksonville, North Carolina incurred property damage and an interruption of business operations as a result of Hurricane Florence. The property was closed for business during and immediately after the natural disaster, however, significant remediation efforts were quickly undertaken and the mall was reopened shortly thereafter.

During the three and nine months ended September 30, 2019, we recorded net recoveries of approximately $2.9 million and $4.5 million, respectively. These net recoveries primarily relate to remediation expenses and business interruption claims. $0.5 million of the recoveries received relate to business interruption.

7. DERIVATIVES

In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.

Cash Flow Hedges of Interest Rate Risk

For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. As of September 30, 2019, all of our outstanding derivatives are designated as cash flow hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets.

During the next 12 months, we estimate that $2.0 million will be reclassified as a decrease to interest expense in connection with derivatives. The recognition of these amounts, however, could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.

Interest Rate Swaps

As of September 30, 2019, we had interest rate swap agreements outstanding with a weighted average base interest rate of 1.85% on a notional amount of $796.1 million, maturing on various dates through May 2023, and forward starting interest rate swap agreements with a weighted average interest rate of 2.75% on a notional amount of $100.0 million, with an effective date in June 2020, and a maturity date in May 2023. We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. The interest rate swap agreements are net settled monthly.

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The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at September 30, 2019 and December 31, 2018 based on the year they mature. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks. In the accompanying consolidated balance sheets, the carrying amount of derivative assets is reflected in “Deferred costs and other assets, net” and the carrying amount of derivative liabilities is reflected in “Accrued expenses and other liabilities.”

Maturity Date	Aggregate Notional Value at September 30, 2019 (in millions of dollars)		Aggregate Fair Value at September 30, 2019 ⁽¹⁾ (in millions of dollars)			Aggregate Fair Value at December 31, 2018 ⁽¹⁾ (in millions of dollars)			Weighted Average Interest Rate
Interest Rate Swaps
2020	$	100.0	$	0.4		$	1.9			1.23	%
2021		496.1		(2.2	)		8.1			1.65	%
2022		-		-			-			-	%
2023		200.0		(9.0	)		(2.0	)		2.67	%
Forward Starting Swaps
2023		100.0		(4.0	)		(1.0	)		2.75	%
Total	$	896.1	$	(14.8	)	$	7.0			1.95	%

⁽¹⁾	As of September 30, 2019 and December 31, 2018, 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).

The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,											Nine Months Ended September 30,
	Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments					Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense						Amount of Gain or (Loss) Recognized in Other Comprehensive Income on Derivative Instruments					Amount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Interest Expense
(in millions of dollars)	2019			2018		2019			2018			2019			2018		2019			2018
Derivatives in Cash Flow Hedging Relationships
Interest rate products	$	(2.8	)	$	3.0	$	(0.8	)	$	(1.0	)	$	(18.6	)	$	11.2	$	(3.1	)	$	(0.8	)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions of dollars)	2019			2018			2019			2018
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded	$	(15.5	)	$	(15.2	)	$	(47.0	)	$	(46.1	)
Amount of loss reclassified from accumulated other comprehensive income into interest expense	$	(0.8	)	$	(1.0	)	$	(3.1	)	$	(0.8	)

Credit-Risk-Related Contingent Features

We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of September 30, 2019, 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 September 30, 2019, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $14.8 million. If we had breached any of the default provisions in these agreements as of September 30, 2019, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $15.6 million. We had not breached any of these provisions as of September 30, 2019.

8. LEASES

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As discussed in Note 1, we adopted the new lease accounting standard effective January 1, 2019.

As Lessee

We have entered into ground leases for portions of the land at Springfield Town Center and Plymouth Meeting Mall. We have also entered into an office lease for our headquarters location, as well as vehicle, solar panel and equipment leases as a lessee. The initial terms of these agreements generally range from three to 40 years, with certain agreements containing extension options for up to an additional 60 years. As of September 30, 2019, we included only those renewal options we were reasonably certain of exercising. Upon lease execution, the Company measures a liability for the present value of future lease payments over the noncancellable period of the lease and any renewal option period we are reasonably certain of exercising. Certain agreements require that we pay a portion of reimbursable expenses such as CAM, utilities, insurance and real estate taxes. These payments are not included in the calculation of the lease liability and are presented as variable lease costs.

We applied judgments related to the determination of the discount rates used to calculate the lease liability upon adoption at January 1, 2019. In order to calculate our incremental borrowing rate under ASC 842, we utilized judgments and estimates regarding our implied credit rating using market data and made other adjustments to determine an appropriate incremental borrowing rate as of January 1, 2019.

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The following table presents additional information pertaining to the Company’s leases:

	Three Months Ended September 30, 2019								Nine Months Ended September 30, 2019
(in thousands of dollars)	Solar Panel Leases		Ground Leases		Office, equipment, and vehicle leases		Total		Solar Panel Leases		Ground Leases		Office, equipment, and vehicle leases		Total
Finance lease cost:
Amortization of right-of-use assets	$	187	$	—	$	—	$	187	$	562	$	—	$	—	$	562
Interest on lease liabilities		73		—		—		73		223		—		—		223
Operating lease costs		—		436		528		964		—		1,311		1,619		2,930
Variable lease costs		—		41		34		75		—		123		102		225
Total lease costs	$	260	$	477	$	562	$	1,299	$	785	$	1,434	$	1,721	$	3,940

Other information related to leases as of and for the nine months ended September 30, 2019 is as follows:

(in thousands of dollars)
Cash paid for the amounts included in the measurement of lease liabilities
Operating cash flows used for finance leases	$	223
Operating cash flows used for operating leases	$	1,744
Financing cash flows used for finance leases	$	470
Weighted average remaining lease term-finance leases (months)		102
Weighted average remaining lease term-operating leases (months)		351
Weighted average discount rate-finance leases		4.41	%
Weighted average discount rate-operating leases		6.68	%

Future payments against lease liabilities as of September 30, 2019 are as follows:

(in thousands of dollars)	Finance leases			Operating leases			Total
October 1 to December 31, 2019	$	232		$	598		$	830
2020		925			1,985			2,910
2021		925			1,919			2,844
2022		925			1,640			2,565
2023		925			1,604			2,529
Thereafter		3,923			48,437			52,360
Total undiscounted lease payments		7,855			56,183			64,038
Less imputed interest		(1,313	)		(33,012	)		(34,325	)
Total lease liabilities	$	6,542		$	23,171		$	29,713

Future minimum lease payments under these agreements as of December 31, 2018 were as follows:

(in thousands of dollars)	Finance leases		Operating leases		Total
Year ending December 31,
2019	$	925	$	3,007	$	3,932
2020		925		1,845		2,770
2021		925		1,856		2,781
2022		925		1,673		2,598
2023		925		1,593		2,518
Thereafter		3,923		33,959		37,882
	$	8,548	$	43,933	$	52,481

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As Lessor

As of September 30, 2019, the fixed contractual lease payments, including minimum rents and fixed CAM amounts, to be received over the next five years pursuant to the terms of noncancellable operating leases with initial terms greater than one year are included in the table below. The amounts presented assume that no leases are renewed and no renewal options are exercised. Additionally, the table does not include variable lease payments that may be received under certain leases for percentage rents or the reimbursement of operating costs, such as common area expenses, utilities, insurance and real estate taxes. These variable lease payments are recognized in the period when the applicable expenditures are incurred or, in the case of percentage rents, when the sales data is made available.

(in thousands of dollars)
October 1 to December 31, 2019	$	53,825
2020		201,475
2021		185,524
2022		167,306
2023		148,580
Thereafter		507,385
	$	1,264,095

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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. The disclosures in this report are complementary to those made in our Annual Report on Form 10-K for the year ended December 31, 2018.

OVERVIEW

Pennsylvania Real Estate Investment Trust, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.

We currently own interests in 26 retail properties, of which 25 are operating properties and one is a development property. The 25 operating properties include 21 shopping malls and four other retail properties, have a total of 19.5 million square feet and are located in nine states. We and partnerships in which we hold an interest own 15.2 million square feet at these properties (excluding space owned by anchors or third parties).

There are 18 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 15.0 million square feet, of which we own 12.0 million square feet. The seven operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.5 million square feet, of which 3.2 million square feet are owned by such partnerships. When we refer to “Same Store” properties, we are referring to properties that have been owned for the full periods presented and exclude properties acquired, disposed of, under redevelopment or designated as a non-core property during the periods presented. Core properties include all operating retail properties except for Exton Square Mall, Valley View Mall and Fashion District Philadelphia, which opened in September 2019 and is not yet stabilized as development work is continuing. “Core Malls” also excludes these properties as well as power centers and Gloucester Premium Outlets. Wyoming Valley Mall was conveyed to the lender of the mortgage loan secured by that property in September 2019. We have one undeveloped land parcel located in Gainesville, Florida, a portion of which was sold in March 2019.

We have one property in our portfolio that is classified as under development; however, we do not currently have any activity occurring at this property.

Our primary business is owning and operating retail shopping malls, which we do primarily through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We provide management, leasing and real estate development services through PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer additional services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.

Our revenue consists primarily of fixed rental income, additional rent in the form of fixed and variable expense reimbursements, and percentage rent (rent that is based on a percentage of our tenants’ sales or a percentage of sales in excess of thresholds that are specified in the leases) derived from our income producing properties. We also receive income from our real estate partnership investments and from the management and leasing services PRI provides.

Net income for the three months ended September 30, 2019 was $24.7 million compared to a net loss of $1.6 million for the three months ended September 30, 2018. This $26.4 million change primarily reflects a gain on debt extinguishment of $29.6 million and insurance recoveries of $2.9 million recorded in the three months ended September 30, 2019, which was partially offset by: (a) a $3.5 million decrease in Same Store NOI; (b) a $2.2 million decrease in Non Same Store NOI; (c) a $2.2 million increase in general and administrative expenses, primarily due to a $1.2 million decrease in capitalized leasing costs as a result of the adoption of ASC 842 effective January 1, 2019; and (d) a $1.2 million decrease in other income primarily due to historic tax credit revenues recorded in the 2018 period, which did not recur in the 2019 period, and lower corporate sponsorship revenues compared to the 2018 period.

Net income for the nine months ended September 30, 2019 was $2.4 million compared to a net loss of $37.7 million for the nine months ended September 30, 2018. This $40.1 million change primarily reflects a net gain on debt extinguishment of $24.8 million, insurance recoveries of $4.5 million, and impairment of assets of $34.3 million recorded in the nine months ended September 30, 2018, which did not recur in the 2019 period, partially offset by: (a) a $10.3 million decrease in Same Store NOI, including a $6.6 million decrease in lease termination revenues; (b) a $5.5 million decrease in Non Same Store NOI; (c) a $5.4 million increase in general and administrative expenses, primarily due to a $3.9 million decrease in capitalized leasing costs as a result of the adoption of ASC 842 effective January 1, 2019; (d) a $2.0 million decrease in other income primarily due to historic tax credit revenues recorded in the 2018 period, which did not recur in the 2019 period, and lower corporate sponsorship revenues and lower fees from management and leasing fees provided to third-parties compared to the 2018 period; and (e) a $1.5 million impairment of a land parcel recorded in the nine months ended September 30, 2019.

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See “Non-GAAP Supplemental Financial Measures” below for more information about our use of Same Store NOI and Non Same Store NOI, which are non-GAAP measures.

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

Current Economic and Industry Conditions

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.

Though we opened certain tenants at our redevelopment projects in the third quarter of 2019, including at Fashion District Philadelphia and Plymouth Meeting Mall, and expect additional tenant openings in the fourth quarter of 2019 and throughout 2020, we also have tenants who continue to face significant economic challenges, and we are in active discussions to restructure certain leasing arrangements through, among other things, downsizing and rent relief, which is expected to impact our results unfavorably.

The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants in bankruptcy at sold properties):

	Pre-bankruptcy								Units Closed
Year	Number of Tenants⁽¹⁾		Number of locations impacted		GLA⁽²⁾		PREIT’s Share of Annualized Gross Rent⁽³⁾ (in thousands)		Number of locations closed		GLA⁽²⁾		PREIT’s Share of Annualized Gross Rent⁽³⁾ (in thousands)
2019 (Nine Months)
Consolidated properties		8		70		398,985	$	14,540		59		209,371	$	8,483
Unconsolidated properties		7		13		54,666		1,413		7		26,399		840
Total		10		83		453,651	$	15,953		66		235,770	$	9,323
2018 (Full Year)
Consolidated properties		10		40		1,055,798	$	6,305		6		365,064	$	1,593
Unconsolidated properties		3		5		14,977		402		—		—		—
Total		10		45		1,070,775	$	6,707		6		365,064	$	1,593

⁽¹⁾	Totals represent number of unique tenants.

⁽²⁾	Gross Leasable Area (“GLA”) in square feet.

⁽³⁾	Includes our share of tenant gross rent from partnership properties based on PREIT’s ownership percentage in the respective equity method investments as of September 30, 2019.

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 and have implemented our ongoing anchor replacement program. In December 2016, we acquired the Sears property at Woodland Mall and in 2017 we recaptured the Sears premises at Capital City Mall and Magnolia Mall (we have since re-leased the Capital City Mall and Magnolia Mall spaces). Also in 2017, we purchased the Macy’s locations at Moorestown Mall, Valley View Mall and Valley Mall locations and we re-leased all of these former Macy’s stores. The replacement tenant for Macy’s at Valley View Mall filed for bankruptcy and subsequently closed that store. We terminated the lease of the Sears store at Dartmouth Mall effective in 2019 and have entered into a lease for a replacement tenant. We have entered into a ground lease for the land associated with the Macy’s store located at Plymouth Meeting Mall and have executed leases with five replacement tenants for that location.

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The table below sets forth information related to our anchor replacement program:

Property	Former Anchors	GLA (in '000's)	Date Closed	Decommission Date	Replacement Tenant(s)	GLA (in '000's)	Actual/Targeted Occupancy Date
Completed:
Magnolia Mall	Sears	91	Q1 17	Q2 17	Burlington	46	Q3 17
					HomeGoods	22	Q2 18
					Five Below	8	Q2 18
Moorestown Mall	Macy's	200	Q1 17	Q2 17	HomeSense	28	Q3 18
					Five Below	9	Q4 18
					Sierra Trading Post	19	Q1 19
Valley Mall	Macy's	120	Q1 16	Q4 17	Tilt Studio	48	Q3 18
					One Life Fitness	70	Q3 18
	Bon-Ton	123	Q1 18	Q1 18	Belk	123	Q4 18
Woodland Mall	Sears	313	Q2 17	Q2 17	REI	20	Q2 19
					Black Rock Bar & Grill	9	Q3 19
Plymouth Meeting Mall	Macy's⁽¹⁾	215	Q1 17	Q2 17	Burlington	42	Q3 19
					Dick's Sporting Goods	58	Q3 19
					Miller's Ale House	8	Q3 19
In progress:
Plymouth Meeting Mall	Macy's⁽¹⁾	see above			Edge Fitness	38	Q4 19
					Michael's	26	Q1 20
Valley Mall	Sears	see above			Dick's Sporting Goods	57	Q1 20
Moorestown Mall	Macy's	see above			Michael's	25	Q1 20
Woodland Mall	Sears	see above			Von Maur	87	Q4 19
					Urban Outfitters	8	Q4 19
					Small shops	13	Q4 19
Willow Grove Park	JC Penney	125	Q3 17	Q1 18	Studio Movie Grill	49	Q1 20
					Yard House	8	Q4 19
Dartmouth Mall	Sears	108	Q3 19	Q3 19	Burlington	44	Q2 20

⁽¹⁾	Property is subject to a ground lease.

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) selling outparcels, (ii) selling land parcels on our properties to multifamily or hotel developers, (iii) entering into sale-leaseback or other structured finance transactions to raise capital, (iv) making additional borrowings under our 2018 Revolving Facility, (v) obtaining construction loans on specific projects, (vi) 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, (vii) 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 (viii) obtaining equity capital, including through the issuance of common or preferred equity securities if market conditions are favorable, or through other actions. In particular, we are in active discussions with multifamily residential property developers to sell certain land parcels and currently expect to enter into agreements of sale before the end of 2019.

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 $151.8 million as of September 30, 2019.

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In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop Fashion District Philadelphia. As we redevelop Fashion District Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, Net Operating Income (“NOI”) and depreciation, will continue to be affected until the newly constructed space is completed, leased and occupied. Fashion District Philadelphia opened in September 2019 and is not yet fully stabilized as development work is continuing.

In January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $250.0 million term loan (the “FDP Term Loan”). The initial term of the FDP Term Loan is five years, and bears interest at a variable rate of 2.00% over LIBOR. PREIT and Macerich have secured the FDP Term Loan by pledging their respective equity interests in the entities that own the Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate of $123.0 million as a distribution of our share of the draws.

In July 2019, the FDP Term Loan was modified to increase the total potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.

As of October 31, 2019, lender commitments have not been received for the remaining $49.0 million available under the FDP Term Loan.

CRITICAL ACCOUNTING POLICIES

Critical Accounting Policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in a similar business. The estimates and assumptions made by management in applying Critical Accounting Policies have not changed materially during 2019 or 2018, 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, 2018.

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.

The determination of undiscounted cash flows requires significant estimates by management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could impact the determination of whether an impairment exists and whether the effects could materially affect our net income. To the extent estimated undiscounted cash flows are less than the carrying value of the property, the loss will be measured as the excess of the carrying amount of the property over the estimated fair value of the property.

Assessment of our ability to recover certain lease related costs must be made when we have a reason to believe that the tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.

An other than temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is charged to income.

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If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, less estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.

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.

RESULTS OF OPERATIONS

Occupancy

The table below sets forth certain occupancy statistics for our properties as of September 30, 2019 and 2018:

	Occupancy⁽¹⁾ at September 30,
	Consolidated Properties						Unconsolidated Properties⁽²⁾						Combined⁽²⁾
	2019			2018			2019			2018			2019			2018
Retail portfolio weighted average:
Total excluding anchors		90.2	%		91.5	%		89.9	%		89.0	%		90.1	%		90.9	%
Total including anchors		92.7	%		93.9	%		91.8	%		91.0	%		92.5	%		93.4	%
Core Malls weighted average:⁽³⁾
Total excluding anchors		91.6	%		92.5	%		86.6	%		89.0	%		91.1	%		92.1	%
Total including anchors		94.8	%		95.3	%		90.9	%		92.4	%		94.4	%		95.0	%

⁽¹⁾

Occupancy for both periods presented includes all tenants irrespective of the term of their agreements. Fashion District Philadelphia is excluded for 2019 and 2018 because the property opened on September 19, 2019 and a significant portion of the space at the property has not yet been placed into service.

⁽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 "— Non-GAAP Supplemental Financial Measures" for further details on our ownership interests in our unconsolidated properties.

⁽³⁾	Core Malls excludes Fashion District Philadelphia, Exton Square Mall, Valley View Mall, power centers and Gloucester Premium Outlets.

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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 September 30, 2019:

		Number		GLA		Term		Initial Rent per square foot ("psf")		Previous Rent psf		Initial Gross Rent Renewal Spread⁽¹⁾						Average Rent Renewal Spread⁽²⁾			Annualized Tenant Improvements psf⁽³⁾
												$			%			%
Non Anchor
New Leases
Under 10k square feet ("sf")	Consolidated		25		62,063		5.9	$	38.34	n/a		n/a			n/a			n/a			$	7.34
	Unconsolidated⁽⁴⁾		3		3,229		3.4		69.41	n/a		n/a			n/a			n/a				-
Total Under 10k sf			28		65,292		5.8	$	39.88	n/a		n/a			n/a			n/a			$	7.13

Over 10k sf	Consolidated		2		35,034		10.7	$	18.94	n/a		n/a			n/a			n/a			$	10.63
Total New Leases			30		100,326		7.5	$	32.57	n/a		n/a			n/a			n/a			$	8.87

Renewal Leases
Under 10k sf	Consolidated		16		18,748		5.3	$	105.18	$	96.89	$	8.29			8.6	%		13.2	%	$	1.45
	Unconsolidated⁽⁴⁾		8		17,996		2.7		81.71		92.23		(10.52	)		(11.4	%)		(13.5	%)		-
Total Under 10k sf			24		36,744		4.0	$	93.69	$	94.61	$	(0.92	)		(1.0	%)		0.1	%	$	0.98

Over 10k sf	Consolidated		5		68,984		3.3	$	24.09	$	22.76	$	1.33			5.8	%		6.5	%	$	-
	Unconsolidated⁽⁴⁾		1		11,306		1.0		14.15		14.15		-			0.0	%		0.0	%		-
Total Over 10k sf			6		80,290		2.9	$	22.69	$	21.55	$	1.14			5.3	%		5.9	%		-
Total Fixed Rent			30		117,034		3.3	$	44.98	$	44.49	$	0.49			1.1	%		2.2	%	$	0.38
Percentage in Lieu	Consolidated		14		24,057		2.5	$	39.24	$	46.13	$	(6.89	)		(14.9	%)					-
Total Renewal Leases			44		141,091		3.2	$	44.00	$	44.77	$	(0.76	)		(1.7	%)				$	0.33
Total Non Anchor			74		241,417		5.0	$	39.25

Anchor
Renewal Leases	Consolidated		1		96,357		5.0	$	4.64	n/a		n/a			n/a			n/a			$	-
Total			1		96,357		5.0	$	4.64

⁽¹⁾

Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.

⁽²⁾

Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.

⁽³⁾	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⁾

We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “— Non-GAAP Supplemental Financial Measures” for further details on our ownership interests in our unconsolidated properties.

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The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the nine months ended September 30, 2019:

		Number		GLA		Term		Initial Rent per square foot ("psf")		Previous Rent psf		Initial Gross Rent Renewal Spread⁽¹⁾						Average Rent Renewal Spread⁽²⁾			Annualized Tenant Improvements psf⁽³⁾
												$			%			%
Non Anchor
New Leases
Under 10k square feet ("sf")	Consolidated		82		213,611		6.7	$	40.32	n/a		n/a			n/a			n/a			$	12.03
	Unconsolidated⁽⁴⁾		8		24,075		5.4		50.15	n/a		n/a			n/a			n/a				11.66
Total Under 10k sf			90		237,686		6.6	$	41.32	n/a		n/a			n/a			n/a			$	12.00

Over 10k sf	Consolidated		4		67,272		10.0		19.32	n/a		n/a			n/a			n/a				5.87
Total New Leases			94		304,958		7.3	$	36.46	n/a		n/a			n/a			n/a			$	10.15

Renewal Leases
Under 10k sf	Consolidated		68		134,047		3.5	$	63.84	$	60.59	$	3.25			5.4	%		6.8	%	$	2.39
	Unconsolidated⁽⁴⁾		16		43,297		3.2		69.57		78.07		(8.50	)		(10.9	%)		(7.1	%)		2.04
Total Under 10k sf			84		177,344		3.4	$	65.24	$	64.86	$	0.38			0.6	%		2.5	%	$	2.31

Over 10k sf	Consolidated		11		201,155		4.3	$	16.76	$	15.85	$	0.91			5.7	%		6.6	%	$	0.49
	Unconsolidated⁽⁴⁾		1		11,306		1.0		14.15		14.15		-			0.0	%		0.0	%		-
Total Over 10k sf			12		212,461		4.1		16.62		15.76		0.86			5.5	%		6.3	%		0.48
Total Fixed Rent			96		389,805		3.8	$	38.74	$	38.10	$	0.64			1.7	%		3.4	%	$	1.23
Percentage in Lieu	Consolidated		54		169,739		1.9	$	31.20	$	45.02	$	(13.82	)		(30.7	%)
Total Renewal Leases			150		559,544		3.2	$	36.45	$	40.20	$	(3.74	)		(9.3	%)				$	1.01
Total Non Anchor			244		864,502		4.7	$	36.46

Anchor
New Leases			1		43,840		10.0	$	16.50	n/a		n/a			n/a			n/a			$	12.11
Renewal Leases	Consolidated		7		726,100		4.0		3.63	$	4.31	$	(0.68	)		(15.8	%)	n/a			$	-
Total			8		769,940		4.3	$	4.36

⁽¹⁾

⁽²⁾

⁽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⁾

Overview

Net income for the three months ended September 30, 2019 was $24.7 million compared to a net loss of $1.6 million for the three months ended September 30, 2018. This $26.4 million change primarily reflects a gain on debt extinguishment of $29.6 million and net insurance recoveries of $2.9 million recorded in the three months ended September 30, 2019, which was partially offset by: (a) a $3.5 million decrease in Same Store NOI; (b) a $2.2 million decrease in Non Same Store NOI; (c) a $2.2 million increase in general and administrative expenses, primarily due to a $1.2 million decrease in capitalized leasing costs as a result of the adoption of ASC 842 effective January 1, 2019; and (d) a $1.2 million decrease in other income primarily due to historic tax credit revenues recorded in the 2018 period, which did not recur in the 2019 period, and lower corporate sponsorship revenues compared to the 2018 period.

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decrease in capitalized leasing costs as a result of the adoption of ASC 842 effective January 1, 2019; (d) $2.0 million decrease in other income primarily due to historic tax credit revenues recorded in the 2018 period, which did not recur in the 2019 period, and lower corporate sponsorship revenues and lower fees from management and leasing fees provided to third-parties compared to the 2018 period; and (e) a $1.5 million impairment of a land parcel recorded in the nine months ended September 30, 2019.

See “Non-GAAP Supplemental Financial Measures—Net Operating Income” for the definitions and additional discussion about Net Operating Income, Same Store NOI and Non Same Store NOI, which are non-GAAP measures.

The following table sets forth our results of operations for the three and nine months ended September 30, 2019 and 2018.

	Three Months Ended September 30,						% Change 2018 to 2019				Nine Months Ended September 30,						% Change 2018 to 2019
(in thousands of dollars)	2019			2018							2019			2018
Real estate revenue	$	80,876		$	86,389			(6	)	%	$	246,629		$	262,904			(6	)	%
Property operating expenses		(34,165	)		(34,700	)		(2	)	%		(103,056	)		(105,464	)		(2	)	%
Other income		498			1,714			(71	)	%		1,440			3,454			(58	)	%
Depreciation and amortization		(31,236	)		(33,119	)		(6	)	%		(98,085	)		(100,505	)		(2	)	%
General and administrative expenses		(10,605	)		(8,441	)		26		%		(33,419	)		(27,969	)		19		%
Provision for employee separation expenses		(218	)		(561	)		(61	)	%		(1,078	)		(956	)		13		%
Insurance recoveries, net		2,878			-			0		%		4,494			-			0		%
Project costs and other expenses		(80	)		(214	)		(63	)	%		(267	)		(465	)		(43	)	%
Interest expense, net		(15,534	)		(15,181	)		2		%		(46,986	)		(46,064	)		2		%
Gain on debt extinguishment, net		29,600			-			0		%		24,832			-			0		%
Impairment of assets		-			-			0		%		-			(34,286	)		(100	)	%
Impairment of development land parcel		-			-			0		%		(1,464	)		-			0		%
Equity in income of partnerships		1,531			2,477			(38	)	%		6,136			8,186			(25	)	%
Gain on sales of real estate by equity method investee		-			-			0		%		553			2,773			(80	)	%
Gain on sales of real estate, net		1,171			-			0		%		2,684			748			259		%
Adjustment to gain on sales of interests in non operating real estate		-			-			0		%		-			(25	)		(100	)	%
Net income (loss)	$	24,716		$	(1,636	)		(1,611	)	%	$	2,413		$	(37,669	)		(106	)	%

The amounts in the preceding tables reflect our consolidated properties and our unconsolidated properties. Our unconsolidated properties are presented under the equity method of accounting in the line item “Equity in income of partnerships.”

Real estate revenue

Effective January 1, 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) and related guidance using the optional transition method and elected to apply the provisions of the standard as of the adoption date rather than the earliest date presented. Prior period amounts were not restated. Since we adopted the practical expedient in ASC 842, which allows us to avoid separating lease (minimum rent) and non-lease rental income (common area maintenance and real estate tax reimbursements), all rental income earned pursuant to tenant leases is reflected as one line, “Lease revenue,” in the consolidated statement of operations. Utility reimbursements are presented separately in “Expense reimbursements.” We review the collectability of both billed and unbilled lease revenues each reporting period, taking into consideration the tenant’s payment history, credit profile and other factors, including its operating performance. For any tenant receivable balances deemed to be uncollectible, under ASC 842 we record an offset for credit losses directly to Lease revenue in the consolidated statement of operations. Previously, under ASC 840, uncollectible tenants’ receivables were reported in Other property operating expenses in the consolidated statement of operations.

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The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September,					Nine Months Ended September 30,
(in thousands of dollars)	2019			2018		2019			2018
Contractual lease payments:
Base rent	$	53,688		$	56,371	$	163,676		$	167,715
CAM reimbursement income		10,816			11,087		33,365			33,888
Real estate tax income		9,114			10,069		27,494			29,998
Percentage rent		772			646		935			902
Lease termination revenue		11			45		480			7,166
		74,401			78,218		225,950			239,669
Less: credit losses		(1,091	)		-		(2,282	)		-
Lease revenue		73,310			78,218		223,668			239,669
Expense reimbursements		5,364			5,677		15,342			16,307
Other real estate revenue		2,202			2,494		7,619			6,928
Total real estate revenue	$	80,876		$	86,389	$	246,629		$	262,904

The Company has presented the above information to provide additional detail about the components of lease revenue based on the terms of the underlying lease contracts. The presentation of contractual lease payments is not, and is not intended to be, a presentation in accordance with GAAP. The Company believes this information is useful to investors, securities analysts and other interested parties to evaluate the Company’s performance.

Real estate revenue decreased by $5.5 million, or 6%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to:

•

a decrease of $1.6 million at non same store properties Valley View Mall and Exton Square Mall due to three anchor store closings during 2018 and 2019 and associated co-tenancy concessions, as well as a decrease in lease revenue at Exton Square Mall due to the sale of an out parcel during the three months ended June 30, 2019;

•

an increase of $1.1 million in same store credit losses as a result of the adoption of ASC 842. Under ASC 840, such amounts were included in other property operating expenses and were $0.3 million in the three months ended September 30, 2018. Credit losses during the three months ended September 30, 2019 were adversely impacted by one tenant bankruptcy impacting thirteen stores (11 stores at wholly owned properties and two stores at joint venture properties);

•

a decrease of $1.0 million in same store base rent due to a $1.1 million decrease related to tenant bankruptcies in 2018 and 2019, partially offset by $0.1 million from net new store openings over the previous twelve months;

•

a decrease of $0.7 million at Wyoming Valley Mall, which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019;

•

a decrease of $0.6 million in same store real estate tax reimbursements due to 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, partially offset by an increase in real estate tax expense (see “Property Operating Expenses”);

•

a decrease of $0.2 million in same store other real estate revenue primarily due to a decrease in corporate sponsorship revenue; and

•

a decrease of $0.2 million in same store tenant utility reimbursements due to a combination of lower tenant electric usage and lower occupancy at some properties.

Real estate revenue decreased by $16.3 million, or 6%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to:

•

a decrease of $6.1 million in same store lease termination revenue, including $6.5 million from the termination of leases with three tenants during the nine months ending September 30, 2018, partially offset by $0.3 million received from two tenants during the nine months ended September 30, 2019;

•

a decrease of $4.3 million at non same store properties Valley View Mall and Exton Square Mall due to three anchor store closings during 2018 and 2019 and associated co-tenancy concessions, as well as a decrease in lease revenue at Exton Square Mall due to the sale of an outparcel during the nine months ended September 30, 2019;

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•

an increase of $1.9 million in same store credit losses as a result of the adoption of ASC 842. Under ASC 840, such amounts were in included in other property operating expenses and were $1.8 million in the nine months ended September 30, 2018;

•

a decrease of $1.6 million in same store real estate tax reimbursements due to 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, partially offset by an increase in real estate tax expense (see “Property Operating Expenses”);

•

a decrease of $1.3 million at Wyoming Valley Mall, which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019;

•

a decrease of $0.5 million in same store tenant utility reimbursements due to a combination of lower tenant usage and lower occupancy at some properties;

•

a decrease of $0.3 million in same store other real estate revenue primarily due to a decrease in corporate sponsorship revenue; and

•

a decrease of $0.1 million in same store common area expense reimbursements, resulting from an increase of $1.9 million associated with the straight lining of fixed common area expense reimbursements effective January 1, 2019 in accordance with ASC 842. Excluding the impact of the straight line adjustment, same store common area reimbursements decreased by $2.0 million due to 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; partially offset by

•

an increase of $0.2 million in same store base rent due to $2.1 million from net new store openings over the previous twelve months, partially offset by a $1.9 million decrease related to tenant bankruptcies in 2018 and 2019.

Property operating expenses

Property operating expenses decreased by $0.5 million, or 2%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to:

•

a decrease of $0.3 million in same store credit losses as a result of the adoption of ASC 842. Under ASC 840, such amounts were included in other property operating expenses and were $0.3 million in the three months ended September 30, 2018;

•

a decrease of $0.3 million at non same store properties Valley View Mall and Exton Square Mall primarily due a decrease in real estate tax expense due to a lower tax assessment;

•

a decrease of $0.3 million in same store tenant utility expense due to a combination of lower tenant electric usage and electric rates;

•

a decrease of $0.2 million in same store marketing expense; and

•

a decrease of $0.1 million in same store property legal expense; partially offset by

•

an increase of $0.4 million in same store common area maintenance expense, including increases of $0.1 million in housekeeping expense, $0.1 million in loss prevention expense and $0.1 million in insurance expense; and

•

an increase of $0.3 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 $2.4 million, or 2%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to:

•

a decrease of $1.8 million in same store credit losses as a result of the adoption of ASC 842. Under ASC 840, such amounts were included in other property operating expenses and were $1.8 million in the nine months ended September 30, 2018;

•

a decrease of $0.7 million at non same store properties Valley View Mall and Exton Square Mall primarily due to a decrease in real estate tax expense due to a lower tax assessment and a decrease in tenant electric expense;

•

a decrease of $0.5 million in same store marketing expense;

•

a decrease of $0.4 million in same store tenant utility expense due to a combination of lower tenant electric usage and electric rates;

•

a decrease of $0.2 million in same store property legal expense; and

•

a decrease of $0.2 million at Wyoming Valley Mall, which was conveyed to the lender of the mortgage loan secured by Wyoming Valley Mall on September 26, 2019; partially offset by

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•

an increase of $1.0 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; and

•

an increase of $0.8 million in same store common area maintenance expense, including increases of $0.4 million in loss prevention expense, $0.2 million in insurance expense and $0.1 million in repairs and maintenance expense.

Depreciation and amortization

Depreciation and amortization expense decreased by $1.9 million, or 6%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to:

•

a decrease of $1.0 million at two properties that have a lower asset base resulting from impairment charges during 2018; and

•

a decrease of $0.8 million at Wyoming Valley Mall due to a lower asset base resulting from an impairment charge during 2018. Wyoming Valley Mall was conveyed to the lender of the mortgage loan secured by the Mall on September 26, 2019.

Depreciation and amortization expense decreased by $2.4 million, or 2%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to:

•

a decrease of $2.9 million at two properties that have a lower asset base resulting from impairment charges during 2018; and

•

a decrease of $1.5 million at Wyoming Valley Mall due to a lower asset base resulting from an impairment charge during 2018. Wyoming Valley Mall was conveyed to the lender of the mortgage loan secured by the Mall on September 26, 2019; partially offset by

•

an increase of $2.0 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.

General and administrative expenses

General and administrative expenses increased by $2.2 million, or 26%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 primarily due to certain internal leasing and legal costs that were previously capitalized under ASC 840 now being recorded as period costs under ASC 842 and included in general and administrative expenses. For the three months ended September 30, 2018, we capitalized $1.6 million of internal leasing and legal salaries and benefits. No such costs were capitalized for the three months ended September 30, 2019. Incentive compensation expenses also increased by $0.4 million, primarily due to higher costs related to equity compensation plans.

General and administrative expenses increased by $5.4 million, or 19%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 primarily due to certain internal leasing and legal costs that were previously capitalized under ASC 840 now being recorded as period costs under ASC 842 and included in general and administrative expenses. For the nine months ended September 30, 2018, we capitalized $3.9 million of internal leasing and legal salaries and benefits. No such costs were capitalized for the nine months ended September 30, 2019. Incentive compensation expenses also increased by $0.9 million.

Interest expense

Interest expense increased by $0.3 million, or 2%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018. This increase was primarily due to higher weighted average interest rates and higher weighted average debt balances. Our weighted average effective borrowing rate was 4.28% for the three months ended September 30, 2019 compared to 4.21% for the three months ended September 30, 2018. Our weighted average debt balance was $1,700.0 million for the three months ended September 30, 2019, compared to $1,614.2 million for the three months ended September 30, 2018.

Interest expense increased by $0.9 million, or 2%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. This increase was primarily due to higher weighted average interest rates and higher weighted average debt balances, partially offset by greater amounts of capitalized interest in 2019. Our weighted average effective borrowing rate was 4.26% for the nine months ended September 30, 2019 compared to 4.16% for the nine months ended September 30, 2018. Our weighted average debt balance was $1,687.4 million for the nine months ended September 30, 2019, compared to $1,615.0 million for the nine months ended September 30, 2018.

Impairment of Assets

Impairment of development land parcel for the nine months ended September 30, 2019 was $1.5 million in connection with the sale of a land parcel in Gainesville, Florida. There was no impairment of development land parcel for the nine months ended September 30, 2018, or the three months ended September 30, 2019 and 2018, respectively.

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There was no impairment of assets for the nine months ended September 30, 2019. Impairment of assets for the nine months ended September 30, 2018 consisted of $32.2 million in connection with Wyoming Valley Mall, Wilkes-Barre, Pennsylvania and $2.1 million in connection with sale negotiations with a prospective buyer of a land parcel in Gainesville, Florida. There was no impairment of assets for the three months ended September 30, 2019 and 2018, respectively.

Equity in income of partnerships

Equity in income of partnerships decreased by $1.0 million, or 39%, in the three months ended September 30, 2019 compared to the three months ended September 30, 2018, primarily due to lower lease revenue in 2019 at Same Store properties.

Equity in income of partnerships decreased by $2.1 million, or 25%, in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018, primarily due to lower lease revenue in 2019 following the sale of an office condominium unit at Fashion District Philadelphia in the first quarter of 2018 and higher lease termination revenue in the nine months ended September 30, 2018.

Gain on debt extinguishment, net

In September 2019, we conveyed Wyoming Valley Mall to the lender of the mortgage loan secured by the property. The loan had a balance of approximately $72.8 million as of the conveyance on September 26, 2019. As a result of the transfer, having previously recognized an asset impairment loss of approximately $32.2 million on the value of the property, we recorded a gain on extinguishment of debt of $29.6 million during the three months ended September 30, 2019.

Gain on sale of real estate by equity method investee

In March 2019, a partnership in which we hold a 25% interest share sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was $0.6 million, which is recorded in gain on sale of real estate by equity method investee in the accompanying consolidated statement of operations.

Gain on sale of real estate by equity method investee was $2.8 million in the nine months ended September 30, 2018, resulting from our 50% share of a $5.5 million gain on the sale of a condominium interest in 907 Market Street in Philadelphia, Pennsylvania by a partnership in which we hold a 50% ownership interest.

Gain on sale of real estate

In April 2019, we sold an undeveloped land parcel located in New Garden Township, Pennsylvania, for total consideration of $11.0 million, consisting of $8.25 million in cash and $2.75 million of preferred stock. We ascribed no value for accounting purposes to the preferred shares as they are not tradeable, cannot be transferred or sold and have no redemption feature. Up to $1.25 million of the cash consideration received is subject to claw-back if the buyer does not receive entitlements for a stipulated number of housing units. In connection with this sale, we recorded a gain of $0.2 million.

In July 2019, we sold an outparcel located at Valley View Mall in La Crosse, Wisconsin for total consideration of $1.4 million. In connection with this sale, we recorded a gain of $1.2 million.

Gain on sale of real estate was $0.7 million in the nine months ended September 30, 2018, resulting from the sale of an outparcel at Magnolia Mall in Florence, South Carolina.

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NON-GAAP SUPPLEMENTAL FINANCIAL MEASURES

Overview

The preceding discussion analyzes our financial condition and results of operations in accordance with generally accepted accounting principles, or GAAP, for the periods presented. We also use Net Operating Income (“NOI”) and Funds from Operations (“FFO”), which are non-GAAP financial measures, to supplement our analysis and discussion of our operating performance:

•

We believe that NOI is helpful to management and investors as a measure of operating performance because it is an indicator of the return on property investment and provides a method of comparing property performance over time. When we use and present NOI, we also do so on a same store (“Same Store NOI”) and non same store (“Non Same Store NOI”) basis to differentiate between properties that we have owned for the full periods presented and properties acquired, sold, under redevelopment or designated as non-core during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below.

•

We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net income that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. In addition to FFO and FFO per diluted share and OP Unit, when applicable, we also present FFO, as adjusted and FFO per diluted share and OP Unit, as adjusted, which we believe is helpful to management and investors because they adjust FFO to exclude items that management does not believe are indicative of operating performance, such as provision for employee separation expense and accelerated amortization of financing costs.

•

We use both NOI and FFO, or related terms like Same Store NOI and, when applicable, Funds From Operations, as adjusted, for determining incentive compensation amounts under certain of our performance-based executive compensation programs.

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

Unconsolidated Properties and Proportionate Financial Information

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

To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.

We have determined that we hold a non controlling interest in each of our unconsolidated partnerships, and account for such partnerships using the equity method of accounting, because:

•

Except for two properties that we co-manage with our partner, all of the other entities are managed on a day-to-day basis by one of our other partners as the managing general partner in each of the respective partnerships. In the case of the co-managed properties, all decisions in the ordinary course of business are made jointly.

•

The managing general partner is responsible for establishing the operating and capital decisions of the partnership, including budgets, in the ordinary course of business.

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•

All major decisions of each partnership, such as the sale, refinancing, expansion or rehabilitation of the property, require the approval of all partners.

•

Voting rights and the sharing of profits and losses are generally in proportion to the ownership percentages of each partner.

We hold legal title to a property owned by one of our unconsolidated partnerships through a tenancy in common arrangement. For this property, such legal title is held by us and another entity, and each has an undivided interest in title to the property. With respect to this property, under the applicable agreements between us and the entity with ownership interests, we and such other entity have joint control because decisions regarding matters such as the sale, refinancing, expansion or rehabilitation of the property require the approval of both us and the other entity owning an interest in the property. Hence, we account for this property like our other unconsolidated partnerships using the equity method of accounting. The balance sheet items arising from this property appear under the caption “Investments in partnerships, at equity.”

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

Net Operating Income (“NOI”)

NOI (a non-GAAP measure) is derived from real estate revenue (determined in accordance with GAAP, including lease termination revenue), minus property operating expenses (determined in accordance with GAAP), plus our pro rata share of revenue and property operating expenses of our unconsolidated partnership investments. NOI excludes other income, general and administrative expenses, insurance recoveries, employee separation expenses, interest expense, depreciation and amortization, impairment of assets, gains/ adjustment to gains on sale of interest in non operating real estate, gain on sale of interest in real estate by equity method investee, gains/ losses on sales of interests in real estate, net, gain or loss on debt extinguishment, and project costs and other expenses. We believe that net income is the most directly comparable GAAP measure to NOI.

Same Store NOI is calculated using retail properties owned for the full periods presented and excludes properties acquired, disposed, under redevelopment or designated as non-core during the periods presented. In 2018, Wyoming Valley Mall was designated as non-core and subsequently conveyed to the lender of the mortgage loan secured by that property in September 2019. In 2019, Exton Square and Valley View Malls were designated as non-core and are excluded from Same Store NOI. Non Same Store NOI is calculated using the retail properties excluded from the calculation of Same Store NOI.

The table below reconciles net loss to NOI of our consolidated properties for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Net income (loss)	$	24,716		$	(1,636	)		2,413			(37,669	)
Other income		(498	)		(1,714	)		(1,440	)		(3,454	)
Depreciation and amortization		31,236			33,119			98,085			100,505
General and administrative expenses		10,605			8,441			33,419			27,969
Insurance recoveries, net		(2,878	)		-			(4,494	)		-
Provision for employee separation expenses		218			561			1,078			956
Project costs and other expenses		80			214			267			465
Interest expense, net		15,534			15,181			46,986			46,064
Impairment of assets		-			-			-			34,286
Impairment of development land parcel		-			-			1,464			-
Equity in income of partnerships		(1,531	)		(2,477	)		(6,136	)		(8,186	)
Gain on debt extinguishment, net		(29,600	)		-			(24,832	)		-
Gain on sales of real estate by equity method investee		-			-			(553	)		(2,773	)
Adjustment to gain on sales of interests in real estate, net		-			-			-			25
Gain on sales of interests in real estate, net		(1,171	)		-			(2,684	)		(748	)
NOI from consolidated properties	$	46,711		$	51,689		$	143,573		$	157,440

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The table below reconciles equity in income of partnerships to NOI of our share of unconsolidated properties for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands of dollars)	2019			2018			2019			2018
Equity in income of partnerships	$	1,531		$	2,477		$	6,136		$	8,186
Other income		(24	)		(12	)		(46	)		(35	)
Depreciation and amortization		2,403			2,132			6,453			6,518
Interest and other expenses		2,823			2,713			8,414			8,090
NOI from equity method investments at ownership share	$	6,733		$	7,310		$	20,957		$	22,759

The table below presents total NOI and total NOI excluding lease termination revenue for the three months ended September 30, 2019 and 2018:

	Same Store				Non Same Store						Total (non-GAAP)
(in thousands of dollars)	2019		2018		2019			2018			2019		2018
NOI from consolidated properties	$	43,858	$	46,888	$	2,853		$	4,801		$	46,711	$	51,689
NOI from equity method investments at ownership share		7,029		7,351		(296	)		(41	)		6,733		7,310
Total NOI		50,887		54,239		2,557			4,760			53,444		58,999
Less: lease termination revenue		55		252		-			14			55		266
Total NOI excluding lease termination revenue	$	50,832	$	53,987	$	2,557		$	4,746		$	53,389	$	58,733

Total NOI decreased by $5.6 million in the three months ended September 30, 2019 compared to the three months ended September 30, 2018 due to (a) a $3.5 million decrease in Same Store NOI and (b) a decrease of $2.3 million in Non Same Store NOI. The decrease in Same Store NOI primarily is due to lost revenues from bankrupt tenants and associated write-offs of pre-petition tenant receivables. The decrease in NOI from Non Same Store properties is due to lower NOI contributions from Valley View and Wyoming Valley Malls, resulting from anchor closings and related co-tenancy revenue adjustments for tenants still in occupancy, lost revenues from bankrupt tenants and the sale of the Whole Foods parcel at Exton Square Mall in the first quarter of 2019. Wyoming Valley Mall was conveyed to the lender of the mortgage loan secured by that property in September 2019. See “— Real Estate Revenue” and “— Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.

The table below presents total NOI and total NOI excluding lease termination revenue for the nine months ended September 30, 2019 and 2018:

	Same Store				Non Same Store					Total (non-GAAP)
(in thousands of dollars)	2019		2018		2019			2018		2019		2018
NOI from consolidated properties	$	133,210	$	142,237	$	10,363		$	15,203	$	143,573	$	157,440
NOI from equity method investments at ownership share		21,148		22,280		(191	)		479		20,957		22,759
Total NOI		154,358		164,517		10,172			15,682		164,530		180,199
Less: lease termination revenue		513		7,066		17			577		530		7,643
Total NOI excluding lease termination revenue	$	153,845	$	157,451	$	10,155		$	15,105	$	164,000	$	172,556

Total NOI decreased by $15.7 million in the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 due to (a) a $10.3 million decrease in Same Store NOI and (b) $5.5 million in Non Same Store NOI. The decrease in Same Store NOI primarily is due to $6.6 million of lower lease termination revenues, $3.5 million of lower revenues from bankrupt tenants and associated write-offs of pre-petition tenant receivables, partially offset by a $2.0 million contribution from anchor replacement tenants and other factors. The decrease in NOI from Non Same Store properties is primarily due lower NOI contributions from Valley View and Wyoming Valley Malls, resulting from anchor closings and related co-tenancy revenue adjustments for tenants still in occupancy, lost revenues from bankrupt tenants and the sale of the Whole Foods parcel at Exton Square Mall in the first quarter of 2019. See “— Real Estate Revenue” and “— Property Operating Expenses” above for further information about the factors affecting NOI from our consolidated properties.

Funds From Operations (“FFO”)

The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO, which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding (i) depreciation and amortization related to real estate, (ii) gains and losses from the sale of certain real estate assets, (iii) gains and losses from change in control, and (iv) impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We compute FFO in accordance with standards established by NAREIT, which may not be comparable to FFO reported by other REITs that do not define the term in accordance with the current NAREIT definition, or that interpret the current NAREIT definition differently than we do.

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FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of limited partnership interest in our operating partnership (“OP Unit”) and, when applicable, related measures such as Funds From Operations, as adjusted, in measuring our performance against our peers and as one of the performance measures for determining incentive compensation amounts earned under certain of our performance-based executive compensation programs.

FFO does not include gains and losses on sales of operating real estate assets or impairment write downs of depreciable real estate, which are included in the determination of net income in accordance with GAAP. Accordingly, FFO is not a comprehensive measure of our operating cash flows. In addition, since FFO does not include depreciation on real estate assets, FFO may not be a useful performance measure when comparing our operating performance to that of other non-real estate commercial enterprises. We compensate for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net income and net cash provided by operating activities, and other non-GAAP financial performance measures, such as NOI. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net income (determined in accordance with GAAP) as an indication of our financial performance or to be an alternative to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available for our cash needs, including our ability to make cash distributions. We believe that net income is the most directly comparable GAAP measurement to FFO.

We also present Funds From Operations, as adjusted, and Funds From Operations per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the three months ended September 30, 2019 and 2018, respectively, to show the effect of such items as gain or loss on debt extinguishment (including accelerated amortization of financing costs), impairment of assets, provision for employee separation expense and insurance recoveries or losses, net, which affected our results of operations, but are not, in our opinion, indicative of our operating performance.

The following table presents a reconciliation of net loss determined in accordance with GAAP to FFO attributable to common shareholders and OP Unit holders, FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, FFO attributable to common shareholders and OP Unit holders, as adjusted, and FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit, as adjusted for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019			2018			2019			2018
Net income (loss)	$	24,716		$	(1,636	)	$	2,413		$	(37,669	)
Depreciation and amortization on real estate:
Consolidated properties		30,948			32,764			97,126			99,428
PREIT’s share of equity method investments		2,402			2,132			6,453			6,518
Gain on sales of real estate by equity method investee		-			-			-			(2,773	)
Gain on sales of interest in real estate, net		(1,171	)		-			(2,684	)		(748	)
Impairment of assets		-			-			-			34,286
Preferred share dividends		(6,843	)		(6,843	)		(20,531	)		(20,531	)
Funds from operations attributable to common shareholders and OP Unit holders		50,052			26,417			82,777			78,511
Gain on debt extinguishment, net		(29,600	)		-			(24,832	)		-
Accelerated amortization of financing costs		-			-			-			363
Impairment of development land parcel		-			-			1,464			-
Provision for employee separation expense		218			561			1,078			956
Insurance recoveries, net		(2,878	)		-			(4,494	)		-
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders	$	17,792		$	26,978		$	55,993		$	79,830
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit	$	0.63		$	0.34		$	1.05		$	1.00
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit	$	0.23		$	0.35		$	0.71		$	1.02
Weighted average number of shares outstanding		76,492			69,803			74,771			69,718
Weighted average effect of full conversion of OP Units		2,023			8,273			3,625			8,273
Effect of common share equivalents		332			38			375			272
Total weighted average shares outstanding, including OP Units		78,847			78,114			78,771			78,263

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FFO attributable to common shareholders and OP Unit holders was $50.1 million for the three months ended September 30, 2019, an increase of $23.6 million, or 89.5%, compared to $26.4 million for the three months ended September 30, 2018.

FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.63 and $0.34 for the three months ended September 30, 2019 and 2018, respectively.

FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.23 and $0.35 for the three months ended September 30, 2019 and 2018, respectively.

FFO attributable to common shareholders and OP Unit holders was $82.8 million for the nine months ended September 30, 2019, an increase of $4.3 million or 5.4%, compared to $78.5 million for the nine months ended September 30, 2018.

FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $1.05 and $1.00 for the nine months ended September 30, 2019 and 2018, respectively.

FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.71 and $1.02 for the nine months ended September 30, 2019 and 2018, respectively.

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, 2018 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 shareholders, recurring capital expenditures, tenant improvements and leasing commissions, but excluding acquisitions and redevelopment and development projects, generally through our available working capital, net cash provided by operations, borrowings under our 2018 Revolving Facility, subject to the terms and conditions of our 2018 Revolving Facility, and asset sales, including the sale of land parcels to third parties for multifamily and hotel developments. 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 nine months ended September 30, 2019 were $70.6 million, based on distributions of $1.3827 per Series B Preferred Share, $1.3500 per Series C Preferred Share, $1.2891 per Series D Share, and $0.63 per common share and OP Unit.

In December 2017, 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.

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, including potentially as a result of the expected phase out of LIBOR, resulting in higher borrowing costs.

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We expect to meet certain of our longer-term requirements, such as obligations to fund redevelopment and development projects, certain capital requirements (including scheduled debt maturities), future property and portfolio acquisitions, renovations, expansions and other non-recurring capital improvements, through a variety of capital sources, subject to the terms and conditions of our Credit Agreements, as further described below.

The capital and credit markets fluctuate and, at times, limit access to debt and equity financing for companies. While we expect to continue to be able to access capital, there is no assurance we will be able to do so in the future or on similar terms and conditions.

LIBOR Alternative

In July 2017, the Financial Conduct Authority (“FCA”), which is the authority that regulates LIBOR, announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has identified the Secured Overnight Financing Rate ("SOFR") as the rate that represents best practice as the alternative to USD-LIBOR for use in derivatives and other financial contracts that are currently indexed to USD-LIBOR. We are not able to predict when LIBOR will cease to be available or when there will be sufficient liquidity in the SOFR markets. Any changes adopted by FCA or other governing bodies in the method used for determining LIBOR may result in a sudden or prolonged increase or decrease in reported LIBOR. If that were to occur, our interest payments could change, perhaps substantially. In addition, uncertainty about the extent and manner of future changes may result in interest rates and/or payments that are higher or lower than if LIBOR were to remain available in its current form.

We have material contracts that are indexed to LIBOR and are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. These risks arise in connection with transitioning contracts to a new alternative rate, including any resulting value transfer that may occur. The value of loans, securities, and derivative instruments tied to LIBOR could also be affected if LIBOR is limited or discontinued. For some instruments, the method of transitioning to an alternative rate may be challenging, as they may require negotiation with the respective counterparty.

If a contract is not transitioned to an alternative rate and LIBOR is discontinued, the impact on our contracts is likely to vary by contract. If LIBOR is discontinued or if the methods of calculating LIBOR change from their current form, interest rates on our current or future indebtedness may be adversely affected.

While we expect LIBOR to be available in substantially its current form until the end of 2021, it is possible that LIBOR will become unavailable prior to that point. This could occur, for example, if a requisite number of banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to an alternative reference rate would be accelerated and magnified.

Credit Agreements

We have entered into two credit agreements (collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit Agreement, which includes (a) the $400 million 2018 Revolving Facility and (b) the $300 million 2018 Term Loan Facility, and (2) the $250 million 2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year Term Loan are collectively referred to as the “Term Loans.”

We are subject to certain financial covenants under the terms of the Credit Agreements. As of September 30, 2019, we were in compliance with all financial covenants in the Credit Agreements. See Note 4 in the notes to our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for a description of the identical covenants and common provisions contained in the Credit Agreements.

As of September 30, 2019, we had borrowed $550.0 million under the Term Loans and $213.0 million was outstanding under our 2018 Revolving Facility. Pursuant to certain covenants in the 2018 Revolving Facility, the unused portion of the 2018 Revolving Facility that was available to us as of September 30, 2019 was $80.7 million.

Interest Rate Derivative Agreements

Mortgage Loan Activity

We received a notice of transfer of servicing, dated July 9, 2018, from the special servicer for the mortgage loan secured by Wyoming Valley Mall, which had a balance of $72.8 million as of September 26, 2019. Our subsidiary that was the borrower under the loan also received a notice of default on the loan from the lender, dated December 14, 2018. The loan was subject to a cash sweep arrangement as a result of an anchor tenant trigger event. We had entered into an agreement with the lender to jointly market the property for sale for a stipulated period of time. The property did not sell and we conveyed the property to the lender by deed in lieu of foreclosure on September 26, 2019.

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Mortgage Loans

As of September 30, 2019, our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to October 2025. Six of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95% and had a weighted average interest rate of 4.08% at September 30, 2019. Three of our mortgage loans bear interest at variable rates, a portion of which have been swapped to fixed rates, and, taking into consideration the impact of interest rate swaps, had a weighted average interest rate of 3.75% at September 30, 2019. The weighted average interest rate of all consolidated mortgage loans was 3.99% at September 30, 2019. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments” on the consolidated balance sheets and are not included in the table below.

The following table outlines the timing of principal payments related to our consolidated mortgage loans as of September 30, 2019:

(in thousands of dollars)	Total		Remainder of 2019		2020-2021		2022-2023		Thereafter
Principal payments	$	70,090	$	4,270	$	34,962	$	20,047	$	10,811
Balloon payments		836,579		—		215,946		409,288		211,345
Total	$	906,669	$	4,270	$	250,908	$	429,335	$	222,156
Less: unamortized debt issuance costs		2,028
Carrying value of mortgage notes payable	$	904,641

Contractual Obligations

The following table presents our aggregate contractual obligations as of September 30, 2019 for the periods presented:

(in thousands of dollars)	Total		Remainder of 2019		2020-2021		2022-2023		Thereafter
Mortgage loan principal payments	$	906,669	$	4,270	$	250,908	$	429,335	$	222,156
Term Loans		550,000		—		250,000		—		300,000
2018 Revolving Facility		213,000		—		—		—		213,000
Interest on indebtedness⁽¹⁾⁽²⁾		204,770		16,305		122,189		50,953		15,323
Operating leases		2,191		144		579		1,468		-
Ground leases		55,246		337		3,304		3,168		48,437
Development and redevelopment commitments⁽³⁾		97,655		59,064		38,591		—		—
Total	$	2,029,531	$	80,120	$	665,571	$	484,924	$	798,916

⁽¹⁾	Includes payments expected to be made in connection with interest rate swaps.

⁽²⁾	For interest payments associated with variable rate debt, these amounts are based on the rates in effect on September 30, 2019.

⁽³⁾

The timing of the payments of these amounts is uncertain. We expect that these payments will be made during the remainder of 2019 and in 2020, but cannot provide any assurance that changed circumstances at these projects will not delay the settlement of these obligations. In addition, we included 100% of the obligations of the Fashion District Philadelphia redevelopment project because our Operating Partnership, PREIT Associates, and Macerich, have jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016.

Preferred Share Dividends

Annual dividends on our 3,450,000 7.375% Series B Preferred Shares ($25.00 liquidation preference), our 6,900,000 7.20% Series C Preferred Shares ($25.00 liquidation preference) and our 5,000,000 6.875% Series D Preferred Shares ($25.00 liquidation preference) are expected to be $6.4 million, $12.4 million and $8.6 million, respectively, in the aggregate.

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CASH FLOWS

Net cash provided by operating activities totaled $79.7 million for the nine months ended September 30, 2019 compared to $94.2 million for the nine months ended September 30, 2018. This decrease was due to lower NOI from Same Store and Non Same Store properties and higher general and administrative expenses primarily due to the change from the new lease accounting standard which requires the expensing of certain leasing costs that were permitted to be capitalized under the previous standard, and changes in working capital between periods, among other factors.

Cash flows used in investing activities were $87.9 million for the nine months ended September 30, 2019 compared to cash flows provided by investing activities of $0.1 million for the nine months ended September 30, 2018. Cash flows provided by investing activities for the nine months ended September 30, 2019 included $44.2 million of proceeds from asset sales including the sale of two land parcels and two outparcels, the sale of a mortgage loan and cash distributions of proceeds from real estate sold by an equity method investee, as well as $7.0 million of insurance proceeds, and $25.0 million of distributions from the draws under our expanded Fashion District Philadelphia term loan. Cash flows used in investing activities included additions to construction in progress of $86.2 million, investments in partnerships of $55.2 million (primarily at Fashion District Philadelphia), and real estate improvements of $21.2 million (primarily related to ongoing improvements at our properties).

Cash flows provided by investing activities for the nine months ended September 30, 2018 included $123.0 million of distributions from our Fashion District Philadelphia term loan and $19.7 million of proceeds from our share of the sale of the condominium space at 907 Market Street, partially offset by additions to construction in progress of $51.3 million, investments in partnerships of $47.1 million (primarily at Fashion District Philadelphia), and real estate improvements of $23.9 million (primarily related to ongoing improvements at our properties).

Cash flows used in financing activities were $6.4 million for the nine months ended September 30, 2019 compared to cash flows used in financing activities of $96.3 million for the nine months ended September 30, 2018. Cash flows used in financing activities for the first nine months of 2019 included aggregate dividends and distributions of $70.6 million, principal installments on mortgage loans of $12.8 million, and $71.2 million used to defease the mortgage loans secured by Capital City Mall and the release of escrow funds relating to the conveyance of the mortgage loan secured by Wyoming Valley Mall to the lender, partially offset by $148.0 million of net borrowings under our 2018 Revolving Facility.

Cash flows used in financing activities for the first nine months of 2018 included $16.0 million of net repayments on our 2013 Revolving Facility, aggregate dividends and distributions of $70.1 million, and principal installments on mortgage loans of $14.2 million, partially offset by $10.2 million of borrowing 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, 2018, 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 non-anchor stores and other tenants. We also compete to acquire land for new site development or to acquire parcels or properties to add to our existing properties. Our malls and our other operating properties face competition from similar retail centers, including more recently developed or renovated centers that are near our retail properties. We also face competition from a variety of different retail formats, including internet retailers, discount or value retailers, home shopping networks, mail order operators, catalogs, and telemarketers. Our tenants face competition from companies at the same and other properties and from other retail formats as well, including internet retailers. This competition could have a material adverse effect on our ability to lease space and on the amount of rent and expense reimbursements that we receive.

The existence or development of competing retail properties and the related increased competition for tenants might, subject to the terms and conditions of the Credit Agreements, require us to make capital improvements to properties that we would have deferred or would not have otherwise planned to make and might also affect the total sales, sales per square foot, occupancy and net operating income of such properties. Any such capital improvements, undertaken individually or collectively, would involve costs and expenses that could adversely affect our results of operations.

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

We receive a substantial portion of our operating income as rent under leases with tenants. At any time, any tenant having space in one or more of our properties could experience a downturn in its business that might weaken its financial condition. Such tenants might enter into or renew leases with relatively shorter terms. Such tenants might also defer or fail to make rental payments when due, delay or defer lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease or preclude the collection of rent in connection with the space for a period of time, and could result in material losses to us and harm to our results of operations. Also, it might take time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants. Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy or store closings of those tenants might be more significant to us than the bankruptcy or store closings of other tenants. See “Item 2. Properties—Major Tenants” in our Annual Report on Form 10-K for the year ended December 31, 2018. In addition, under many of our leases, our tenants pay rent based, in whole or in part, on a percentage of their sales. Accordingly, declines in these tenants’ sales directly affect our results of operations. Also, if tenants are unable to comply with the terms of their leases, or otherwise seek changes to the terms, including changes to the amount of rent, we might modify lease terms in ways that are less favorable to us. Given current conditions in the economy, certain industries and the capital markets, 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 might also provide for tenants to bear all or a portion of operating expenses, which might reduce the impact of such increases on us. However, rent increases might not keep up with inflation, or if we recover a smaller proportion of property operating expenses, we might bear more costs if such expenses increase because of inflation.

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q for the quarter ended September 30, 2019 , together with other statements and information publicly disseminated by us, contain certain forward-looking statements that can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “project,” “intend,” “may” or similar expressions. Forward-looking statements relate to expectations, beliefs, projections, future plans, strategies, anticipated events, trends and other matters that are not historical facts. 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 the following:

•

changes in the retail and real estate industries, including consolidation and store closings, particularly among anchor tenants;

•

current economic conditions and the corresponding effects on tenant business performance, prospects, solvency and leasing decisions;

•

our inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise;

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•

our ability to maintain and increase property occupancy, sales and rental rates;

•

increases in operating costs that cannot be passed on to tenants;

•

the effects of online shopping and other uses of technology on our retail tenants;

•

risks related to our development and redevelopment activities, including delays, cost overruns and our inability to reach projected occupancy or rental rates;

•

acts of violence at malls, including our properties, or at other similar spaces, and the potential effect on traffic and sales;

•

our ability to sell properties that we seek to dispose of or our ability to obtain prices we seek;

•

potential losses on impairment of certain long-lived assets, such as real estate, including losses that we might be required to record in connection with any disposition of assets;

•

our substantial debt and the liquidation preference of our preferred shares and our high leverage ratio;

•

our ability to refinance our existing indebtedness when it matures, on favorable terms or at all;

•

our ability to raise capital, including through sales of properties or interests in properties and through the issuance of equity or equity-related securities if market conditions are favorable; and

•

potential dilution from any capital raising transactions or other equity issuances.

Additional factors that might cause future events, achievements or results to differ materially from those expressed or implied by our forward-looking statements include those discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2018 in the section entitled “Item 1A. Risk Factors” and any subsequent reports we file with the SEC. We do not intend to update or revise any forward-looking statements to reflect new information, future events or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. As of September 30, 2019, our consolidated debt portfolio consisted of $904.6 million of fixed and variable rate mortgage loans (net of debt issuance costs), $300.0 million borrowed under our 2018 Term Loan Facility, which bore interest at a rate of 4.00% and $250.0 million borrowed under our 2014 7-Year Term Loan, which bore interest at a rate of 4.00%. As of September 30, 2019, $213.0 million was outstanding under our 2018 Revolving Facility, which bore interest at a rate of 3.60%.

Our mortgage loans, which are secured by nine of our consolidated properties, are due in installments over various terms extending to October 2025. Six of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 5.95%, and had a weighted average interest rate of 4.08% at September 30, 2019. Three of our mortgage loans bear interest at variable rates, a portion of which has been swapped to fixed rates, and, taking into consideration the impact of interest rate swaps, had a weighted average interest rate of 3.75% at September 30, 2019. The weighted average interest rate of all consolidated mortgage loans was 3.99% at September 30, 2019. 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⁾
2019	$	3,850		4.09	%	$	420			4.40	%
2020		42,581		5.01	%		1,680	₍₂₎		4.40	%
2021		15,745		4.01	%		440,902	₍₂₎		4.10	%
2022		302,539		3.96	%		279,912	₍₂₎		3.34	%
2023 and thereafter		282,040		4.04	%		300,000			4.00	%

⁽¹⁾	Based on the weighted average interest rates in effect as of September 30, 2019.

⁽²⁾	Includes Term Loan debt balance of $550.0 million with a weighted average interest rate of 4.00% as of September 30, 2019.

As of September 30, 2019, we had $1,022.9 million of variable rate debt. Also, as of September 30, 2019, we had entered into interest rate swap agreements outstanding with an aggregate weighted average interest rate of 1.85% on a notional amount of $796.1 million maturing on various dates through May 2023 and forward starting interest rate swap agreements with a weighted average interest rate of 2.75% on a notional amount of $100.0 million, with an effective date in June 2020 and a maturity date in May 2023.

Changes in market interest rates have different effects on the fixed and variable rate portions of our debt portfolio. A change in market interest rates applicable to the fixed portion of the debt portfolio affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of the debt portfolio affects the interest incurred and cash flows, but does not affect the fair value. The following sensitivity analysis related to our debt portfolio, which includes the effects of our interest rate swap agreements, assumes an immediate 100 basis point change in interest rates from their actual September 30, 2019 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 $40.7 million at September 30, 2019. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position of $42.3 million at September 30, 2019. Based on the variable rate debt included in our debt portfolio at September 30, 2019, a 100 basis point increase in interest rates would have resulted in an additional $2.3 million in interest expense annually. A 100 basis point decrease would have reduced interest incurred by $2.3 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 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 September 30, 2019, 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.

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ITEM 4. CONTROLS AND PROCEDURES.

We are committed to providing accurate and timely disclosure in satisfaction of our SEC reporting obligations. In 2002, we established a Disclosure Committee to formalize our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019, 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 control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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. The following is an update to the Company’s risk factors and should be read in conjunction with the risk factors previously disclosed under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018.

We face risks associated with, and have experienced, security breaches through cyber attacks. A significant privacy breach or IT system disruption could adversely affect our business and we might be required to increase our spending on data and system security, which could adversely affect our financial condition.

We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities. In addition, our business relationships with our tenants and vendors involve the storage and transmission of proprietary information and sensitive or confidential data. Like many businesses today, we have experienced an increase in cyber-threats and attempted intrusions. Our systems are subject to a variety of forms of cyber attacks with the objective of gaining unauthorized access to our systems or data or disrupting our operations. Security breaches have, from time to time, occurred and may occur in the future. Due to the nature of these attacks, there is a risk that an attack or intrusion remains undetected for a period of time. Though the cyber attacks we have experienced have not had a material impact on our financial results to date, and we maintain cyber liability insurance coverage, there remains a risk that breaches in security could expose us, our tenants or our employees to a risk of loss, misappropriation of assets that cannot be recovered, or misuse of proprietary information and of sensitive or confidential data. In addition, our information technology systems, some of which are managed or hosted by third-parties, may be susceptible to damage, disruptions or shutdowns due to computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events, failures during the process of upgrading or replacing software, databases or components thereof, power outages or hardware failures. Any of these occurrences could result in disruptions in our operations, the loss of existing or potential tenants or shoppers, damage to our brand and reputation, regulatory compliance efforts and costs, remediation costs, and litigation and potential liability. Even the most well-protected information remains potentially vulnerable, because the techniques and sophistication used to conduct cyber attacks and breaches of IT systems, as well as the sources of these attacks, change frequently and are often not recognized until they are launched and have been put in place for a period of time. Although we make substantial efforts to maintain the security of our networks and related systems, there can be no assurance that our security efforts will be effective or that attempted security breaches would not be successful or damaging. Our efforts include conducting periodic assessments of internal and external threats to and vulnerabilities of our information and technology systems, security controls and processes in place and the effectiveness of our management of cybersecurity risk. The results of these assessments are used to create and implement strategies designed to prevent, detect and respond to cybersecurity threats, and we expect to continue to employ cybersecurity risk mitigation measures, as well as seek to improve and expand such measures. We may incur increasing costs to deploy additional personnel and protection technologies, to train employees and engage third-party experts and consultants, or to notify employees, suppliers or the general public as part our notification obligations. The cost and operational consequences of implementing further data or system protection measures or remediation efforts could be significant. Our processes, procedures and controls to reduce these risks, our increased awareness of the risk of a cyber incident, and our insurance coverage, however, do not guarantee that our financial results would not be materially impacted by a cyber incident.

Our retailer tenants’ businesses also require the collection, transmission and retention of large volumes of shopper and employee data, including credit and debit card numbers and other personally identifiable information, in various information technology systems. The consequences of cyber attacks perpetrated against our retailer tenants, which may include the misappropriation of assets or sensitive information or an operational disruption, could diminish consumer confidence and spending, result in fines, legal claims or proceedings or other liability, as well as significant remediation costs, any of which could have a material and adverse effect on their financial condition and results of operations and business generally. This could, in turn, have an adverse effect on our financial condition or results of operations.

We are subject to risks associated with increases in interest rates, including in connection with our variable interest rate debt.

As of September 30, 2019, we had $1,022.9 million of indebtedness with variable interest rates, although we have fixed the interest rates on an aggregate of $796.1 million of this variable rate debt by using derivative instruments. In addition, our unconsolidated partnerships have $175.1 million, at our proportionate share, of indebtedness with variable rates. We might incur additional variable rate debt in the future, and, if we do so, the proportion of our debt with variable interest rates might increase. See “Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk.”

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An increase in market interest rates applicable to the variable portion of the debt portfolio would increase the interest incurred and cash flows necessary to service such debt, subject to our hedging arrangements on such debt. This has and could, in the future, adversely affect our results of operations and our ability to make distributions to shareholders. Also, in coming years, as our current mortgage loans mature, if these mortgage loans are refinanced at higher interest rates than the rates in effect at the time of the prior loans, our interest expense in connection with debt secured by our properties will increase, and could adversely affect our results of operations and ability to make distributions to shareholders.

Furthermore, the expected discontinuation of LIBOR after 2021 and the transition away from LIBOR presents various risks and challenges, including with respect to our borrowings and hedging arrangements that rely on the LIBOR benchmark. Various parties are working on industry wide and company specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. We have material contracts that are indexed to LIBOR and are monitoring and evaluating the related risks, which include interest on loans or amounts received and paid on derivative instruments. To the extent that our contracts that rely on the LIBOR benchmark do not provide for replacement rates, we may seek to amend such contracts. While we are focused on effective planning for the phase-out of LIBOR, the transition may divert management attention and could have other adverse consequences for us, including on our interest rates for current and future indebtedness.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

Issuer Purchases of Equity Securities

The following table shows the total number of shares that we acquired in the three months ended September 30, 2019 and the average price paid per share (in thousands of shares).

Period

Total Number

of Shares

Purchased

Average Price

Paid per

Total Number of

Shares Purchased

as part of Publicly

Announced Plans

or Programs

Maximum Number

(or Approximate

Dollar Value) of

Shares that May

Yet Be Purchased

Under the Plans or

Programs

July 1 - July 31, 2019

—

August 1 - August 31, 2019

—

September 1 -September 30, 2019

—

Total

—

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ITEM 6. EXHIBITS.


31.1*	Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*	Certification pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2**	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS*	Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*	Inline XBRL Taxonomy Extension Schema Document.

101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.


104*	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS).

*	Filed herewith

**	Furnished herewith

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SIGNATURE OF REGISTRANT

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date:	November 4, 2019
		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