UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
__________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported) November 20, 2003
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Pennsylvania Real Estate Investment Trust
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(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 1-6300 23-6216339
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(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
The Bellevue, 200 S. Broad Street, Philadelphia, Pennsylvania 19102
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (215) 875-0700
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(Former Name or Former Address, if Changed Since Last Report)
Item 2. Acquisition or Disposition of Assets.
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On November 20, 2003, Pennsylvania Real Estate Investment Trust
("PREIT") announced the closing of the merger of Crown American Realty Trust
("Crown") with and into PREIT (the "Merger") in accordance with an Agreement and
Plan of Merger (the "Merger Agreement") dated as of May 13, 2003, by and among
PREIT, PREIT Associates, L.P., a limited partnership of which PREIT is the sole
general partner ("PALP"), Crown and Crown American Properties, L.P., a limited
partnership of which Crown was the sole general partner before the Merger
("CAP"). Through the Merger and related transactions, PREIT acquired 26 wholly
owned regional shopping malls and the remaining 50% interest in Palmer Park Mall
in Easton, Pennsylvania.
In the Merger, each Crown common share automatically was converted into
the right to receive 0.3589 of a PREIT common share in a tax-free,
share-for-share transaction. Accordingly, PREIT issued approximately 11,725,175
of its common shares to the former holders of Crown common shares. In addition,
each Crown preferred share automatically was converted into the right to receive
one newly-created PREIT 11% non-convertible senior preferred share (a "Preferred
Share") with substantially the same rights, preferences, privileges,
qualifications, limitations and restrictions as those of the previously existing
Crown preferred shares. PREIT issued 2,475,000 Preferred Shares to the former
holders of Crown preferred shares in connection with the Merger. Also as part of
the Merger, options to purchase a total of 30,000 Crown common shares were
replaced with options to purchase a total of 10,754 PREIT common shares with a
weighted average exercise price of $21.13 per share and options to purchase a
total of 421,100 CAP limited partnership units were replaced with options to
purchase a total of 151,087 PREIT common shares with a weighted average exercise
price of $17.23 per share. In addition, a warrant to purchase 100,000 Crown
common shares automatically was converted into a replacement warrant to purchase
35,890 PREIT common shares at an exercise price of $25.0766 per share.
In connection with the execution of the Merger Agreement, Crown and CAP
entered into a distribution agreement (the "Crown Distribution Agreement"),
PREIT and PALP entered into a contribution agreement (the "PREIT Contribution
Agreement") and CAP and PALP entered into a contribution agreement (the "CAP
Contribution Agreement"), each dated as of May 13, 2003. Pursuant to the Crown
Distribution Agreement, two business days before the closing of the Merger, CAP
distributed Crown's proportionate interest in all of CAP's assets and
substantially all of CAP's liabilities (the "Distributed Share") to Crown in
complete liquidation of Crown's partnership interests in CAP, including its
general partner interest. Following this distribution transaction, Crown was
replaced as the general partner of CAP by Crown American Investment Company
("CAIC"), an entity controlled by Mark E. Pasquerilla, who at the time was
Crown's chairman and chief executive officer. CAP's sole limited partners
following the distribution transaction are CAIC and Crown Investments Trust
("CIT"), which also is controlled by Mr. Pasquerilla.
Pursuant to the PREIT Contribution Agreement, immediately after the
closing of the Merger, PREIT contributed the Distributed Share - to which PREIT
succeeded in the merger - to PALP in exchange for approximately 11,725,175
common units of limited partnership interest in PALP ("PALP OP Units") and
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2,475,000 preferred units of limited partnership interest in PALP. The number of
common and preferred units received by PREIT equals the number of PREIT common
shares and Preferred Shares that PREIT issued to the former Crown common and
preferred shareholders in the Merger. Pursuant to the CAP Contribution
Agreement, immediately after the closing of the Merger, CAP contributed the
remaining interest in all of CAP's assets - excluding a portion of CAP's
interest in two partnerships - and substantially all of CAP's liabilities to
PALP in exchange for 1,703,214 PALP OP Units.
As a result of the distribution from CAP to Crown, followed by the
merger of Crown with and into PREIT, followed by the contributions by PREIT and
CAP to PALP, PALP acquired substantially all of CAP's assets and liabilities
other than an 11% interest in the capital and 1% interest in the profits of two
partnerships that own 14 shopping malls. CAP's retained interest in the two
partnerships (the "Retained Interest") is subject to a put-call arrangement
between CAP and PALP, pursuant to which PALP has the right to require CAP to
contribute the Retained Interest to PALP following the 36th month after the
closing of the Merger and CAP has the right to contribute the Retained Interest
to PALP following the 40th month after the closing of the Merger, in each case
in exchange for 341,297 additional PALP OP Units.
In connection with the Merger, PREIT also assumed from Crown
approximately $444 million of a first mortgage loan that has a final maturity
date of September 10, 2025 and is secured by a portfolio of 15 properties at an
interest rate of 7.43% per annum until September 10, 2008 and thereafter at an
interest rate equal to the greater of (i) 10.43% per annum and (ii) the Treasury
Rate plus 3.0% per annum. PREIT also assumed an additional $153 million in
mortgages on certain properties with interest rates between 3.12% and 7.61% per
annum.
Also on November 20, 2003, PREIT completed the refinancing of its $200
million secured line of credit with a $500 million unsecured revolving line of
credit (the "Credit Facility") with an option to increase the Credit Facility to
$650 million under prescribed conditions. The Credit Facility bears interest at
a rate between 1.5% and 2.5% per annum over LIBOR based on PREIT's leverage. The
availability of funds under the Credit Facility is subject to PREIT's compliance
with financial and other covenants and agreements, some of which are described
below. The Credit Facility has a term of three years with an additional one year
extension provided that there is no event of default at that time. PREIT used
$170 million from its new line of credit to repay all of the indebtedness of
approximately $154.9 million outstanding under Crown's line of credit facility
with GE Capital Corporation, and to pay certain closing costs in connection with
the merger.
The Credit Facility, contains affirmative and negative covenants
customarily found in facilities of this type, as well as requirements that PREIT
maintain, on a consolidated basis (all capitalized terms used in this paragraph
shall have the meanings ascribed to such terms in the Credit Agreement): (1) a
minimum Tangible Net Worth of not less than 80% of the Tangible Net Worth of
PREIT as of December 31, 2003 plus 75% of the Net Proceeds of all Equity
Issuances effected at any time after December 31, 2003 by PREIT or any of its
Subsidiaries minus the carrying value attributable to any Preferred Stock of the
Company or any Subsidiary redeemed after December 31, 2003; (2) a maximum ratio
of Total Liabilities to Gross Asset Value of 0.65:1; (3) a minimum ratio of
EBITDA to Interest Expense of 1.90:1; (4) a minimum ratio of Adjusted EBITDA to
-3-
Fixed Charges of 1.50:1; (5) maximum Investments in unimproved real estate not
in excess of 5.0% of Gross Asset Value; (6) maximum Investments in Persons
(other than Subsidiaries and Unconsolidated Affiliates) not in excess of 10.0%
of Gross Asset Value; (7) maximum Investments in Indebtedness secured by
Mortgages in favor of PREIT, the Company or any other Subsidiary, not in excess
of 5.0% of Gross Asset Value; (8) maximum Investments in Subsidiaries that are
not Wholly Owned Subsidiaries and Investments in Unconsolidated Affiliates in
excess of 10.0% of Gross Asset Value; (9) maximum Investments subject to the
limitations in the preceding clauses (5) through (8) not in excess of 15.0% of
Gross Asset Value; (10) a maximum Gross Asset Value attributable to any one
Property not in excess of 15.0% of Gross Asset Value; (11) a maximum Total
Budgeted Cost Until Stabilization for all properties under development not in
excess of 10% of Gross Asset Value; (12) an aggregate amount of projected
rentable square footage of all development properties subject to binding leases
of not less than 50% of the aggregate amount of projected rentable square
footage of all such development properties; (13) a maximum Floating Rate
Indebtedness in an aggregate outstanding principal amount not in excess of
one-third of all Indebtedness of PREIT, its Subsidiaries and its Unconsolidated
Affiliates; (14) a maximum ratio of Secured Indebtedness of PREIT, its
Subsidiaries and its Unconsolidated Affiliates to Gross Asset Value of 0.60:1;
(15) a maximum ratio of recourse Secured Indebtedness of the Borrower or
Guarantors to Gross Asset Value of 0.25:1; and (16) a minimum ratio of EBITDA to
Indebtedness of 0.130:1. As of the date of this report, PREIT is in compliance
with all of these debt covenants.
Upon the closing of the Merger, PREIT recognized a one-time
restructuring charge of approximately $5.8 million, and expects to incur
additional expenses of approximately $1.3 million in connection with the Merger.
In connection with the execution of the Merger Agreement, CAP and CIT
entered into an Agreement of Exchange, dated as of May 13, 2003. Pursuant to the
exchange agreement, immediately before the distribution of the Distributed Share
from CAP to Crown, CAP transferred Pasquerilla Plaza in Johnstown, Pennsylvania,
where Crown formerly maintained its executive offices, to CIT in exchange for 14
unimproved parcels of property adjacent to three of Crown's malls and
approximately $1.25 million in cash. PREIT has agreed to enter into a lease with
CIT with respect to certain space in Pasquerilla Plaza for use in connection
with PREIT's post-closing transition activities and is continuing to negotiate
with an entity controlled by Mark Pasquerilla for the sale of certain personal
property in Pasquerilla Plaza by PREIT to that entity. PREIT also contracted
with an entity controlled by Mr. Pasquerilla to provide information technology
support services to PREIT at Pasquerilla Plaza during the transition period,
which is expected to last for approximately six months, although PREIT has the
option of extending the period for up to an additional three months. Following
the conclusion of the transition period, the entity controlled by Mr.
Pasquerilla has the option of obtaining from PREIT much of the information
technology equipment, either through assumption of remaining lease payments for
the equipment, meeting the buyout terms of leases or through direct purchase
from PREIT.
In connection with the execution of the Merger Agreement, the cash flow
support obligations of Mr. Pasquerilla and entities affiliated with Mr.
Pasquerilla (the "Pasquerilla Group") to Crown and CAP were terminated in
consideration for a reduction in the Pasquerilla Group's economic interest in
CAP. In addition, the Pasquerilla Group entered into an indemnification
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agreement with PREIT and PALP, dated as of May 13, 2003, whereby the Pasquerilla
Group agreed to indemnify PREIT and PALP for certain liabilities that PREIT and
PALP may incur as a result of various transactions among the Pasquerilla Group,
on the one hand, and Crown and CAP, on the other hand. The indemnification
agreement also provides for certain participation rights for PREIT in any net
proceeds received by the Pasquerilla Group upon the resale of Oak Ridge Mall or
Pasquerilla Plaza in excess of specified amounts within specified time periods.
PREIT and PALP also entered into a tax protection agreement with the
members of the Pasquerilla Group in connection with the Merger. Under this tax
protection agreement, PREIT and PALP agreed not to dispose of certain protected
properties acquired in the Merger in a taxable transaction until November 20,
2011 or until the Pasquerilla Group collectively owns less that 25% of the
aggregate of the shares and PALP OP Units that they acquired in the Merger. If
PREIT or PALP violates the tax protection agreement during the first five years
of the protection period, they would owe as damages the sum of the hypothetical
tax owed by the Pasquerilla Group, plus an amount intended to make the
Pasquerilla Group whole for taxes that may be due upon receipt of those damages.
From the end of the first five years through the end of the tax protection
period, damages are intended to compensate the affected parties for interest
expense incurred on amounts borrowed to pay the taxes incurred on the prohibited
sale. If PREIT or PALP were to sell properties in violation of the tax
protection agreement, the amounts that PREIT or PALP would be required to pay to
the Pasquerilla Group could be substantial.
The members of the Pasquerilla Group entered into several additional
agreements with PREIT and PALP in connection with the closing of the Merger.
These agreements include (1) a shareholder agreement, under which the
Pasquerilla Group agreed that, for a period of five years and nine months
following the closing of the Merger, if any of them transfer the PREIT common
shares received by them in connection with the Merger or the related
transactions other than in accordance with the terms of the shareholder
agreement, they will forfeit a portion of their rights under the tax protection
agreement or, in certain circumstances, Mr. Pasquerilla can elect to surrender
his seat on PREIT's board of trustees in lieu of forfeiting a portion of the
rights under the tax protection agreement; (2) a registration rights agreement,
under which PREIT granted to the Pasquerilla Group certain registration rights
in respect of the PREIT common shares and the PREIT common shares underlying
PALP OP Units received by them in connection with the Merger and the related
transactions; (3) a standstill agreement, under which the Pasquerilla Group
agreed to certain restrictions on their ability to acquire additional securities
of PREIT or otherwise seek, alone or together with others, to acquire control of
the board of trustees of PREIT, which restrictions will remain in place until
the later of the eighth anniversary of the closing of the Merger or such time as
Mr. Pasquerilla no longer serves as a trustee of PREIT; (4) a non-competition
agreement, under which the Pasquerilla Group agreed that, for a period of eight
years following the closing of the Merger, they will not engage in certain
activities that would be competitive with PREIT, solicit PREIT's employees or
induce PREIT's business contacts to curtail or terminate their business
relationship with PREIT; and (5) an intellectual property license agreement
under which certain members of the Pasquerilla Group granted a non-exclusive,
non-assignable, non-transferable, non-sublicenseable, royalty-free license for
PREIT and its affiliates to use certain intellectual property and domain names
associated with the Crown name and logo.
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At the next regularly scheduled meeting of PREIT's board of trustees,
the PREIT board of trustees will be expanded by two members and Mr. Pasquerilla
and Donald F. Mazziotti, a former trustee of Crown, will be added to PREIT's
board of trustees. In addition, assuming the redemption of their PALP OP Units
for PREIT shares, the Pasquerilla Group owns approximately 7.6% of PREIT's
outstanding common shares.
The foregoing description of the Merger, the related transactions, the
Merger Agreement and other related agreements is qualified in its entirety by
reference to the Merger Agreement and other related agreements attached as
exhibits hereto, each of which is incorporated herein by reference.
This report contains certain "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934 and the U.S.
Private Securities Litigation Reform Act of 1995. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and other matters that are not historical facts.
These forward-looking statements reflect PREIT's current views about future
events and are subject to risks, uncertainties, assumptions and changes in
circumstances that may cause future events, achievements or results to differ
materially from those expressed by the forward-looking statements. PREIT's
business is subject to uncertainties regarding the revenues, operating expenses,
leasing activities, occupancy rates, and other competitive factors relating to
PREIT's portfolio and changes in local market conditions as well as general
economic, financial and political conditions, including the possibility of
outbreak or escalation of war or terrorist attacks, any of which may cause
future events, achievements or results to differ materially from those expressed
by the forward-looking statements. PREIT does not intend to and disclaims any
duty or obligation to update or revise any forward-looking statements or
industry information set forth in this report to reflect new information, future
events or otherwise.
Item 7. Financial Statements and Exhibits.
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(a) Financial Statements of Business Acquired.
Audited Consolidated Financial Statements of Crown American
Realty Trust as of December 31, 2002 and 2001, and for the
years ended December 31, 2002, 2001 and 2000 (attached hereto
as Exhibit 99.1).
Unaudited Consolidated Financial Statements of Crown American
Realty Trust as of September 30, 2003 and for the three and
nine month periods ended September 30, 2003 and 2002 (attached
hereto as Exhibit 99.2).
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(b) Pro Forma Financial Information.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
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INTRODUCTORY NOTE F-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2003................................................ F-3
Pro Forma Condensed Consolidated Statements of Income for the nine months ended September 30, 2003 and the
year ended December 31, 2002......................................................................................... F-4
Notes to Pro Forma Condensed Consolidated Financial Statements......................................................... F-6
F-1
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial
information sets forth:
o the historical financial information as of September 30, 2003,
for the nine months ended September 30, 2003 and for the year
ended December 31, 2002 derived from PREIT's and Crown's
audited and unaudited financial statements;
o adjustments to give effect to the acquisition of interests in
seven enclosed shopping malls during the second and third
quarters of 2003 (collectively, the "Completed Acquisitions").
PREIT's historical balance sheet as of September 30, 2003
reflects the acquisition of six properties that were acquired
from The Rouse Company in the second quarter of 2003,
consisting of five wholly-owned properties and a 73% interest
in a partnership that owns a sixth property (New Castle
Associates that owns Cherry Hill Mall). The purchase price
allocation for Cherry Hill Mall is equal to 73% of the fair
value of the property acquired (reflecting the Company's 73%
acquired ownership interest) plus the remaining 27% carryover
basis, which is based on the historical basis of New Castle
Associates. New Castle Associates is consolidated for
financial reporting purposes. The Company expects to issue
609,317 PREIT Operating Partnership units in 2004 to purchase
the remaining 27% minority interest in New Castle Associates.
PREIT also acquired the remaining 70% of the economic interest
in Willow Grove Park from its joint venture partner in
September 2003;
o the sale of 15 wholly-owned multifamily properties and the
interests in four joint ventures owning multifamily properties
during the second and third quarters of 2003 (collectively,
the "Multifamily Sales"). The Completed Acquisitions and the
Multifamily Sales are collectively referred to as the
"Completed Transactions";
o adjustments to give effect to the merger of Crown with and
into PREIT, including (i) the acquisition of the assets and
liabilities of Crown American, including 12 wholly-owned
enclosed shopping malls, an 89% interest in 14 enclosed
shopping malls and a 50% partnership interest in a shopping
mall, (ii) the issuance of 11,725,175 PREIT shares of
beneficial interest, (iii) the issuance of 2,475,000 PREIT
preferred shares, and (iv) the issuance of 1,703,214 Operating
Partnership units. The Company expects to issue an additional
341,297 PREIT Operating Partnership units in 2006 to purchase
the remaining 11% minority interest in the 14 shopping malls;
and
o the pro forma, as adjusted, unaudited condensed consolidated
balance sheet as of September 30, 2003 and the pro forma, as
adjusted, unaudited condensed consolidated statements of
income for the nine months ended September 30, 2003 and for
the year ended December 31, 2002, as adjusted to give effect
to the Completed Transactions and the merger of Crown with and
into PREIT.
You should read the information below along with all other financial
information and analysis presented or incorporated by reference in this Form
8-K. The unaudited pro forma condensed consolidated financial information is
presented for information purposes only, and PREIT's management does not expect
that this information will reflect PREIT's future results of operations or
financial position. The unaudited pro forma adjustments are based on available
information and upon assumptions that PREIT believes are reasonable. The
purchase accounting allocations made by management in connection with the
unaudited pro forma financial information are based on the assumptions and
estimates of management, and are subject to reallocation when the final purchase
accounting takes place. The unaudited pro forma condensed consolidated financial
information assumes that the Completed Transactions and the merger of Crown with
and into PREIT were completed as of September 30, 2003 for the purposes of the
unaudited pro forma condensed consolidated balance sheet and as of January 1,
2002 for purposes of the unaudited pro forma condensed consolidated statements
of income. The unaudited pro forma financial information has not been adjusted
to reflect the effects of PREIT's August 2003 equity offering on periods prior
to the date of the offering.
F-2
Pennsylvania Real Estate Investment Trust
Pro Forma Condensed Consolidated Balance Sheet
As of September 30, 2003
(Unaudited)
(In thousands)
Company
PREIT Crown Pro Forma Pro Forma
Historical (a) Historical (b) Adjustments (c),(d) As Adjusted
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Assets
Investments in real estate, net $1,100,795 $ 776,787 $525,072 (e) $2,402,654
Investments in and advances to partnerships
and joint ventures, at equity 15,892 2,681 (2,724) (f) 15,849
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1,116,687 779,468 522,348 2,418,503
Other assets:
Cash and cash equivalents 38,400 19,303 251 (d) 57,954
Rents and sundry receivables 13,339 14,870 (8,791) (g) 19,418
Intangible assets, net 55,958 - 61,728 (h) 117,686
Deferred costs and other assets, net 41,628 17,762 (334) (i) 59,056
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$1,266,012 $ 831,403 $575,202 $2,672,617
========== ========= ======== ==========
Liabilities and Shareholders' Equity
Mortgage notes payable $620,535 $ 754,435 $(75,186) (j) $1,299,784
Bank loans payable - - 155,228 (j) 155,228
Tenants' deposits and deferred rents 6,928 - 177 (d) 7,105
Accrued expenses and other liabilities 31,951 42,973 40,728 (k) 115,652
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659,414 797,408 120,947 1,577,769
Minority interest:
Minority interest in properties 5,991 - 39,067 (l) 45,058
Minority interest in Operating Partnership 58,270 - 47,690 (l) 105,960
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Total minority interest 64,261 - 86,757 151,018
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Shareholders' equity:
Preferred shares - 25 - (l) 25
Shares of beneficial interest 23,481 355 11,370 (l) 35,206
Capital contributed in excess of par 407,739 353,297 44,228 (l) 805,264
Deferred compensation (3,901) - - (3,901)
Accumulated other comprehensive loss (1,929) - - (1,929)
Retained earnings/(Distributions in excess
of net income) 116,947 (319,682) 311,900 (l) 109,165
---------- --------- -------- ----------
Total shareholders' equity 542,337 33,995 367,498 943,830
---------- --------- -------- ----------
$1,266,012 $ 831,403 $575,202 $2,672,617
========== ========= ======== ==========
F-3
Pennsylvania Real Estate Investment Trust
Pro Forma Condensed Consolidated Statement of Income
For the Nine Months Ended September 30, 2003
(Unaudited)
(In thousands, except per share amounts)
Completed
Transactions Company
PREIT Completed Pro Forma PREIT Crown Pro Forma Pro forma
Historical (m) Transactions Adjustments Adjusted Historical (u) Adjustments (v),(w) As Adjusted
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Revenue
Real estate revenue
Base rent $ 62,824 $ 29,607 (n) $ 772 (o) $ 93,203 $ 99,666 $ 3,600 (x) $ 196,469
Expense
reimbursements 26,389 20,335 (n) - 46,724 44,542 1,168 (y) 92,434
Percentage rent 948 488 (n) - 1,436 4,361 20 (z) 5,817
Lease termination
revenue 285 1,019 (n) - 1,304 - - 1,304
Other real estate
revenue 1,712 2,590 (n) - 4,302 - 162 (aa) 4,464
---------- -------- --------- -------- --------- ------- ---------
Total real estate
revenue 92,158 54,039 772 146,969 148,569 4,950 300,488
Management company
revenue 7,946 - (825) (p) 7,121 2,320 (210) (bb) 9,231
Interest and other
income 552 - - 552 - - 552
---------- -------- --------- -------- --------- ------- --------
Total revenue 100,656 54,039 (53) 154,642 150,889 4,740 310,271
---------- -------- --------- -------- --------- ------- ---------
Expenses
Property operating
expenses (32,888) (23,120) (n) (160) (p) (56,168) (57,710) (1,430) (cc) (115,308)
Depreciation and
amortization (19,699) - (14,141) (q) (33,840) (35,964) 1,773 (dd) (68,031)
General and
administrative
expenses (22,168) - - (22,168) (8,489) 368 (ee) (30,289)
---------- -------- --------- -------- --------- ------- ---------
(74,755) (23,120) (14,301) (112,176) (102,163) 711 (213,628)
Interest expense (21,626) (6,230) (n) (11,526) (r) (39,382) (38,174) 7,956 (ff) (69,600)
Equity in income of
partnerships and
joint ventures 5,621 - (514) (s) 5,107 - (627) (gg) 4,480
Gains on sales of
interests in real
estate 11,742 - - 11,742 274 - 12,016
---------- -------- --------- -------- --------- ------- ---------
Income from
continuing
operations before
minority interest 21,638 24,689 (26,394) 19,933 10,826 12,780 43,539
Minority interest
in properties (518) (413) (t) (931) - (553) (hh) (1,484)
Minority interest
in Operating
Partnership (2,099) - (105) (t) (2,204) (1,613) (355) (hh) (4,172)
---------- -------- --------- -------- --------- ------- ---------
Income from
continuing
operations $ 19,021 $ 24,689 $ (26,912) $ 16,798 $ 9,213 $11,872 $ 37,883
---------- -------- --------- -------- --------- ------- ---------
Basic income from
continuing
operations
per share $ 1.08 $ 0.94 (ii)
---------- ---------
Diluted income from
continuing
operations
per share $ 1.06 $ 0.93 (ii)
---------- ---------
Weighted average
number of shares
outstanding:
Basic 17,560 29,285 (ii)
---------- ---------
Diluted 17,874 29,646 (ii)
---------- ---------
F-4
Pennsylvania Real Estate Investment Trust
Pro Forma Condensed Consolidated Statement of Income
For the Year Ended December 31, 2002
(Unaudited)
(In thousands, except per share amounts)
Completed
Transactions Company
PREIT Completed Pro Forma PREIT Crown Pro Forma Pro forma
Historical (m) Transactions Adjustments Adjusted Historical (u) Adjustments (v),(w) As Adjusted
----------------------------------------------------------------------------------------------------------
Revenue
Real estate revenue
Base rent $46,022 $ 73,841 (n) $ 2,433 (o) $122,296 $ 126,022 $13,359 (x) $ 261,677
Expense
reimbursements 12,959 46,721 (n) - 59,680 50,891 5,402 (y) 115,973
Percentage rent 1,948 1,683 (n) - 3,631 6,650 195 (z) 10,476
Lease termination
revenue 754 2,638 (n) - 3,392 - 35 (v) 3,427
Other real estate
revenue 1,658 4,265 (n) - 5,923 - 472 (aa) 6,395
---------- -------- --------- -------- --------- ------- ---------
Total real estate
revenue 63,341 129,148 2,433 194,922 183,563 19,463 397,948
Management company
revenue 11,003 - (1,741) (p) 9,262 2,441 (250) (bb) 11,453
Interest and other
income 711 - - 711 - - 711
---------- -------- --------- -------- --------- ------- ---------
Total revenue 75,055 129,148 692 204,895 186,004 19,213 410,112
---------- -------- --------- -------- --------- ------- ---------
Expenses
Property operating
expenses (16,265) (53,183) (n) (425) (p) (69,873) (66,756) (6,479) (cc) (143,108)
Depreciation and
amortization (12,969) - (26,191) (q) (39,160) (44,375) (1,887) (dd) (85,422)
General and
administrative
expenses (24,747) - - (24,747) (6,822) 490 (ee) (31,079)
---------- -------- --------- --------- --------- ------- ---------
(53,981) (53,183) (26,616) (133,780) (117,953) (7,876) (259,609)
Interest expense (15,378) (9,189) (n) (23,651) (r) (48,218) (55,050) 8,699 (ff) (94,569)
Equity in income of
partnerships and
joint ventures 7,449 - (829) (s) 6,620 - (872) (gg) 5,748
Gains on sales of
interests in real
estate - - - 369 - 369
---------- -------- --------- -------- --------- ------- ---------
Income before
minority interest
and discontinued
operations 13,145 66,776 (50,404) 29,517 13,370 19,164 62,051
Minority interest in
properties - - (1,244) (t) (1,244) - (737) (hh) (1,981)
Minority interest in
Operating
Partnership (1,307) - (2,312) (t) (3,619) (5,351) 3,256 (hh) (5,714)
---------- -------- --------- -------- --------- ------- ---------
Income from
continuing
operations $11,838 $ 66,776 $ (53,960) $ 24,654 $ 8,019 $21,683 $ 54,356
---------- -------- --------- -------- --------- ------- ---------
Basic income from
continuing
operations
per share $ 0.73 $ 1.46 (ii)
---------- ---------
Diluted income from
continuing
operations
per share $ 0.72 $ 1.45 (ii)
---------- ---------
Weighted average
number of shares
outstanding:
Basic 16,162 27,887 (ii)
---------- ---------
Diluted 16,388 28,160 (ii)
---------- ---------
F-5
Notes to Pro Forma Condensed Consolidated Financial Statements (Unaudited)
1. Adjustments to the Pro Forma Condensed Consolidated Balance Sheet
a. Reflects PREIT's historical consolidated balance sheet as of September
30, 2003.
b. Reflects Crown's historical consolidated balance sheet as of September
30, 2003. Certain amounts were reclassified to conform to PREIT's balance
sheet presentation.
c. Reflects the adjustments to step-up Crown's assets and liabilities to
estimated fair value. The purchase price, purchase price allocation and
financing of the merger transaction are summarized as follows:
($000's)
--------
Preferred stock................................... $123,750 See note l
Shares of beneficial interest..................... 328,305 See note l
Operating Partnership units....................... 47,690 See note l
Options to purchase shares of beneficial interest. 837 See note l
Impact of minority interest carryover basis....... (4,550) See note l
--------
Total purchase consideration...................... $496,032
========
The Company has allocated the purchase price to the estimated fair value
of the net assets acquired and liabilities assumed as follows:
($000's)
--------
Investments in real estate........................ $516,397 See note e
Above-market lease intangibles.................... 8,005 See note h
In-place lease intangibles........................ 53,723 See note h
Deferred financing costs.......................... 5,141 See note i
--------
Total assets...................................... 583,266
---------
Debt premium...................................... (61,722) See note j
Palmer Park mortgage.............................. (9,160) See note d
Liabilities and restructuring accruals............ (27,128) See note k
Below-market lease intangibles.................... (7,280) See note k
Other working capital, net........................ (15,939)
---------
Total liabilities assumed......................... (121,229)
---------
Net fair value adjustments........................ 462,037
Crown's net book value of assets acquired......... 33,995 See note l
---------
Total net assets acquired......................... $496,032
========
The Company's policies for the purchase accounting of fixed assets and
intangible assets are described below.
Amounts allocated to land, building and intangible assets are based on
management's preliminary estimates of their fair value based on
management's pre-acquisition due diligence performed in connection with
the purchase of the interest.
The value of intangible assets acquired is measured based on the
difference between (i) prices of the acquired properties and (ii) the
properties valued as-if vacant. Factors considered by management in their
analysis of the "as-if vacant" value include lost rentals at market rates
during an expected lease-up period, which primarily ranges from two to
six months, and costs to execute similar leases including leasing
commissions, legal and other related expenses.
F-6
The total amount of other intangible assets acquired is allocated to (i)
in-place lease values and (ii) above-market and below-market lease
values. No value has been allocated to customer relationship intangibles
as the Company has pre-existing business relationships with substantially
all of the major retailers in the properties acquired, and the properties
acquired provide no incremental value over such existing relationships.
The value of in-place leases is amortized to expense over the remaining
portion of the current term of the respective leases, primarily ranging
from two to ten years. Should a tenant terminate its lease, the
unamortized portion of the in-place lease value would be charged to
expense.
Above-market and below-market in-place lease values for acquired
properties are recorded based on the present value (using a discount rate
that reflects the risks associated with the property acquired) of the
difference between (i) the contractual amounts to be paid pursuant to the
in-place leases and (ii) management's estimates of fair market lease
rates for the corresponding in-place leases, measured over a period equal
to the remaining non-cancelable term of the lease. The capitalized
above-market lease values are amortized as a reduction of rental income
over the remaining non-cancelable terms of the respective leases.
The capitalized below-market lease values are amortized as an increase to
rental income over the initial term and any fixed-rate renewal periods of
the respective leases.
Crown incurred non-capitalizable expenses totaling approximately $7.8
million in connection with the merger. These costs are reflected as an
increase to accrued expenses and other liabilities (see note k) and a
decrease to retained earnings/ (distributions in excess of net income)
(see note l).
PREIT acquired an 89% interest in Crown's properties that are located in
Pennsylvania (the "Pennsylvania Properties"). The remaining 11% is
expected to be purchased by PREIT three years and one day after the
merger date. The minority interest value assigned to the 11% minority
interest reflects 11% of the historical carrying value in the
Pennsylvania Properties of $39.1 million. This amount is reflected as an
increase in minority interest in properties and a decrease in capital
contributed in excess of par. If PREIT acquires the remaining 11% of the
Pennsylvania Properties, the remaining 11% property basis will be
stepped-up to fair value, for an expected increase to investments in real
estate of approximately $4.6 million.
d. Reflects pro forma adjustments to consolidate PREIT's 50% interest in
Palmer Park Mall ("Palmer Park"). PREIT accounts for Palmer Park under
the equity method of accounting. Crown owned the remaining 50% interest
in Palmer Park. In connection with the merger with Crown, PREIT now owns
a 100% interest in Palmer Park, and it is consolidated for financial
reporting purposes. PREIT retained its historical carryover basis in 50%
of the consolidated assets and liabilities of Palmer Park. The 50%
portion of Palmer Park that PREIT acquired in connection with the merger
with Crown will be stepped-up to fair value, as described in note c. The
effects of consolidating PREIT's historical share of its investment in
Palmer Park, including its portion of assets and liabilities of the
venture as of September 30, 2003 are as follows:
($000's)
--------
Investment in real estate, at cost............. $14,223
Accumulated depreciation....................... (5,548)
-------
Investment in real estate, net................. 8,675 See note e
Cash and cash equivalents...................... 251
Rents and sundry receivables................... 50 See note g
Deferred costs and other assets, net........... 513 See note i
-------
Total assets................................... $ 9,489
=======
Mortgage note payable (1)...................... $(9,160)
Tenants' deposits and deferred rents........... (177)
Accrued expenses and other liabilities......... (109) See note k
-------
Total liabilities.............................. $(9,446)
=======
Net equity investment in Palmer Park........... $(43) See note f
=======
F-7
(1) The total mortgage for Palmer Park Mall is $18.3 million. The
50% portion of the mortgage balance shown in this note reflects
the consolidation of PREIT's equity interest in Palmer Park. The
other 50% portion of the mortgage balance reflected in note c
reflects the additional mortgage that PREIT will assume as a
result of the Crown merger. The total mortgage balance of $18.3
million is included in the net pro forma mortgage payable
adjustment (see note j).
e. Reflects pro forma adjustments to investments in real estate and
accumulated depreciation. Amounts allocated to land and building are
based on management's estimates of the fair value of the acquired
properties based on management's pre-acquisition due diligence performed
in connection with the purchase of the respective properties. Intangible
asset allocations are reflected in note c.
($000's)
--------
Investments in real estate
Step-up of historical Crown cost to fair value (see note c)... $516,397
Consolidation of PREIT's investment in Palmer Park real
estate, net (see note d)..................................... 8,675
--------
$525,072
========
The cost and accumulated depreciation of PREIT's and Crown's investments
in real estate, on historical and pro forma bases are as follows:
Investments in real Accumulated Net book
($000's) estate, at cost depreciation value
-------- --------------- ------------ ----------
PREIT historical......... $1,161,717 $(60,922) $1,100,795
Palmer Park Mall......... 14,223 (5,548) 8,675
Crown historical......... 1,287,690 (510,903) 776,787
Allocation of fair value. 5,494 510,903 516,397
---------- -------- ----------
Total.................... $2,469,124 $(66,470) $2,402,654
========== ======== ==========
The acquired Crown real estate assets and the allocation of fair value
are allocated to land and building as follows:
($000's)
--------
Land...................................................... $ 258,637
Building.................................................. 1,034,547
----------
$1,293,184
==========
f. Reflects pro forma adjustments to investments in partnerships and joint
ventures to consolidate Palmer Park Mall.
($000's)
--------
Elimination of Crown's equity investment in Palmer Park... $(2,681)
Elimination of PREIT's equity investment in Palmer Park
(see note d)............................................. (43)
-------
$(2,724)
=======
F-8
g. Reflects pro forma adjustments to rents and sundry receivables.
($000's)
--------
Elimination of Crown's historical straight-line rents
receivable.......................................... $(8,841)
Consolidation of Palmer Park accounts receivable
(see note d)........................................ 50
-------
$(8,791)
=======
h. Reflects pro forma adjustments to intangible assets, net.
($000's)
--------
Adjustment to record Crown's in-place lease intangibles
(see note c)............................................. $53,723
Adjustment to record Crown's above-market lease intangibles
(see note c)............................................. 8,005
-------
$61,728
=======
i. Reflects pro forma adjustments to deferred costs and other assets, net.
Costs of approximately $5.1 million were incurred in connection with
financing activities related to the Crown merger.
($000's)
--------
Adjustment to record deferred financing costs (see note c)... $5,141
Adjustment to adjust Crown's historical deferred costs and
other assets, net, to fair value by eliminating deferred
financing costs............................................ (5,988)
Adjustment to record Palmer Park historical deferred costs and
other assets, net (see note d)............................. 513
------
$ (334)
======
j. Reflects the pro forma adjustments to mortgage notes payable and bank
loans payable. PREIT entered into new borrowings consisting of additional
line of credit borrowings of $155.2 million at a rate of 3.37% that paid
off Crown's existing line of credit with a balance of $147.7 million at
September 30, 2003 and reduce mortgage loans payable by $7.5 million.
The fixed interest rates on the mortgage notes payable that PREIT assumed
upon the completion of the merger with Crown are at above-market rates.
PREIT recorded a debt premium adjustment of approximately $61.7 million
to reflect the difference between the fixed interest rates and the market
interest rates for those borrowings. The debt premium was calculated
based on management's estimates of market interest rates on similar
completed mortgage transactions. PREIT determined that the market
interest rates for these four borrowings were between 5.00% and 5.75%,
compared with existing fixed interest rates between 6.15% and 7.61%.
($000's)
--------
Mortgage notes payable
Repayment of existing Crown long-term borrowings.......... $(155,228)
Adjustment to record debt premium resulting from Crown
merger (see note c)..................................... 61,722
Adjustment to record Palmer Park mortgage note
(see note d)............................................ 18,320
---------
$ (75,186)
=========
Bank loans payable
Additional bank loan borrowings resulting from Crown merger $155,228
========
F-9
k. Reflects pro forma adjustments to accrued expenses and other liabilities.
($000's)
--------
Adjustment to record Crown's below-market leases
(see note c).......................................... $ 7,280
Adjustment to eliminate certain of Crown's historical
accrued expenses not acquired......................... (1,571)
Liabilities and restructuring accruals (see note c).... 27,128
Adjustment to accrue merger costs (see notes c and l).. 7,782
Adjustment to record Palmer Park historical accrued
expenses and other liabilities (see note d)........... 109
-------
$40,728
=======
The liabilities and restructuring accruals aggregate an estimated $27.1
million and are comprised of $10.9 million related to payments to
employees for severance and relocation costs, $10.3 million of
professional fees, $5.1 million of deferred financing costs and $0.8
million of prepayment and lender fees. The Company has also estimated
that it will have to make cash expenditures of an additional $21.1
million for merger and integration costs associated with the Crown merger
that are expected to be non-recurring, and that are not part of the Crown
purchase accounting. Adjustments for such costs have not been included in
the pro forma balance sheet or statements of income.
l. In connection with the merger, we issued 0.3589 PREIT shares of
beneficial interest for each outstanding common share of Crown. This
resulted in the issuance of 11,725,175 PREIT shares at an aggregate par
value of approximately $11.7 million and additional paid-in capital of
approximately $316.6 million based on a share price of $28.00 at May 13,
2003.
Also in connection with the merger, we issued 0.2053 Operating
Partnership ("OP") units in PREIT Associates for each outstanding
operating partnership unit of Crown American Properties, L.P. This
resulted in the issuance of 1,703,214 OP Units at a value of
approximately $47.7 million based on a share price of $28.00 at May 13,
2003.
Also in connection with the merger, we issued new preferred shares to the
former holders of Crown's non-convertible senior preferred shares. A
total of 2,475,000 preferred shares was issued at a par value of $0.01
per share and a liquidation value of $50.00 per share, or approximately
$123.8 million.
Also in connection with the merger, we issued options to purchase 161,851
PREIT shares of beneficial interest in exchange for vested Crown options
outstanding. The options have a value of $5.17 per PREIT option at May
13, 2003 based on a Black-Scholes option valuation model, for an
approximate total value of $0.8 million.
The following table summarizes the pro forma impact of the equity
transactions noted above, as well as the elimination of Crown's
historical minority interest and shareholders' equity accounts.
Retained
Minority earnings
Minority interest in Shares of Capital (Distributions
interest in Operating Preferred beneficial contributed in in excess of
($000's) properties Partnership shares interest excess of par net income) Total
-------- ----------- ----------- --------- ---------- -------------- ------------ --------
Issuance of shares of
beneficial interest........ $ -- $ -- $ -- $11,725 $316,580 $ -- $328,305
Issuance of OP Units......... -- 47,690 -- -- -- -- 47,690
Issuance of preferred shares. -- -- 25 -- 123,725 -- 123,750
Issuance of options to
purchase shares of
beneficial interest........ -- -- -- -- 837 -- 837
Adjustment to record
minority interest on
Pennsylvania properties
(see note c)............... 39,067 -- -- -- (39,067) -- --
Impact of minority interest
carryover basis............ -- -- -- -- (4,550) -- (4,550)
Adjustment to record Crown
merger costs............... -- -- -- -- -- (7,782) (7,782)
Elimination of Crown's
historical minority
interest and shareholders'
equity accounts............ -- -- (25) (355) (353,297) 319,682 (33,995)
------- ------- ------ ------- -------- -------- --------
$39,067 $47,690 $ -- $11,370 $ 44,228 $311,900 $454,255
======= ======= ====== ======= ======== ======== ========
F-10
2. Adjustments to the Pro Forma Condensed Consolidated Statements of
Income--Year Ended December 31, 2002 and nine month period ended September
30, 2003.
m. Reflects PREIT's historical results of operations for the year ended
December 31, 2002 and the nine months ended September 30, 2003
(unaudited).
n. In the second quarter of 2003, the Company acquired interests in six
properties from the Rouse Company consisting of The Gallery at Market
East, Moorestown Mall, Exton Square Mall, Echelon Mall, Plymouth Meeting
Mall and a 73% joint venture partnership interest in New Castle
Associates. New Castle Associates acquired Cherry Hill Mall in a
transaction that immediately preceded the Company's acquisition of the
New Castle Associates partnership interest. Such interest is consolidated
for accounting purposes. The Gallery at Market East, Moorestown Mall,
Exton Square Mall and the interest in New Castle Associates were acquired
on April 28, 2003. Echelon Mall and Plymouth Meeting Mall were acquired
on June 5, 2003.
On September 2, 2003, the Company acquired an additional 70% interest in
Willow Grove Park, an enclosed mall located in Willow Grove,
Pennsylvania. The Company now owns 100% of Willow Grove Park. These
acquisitions are collectively referred to as the "Completed
Acquisitions." The adjustments reflect the historical results of
operations, prior to acquisition, for properties acquired by PREIT in the
Completed Acquisitions for the year ended December 31, 2002 and the nine
months ended September 30, 2003 (unaudited).
Year Ended December 31, 2002 Nine Months Ended September 30, 2003
-------------------------------------- ------------------------------------
Rouse Willow Completed Rouse Willow Completed
($000's) Acquisitions Grove Park Acquisitions Acquisitions Grove Park Acquisitions
------- ------------ ---------- ------------ ------------ ---------- ------------
Revenue
Real estate revenue
Base rent............................ $ 61,560 $12,281 $ 73,841 $ 21,385 $ 8,222 $ 29,607
Expense reimbursements............... 37,136 9,585 46,721 13,947 6,388 20,335
Percentage rent...................... 1,583 100 1,683 463 25 488
Lease termination revenue............ 2,638 -- 2,638 1,019 -- 1,019
Other real estate revenue............ 1,879 2,386 4,265 1,433 1,157 2,590
-------- ------- -------- -------- ------- --------
Total real estate revenue.............. 104,796 24,352 129,148 38,247 15,792 54,039
-------- ------- -------- -------- ------- --------
Expenses
Property operating expenses............ (44,666) (8,517) (53,183) (17,108) (6,012) (23,120)
Interest expense....................... -- (9,189) (9,189) -- (6,230) (6,230)
-------- ------- -------- -------- ------- --------
Income from continuing operations...... $ 60,130 $ 6,646 $ 66,776 $ 21,139 $ 3,550 $ 24,689
-------- ------- -------- -------- ------- --------
o. Reflects the additional revenue associated with straight-line rent
adjustments and amortization of leases to market rates as a result of
Completed Acquisitions.
F-11
Year Ended Nine Months Ended
($000's) December 31, 2002 September 30, 2003
-------- ----------------- ------------------
Straight-line rent............................... $2,887 $ 958
Amortization of above/below market rents......... (454) (186)
------ -----
$2,433 $ 772
====== =====
p. Reflects the pro forma adjustments resulting from changes in properties
managed by PREIT-RUBIN, Inc. as the result of the Completed Acquisitions.
PREIT-RUBIN, Inc. no longer manages Christiana Mall and Willow Grove Park
(PREIT Services, LLC now manages Willow Grove Park, but does not receive
a management fee). PREIT-RUBIN, Inc. manages Cherry Hill Mall for a
management fee equal to 5.25% of Cherry Hill Mall's revenues. The pro
forma adjustment for Cherry Hill Mall reflects only the portion of the
management fee that is attributable to the Company's partner's 27%
minority interest in the property as the remaining amount will be
eliminated in consolidation.
Year Ended Nine Months Ended
($000's) December 31, 2002 September 30, 2003
-------- ----------------- -------------------
Pro forma management fees for Cherry Hill Mall... $ 425 $ 160
Historical management fees for Willow Grove Park. (873) (528)
Historical management fees for Christiana Mall... (1,293) (457)
------- -----
$(1,741) $(825)
======= =====
q. Reflects depreciation expense related to the Completed Acquisitions and
amortization expense on intangible assets acquired in the Completed
Acquisitions. Depreciation expense is calculated using a 30-year blended
life for buildings and improvements. The value of in-place leases is
amortized on a straight-line basis over the remaining term of the
respective leases.
Asset information
($000's) Date Building and In-Place
Property Acquired Improvements Lease Value
------------------------------------------------------ --------------------- --------------- -------------
Moorestown Mall....................................... April 28, 2003 $ 55,816 $ 5,156
The Gallery at Market East............................ April 28, 2003 47,724 2,382
Exton Square Mall..................................... April 28, 2003 111,086 7,702
Cherry Hill Mall...................................... April 28, 2003 147,474 8,752
Echelon Mall.......................................... June 5, 2003 11,156 4,258
Plymouth Meeting Mall................................. June 5, 2003 46,104 4,137
Willow Grove Park-- historical........................ September 4, 2003 (1) 42,667 --
Willow Grove Park-- stepped-up........................ September 4, 2003 93,189 8,285
-------- -------
$555,216 $40,672
======== =======
(1) Indicates date that the property was first consolidated by the
Company.
For the Year Ended For the Nine Months Ended
Expense information December 31, 2002 September 30, 2003
($000's) ----------------------------------------- ---------------------------------------
Property Depreciation Amortization Total Depreciation Amortization Total
------------------------------ ------------ ------------ ------- ------------ ------------ -------
Moorestown Mall............... $ 1,861 $ 879 $ 2,740 $ 930 $ 440 $ 1,370
The Gallery at Market East.... 1,591 654 2,245 796 326 1,122
Exton Square Mall............. 3,703 879 4,582 1,852 440 2,292
Cherry Hill Mall.............. 4,916 2,445 7,361 2,458 1,222 3,680
Echelon Mall.................. 372 1,163 1,535 186 582 768
Plymouth Meeting Mall......... 1,537 633 2,170 768 316 1,084
Willow Grove Park-- historical 1,422 -- 1,422 1,067 -- 1,067
Willow Grove Park-- stepped-up 3,106 1,030 4,136 2,071 687 2,758
------- ------ ------- ------- ------ -------
$18,508 $7,683 $26,191 $10,128 $4,013 $14,141
======= ====== ======= ======= ====== =======
F-12
r. Reflects interest expense, including amortization of financing costs, on
indebtedness used to finance the Completed Acquisitions. The balances
amortize over varying periods. In May 2003, the Moorestown Mall and
Dartmouth Mall mortgages were refinanced at a fixed interest rate of
4.95%. The bank loan borrowing interest rate is based on the Company's
bridge loan financing, which bears an interest rate at LIBOR plus 300
basis points, or 4.30% at the acquisition date. A variance of a 1/8
percent increase or decrease in interest rates would result in an
increase or decrease in pro forma interest expense, respectively, of
$176,000 and $132,000 for the year ended December 31, 2002 and the nine
months ended September 30, 2003, respectively.
Year Ended Nine Months Ended
($000's) December 31, 2002 September 30, 2003
-------- ----------------- ------------------
Mortgage Borrowings:
Moorestown Mall $64.3 million at 4.95%............. $ 3,159 $ 1,589
Exton Square Mall $100.5 million at 6.95%.......... 6,947 3,443
Cherry Hill Mall $73.7 million at 10.6%............ 7,447 3,817
Cherry Hill Mall $60.4 million at 5.0%............. 3,000 1,482
Dartmouth Mall $70.0 million at 4.95%.............. 3,500 1,731
------- -------
Total mortgage expense......................... 24,053 12,062
------- -------
Bank loan borrowing of $140.5 million at
4.30%............................................. 6,044 3,022
Amortization of debt premium....................... (6,446) (3,558)
------- -------
$23,651 $11,526
======= =======
s. Reflects the adjustment made to (i) eliminate the historical equity in
income of partnerships and joint ventures related to Willow Grove Park
for the year ended December 31, 2002 (there was no historical equity in
income of Willow Grove Park for the nine months ended September 30, 2003)
and (ii) eliminate the equity in income of four joint ventures owning
multifamily properties that were sold in 2003.
Year Ended Nine Months Ended
($000's) December 31, 2002 September 30, 2003
-------- ----------------- ------------------
Equity in income of Willow Grove Park.............. $(108) $ --
Equity in income of multifamily joint ventures..... (721) (514)
----- -----
$(829) $(514)
===== =====
t. Reflects the adjustment to minority interest as a result of the preferred
return due to the minority interest partners in New Castle Associates.
The minority partners receive a preferred return of $1.2 million
annually, which is equal to a return of 6.97% per annum on the fair
market value of their minority interest, which was $17.8 million at the
acquisition date.
Also reflects minority interest adjustment for the impact of 585,422
PREIT Operating Partnership Units that were issued in connection with the
Completed Acquisitions and the minority interest adjustment to the PREIT
Adjusted column. The additional units outstanding increased the minority
interest percentage to 12.8% and 11.6% for the year ended December 31,
2002 and the nine months ended September 30, 2003, respectively.
F-13
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- ------------------
Income from continuing operations before minority
interest......................................... $29,517 $19,933
Less: minority interest in properties.............. (1,244) (931)
------- -------
28,273 19,002
Pro forma minority interest percentage for
PREIT Adjusted column............................. 12.8% 11.6%
------- -------
Minority interest in Operating Partnership......... 3,619 2,204
Less: PREIT historical minority interest........... (1,307) (2,099)
------- -------
$ 2,312 $ 105
======= =======
u. Reflects Crown historical results of operations for the year ended
December 31, 2002 and the nine months ended September 30, 2003
(unaudited). Certain amounts were combined to conform to PREIT's income
statement presentation. The amounts that are presented for the minority
interest in Operating Partnership of approximately $5.4 million and $1.6
million for the year ended December 31, 2002 and the nine months ended
September 30, 2003 represent the portion of minority interest that
relates only to Crown's continuing operations based on the historical
weighted average minority ownership percentages for the time periods
presented.
v. Reflects the pro forma adjustments to eliminate the equity in income of
Palmer Park recorded by PREIT and Crown and to consolidate the operations
of Palmer Park for the year ended December 31, 2002 and the nine months
ended September 30, 2003.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Base rent....................................... $ 3,553 $ 2,719 See note x
Expense reimbursements.......................... 1,419 1,168 See note y
Percentage rent................................. 164 20 See note z
Lease termination revenue....................... 35 --
Other real estate revenues...................... 255 162 See note aa
------- -------
Total real estate revenues...................... 5,426 4,069
------- -------
Property operating expenses..................... (2,146) (1,640) See note cc
Depreciation and amortization................... (1,093) (834) See note dd
------- -------
Total expenses before interest expense.......... (3,239) (2,474)
------- -------
2,187 1,595
Interest expense................................ (1,315) (968) See note ff
------- -------
Equity in income of Palmer Park................. $ 872 $ 627
======= =======
w. Reflects the pro forma adjustments for two properties, Valley View and
Wiregrass Commons, acquired by Crown in the third and fourth quarters of
2002, respectively, to reflect the acquisitions as if they occurred on
January 1, 2002. No adjustments are needed for the nine months ended
September 30, 2003 because they are included in Crown's historical
September 30, 2003 results.
F-14
Year Ended
($000's) December 31, 2002
-------- -----------------
Base rent........................................... $7,949 See note x
Expense reimbursements.............................. 3,983 See note y
Percentage rent..................................... 31 See note z
Other real estate revenues.......................... 217 See note aa
------
Total real estate revenues.......................... 12,180
------
Property operating expenses......................... (4,583) See note cc
Interest expense.................................... (3,272) See note ff
------
Total pro forma expenses............................ (7,855)
------
$4,325
======
x. Reflects the pro forma adjustments to base rents for properties acquired
by us in connection with the Crown merger.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Straight-line rent adjustment...................... $ 2,221 $1,121
Amortization of above-market and below-market leases (364) (240)
Consolidation of Palmer Park base rents (see note v) 3,553 2,719
Pro forma adjustments for Valley View and
Wiregrass Commons (see note w).................... 7,949 --
------- ------
$13,359 $3,600
======= ======
y. Reflects the pro forma adjustments to expense reimbursements for
properties acquired by us in connection with the Crown merger.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Consolidation of Palmer Park expense
reimbursements (see note v)....................... $1,419 $1,168
Pro forma adjustments for Valley View and Wiregrass
Commons (see note w)............................. 3,983 --
------ ------
$5,402 $1,168
====== ======
z. Reflects the pro forma adjustments to percentage rent for properties
acquired by us in connection with the Crown merger.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- --------------
Consolidation of Palmer Park percentage rent (see
note v).......................................... $164 $20
Pro forma adjustments for Valley View and Wiregrass
Commons (see note w)............................. 31 --
---- ---
$195 $20
==== ===
F-15
aa. Reflects the pro forma adjustments to other real estate revenue for
properties acquired by us in connection with the Crown merger.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Consolidation of Palmer Park other real estate
revenue (see note v)............................. $255 $162
Pro forma adjustments for Valley View and
Wiregrass Commons (see note w)................... 217 --
---- ----
$472 $162
==== ====
bb. Reflects decrease in management fee income that will result because
PREIT-RUBIN, Inc. no longer charges management fees to Palmer Park Mall.
Palmer Park Mall was previously owned approximately 50% by PREIT and
approximately 50% by Crown, and was not previously consolidated for
financial reporting purposes. Management fees for Palmer Park were
$250,000 for the year ended December 31, 2002 and $210,000 for the nine
months ended September 30, 2003.
cc. Reflects adjustments to property operating expenses as a result of the
merger with Crown.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- --------------
Consolidation of Palmer Park property
operating expenses (see note v)............................ $2,146 $1,640
Elimination of Palmer Park management fee
(see note bb).............................................. (250) (210)
Pro forma adjustments for Valley View and
Wiregrass Commons (see note w)............................. 4,583 --
------ ------
$6,479 $1,430
====== ======
dd. Reflects adjustments to depreciation expense and amortization expense on
intangible assets in connection with the Crown merger. Depreciation
expense is calculated using a 30-year blended life for buildings and
improvements. The value of in-place leases is amortized on a
straight-line basis over the remaining term of the respective leases.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Depreciation expense
Depreciation on Crown investments in real
estate at stepped-up basis............................... $ 34,485 $ 25,864
Consolidation of Palmer Park depreciation
expense (see note v)..................................... 1,093 834
Elimination of Crown historical depreciation expense (44,375) (35,964)
-------- --------
(8,797) (9,266)
Amortization expense
Amortization of in-place lease value...................... 10,684 7,493
-------- --------
$ 1,887 $(1,773)
======== ========
ee. Reflects an adjustment to decrease general and administrative expenses
on a pro forma basis as a result of the merger transaction with Crown.
PREIT anticipates that general and administrative expenses will decrease
by $490,000 annually and by $368,000 for nine months, as a result of
reduction in compensation expense. Also, PREIT's management has
estimated there will be further reductions of general and administrative
expenses as a result of the merger of approximately $6.5 million
annually on a pro forma basis. The additional general and administrative
expense savings have not been included in the unaudited pro forma
condensed consolidated statements of income. There can be no assurance
that PREIT will be successful in realizing these anticipated cost
savings.
F-16
ff. Reflects the adjustments to interest expense resulting from the Crown
merger. A variance of a 1/8 percent increase or decrease in interest
rates would result in an increase or decrease in pro forma interest
expense, respectively, of $194,000 and $146,000 for the year ended
December 31, 2002 and the nine months ended September 30, 2003,
respectively.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Crown historical expenses that will not be
incurred post-merger:
Line of credit borrowings.......................... $ (6,360) $(3,802)
Schuylkill Mall mortgage interest expense.......... (740) (411)
Amortization of deferred financing fees............ (1,756) (1,388)
Pro forma borrowings
Line of credit borrowings.......................... 5,231 3,923
Amortization of debt premium....................... (10,689) (8,017)
Amortization of deferred financing fees............ 1,028 771
Consolidation of Palmer Park interest expense
(see note v)...................................... 1,315 968
Pro forma adjustments for Valley View and
Wiregrass Commons (see note w).................... 3,272 --
-------- -------
Pro forma interest expense adjustment.............. $ (8,699) $(7,956)
======== =======
gg. Reflects the adjustments to eliminate the equity in income of Palmer
Park recorded by PREIT and Crown of $872,000 and $627,000 for the year
ended December 31, 2002 and the nine months ended September 30, 2003,
respectively (see note v).
hh. Reflects adjustment to minority interest as a result of the preferred
return due to the Company's minority interest partner in the
Pennsylvania properties. The Company's minority interest partner
receives a preferred return of $0.7 million annually, which is equal to
the anticipated annual operating partnership distribution on the 341,297
Operating Partnership units that the Company expects to issue to
purchase the remaining 11% minority interest in 2006.
Also, reflects adjustment to minority interest as a result of the
issuance of additional units of the Company's operating partnership and
the change in net income in connection with Completed Transactions and
the merger with Crown. As a result of the additional operating
partnership units issued, pro forma minority interest in the operating
partnership would increase from 10.0% to 12.3% for the year ended
December 31, 2002 and from 9.9% to 13.1% for the nine months ended
September 30, 2003. Also reflects elimination of Crown's historical
minority interest account.
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- --------------
Pro forma income from continuing operations before
minority interest................................ $ 62,051 $ 43,539
Dividends on preferred shares...................... (13,613) (10,211)
Minority interest in properties.................... (1,981) (1,484)
-------- --------
46,457 31,844
Minority interest percentage....................... 12.3% 13.1%
-------- --------
Minority interest in Operating Partnership......... (5,714) (4,172)
PREIT historical minority interest................. 3,619 2,204
Crown historical minority interest................. 5,351 1,613
-------- --------
$ 3,256 $ (355)
======== ========
F-17
ii. Reflects adjustment to weighted average shares outstanding (basic and
diluted) and income from continuing operations per share (basic and
diluted).
Nine Months
Ended
Year Ended September 30,
($000's) December 31, 2002 2003
-------- ----------------- -------------
Pro forma income from continuing operations
before minority interest.......................... $ 62,051 $ 43,539
Minority interest in properties.................... (1,981) (1,484)
Minority interest in Operating Partnership......... (5,714) (4,172)
-------- --------
Pro forma income from continuing operations........ 54,356 37,883
Dividends on preferred shares...................... (13,613) (10,211)
-------- --------
Pro forma income from continuing operations
available to common shares........................ $ 40,743 $ 27,672
======== ========
Weighted average shares outstanding
Historical weighted average shares outstanding
-- basic.......................................... 16,162 17,560
Impact of common share exchange (see note l)....... 11,725 11,725
-------- --------
Pro forma weighted average shares outstanding
-- basic.......................................... 27,887 29,285
======== ========
Historical weighted average shares outstanding
-- diluted........................................ 16,388 17,874
Impact of common share exchange (see note l)....... 11,725 11,725
Impact of newly issued options to purchase shares
of beneficial interest............................ 47 47
-------- --------
Pro forma weighted average shares outstanding
-- diluted........................................ 28,160 29,646
======== ========
Income from continuing operations per share
Historical income from continuing operations
per share -- basic................................ $ 0.73 $ 1.08
Impact of pro forma adjustments.................... 0.73 (0.14)
-------- --------
Pro forma income from continuing operations
per share -- basic................................ $ 1.46 $ 0.94
======== ========
Historical income from continuing operations
per share -- diluted.............................. $ 0.72 $ 1.06
Impact of pro forma adjustments.................... 0.73 (0.13)
-------- --------
Pro forma income from continuing operations
per share -- diluted.............................. $ 1.45 $ 0.93
======== ========
In August 2003, the Company issued 6,325,000 common shares at a public
offering price of $29.75 per share, for net proceeds of approximately
$184 million. The net proceeds were used to pay down approximately $94.9
million that was then outstanding under the Company's line of credit and
to finance the $45.5 million purchase price of the acquired interest in
Willow Grove Park, with the remaining proceeds used for working capital
purposes. The accompanying pro forma consolidated financial information
has not been adjusted to reflect the impact of this public stock
offering prior to the offering date. Pro forma income from continuing
operations per share--basic and diluted would be $1.39 and $1.38,
respectively, for the year ended December 31, 2002 and $0.98 and $0.97,
respectively, for the nine months ended September 30, 2003 if the pro
forma consolidated financial information were to give effect to this
public offering and subsequent pay-down of the Company's line of credit
as if these events occurred, for pro forma purposes, as of January 1,
2002.
F-18
(c) Exhibits.
2.1 Agreement and Plan of Merger among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown American Realty Trust and Crown American
Properties, L.P., dated as of May 13, 2003
(incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.2 Crown Partnership Distribution Agreement between
Crown American Realty Trust and Crown American
Properties, L.P., dated as of May 13, 2003
(incorporated by reference to Exhibit 2.2 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.3 PREIT Contribution Agreement between Pennsylvania
Real Estate Investment Trust and PREIT Associates,
L.P., dated as of May 13, 2003 (incorporated by
reference to Exhibit 2.3 to the Registrant's Form
8-K, as filed with the SEC on May 22, 2003)
2.4 Crown Partnership Contribution Agreement between
Crown American Properties, L.P. and PREIT Associates,
L.P., dated as of May 13, 2003 (incorporated by
reference to Exhibit 2.4 to the Registrant's Form
8-K, as filed with the SEC on May 22, 2003)
2.5 Agreement of Exchange between Crown Investments Trust
and Crown American Properties, L.P., dated as of May
13, 2003 (incorporated by reference to Exhibit 2.5 to
the Registrant's Form 8-K, as filed with the SEC on
May 22, 2003)
2.6 Indemnification Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown Investments Trust, Crown American Investment
Company, Mark E. Pasquerilla and Crown Delaware
Holding Company, dated as of May 13, 2003
(incorporated by reference to Exhibit 2.6 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.7 Tax Protection Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown American Properties, L.P., Mark E. Pasquerilla,
Crown Investments Trust, Crown American Investment
Crown Holding Company and Crown American Associates,
dated as of November 18, 2003
2.8 Shareholder Agreement by Mark E. Pasquerilla, Crown
American Properties, L.P., Crown Investments Trust,
Crown American Investment Company and Crown Delaware
Holding Company, and acknowledged and agreed by
Pennsylvania Real Estate Investment Trust and PREIT
Associates, L.P., dated as of November 18, 2003
-7-
2.9 Registration Rights Agreement among Pennsylvania Real
Estate Investment Trust, Mark E. Pasquerilla, Crown
Investments Trust, Crown American Investment Company,
Crown Delaware Holding Company and Crown American
Properties, L.P., dated as of November 18, 2003
2.10 Standstill Agreement among Pennsylvania Real Estate
Investment Trust, PREIT Associates, L.P., Mark E.
Pasquerilla, Crown Investments Trust, Crown American
Investment Company, Crown Delaware Holding Company,
Crown Holding Company, and Crown American Properties,
L.P., dated as of November 18, 2003
2.11 Non-Competition Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P., Mark
E. Pasquerilla, Crown Investments Trust, Crown
American Investment Company, Crown Delaware Holding
Company and Crown American Properties, L.P., dated as
of November 18, 2003
4.1 Designating Amendment to Trust Agreement Designating
the Rights, Preferences, Privileges, Qualifications,
Limitations and Restrictions of 11% Non-Convertible
Senior Preferred Shares
4.2 Amendment to Trust Agreement as Amended and Restated
on December 16, 1997
4.3 Addendum to First Amended and Restated Partnership
Agreement of PREIT Associates, L.P. Designating the
Rights, Obligations, Duties and Preferences of Senior
Preferred Units
*10.1 Credit Agreement, dated as of November 20, 2003,
among PALP, PREIT and each of the financial
institutions signatory thereto
10.2 Form of Revolving Note, dated November 20, 2003
10.3 Swingline Note, dated November 20, 2003
10.4 Guaranty, dated as of November 20, 2003, executed by
PREIT and certain of its direct and indirect
subsidiaries
10.5 Common Share Purchase Warrant between PREIT and
Laurel Centre Associates LLC dated November 20, 2003
*10.6 Agreement between PREIT Services, LLC and Crown
American Hotels Company, dated November 20, 2003,
regarding information technology support
-8-
10.7 License Agreement, dated as of November 20, 2003 by
and among Crown Investments Trust, Crown American
Hotels Company and PREIT
23 Consent of Ernst & Young LLP (former Independent
Auditors of Crown)
99.1 Audited Consolidated Financial Statements of Crown
American Realty Trust as of December 31, 2002 and
2001, and for the years ended December 31, 2002, 2001
and 2000
99.2 Unaudited Consolidated Financial Statements of Crown
American Realty Trust as of September 30, 2003 and
for the three and nine month periods ended September
30, 2003 and 2002
* Schedules omitted. The Registrant will furnish a
supplementary copy of any omitted schedules to the
SEC upon request.
-9-
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PENNSYLVANIA REAL ESTATE INVESTMENT TRUST
Date: December 3, 2003 By: /s/ Jonathan B. Weller
-------------------------------------
Jonathan B. Weller
President and Chief Operating Officer
-10-
Exhibit Index
-------------
2.1 Agreement and Plan of Merger among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown American Realty Trust and Crown American
Properties, L.P., dated as of May 13, 2003
(incorporated by reference to Exhibit 2.1 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.2 Crown Partnership Distribution Agreement between
Crown American Realty Trust and Crown American
Properties, L.P., dated as of May 13, 2003
(incorporated by reference to Exhibit 2.2 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.3 PREIT Contribution Agreement between Pennsylvania
Real Estate Investment Trust and PREIT Associates,
L.P., dated as of May 13, 2003 (incorporated by
reference to Exhibit 2.3 to the Registrant's Form
8-K, as filed with the SEC on May 22, 2003)
2.4 Crown Partnership Contribution Agreement between
Crown American Properties, L.P. and PREIT Associates,
L.P., dated as of May 13, 2003 (incorporated by
reference to Exhibit 2.4 to the Registrant's Form
8-K, as filed with the SEC on May 22, 2003)
2.5 Agreement of Exchange between Crown Investments Trust
and Crown American Properties, L.P., dated as of May
13, 2003 (incorporated by reference to Exhibit 2.5 to
the Registrant's Form 8-K, as filed with the SEC on
May 22, 2003)
2.6 Indemnification Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown Investments Trust, Crown American Investment
Company, Mark E. Pasquerilla and Crown Delaware
Holding Company, dated as of May 13, 2003
(incorporated by reference to Exhibit 2.6 to the
Registrant's Form 8-K, as filed with the SEC on May
22, 2003)
2.7 Tax Protection Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P.,
Crown American Properties, L.P., Mark E. Pasquerilla,
Crown Investments Trust, Crown American Investment
Crown Holding Company and Crown American Associates,
dated as of November 18, 2003
2.8 Shareholder Agreement by Mark E. Pasquerilla, Crown
American Properties, L.P., Crown Investments Trust,
Crown American Investment Company and Crown Delaware
Holding Company, and acknowledged and agreed by
Pennsylvania Real Estate Investment Trust and PREIT
Associates, L.P., dated as of November 18, 2003
-11-
2.9 Registration Rights Agreement among Pennsylvania Real
Estate Investment Trust, Mark E. Pasquerilla, Crown
Investments Trust, Crown American Investment Company,
Crown Delaware Holding Company and Crown American
Properties, L.P., dated as of November 18, 2003
2.10 Standstill Agreement among Pennsylvania Real Estate
Investment Trust, PREIT Associates, L.P., Mark E.
Pasquerilla, Crown Investments Trust, Crown American
Investment Company, Crown Delaware Holding Company,
Crown Holding Company, and Crown American Properties,
L.P., dated as of November 18, 2003
2.11 Non-Competition Agreement among Pennsylvania Real
Estate Investment Trust, PREIT Associates, L.P., Mark
E. Pasquerilla, Crown Investments Trust, Crown
American Investment Company, Crown Delaware Holding
Company and Crown American Properties, L.P., dated as
of November 18, 2003
4.1 Designating Amendment to Trust Agreement Designating
the Rights, Preferences, Privileges, Qualifications,
Limitations and Restrictions of 11% Non-Convertible
Senior Preferred Shares
4.2 Amendment to Trust Agreement as Amended and Restated
on December 16, 1997
4.3 Addendum to First Amended and Restated Partnership
Agreement of PREIT Associates, L.P. Designating the
Rights, Obligations, Duties and Preferences of Senior
Preferred Units
*10.1 Credit Agreement, dated as of November 20, 2003,
among PALP, PREIT and each of the financial
institutions signatory thereto
10.2 Form of Revolving Note, dated November 20, 2003
10.3 Swingline Note, dated November 20, 2003
10.4 Guaranty, dated as of November 20, 2003, executed by
PREIT and certain of its direct and indirect
subsidiaries
10.5 Common Share Purchase Warrant between PREIT and
Laurel Centre Associates LLC dated November 20, 2003
*10.6 Agreement between PREIT Services, LLC and Crown
American Hotels Company, dated November 20, 2003,
regarding information technology support
-12-
10.7 License Agreement, dated as of November 20, 2003 by
and among Crown Investments Trust, Crown American
Hotels Company and PREIT
23 Consent of Ernst & Young LLP (former Independent
Auditors of Crown)
99.1 Audited Consolidated Financial Statements of Crown
American Realty Trust as of December 31, 2002 and
2001, and for the years ended December 31, 2002, 2001
and 2000
99.2 Unaudited Consolidated Financial Statements of Crown
American Realty Trust as of September 30, 2003 and
for the three and nine month periods ended September
30, 2003 and 2002
* Schedules omitted. The Registrant will furnish a
supplementary copy of any omitted schedules to the
SEC upon request.
-13-