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, 2021.
OVERVIEW
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 shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.
We currently own interests in 24 retail properties, of which 23 are operating properties and one is a development property. The 23 operating properties include 20 shopping malls and three other retail properties, have a total of 19.3 million square feet and are located in eight states. We and partnerships in which we hold an interest own 14.8 million square feet at these properties (excluding space owned by anchors or third parties).
There are 17 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 14.7 million square feet, of which we own 11.5 million square feet. The six operating retail properties that are owned by unconsolidated partnerships with third parties have a total of 4.6 million square feet of which 3.3 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 or 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 was previously designated as a non-core property, but has since been removed altogether. As discussed further in Note 2 to our consolidated financial statements, a foreclosure sale judgment with respect to Valley View Mall was ordered by the court and we no longer operate the property. The foreclosure proceedings for Valley View Mall were completed in May 2022. “Core Malls” consists of core proprieties other than power centers.
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, operating and redeveloping shopping malls, which we do primarily through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We believe our distinctive real estate is at the forefront of enabling communities to flourish through the built environment by providing opportunities to create vibrant multi-use destinations. In general, our malls include carefully curated retail and lifestyle offerings, including national and regional department stores, large format retailers and other anchors, mixed with destination dining and entertainment experiences. In recent years, we have increased the portion of our mall properties that are leased to non-traditional mall tenants, including life sciences, healthcare, supermarkets and self-storage facilities.
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 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.
The COVID-19 global pandemic that began in early 2020 has adversely impacted and continues to impact our business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The prolonged and increased spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets. Some of our tenants’ financial health and business viability have been adversely impacted and their creditworthiness has deteriorated. We anticipate that our future business, financial condition, liquidity and results of operations, including in 2021 and potentially in future periods, will continue to be materially impacted by the COVID-19 pandemic. Although we have operated in the COVID-19 environment for approximately two years, uncertainty remains as to how long the global pandemic, economic challenges and restrictions on day-to-day life and business operations will continue to impact us or our tenants.
COVID-19 closures of our properties began on March 12, 2020 and continued through the reopening of our last property on July 3, 2020; all of our properties have remained open since that time and are employing safety and sanitation measures designed to address the risks posed by COVID-19. As of August 9, 2022, government-imposed capacity restrictions are no longer in place in the Company’s markets. Following the pandemic-related closures, approximately 4% of our tenants failed to re-open (inclusive of tenants that filed for bankruptcy protection in the aftermath). As a result of the challenging environment created by COVID-19, primarily beginning in the second quarter of 2020, many of our
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tenants have sought rent relief and deferral and several have failed to pay rent due. Although we continue to make progress in collecting COVID-19-period rents, we have also initiated legal proceedings against certain tenants for failure to pay. Collections improved in 2022 and 2021 as compared to 2020. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as the effects of COVID-19 affect the financial strength of our tenants. Although market fundamentals improved during 2021 and into 2022, the impacts of COVID-19, including the emergence of new variants and various impacts on the global supply chain, create significant uncertainty and are likely to continue impact our operations and results in 2022.
Net loss for the three months ended June 30, 2022 was $11.0 million compared to net loss of $25.4 million for the three months ended June 30, 2021. This $14.4 million decrease in net loss was primarily due to: : (a) a decrease in real estate revenue of $0.9 million; (b) a decrease in gain on debt extinguishment of debt of $4.6 million; (c) an increase in gain on sales of interest in real estate of $2.7 million; (d) an increase on gain on sales of equity method investment of $9.1 million; (e) a decrease in gain on sales of real estate by equity method investee of $1.3 million; and (f) an increase in gain on sales of non-operating real estate of $8.8 million.
Net loss for the six months ended June 30, 2022 was $44.0 million compared to net loss of $69.4 million for the six months ended June 30, 2021. This $25.4 million decrease in net loss was primarily due to: (a) an increase in real estate revenue of $3.0 million resulting from the recovering economic conditions following the impact of COVID-19 on our tenants; (b) a decrease in gain on debt extinguishment of debt of $4.6 million; (c) an increase in gain on sales of interest in real estate of $2.7 million; (d) an increase on gain on sales of equity method investment of $9.1 million; (e) a decrease in gain on sales of real estate by equity method investee of $1.3 million; (f) an increase in gain on sales of non-operating real estate of $8.8 million; and (g) an increase in gain on sale of preferred equity interest of $3.7 million.
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, dining and entertainment, 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 and Impact of COVID-19
Conditions in the economy have caused fluctuations and variations in business and consumer confidence, retail sales, and consumer spending on retail goods, destination dining and entertainment. 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. All of these factors have been exacerbated by the ongoing impact of the COVID-19 pandemic.
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):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2022 (through June 30, 2022) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
Unconsolidated properties |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
— |
|
2021 (Full Year) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
5 |
|
|
|
10 |
|
|
|
331,314 |
|
|
$ |
1,589 |
|
|
|
5 |
|
|
|
18,344 |
|
|
$ |
380 |
|
Unconsolidated properties |
|
|
1 |
|
|
|
1 |
|
|
|
4,046 |
|
|
|
57 |
|
|
|
1 |
|
|
|
4,046 |
|
|
|
57 |
|
Total |
|
|
5 |
|
|
|
11 |
|
|
|
335,360 |
|
|
$ |
1,646 |
|
|
|
6 |
|
|
|
22,390 |
|
|
$ |
437 |
|
(1) Total represents unique tenants and includes both tenant-owned and landlord-owned stores. As a result, amounts may not total.
(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 June 30, 2022.
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.
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During 2019, we re-opened or introduced additional tenants to former anchor positions at Woodland Mall in Grand Rapids, Michigan, Valley Mall in Hagerstown, Maryland and Plymouth Meeting Mall, in Plymouth Meeting, Pennsylvania. Dick’s Sporting Goods at Valley Mall opened in the first quarter of 2020. At Plymouth Meeting Mall, we opened Michaels in the first quarter of 2020. In 2017, we purchased the Macy’s location at Moorestown Mall in Moorestown, New Jersey and opened HomeSense, Sierra Trading, Five Below and Michaels between 2018 and the first quarter of 2020. During 2021, we opened Power Warehouse and during the first quarter of 2022, we opened HomeGoods at Cumberland Mall in Vineland, New Jersey.
Construction was completed in the first quarter of 2020 giving way to the opening of Burlington in place of a former Sears at Dartmouth Mall in Dartmouth, Massachusetts. Aldi also opened in the space adjacent to Burlington in September 2021. We expect to continue to move forward with several outparcels at Dartmouth Mall resulting from the Sears recapture and to work with large format prospects for the additional space adjacent to Burlington, but have experienced delays due to the impact of the COVID-19 pandemic.
During 2019, an anchor tenant, Sears, closed at Exton Square Mall in Exton, Pennsylvania. In January 2020, the Lord & Taylor store at Moorestown Mall in Moorestown, New Jersey closed and we executed a lease with Turn 7, which opened in the fourth quarter of 2021. Sears closed its stores at Moorestown Mall in Moorestown, New Jersey and Jacksonville Mall in Jacksonville, North Carolina in April 2020. Sears continues to be financially obligated pursuant to the lease at the Jacksonville Mall location. In July 2021, the former Sears site at Moorestown Mall was sold to Cooper University Health Care. In May 2020, J.C. Penney filed for bankruptcy and announced the closure of its stores at The Mall at Prince George's in Hyattsville, Maryland, and Magnolia Mall in Florence, South Carolina. The Magnolia Mall location has been leased to Tilt Studio, an entertainment concept that opened in October 2021.
In response to anchor store closings and other trends in the retail space, we have been changing the mix of tenants at our properties. In general, our malls include national and regional department stores, large format retailers and other anchors, mixed with destination dining and entertainment experiences, however, in recent years, we have been reducing the percentage of traditional mall tenants and increasing the share of space dedicated to non-traditional mall tenants. Approximately 29% of our mall space is committed to non-traditional tenants offering services such as dining and entertainment, health and wellness, off-price retail and fast fashion. See “— Capital Improvements, Redevelopment and Development Projects.”
To fund the capital necessary to replace anchors and to maintain a reasonable level of leverage, we expect to use a variety of means available to us, subject to and in accordance with the terms of our Credit Agreements. These steps might include (i) making additional borrowings under our Credit Agreements (assuming availability and continued compliance with the financial covenants thereunder), (ii) obtaining construction loans on specific projects, (iii) selling properties or interests in properties with values in excess of their mortgage loans (if applicable) and applying the excess proceeds to fund capital expenditures or for debt reduction, or (iv) obtaining capital from joint ventures or other partnerships or arrangements involving our contribution of assets with institutional investors, private equity investors or other REITs.
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 $45.5 million as of June 30, 2022.
As of June 30, 2022, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects at our consolidated and unconsolidated properties of $4.3 million, including $0.5 million of commitments related to the redevelopment of Fashion District Philadelphia, in the form of contracts with general service providers and other professional service providers.
In 2014, we entered into a 50/50 joint venture with The Macerich Company (“Macerich”) to redevelop Fashion District Philadelphia. As we redevelop Fashion District Philadelphia, operating results in the short term, as measured by sales, occupancy, real estate revenue, property operating expenses, Net Operating Income (“NOI”) and depreciation, will continue to be affected until the newly constructed space is completed, leased and occupied.
In January 2018, the Company and Macerich entered into a $250.0 million term loan (as amended in July 2019 to increase the total maximum potential borrowings to $350.0 million) to fund the ongoing redevelopment of Fashion District Philadelphia and to repay capital contributions to the venture previously made by the partners. 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. On December 10, 2020, PM Gallery LP, together with certain other subsidiaries owned indirectly by us and Macerich (including the fee and leasehold owners of the properties that are part of the Fashion District Philadelphia project), entered into an Amended and Restated Term Loan Agreement (the “FDP Loan Agreement”). In connection with the execution of the FDP Loan Agreement, a $100.0 million principal payment was made (and funded indirectly by Macerich, the “Partnership Loan”) to pay down the existing loan, reducing the outstanding principal under the FDP Loan Agreement from $301.0 million to $201.0 million. The joint venture must repay the Partnership Loan plus 15% accrued interest to Macerich, in its capacity as the lender, prior to the resumption of 50/50 cash distributions to us and Macerich. In connection with the execution of the FDP Loan Agreement, the governing structure of PM Gallery LP was
25
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modified such that, effective as of January 1, 2021, Macerich is responsible for the entity’s operations and, subject to limited exceptions, controls major decisions. The Company considered the changes to the governing structure of PM Gallery LP and determined the investment qualifies as a variable interest entity and would continue to be accounted for under the equity method of accounting.
The FDP Loan Agreement provides for (i) a maturity date of January 22, 2023, with the potential for a one-year extension upon the borrowers’ satisfaction of certain conditions, (ii) an interest rate at the borrowers’ option with respect to each advance of either (A) the Base Rate (defined as the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) the LIBOR Market Index Rate plus 1.00%) plus 2.50% or (B) LIBOR for the applicable period plus 3.50%, (iii) a full recourse guarantee of 50% of the borrowers’ obligations by PREIT Associates, L.P., on a several basis, (iv) a full recourse guarantee of certain of the borrowers’ obligations by The Macerich Partnership, L.P., up to a maximum of $50.0 million, on a several basis, (v) a pledge of the equity interests of certain indirect subsidiaries of PREIT and Macerich, as well as of PREIT-RUBIN, Inc. and one of its subsidiaries, that have a direct or indirect ownership interest in the borrowers, (vi) a non-recourse carve-out guaranty and a hazardous materials indemnity by each of PREIT Associates, L.P. and The Macerich Partnership, L.P., and (vii) mortgages of the borrowers’ fee and leasehold interests in the properties that are part of the Fashion District Philadelphia project and certain other properties. The FDP Loan Agreement contains certain covenants typical for loans of its type.
We also own an interest in a development property, but we do not expect to make any significant investment at this property in the short term.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies are those that require the application of management’s most difficult, subjective, or complex judgments, often because of the need to make estimates about the effect of matters that are inherently uncertain and that might change in subsequent periods. In preparing the unaudited consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the unaudited 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 2022 and 2021, 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 and Estimates” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021.
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, which is referred to as a "triggering event.". 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.
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.
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. Our intent is to hold and operate our properties long-term, which reduces the likelihood that our carrying value is not recoverable. A shortened holding period would increase the likelihood that the carrying value is not recoverable.
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 recorded as reduction to income.
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Table of Contents
During the three and six months ended June 30, 2022, no asset impairment loss was recorded. During the three months ended June 30, 2021, we recorded an impairment loss of $1.3 million in connection with our classification of Valley View Center as held for sale. The June 30, 2021 impairment loss is included in the consolidated statement of operations.
Revenue and Receivables
We derive over 95% of our revenue from tenant rent and other tenant-related activities. Tenant rent includes base rent, percentage rent, expense reimbursements (such as reimbursements of costs of common area maintenance (“CAM”), real estate taxes and utilities), and the amortization of above-market and below-market lease intangibles.
We accrue revenue under leases, provided that it is probable that we will collect substantially all of the lease revenue that is due under the terms of the lease both at inception and on an ongoing basis. When collectability of lease revenue is not probable, leases are prospectively accounted for on a cash basis and any difference between the revenue that has been accrued and the cash collected from the tenant over the life of the lease is recognized as a current period adjustment to lease revenue. We review the collectability of our tenant receivables related to tenant rent including base rent, straight-line rent, expense reimbursements and other revenue or income by specifically analyzing billed and unbilled revenues, including straight-line rent receivable, and considering historical collection issues, tenant creditworthiness and current economic and industry trends. Our revenue recognition and receivables collectability analysis places particular emphasis on past-due accounts and considers the nature and age of the receivables, the payment history and financial condition of the payor, the basis for any disputes or negotiations with the payor, and other information that could affect collectability.
We record base rent on a straight-line basis, which means that the monthly base rent revenue according to the terms of our leases with our tenants is adjusted so that an average monthly rent is recorded for each tenant over the term of its lease. When tenants vacate prior to the end of their lease, we accelerate amortization of any related unamortized straight-line rent balances, and unamortized above-market and below-market intangible balances are amortized as a decrease or increase to real estate revenue, respectively.
Percentage rent represents rental revenue that the tenant pays based on a percentage of its sales, either as a percentage of its total sales or as a percentage of sales over a certain threshold. In the latter case, we do not record percentage rent until the sales threshold has been reached.
Revenue for rent received from tenants prior to their due dates is deferred until the period to which the rent applies.
In addition to base rent, certain lease agreements contain provisions that require tenants to reimburse a fixed or pro rata share of certain CAM costs, real estate taxes and utilities. Tenants generally make monthly expense reimbursement payments based on a budgeted amount determined at the beginning of the year. Effective January 1, 2019, we recognize fixed CAM revenue prospectively on a straight-line basis.
Certain lease agreements contain co-tenancy clauses that can change the amount of rent or the type of rent that tenants are required to pay, or, in some cases, can allow the tenant to terminate their lease, in the event that certain events take place, such as a decline in property occupancy levels below certain defined levels or the vacating of an anchor store. Co-tenancy clauses do not generally have any retroactive effect when they are triggered. The effect of co-tenancy clauses is applied on a prospective basis to recognize the new rent that is in effect.
Payments made to tenants as inducements to enter into a lease are treated as deferred costs that are amortized as a reduction of rental revenue over the term of the related lease.
Lease termination fee revenue is recognized in the period when a termination agreement is signed, collectability is assured, and the tenant has vacated the space. In the event that a tenant is in bankruptcy when the termination agreement is signed, termination fee income is deferred and recognized when it is received.
Utility reimbursement revenue is presented separate from rental revenue based on actual usage as the pattern of transfer is not aligned with the use of the property.
We also generate revenue by providing management services to third parties, including property management, brokerage, leasing and development. Management fees generally are a percentage of managed property revenue or cash receipts. Leasing fees are earned upon the consummation of new leases. Development fees are earned over the time period of the development activity and are recognized on the percentage of completion method. These activities are collectively included in “Other income” in the consolidated statements of operations.
Revenue from the reimbursement of marketing expenses is generated through tenant leases that require tenants to reimburse a defined amount of property marketing expenses. Our contractual performance obligations are fulfilled as marketing expenditures are made. Tenant payments are received monthly as required by the respective lease terms. We defer income recognition if the reimbursements exceed the aggregate marketing expenditures made through that date. Deferred marketing reimbursement revenue is recorded in tenants’ deposits and deferred rent on the consolidated balance sheet. The marketing reimbursements are recognized as revenue at the time that the marketing expenditures occur.
Property management revenue from management and development activities is generated through contracts with third party owners of real estate properties or with certain of our joint ventures, and is recorded in other income in the consolidated statements of operations. In the case of management fees, our performance obligations are fulfilled over time as the management services are performed and the associated revenues are recognized on a monthly basis when the customer is billed. In the case of development fees, our performance obligations are fulfilled over
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Table of Contents
time as we perform certain stipulated development activities as set forth in the respective development agreements and the associated revenues are recognized on a monthly basis when the customer is billed.
New Accounting Developments
See Note 1 to our unaudited consolidated financial statements for descriptions of new accounting developments.
RESULTS OF OPERATIONS
Overview
Net loss for the three months ended June 30, 2022 was $11.0 million compared to net loss of $25.4 million for the three months ended June 30, 2021. This $14.4 million decrease in net loss was primarily due to: (a) a decrease in real estate revenue of $0.9 million; (b) a decrease in gain on debt extinguishment of debt of $4.6 million; (c) an increase in gain on sales of interest in real estate of $2.7 million; (d) an increase on gain on sales of equity method investment of $9.1 million; (e) a decrease in gain on sales of real estate by equity method investee of $1.3 million; and (f) an increase in gain on sales of non-operating real estate of $8.8 million.
Net loss for the six months ended June 30, 2022 was $44.0 million compared to net loss of $69.4 million for the six months ended June 30, 2021. This $25.4 million decrease in net loss was primarily due to: (a) an increase in real estate revenue of $3.0 million resulting from the recovering economic conditions following the impact of COVID-19 on our tenants; (b) a decrease in gain on debt extinguishment of debt of $4.6 million; (c) an increase in gain on sales of interest in real estate of $2.7 million; (d) an increase on gain on sales of equity method investment of $9.1 million; (e) a decrease in gain on sales of real estate by equity method investee of $1.3 million; (f) an increase in gain on sales of non-operating real estate of $8.8 million; and (g) an increase in gain on sale of preferred equity interest of $3.7 million.
Occupancy
The table below sets forth certain occupancy statistics for our properties as of June 30, 2022 and 2021:
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|
|
Occupancy(1) at June 30, |
|
|
|
Consolidated
Properties |
|
|
Unconsolidated
Properties |
|
|
Combined(2) |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Retail portfolio weighted average (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
|
90.5 |
% |
|
|
86.5 |
% |
|
|
87.6 |
% |
|
|
80.8 |
% |
|
|
89.8 |
% |
|
|
84.8 |
% |
Total including anchors |
|
|
92.3 |
% |
|
|
89.0 |
% |
|
|
90.2 |
% |
|
|
84.4 |
% |
|
|
91.8 |
% |
|
|
87.9 |
% |
Core Malls weighted average: (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total excluding anchors |
|
|
92.7 |
% |
|
|
88.5 |
% |
|
|
80.3 |
% |
|
|
74.6 |
% |
|
|
90.5 |
% |
|
|
86.0 |
% |
Total including anchors |
|
|
95.3 |
% |
|
|
90.5 |
% |
|
|
85.6 |
% |
|
|
81.4 |
% |
|
|
93.8 |
% |
|
|
89.0 |
% |
(1) Occupancy for all periods presented includes all tenants irrespective of the term of their agreement.
(2) Combined occupancy is calculated by using occupied gross leasable area (“GLA”) for consolidated and unconsolidated properties and dividing by total GLA for consolidated and unconsolidated properties.
(3) Retail portfolio includes all retail properties including Fashion District Philadelphia.
(4) Core Malls excludes Exton Square Mall and power centers.
28
Table of Contents
Leasing Activity
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the three months ended June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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") |
|
|
|
|
51 |
|
|
|
131,077 |
|
|
|
5.0 |
|
|
$ |
30.92 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
4.40 |
|
Over 10k sf |
|
|
|
|
2 |
|
|
|
33,246 |
|
|
|
10.0 |
|
|
|
21.31 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
11.39 |
|
Total New Leases |
|
|
|
|
53 |
|
|
|
164,323 |
|
|
|
6.0 |
|
|
$ |
28.98 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
6.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k sf |
|
|
|
|
30 |
|
|
|
51,340 |
|
|
|
3.2 |
|
|
$ |
80.12 |
|
|
$ |
79.07 |
|
|
$ |
1.05 |
|
|
|
1.3 |
% |
|
|
5.7 |
% |
|
$ |
- |
|
Over 10k sf |
|
|
|
|
3 |
|
|
|
87,431 |
|
|
|
2.2 |
|
|
|
12.67 |
|
|
|
14.73 |
|
|
|
(2.06 |
) |
|
|
(14.0 |
%) |
|
|
(14.4 |
%) |
|
|
- |
|
Total Fixed Rent |
|
|
|
|
33 |
|
|
|
138,771 |
|
|
|
2.6 |
|
|
$ |
37.62 |
|
|
$ |
38.53 |
|
|
$ |
(0.91 |
) |
|
|
(2.4 |
%) |
|
|
0.3 |
% |
|
$ |
- |
|
Total Percentage in Lieu |
|
|
|
|
22 |
|
|
|
47,313 |
|
|
|
2.9 |
|
|
|
44.50 |
|
|
|
44.16 |
|
|
|
0.34 |
|
|
|
0.8 |
% |
|
N/A |
|
|
|
- |
|
Total Renewal Leases |
|
|
|
|
55 |
|
|
|
186,084 |
|
|
|
2.7 |
|
|
$ |
39.37 |
|
|
$ |
39.96 |
|
|
$ |
(0.59 |
) |
|
|
(1.5 |
%) |
|
N/A |
|
|
$ |
- |
|
Total Non Anchor (4) |
|
|
|
|
108 |
|
|
|
350,407 |
|
|
|
4.2 |
|
|
$ |
34.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anchor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
N/A |
|
|
N/A |
|
|
$ |
- |
|
Renewal Leases |
|
|
|
|
2 |
|
|
|
447,900 |
|
|
|
7.8 |
|
|
|
5.06 |
|
|
|
5.06 |
|
|
|
- |
|
|
- |
|
|
N/A |
|
|
|
- |
|
Total |
|
|
|
|
2 |
|
|
|
447,900 |
|
|
|
7.8 |
|
|
$ |
5.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.
(2) Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.
(3) These leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term.
(4) Includes 9 leases and 21,079 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “— Non-GAAP Supplemental Financial Measures” for further details on our ownership interests in our unconsolidated properties.
29
Table of Contents
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the six months ended June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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") |
|
|
|
|
86 |
|
|
|
209,130 |
|
|
|
5.5 |
|
|
$ |
34.65 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
5.57 |
|
Over 10k sf |
|
|
|
|
4 |
|
|
|
74,696 |
|
|
|
11.4 |
|
|
$ |
16.98 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
|
8.08 |
|
Total New Leases |
|
|
|
|
90 |
|
|
|
283,826 |
|
|
|
7.1 |
|
|
$ |
30.00 |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
6.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Renewal Leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under 10k sf |
|
|
|
|
63 |
|
|
|
151,321 |
|
|
|
3.9 |
|
|
$ |
61.40 |
|
|
$ |
61.87 |
|
|
$ |
(0.47 |
) |
|
|
(0.8 |
%) |
|
|
4.7 |
% |
|
$ |
0.94 |
|
Over 10k sf |
|
|
|
|
6 |
|
|
|
157,166 |
|
|
|
3.1 |
|
|
|
17.83 |
|
|
|
18.63 |
|
|
|
(0.80 |
) |
|
|
(4.3 |
%) |
|
|
(4.4 |
%) |
|
|
2.08 |
|
Total Fixed Rent |
|
|
|
|
69 |
|
|
|
308,487 |
|
|
|
3.4 |
|
|
$ |
39.20 |
|
|
$ |
39.84 |
|
|
$ |
(0.64 |
) |
|
|
(1.6 |
%) |
|
|
2.3 |
% |
|
$ |
1.46 |
|
Total Percentage in Lieu |
|
|
|
|
35 |
|
|
|
95,660 |
|
|
|
2.6 |
|
|
$ |
31.96 |
|
|
$ |
32.18 |
|
|
|
(0.22 |
) |
|
|
(0.7 |
%) |
|
|
0.0 |
% |
|
|
0.75 |
|
Total Renewal Leases (4) |
|
|
|
|
104 |
|
|
|
404,147 |
|
|
|
3.2 |
|
|
$ |
37.49 |
|
|
$ |
38.03 |
|
|
$ |
(0.54 |
) |
|
|
(1.4 |
%) |
|
N/A |
|
|
$ |
1.33 |
|
Total Non Anchor |
|
|
|
|
194 |
|
|
|
687,973 |
|
|
|
4.8 |
|
|
$ |
34.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anchor |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New Leases |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
$ |
- |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
N/A |
|
|
$ |
- |
|
Renewal Leases |
|
|
|
|
2 |
|
|
|
447,900 |
|
|
|
7.8 |
|
|
|
5.06 |
|
|
|
5.06 |
|
|
|
- |
|
|
|
0.0 |
% |
|
N/A |
|
|
|
- |
|
Total |
|
|
|
|
2 |
|
|
|
447,900 |
|
|
|
7.8 |
|
|
$ |
5.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Initial gross rent renewal spread is computed by comparing the initial rent per square foot in the new lease to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent, common area maintenance (“CAM”) charges, estimated real estate tax reimbursements and marketing charges, but excludes percentage rent. In certain cases, a lower rent amount may be payable for a period of time until specified conditions in the lease are satisfied.
(2) Average rent renewal spread is computed by comparing the average rent per square foot over the new lease term to the final rent per square foot amount in the expiring lease. For purposes of this computation, the rent amount includes minimum rent and fixed CAM charges, but excludes pro rata CAM charges, estimated real estate tax reimbursements, marketing charges and percentage rent.
(3) These leasing costs are presented as annualized amounts per square foot and are spread uniformly over the initial lease term.
(4) Includes 12 leases and 33,335 square feet of GLA with respect to our unconsolidated partnerships. We own a 25% to 50% interest in each of our unconsolidated properties and do not control such properties. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. See “— Non-GAAP Supplemental Financial Measures” for further details on our ownership interests in our unconsolidated properties.
30
Table of Contents
The following table sets forth our results of operations for the three and six months ended June 30, 2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30, |
|
|
% Change
2021 to 2022 |
|
Six Months Ended
June 30, |
|
|
% Change
2021 to 2022 |
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
|
|
2022 |
|
|
2021 |
|
|
|
Real estate revenue |
|
$ |
73,058 |
|
|
$ |
73,956 |
|
|
|
(1.2 |
) |
% |
|
$ |
142,252 |
|
|
$ |
139,234 |
|
|
|
2.2 |
|
% |
Property operating expenses |
|
|
(31,802 |
) |
|
|
(30,765 |
) |
|
|
3.4 |
|
% |
|
|
(65,375 |
) |
|
|
(63,924 |
) |
|
|
2.3 |
|
% |
Other income |
|
|
69 |
|
|
|
162 |
|
|
|
(57.4 |
) |
% |
|
|
310 |
|
|
|
288 |
|
|
|
7.6 |
|
% |
Depreciation and amortization |
|
|
(28,382 |
) |
|
|
(29,686 |
) |
|
|
(4.4 |
) |
% |
|
|
(57,492 |
) |
|
|
(59,525 |
) |
|
|
(3.4 |
) |
% |
General and administrative expenses |
|
|
(9,744 |
) |
|
|
(13,535 |
) |
|
|
(28.0 |
) |
% |
|
|
(21,227 |
) |
|
|
(25,366 |
) |
|
|
(16.3 |
) |
% |
Provision for employee separation expenses |
|
|
85 |
|
|
|
(149 |
) |
|
|
(157.0 |
) |
% |
|
|
1 |
|
|
|
(240 |
) |
|
|
(100.4 |
) |
% |
Insurance recoveries, net |
|
|
— |
|
|
|
670 |
|
|
|
(100.0 |
) |
% |
|
|
— |
|
|
|
670 |
|
|
|
(100.0 |
) |
% |
Project costs and other expenses |
|
|
(19 |
) |
|
|
(77 |
) |
|
|
(75.3 |
) |
% |
|
|
(79 |
) |
|
|
(179 |
) |
|
|
(55.9 |
) |
% |
Interest expense, net |
|
|
(32,601 |
) |
|
|
(31,978 |
) |
|
|
1.9 |
|
% |
|
|
(63,992 |
) |
|
|
(62,709 |
) |
|
|
2.0 |
|
% |
Reorganization expenses |
|
|
— |
|
|
|
(69 |
) |
|
|
(100.0 |
) |
% |
|
|
— |
|
|
|
(267 |
) |
|
|
(100.0 |
) |
% |
Gain on debt extinguishment, net |
|
|
— |
|
|
|
4,587 |
|
|
|
(100.0 |
) |
% |
|
|
— |
|
|
|
4,587 |
|
|
|
(100.0 |
) |
% |
Impairment of assets |
|
|
— |
|
|
|
(1,302 |
) |
|
|
(100.0 |
) |
% |
|
|
— |
|
|
|
(1,302 |
) |
|
|
(100.0 |
) |
% |
Equity in (loss) income of partnerships |
|
|
(1,188 |
) |
|
|
2,433 |
|
|
|
(148.8 |
) |
% |
|
|
(1,583 |
) |
|
|
(1,000 |
) |
|
|
58.3 |
|
% |
Gain (loss) on sales of interests in real estate |
|
|
1,701 |
|
|
|
(974 |
) |
|
|
(274.6 |
) |
% |
|
|
1,701 |
|
|
|
(974 |
) |
|
|
(274.6 |
) |
% |
Gain on sale of equity method investment |
|
|
9,053 |
|
|
|
|
|
|
100.0 |
|
% |
|
|
9,053 |
|
|
|
|
|
|
100.0 |
|
% |
Gain on sales of real estate by equity method investee |
|
|
— |
|
|
|
1,347 |
|
|
|
(100.0 |
) |
% |
|
|
— |
|
|
|
1,347 |
|
|
|
(100.0 |
) |
% |
Gain on sales of non operating real estate |
|
|
8,755 |
|
|
|
— |
|
|
|
0.0 |
|
% |
|
|
8,755 |
|
|
|
— |
|
|
|
0.0 |
|
% |
Gain on sale of preferred equity interest |
|
|
— |
|
|
|
— |
|
|
|
100.0 |
|
% |
|
|
3,688 |
|
|
|
— |
|
|
|
100.0 |
|
% |
Net loss |
|
$ |
(11,015 |
) |
|
$ |
(25,380 |
) |
|
|
(56.6 |
) |
% |
|
$ |
(43,988 |
) |
|
$ |
(69,360 |
) |
|
|
(36.6 |
) |
% |
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 (loss) income of partnerships.”
Real Estate Revenue
We include all rental income earned pursuant to tenant leases under the “Lease revenue” line item in the consolidated statements of operations. Utility reimbursements are presented separately in “Expense reimbursements” as the pattern of transfer is not aligned with the use of the property. 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 the tenant’s operating performance. For any tenant receivable balance deemed to be uncollectible, we record an offset for credit losses directly to Lease revenue in the consolidated statements of operations.
The following table reports the breakdown of real estate revenues based on the terms of the lease contracts for the three and six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Contractual lease payments: |
|
|
|
|
|
|
|
|
|
|
|
|
Base rent |
|
$ |
48,452 |
|
|
$ |
49,613 |
|
|
|
96,107 |
|
|
$ |
95,530 |
|
CAM reimbursement income |
|
$ |
8,306 |
|
|
|
8,301 |
|
|
|
16,782 |
|
|
|
16,660 |
|
Real estate tax income |
|
$ |
7,154 |
|
|
|
6,677 |
|
|
|
14,321 |
|
|
|
13,621 |
|
Percentage rent |
|
$ |
472 |
|
|
|
217 |
|
|
|
585 |
|
|
|
205 |
|
Lease termination revenue |
|
$ |
1,530 |
|
|
|
622 |
|
|
|
1,539 |
|
|
|
659 |
|
|
|
|
65,914 |
|
|
|
65,430 |
|
|
|
129,334 |
|
|
|
126,675 |
|
Less: credit losses |
|
|
738 |
|
|
|
2,682 |
|
|
|
759 |
|
|
|
1,345 |
|
Lease revenue |
|
|
66,652 |
|
|
|
68,112 |
|
|
|
130,093 |
|
|
|
128,020 |
|
Expense reimbursements |
|
|
4,215 |
|
|
|
3,887 |
|
|
|
8,359 |
|
|
|
7,786 |
|
Other real estate revenue |
|
|
2,191 |
|
|
|
1,957 |
|
|
|
3,800 |
|
|
|
3,428 |
|
Total real estate revenue |
|
$ |
73,058 |
|
|
$ |
73,956 |
|
|
|
142,252 |
|
|
$ |
139,234 |
|
Real Estate Revenue
Real estate revenue decreased by $0.9 million, or 1%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to:
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•an increase of $1.5 million in same store credit losses due to the collection of receivables from the resolution of COVID-19 related issues with tenants across our portfolio for the three months ended June 30, 2021;
•a decrease of $0.9 million at non-same store properties Valley View Mall and Exton Square Mall due to lower occupancy and the collection of receivables from the resolution of COVID-19 related issues with tenants for the three months ended June 30, 2021 at Exton Square Mall, and the sale of the strip center at Valley View Mall in the third quarter of 2021;
•a decrease of $0.6 million in same store base rent due to decreases of $1.8 million from the treatment and amortization of COVID-19 related rent credits and $0.1 million from comparable tenants paying a percentage of sales in lieu of minimum rent partially offset by an increase of $1.3 million from net new store openings over the previous twelve months; partially offset by,
•an increase of $0.9 million in lease termination revenue, including $1.5 million from the termination of leases with two tenants during 2022, partially offset by $0.6 million received from four tenants during 2021;
•an increase of $0.5 million in same store real estate tax reimbursements due to increased occupancy and abatements recorded in the prior year;
•an increase of $0.4 million in same store utility reimbursements related to the increase in same store utility expense (see “-Property Operating Expenses”);
•an increase of $0.3 million in same store other real estate revenue due to promotional revenues in the common areas and parking lots; and
Real estate revenue increased by $3.0 million, or 2%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to:
•an increase of $1.3 million in same store base rent due to increases of $2.8 million from net new store openings over the previous twelve months and $0.3 million from comparable tenants paying a percentage of sales in lieu of minimum rent, partially offset by a decrease of $1.8 million from the treatment and amortization of COVID-19 related rent credits;
•an increase of $0.8 million in same store lease termination revenue, including $1.5 million from the termination of leases with three tenants during 2022, partially offset by $0.7 million received from seven tenants during 2021;
•an increase of $0.8 million in same store real estate tax reimbursements due to increased occupancy and abatements recorded in the prior year;
•an increase of $0.7 million in same store utility reimbursements related to the increase in same store utility expense (see “-Property Operating Expenses”);
•an increase of $0.3 million in same store other real estate revenue due to promotional revenues in the common areas and parking lots;
•an increase of $0.2 million in same store common area expense reimbursements due to increased occupancy and abatements recorded in the prior year, partially offset by a decrease of $0.3 million associated with the straight lining of fixed common area expense reimbursements;
•an increase of $0.2 million in same store percentage rent; partially offset by
•a decrease of $1.0 million at non-same store properties Valley View Mall and Exton Square Mall due to lower occupancy and the collection of receivables from the resolution of COVID-19 related issues with tenants for the six months ended June 30, 2021 at Exton Square Mall, and the sale of the strip center at Valley View Mall in the third quarter of 2021; and
•an increase of $0.3 million in same store credit losses due to credit losses due to the collection of receivables from the resolution of COVID-19 related issues with tenants across our portfolio for the six months ended June 30, 2021.
Property Operating Expenses
Property operating expenses increased by $1.0 million, or 3%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to:
•an increase of $0.7 million in same store tenant utility expense due to a combination of higher electricity usage and electricity rates;
•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; and
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•an increase of $0.2 million in same store common area maintenance expense, including a $0.3 million increase in repairs and maintenance, a $0.2 million increase in utility expense due to a combination of higher electricity usage and electricity rates and a $0.1 million increase in insurance expense, partially offset by a $0.4 million decrease in security expense due to negotiated credits with our vendor; partially offset by
•a decrease of $0.2 million at non-same store properties Valley View Mall and Exton Square Mall.
Property operating expenses increased by $1.5 million, or 2%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to:
•an increase of $1.2 million in same store tenant utility expense due to a combination of higher electricity usage and electricity rates;
•an increase of $0.4 million in same store common area maintenance expense, including a $0.5 million increase in utility expense due to a combination of higher electricity usage and electricity rates, a $0.3 million increase in insurance expense and a $0.1 million increase in repairs and maintenance, partially offset by a $0.4 million decrease in security expense due to negotiated credits with our vendor and a $0.1 million decrease in snow removal expense due to higher snowfall amounts during 2021 across the Mid-Atlantic States; and
•an increase of $0.4 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment value and the real estate tax rate; partially offset by
•a decrease of $0.3 million at non-same store properties Valley View Mall and Exton Square Mall; and
•a decrease of $0.2 million in same store other property operating expenses due to a decrease in property legal expense.
Depreciation and Amortization
Depreciation and amortization expense decreased by $1.3 million, or 4%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021, primarily due to:
•a decrease of $0.8 million resulting from accelerated amortization of capital improvements associated with store closings during 2021; and
•a decrease of $0.5 million at non-same store properties Exton Square Mall and Valley View Mall.
Depreciation and amortization expense decreased by $2.0 million, or 3%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021, primarily due to:
•a decrease of $1.3 million resulting from accelerated amortization of capital improvements associated with store closings during 2021; and
•a decrease of $0.7 million at non-same store properties Exton Square Mall and Valley View Mall.
General and Administrative Expenses
General and administrative expenses decreased by $3.8 million, or 28.0%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 primarily due to lower incentive compensation expenses in 2022.
General and administrative expenses decreased by $4.1 million, or 16.3%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 primarily due to lower incentive compensation expenses in 2022.
Interest Expense
Interest expense increased by $0.6 million, or 1.9%, in the three months ended June 30, 2022 compared to the three months ended June 30, 2021. This increase was primarily due to higher weighted average interest rates. Our weighted average effective borrowing rate was 7.07% for the three months ended June 30, 2022 compared to 5.90% for the three months ended June 30, 2021. Our weighted average debt balance was $1,846.2 million for the three months ended June 30, 2022, compared to $1,856.8 million for the three months ended June 30, 2021.
Interest expense increased by $1.3 million, or 2.0%, in the six months ended June 30, 2022 compared to the six months ended June 30, 2021. This increase was primarily due to higher weighted average interest rates. Our weighted average effective borrowing rate was 6.90% for the six months ended June 30, 2022 compared to 6.28% for the six months ended June 30, 2021. Our weighted average debt balance was $1,855.0 million for the six months ended June 30, 2022, compared to $1,855.5 million for the six months ended June 30, 2021.
Gain on Debt Extinguishment
For the three and six months ended June 30, 2022, we did not record any gain on debt extinguishment.
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On June 10, 2021, we were notified that the full principal balance and accrued interest on our loan under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act was forgiven. As a result of the forgiveness, we recorded a gain on debt extinguishment of $4.6 million during the three and six months ended June 30, 2021.
Reorganization Expenses
For the three and six months ended June 30, 2022, we have not incurred any reorganization expenses.
For the three and six months ended June 30, 2021, we incurred costs and fees of $0.1 million and $0.3 million in connection with our efforts to finalize our Financial Restructuring that were directly attributable to our bankruptcy proceedings, which we classified within reorganization expenses in the consolidated statement of operations.
Equity in Loss (Income) of Partnerships
Equity in loss of partnerships was a loss of $1.2 million in the three months ended June 30, 2022 compared to income of $2.4 million in the prior year period, reflecting a decrease of $3.6 million, or 148.8%. The increase in loss was primarily due to a significant lease termination at Fashion District Philadelphia in 2021 as the payment was applied to rent and outstanding charges with the remainder being recorded as lease termination income.
Equity in loss of partnerships was $1.6 million in the six months ended June 30, 2022 compared to a loss of $1.0 million in the prior year period, reflecting a change of $0.6 million, or 58.3% due to the lease termination in 2021 at Fashion District Philadelphia offset by higher real estate revenues across all of our partnership properties in 2022 due to the economic rebound following the COVID-19 impact.
Gain (Loss) on Sales of Real Estate
During the three and six months ended June 30, 2022, there was a $1.7 million gain on sales of real estate compared to a loss of $1.0 million in the prior year period. In June 2022, we closed on the sale of an outparcel at Francis Scott Key Mall for $2.4 million and recorded a gain on sales of real estate of $1.7 million.
In May 2021, we closed on the sale of a parcel of property at Moorestown Mall for $10.1 million. In connection with the sale, we paid a $9.0 million lease termination fee for a portion of the property that was under a lease agreement along with closing costs that resulted in net proceeds of $0.8 million. For the six months ended June 30, 2021, we recorded a loss on sales of real estate of $1.0 million in connection with the sale.
Gain on Sale of Equity Method Investment
During the three and six months ended June 30, 2022, there was a $9.1 million gain on sale of equity method investment. In June 2022, we closed on the sale of our 25% interest in Gloucester Premium Outlets for $35.4 million for which we recorded a gain on sale of equity method investment of $9.1 million.
There was no gain on sale of equity method investment for the three and six months ended June 30, 2021.
Gain on Sales of Interests in Non Operating Real Estate
During the three and six months ended June 30, 2022, there was an $8.8 million gain on sales of interests in non-operating real estate. In June 2022, we sold a parcel of land adjacent to Moorestown Mall for $11.8 million for residential development purposes. The gain resulting from the sale was $8.8 million.
There was no gain on sale of interest in non operating real estate for the three and six months ended June 30, 2021.
Gain on Sale of Preferred Equity Interest
During the three months ended June 30, 2022 there was no gain on sale of preferred equity interest. During the six months ended June 30, 2022, there was a $3.7 million gain on sale of preferred equity interest in a property that we received in exchange for the sale of a property we previously owned, respectively.
There was no gain on sale of preferred equity interest for the three and six months ended June 30, 2021.
34
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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 or under redevelopment during those periods. Furthermore, our use and presentation of NOI combines NOI from our consolidated properties and NOI attributable to our share of unconsolidated properties in order to arrive at total NOI. We believe that this is also helpful information because it reflects the pro rata contribution from our unconsolidated properties that are owned through investments accounted for under GAAP as equity in income of partnerships. See “Unconsolidated Properties and Proportionate Financial Information” below.
•We believe that FFO is also helpful to management and investors as a measure of operating performance because it excludes various items included in net loss 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 gain on debt extinguishment and insurance recoveries.
•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 loss, 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 (loss) income of partnerships.”
To derive the proportionate financial information reflected in the tables below as “unconsolidated,” we multiplied the percentage of our economic interest in each partnership on a property-by-property basis by each line item. Under the partnership agreements relating to our current unconsolidated partnerships with third parties, we own a 25% to 50% economic interest in such partnerships, and there are generally no provisions in such partnership agreements relating to special non-pro rata allocations of income or loss, and there are no preferred or priority returns of capital or other similar provisions. While this method approximates our indirect economic interest in our pro rata share of the revenue and expenses of our unconsolidated partnerships, we do not have a direct legal claim to the assets, liabilities, revenues or expenses of the unconsolidated partnerships beyond our rights as an equity owner in the event of any liquidation of such entity. Our percentage ownership is not necessarily indicative of the legal and economic implications of our ownership interest. Accordingly, NOI and FFO results based on our share of the results of unconsolidated partnerships do not represent cash generated from our investments in these partnerships.
We have determined that we hold a noncontrolling interest in each of our unconsolidated partnerships, and account for such partnerships using the equity method of accounting, because:
•Except for one property 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 property, 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.
35
Table of Contents
•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 does not represent cash generated from operating activities in accordance with GAAP and should not be considered to be an alternative to net loss (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. It is not indicative of funds available for our cash needs, including our ability to make cash distributions. We believe 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. We believe that net loss is the most directly comparable GAAP measure to NOI. NOI excludes other income, depreciation and amortization, general and administrative expenses, insurance recoveries (net), provision for employee separation expenses, project costs and other expenses, interest expense, reorganization expenses, impairment of assets, equity in loss/income of partnerships, gain on extinguishment of debt, gain/loss on sales of real estate and gain/loss on sale of preferred equity interest.
Same Store NOI is calculated using retail properties owned for the full periods presented and excludes properties acquired or disposed of, under redevelopment, or designated as non-core during the periods presented. 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 six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net loss |
|
$ |
(11,015 |
) |
|
$ |
(25,380 |
) |
|
$ |
(43,988 |
) |
|
$ |
(69,360 |
) |
Other income |
|
|
(69 |
) |
|
|
(162 |
) |
|
|
(310 |
) |
|
|
(288 |
) |
Depreciation and amortization |
|
|
28,382 |
|
|
|
29,686 |
|
|
|
57,492 |
|
|
|
59,525 |
|
General and administrative expenses |
|
|
9,744 |
|
|
|
13,535 |
|
|
|
21,227 |
|
|
|
25,366 |
|
Insurance recoveries, net |
|
|
— |
|
|
|
(670 |
) |
|
|
— |
|
|
|
(670 |
) |
Provision for employee separation expenses |
|
|
(85 |
) |
|
|
149 |
|
|
|
(1 |
) |
|
|
240 |
|
Project costs and other expenses |
|
|
19 |
|
|
|
77 |
|
|
|
79 |
|
|
|
179 |
|
Interest expense, net |
|
|
32,601 |
|
|
|
31,978 |
|
|
|
63,992 |
|
|
|
62,709 |
|
Reorganization expenses |
|
|
— |
|
|
|
69 |
|
|
|
— |
|
|
|
267 |
|
Impairment of assets |
|
|
— |
|
|
|
1,302 |
|
|
|
— |
|
|
|
1,302 |
|
Equity in loss (income) of partnerships |
|
|
1,188 |
|
|
|
(2,433 |
) |
|
|
1,583 |
|
|
|
1,000 |
|
Gain on extinguishment of debt |
|
|
— |
|
|
|
(4,587 |
) |
|
|
— |
|
|
|
(4,587 |
) |
(Gain) loss on sales of interests in real estate |
|
|
(1,701 |
) |
|
|
974 |
|
|
|
(1,701 |
) |
|
|
974 |
|
Gain on sale of equity method investment |
|
|
(9,053 |
) |
|
|
— |
|
|
|
(9,053 |
) |
|
|
— |
|
Gain on sales of real estate by equity method investee |
|
|
— |
|
|
|
(1,347 |
) |
|
|
— |
|
|
|
(1,347 |
) |
Gain on sales of non-operating real estate |
|
|
(8,755 |
) |
|
|
— |
|
|
|
(8,755 |
) |
|
|
— |
|
Gain on sale of preferred equity interest |
|
|
— |
|
|
|
— |
|
|
|
(3,688 |
) |
|
|
— |
|
NOI from consolidated properties |
|
$ |
41,256 |
|
|
$ |
43,191 |
|
|
$ |
76,877 |
|
|
$ |
75,310 |
|
36
Table of Contents
The table below reconciles equity in (loss) income of partnerships to NOI of our share of unconsolidated properties for the three and six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Equity in (loss) income of partnerships |
|
$ |
(1,188 |
) |
|
$ |
2,433 |
|
|
$ |
(1,583 |
) |
|
$ |
(1,000 |
) |
Depreciation and amortization |
|
|
2,973 |
|
|
|
2,974 |
|
|
|
5,995 |
|
|
|
6,162 |
|
Impairment of assets |
|
|
— |
|
|
|
265 |
|
|
|
— |
|
|
|
265 |
|
Interest and other expenses |
|
|
6,050 |
|
|
|
5,531 |
|
|
|
11,852 |
|
|
|
10,818 |
|
NOI from equity method investments at ownership share |
|
$ |
7,835 |
|
|
$ |
11,203 |
|
|
$ |
16,264 |
|
|
$ |
16,245 |
|
The table below presents total NOI and total NOI excluding lease termination revenue for the three months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store |
|
|
Non Same Store |
|
|
Total (non-GAAP) |
|
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
NOI from consolidated properties |
|
$ |
41,469 |
|
|
$ |
42,617 |
|
|
$ |
(213 |
) |
|
$ |
574 |
|
|
$ |
41,256 |
|
|
$ |
43,191 |
|
NOI from equity method investments at ownership share |
|
|
7,275 |
|
|
|
10,544 |
|
|
|
560 |
|
|
|
658 |
|
|
|
7,835 |
|
|
|
11,202 |
|
Total NOI |
|
|
48,744 |
|
|
|
53,161 |
|
|
|
347 |
|
|
|
1,232 |
|
|
|
49,091 |
|
|
|
54,393 |
|
Less: lease termination revenue |
|
|
1,551 |
|
|
|
3,135 |
|
|
|
41 |
|
|
|
- |
|
|
|
1,592 |
|
|
|
3,135 |
|
Total NOI excluding lease termination revenue |
|
$ |
47,193 |
|
|
$ |
50,026 |
|
|
$ |
306 |
|
|
$ |
1,232 |
|
|
$ |
47,499 |
|
|
$ |
51,258 |
|
Total NOI decreased by $5.3 million in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to (a) a $4.4 million decrease in Same Store NOI and (b) a decrease of $0.9 million in Non Same Store NOI. The decrease in Same Store NOI and decrease in Non Same Store NOI is primarily due the reasons described in “— Real Estate Revenue” and “— Property Operating Expenses.”
The table below presents total NOI and total NOI excluding lease termination revenue for the six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Same Store |
|
|
Non Same Store |
|
|
Total (non-GAAP) |
|
(in thousands of dollars) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
NOI from consolidated properties |
|
$ |
77,591 |
|
|
$ |
75,323 |
|
|
$ |
(713 |
) |
|
$ |
(13 |
) |
|
$ |
76,878 |
|
|
$ |
75,310 |
|
NOI from equity method investments at ownership share |
|
|
15,102 |
|
|
|
15,020 |
|
|
|
1,162 |
|
|
|
1,225 |
|
|
|
16,264 |
|
|
|
16,245 |
|
Total NOI |
|
|
92,693 |
|
|
|
90,343 |
|
|
|
449 |
|
|
|
1,212 |
|
|
|
93,142 |
|
|
|
91,555 |
|
Less: lease termination revenue |
|
|
2,345 |
|
|
|
3,170 |
|
|
|
49 |
|
|
|
- |
|
|
|
2,394 |
|
|
|
3,170 |
|
Total NOI excluding lease termination revenue |
|
$ |
90,348 |
|
|
$ |
87,173 |
|
|
$ |
400 |
|
|
$ |
1,212 |
|
|
$ |
90,748 |
|
|
$ |
88,385 |
|
Total NOI increased by $1.6 million in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to (a) a $2.4 million increase in Same Store NOI and (b) and a $(0.8) million decrease in Non Same Store NOI. The increase in Same Store NOI and decrease in Non Same Store NOI is primarily due the reasons described in “— Real Estate Revenue” and “— Property Operating Expenses.”
Funds From Operations (“FFO”)
The National Association of Real Estate Investment Trusts (“NAREIT”) defines Funds From Operations (“FFO”), which is a non-GAAP measure commonly used by REITs, as net income (computed in accordance with GAAP) excluding (i) depreciation and amortization of real estate, (ii) gains and losses on sales 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. NAREIT’s established guidance provides that excluding impairment write downs of depreciable real estate is consistent with the NAREIT definition.
FFO is a commonly used measure of operating performance and profitability among REITs. We use FFO and FFO per diluted share and unit of limited partnership interest in our operating partnership (“OP Unit”) in measuring our performance against our peers and have used it 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 (including development land parcels), which are included in the determination of net loss 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
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compensate for these limitations by using FFO in conjunction with other GAAP financial performance measures, such as net loss and net cash used in 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 loss (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 loss is the most directly comparable GAAP measurement to FFO.
When applicable, we also present FFO, as adjusted, and FFO per diluted share and OP Unit, as adjusted, which are non-GAAP measures, for the three and six months ended June 30, 2022 and 2021, 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, insurance recoveries or losses, net, gain on derecognition of property, gain/loss on hedge ineffectiveness, gain on sale of preferred equity interest and reorganization expenses which had an effect on our results of operations, but are not, in our opinion, indicative of our ongoing operating performance.
We believe that FFO is helpful to management and investors as a measure of operating performance because it excludes various items included in net loss that do not relate to or are not indicative of operating performance, such as gains on sales of operating real estate and depreciation and amortization of real estate, among others. We believe that Funds From Operations, as adjusted, is helpful to management and investors as a measure of operating performance because it adjusts FFO to exclude items that management does not believe are indicative of our operating performance, such as provision for employee separation expense, gain on hedge ineffectiveness and reorganization expenses.
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, as adjusted per diluted share and OP Unit, for the three and six months ended June 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
Six Months Ended June 30, |
|
(in thousands, except per share amounts) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Net loss |
|
$ |
(11,015 |
) |
|
$ |
(25,380 |
) |
|
$ |
(43,988 |
) |
|
$ |
(69,360 |
) |
Depreciation and amortization on real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
28,078 |
|
|
|
29,349 |
|
|
|
56,876 |
|
|
|
58,840 |
|
PREIT’s share of equity method investments |
|
|
2,973 |
|
|
|
2,974 |
|
|
|
5,995 |
|
|
|
6,162 |
|
(Gain) loss on sales of interests in real estate |
|
|
(1,701 |
) |
|
|
974 |
|
|
|
(1,701 |
) |
|
|
974 |
|
Gain on sale of equity method investment |
|
|
(9,053 |
) |
|
|
— |
|
|
|
(9,053 |
) |
|
|
— |
|
Gain on sales of real estate by equity method investee |
|
|
— |
|
|
|
(1,347 |
) |
|
|
— |
|
|
|
(1,347 |
) |
Impairment of Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated properties |
|
|
— |
|
|
|
1,302 |
|
|
|
— |
|
|
|
1,302 |
|
PREIT’s share of equity method investments |
|
|
— |
|
|
|
265 |
|
|
|
— |
|
|
|
265 |
|
Funds from operations attributable to common shareholders and OP Unit holders |
|
|
9,282 |
|
|
|
8,137 |
|
|
|
8,129 |
|
|
|
(3,164 |
) |
Provision for employee separation expense |
|
|
(85 |
) |
|
|
149 |
|
|
|
(1 |
) |
|
|
240 |
|
Gain on hedge ineffectiveness |
|
|
— |
|
|
|
(494 |
) |
|
|
— |
|
|
|
(1,797 |
) |
Gain on debt extinguishment |
|
|
— |
|
|
|
(4,587 |
) |
|
|
— |
|
|
|
(4,587 |
) |
Insurance recoveries, net |
|
|
— |
|
|
|
(670 |
) |
|
|
— |
|
|
|
(670 |
) |
Reorganization expenses |
|
|
— |
|
|
|
69 |
|
|
|
— |
|
|
|
267 |
|
Gain on sale of preferred equity interest |
|
|
— |
|
|
|
— |
|
|
|
(3,688 |
) |
|
|
— |
|
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders |
|
$ |
9,197 |
|
|
$ |
2,604 |
|
|
$ |
4,440 |
|
|
$ |
(9,711 |
) |
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit (1) |
|
$ |
1.72 |
|
|
$ |
1.51 |
|
|
$ |
1.51 |
|
|
$ |
(0.59 |
) |
Funds from operations, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit (1) |
|
$ |
1.71 |
|
|
$ |
0.48 |
|
|
$ |
0.83 |
|
|
$ |
(1.81 |
) |
Weighted average number of shares outstanding |
|
|
5,317 |
|
|
|
5,210 |
|
|
|
5,311 |
|
|
|
5,193 |
|
Weighted average effect of full conversion of OP Units |
|
|
69 |
|
|
|
132 |
|
|
|
69 |
|
|
|
132 |
|
Effect of common share equivalents |
|
|
— |
|
|
|
61 |
|
|
|
— |
|
|
|
54 |
|
Total weighted average shares outstanding, including OP Units |
|
|
5,386 |
|
|
|
5,403 |
|
|
|
5,380 |
|
|
|
5,379 |
|
(1) Does not include the impact of $6.8 million and $13.7 million of accrued, undeclared and unpaid preferred share dividends for the three and six months ended June 30, 2022, respectively, and the $6.8 million and $13.7 million of accrued, undeclared and unpaid preferred share dividends for the three and six months ended June 30, 2021, respectively. The Company cannot declare and pay cash dividends on common shares while there exists a preferred dividend arrearage.
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FFO attributable to common shareholders and OP Unit holders was $9.3 million for the three months ended June 30, 2022, an increase of $1.1 million, or 14.1%, compared to $8.1 million for the three months ended June 30, 2021.
FFO attributable to common shareholders and OP Unit holders was $8.1 million for the six months ended June 30, 2022, an increase of $11.3 million, or 356.9%, compared to negative $3.2 million for the six months ended June 30, 2021.This increase was primarily due to:
•a $1.1 million increase in Same Store NOI primarily due to an increase in net new store openings and lease modifications over the previous twelve months;
•a $4.1 million decrease in general and administrative expense primarily due to decreased incentive compensation and offset by increased professional service costs;
•an $8.8 million increase on gain on sale of non operating real estate;
•a $4.6 million decrease on gain on debt extinguishment; and,
•a $3.7 million increase in gain on sale of preferred equity interest.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $1.72 and $1.51 for the three months ended June 30, 2022 and 2021, respectively.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $1.51 and $(0.59) for the six months ended June 30, 2022 and 2021, respectively.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $1.71 and $0.48 for the three months ended June 30, 2022 and 2021, respectively.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit was $0.83 and $(1.81) for the six months ended June 30, 2022 and 2021, 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, 2021 filed with the SEC. We do not intend to update or revise any forward-looking statements about our liquidity and capital resources to reflect new information, future events or otherwise.
Capital Resources
We currently expect to meet certain of our short-term liquidity requirements, except for the FDP debt that is discussed below, including operating expenses, recurring capital expenditures, tenant improvements and leasing commissions, generally through our available working capital and our First Lien Revolving Facility, subject to the terms and conditions of our First Lien Credit Agreement. See “Credit Agreements—Similar terms of the Credit Agreements” below for covenant information. We expect to spend approximately $4.3 million related to our capital improvements and development projects in 2022. 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. Our Credit Agreements limit our ability to declare and pay dividends on our common and preferred shares, subject to certain exceptions. We have deferred payments on our preferred shares and suspended payments on our common shares since the third quarter of 2020. Other than as may be required to maintain our status as a REIT, we do not anticipate that we will pay any cash dividends to holders of our common or preferred shares for the foreseeable future.
As a result of the existing cumulative unpaid dividends on our preferred shares and our bankruptcy filing, we are no longer able to register the offer and sale of securities on Form S-3. This creates additional limitations on our ability to raise capital in the capital markets, potentially increasing our costs of raising capital in the future. Our ability to raise capital in the capital markets may also be impacted by market fluctuations more generally, including as a result of the COVID-19 pandemic and related economic downturn.
We have availability under our revolving facility of $113.9 million as of June 30, 2022. We have been focused on improving operational efficiency and driving stable and increasing cash flows from operations while advancing our portfolio, including by undertaking, with the assistance of outside advisors, a thorough review of our business and capital structure and evaluating a wide range of opportunities to further strengthen our balance sheet and financial flexibility. We are actively seeking to raise additional capital, including through asset dispositions identified through our portfolio property reviews. Disposing of these properties can enable us to redeploy or recycle our capital to other uses. In many cases, we are marketing land parcels for development for a variety of different nontraditional, non-retail uses, including hotel, multifamily residential and healthcare uses, which we believe can also help position our portfolio within differentiated mixed-use environments. In 2022, we executed agreements of sale for Exton Square Mall, the sale of various outparcels across multiple properties and the
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Table of Contents
sale of a former Sears TBA location. The mall and retail space sale agreements along with previously executed sale agreements that have not yet closed are expected to provide approximately $65 million in gross proceeds. The proceeds from our anticipated property sales will primarily be used to repay amounts outstanding under our Credit Agreements. We are also in various stages of negotiations for the sale of land parcels for multifamily residential development, the sale of operating outparcels and the sale of land parcels for hotel development. Each of these transactions is subject to numerous closing conditions, including the completion of due diligence and securing of entitlements, which in several/most cases requires zoning variances and similar approvals. Closing of the transactions cannot be assured or the timing of their completion yet estimated with certainty, in particular not all transactions are expected to close in 2022, and many of them are expected to extend into 2023 and 2024.
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, as a result of the COVID-19 pandemic, inflationary pressure or otherwise, leading to a reduction in real estate revenue or cash flows or an increase in expenses;
•continued deterioration in our tenants’ business operations and financial stability, particularly in light of the COVID-19 pandemic, 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;
•costs associated with negotiating and implementing asset dispositions, particularly if delays are experienced;
•increases in operating costs, including increases that cannot be passed on to tenants, resulting in reduced operating income and cash flows; and
•increases in interest rates, resulting in higher borrowing costs.
In addition, we are continuing to monitor the COVID-19 pandemic and the related restrictions and changes to behavior intended to reduce its spread, and its impact on our tenants, their supply chains and customers and the retail industry. Thus far, the pandemic and the actions taken to address it and the related overall worsening of economic conditions have had an adverse effect on our business, operations, liquidity and financial condition.
As of the third quarter of 2020, all of our malls had re-opened while adhering to social distancing and sanitation and safety protocols designed to address the risks posed by COVID-19. The pandemic’s effect, primarily beginning in the second quarter of 2020, had a significant impact on our operations, financial condition, liquidity and results of operations in 2020, 2021, and the first half of 2022 and its impact is expected to continue through future periods. We believe that our rent collections are probable, but expect that collections will continue to be below our tenants’ rent obligations as long as lingering effects of COVID-19, including continued outbreaks with the emergence of new variants, affect the return of customers to malls and the financial strength of our tenants. While we continue to record rental revenue, the reduced collection levels had impacted our liquidity position and may continue to do so. The extent and duration of such effects are uncertain, continuously changing and difficult to predict. Additionally, the future outbreak of any other highly infectious or contagious diseases may materially and adversely affect our business, financial condition, liquidity and operating results.
We expect to meet certain of our longer-term requirements, such as obligations to fund redevelopment and development projects, certain capital requirements, 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.
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. The FCA no longer publishes one-week and two-month U.S. dollar LIBOR rates and plans to cease publishing all other LIBOR tenors (overnight, one-month, three-month, six-month and 12-month) on June 30, 2023. It is not presently known whether SOFR or any other alternative reference rates will attain broad market acceptance as replacements of LIBOR. There remains uncertainty as to how the financial services industry will address the discontinuance of LIBOR in financial instruments that are indexed to LIBOR. Further, various financial instruments indexed to LIBOR could experience different outcomes based on their contractual terms, ability to amend those terms, market or product type, legal or regulatory jurisdiction, and other factors. Alternative reference rates that replace LIBOR may not yield the same or similar economic results over the lives of the financial instruments, which could adversely affect the value of and return on these instruments.
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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 phased out and changes implemented, 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 2022, 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 secured credit agreements (collectively, as amended, the “Credit Agreements”): (a) the First Lien Credit Agreement, which, as described in more detail below, includes (i) the $130.0 million First Lien Revolving Facility, and (ii) the $384.5 million First Lien Term Loan Facility, and (b) the Second Lien Credit Agreement, which, as described in more detail below, includes the $535.2 million Second Lien Term Loan Facility. The First Lien Term Loan Facility and the Second Lien Term Loan Facility are collectively referred to as the “Term Loans.” The Credit Agreements refinanced our previously existing credit agreements in effect prior to the effective date, including our secured term loan under the Credit Agreement dated as of August 11, 2020 (as amended, the “Bridge Credit Agreement”), our Seven-Year Term Loan Agreement entered into on January 8, 2014 (as amended, the “7-Year Term Loan”), and our 2018 Amended and Restated Credit Agreement entered into on May 24, 2018 (as amended, the “2018 Credit Agreement”).
As of June 30, 2022, we had borrowed $971.8 million under the Term Loans and $16.1 million under the First Lien Revolving Facility. The carrying value of the Term Loans on our consolidated balance sheet as of June 30, 2022 is net of $3.0 million of unamortized debt issuance costs. The maximum amount that was available to be borrowed by us under the First Lien Revolving Facility as of June 30, 2022 was $113.9 million.
Our obligations under the Credit Agreements are guaranteed by certain of our subsidiaries. Our obligations under the Credit Agreements and the guaranties are secured by mortgages and deeds of trust on a portfolio of 10 of our subsidiaries’ properties, including nine malls and one additional parcel. The obligations are further secured by a lien on substantially all of our personal property pursuant to collateral agreements and a pledge of substantially all of the equity interests held by us and the guarantors, pursuant to pledge agreements, in each case subject to limited exceptions.
The maturity date of the Credit Agreements is December 10, 2022 (or such earlier date that the obligations under the applicable Credit Agreement have been accelerated), unless extended by one year until December 10, 2023 at our option (the “Maturity Date”). Any such extension would be subject to our fulfillment of certain conditions including maintaining minimum liquidity of $35.0 million, a minimum corporate debt yield of 8.0% and a maximum loan-to-value ratio of 105% for the total first lien and second lien loans and letters of credit and the Borrowing Base Properties as determined by an appraisal (provided that we may obtain a second appraisal of each Borrowing Base Property prepared by a nationally recognized appraisal firm and use the highest appraised value), and provided that no default or event of default exists and our representations and warranties are true in all material respects.
First Lien Credit Agreement
On December 10, 2020, we entered into an Amended and Restated First Lien Credit Agreement (the “First Lien Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo Bank”) and the other financial institutions signatory thereto and their assignees, for secured loan facilities consisting of: (i) a secured first lien revolving credit facility allowing for borrowings up to $130.0 million, including a sub-facility for letters of credit to be issued thereunder in an aggregate stated amount of up to $10.0 million (collectively, the “First Lien Revolving Facility”), and (ii) a $384.5 million secured first lien term loan facility (the “First Lien Term Loan Facility”).
Amounts borrowed under the First Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base Rate will not be less than 1.50% per annum, in each case plus (w) for revolving loans, 2.50% per annum, and (x) for term loans, 4.74% per annum. LIBOR Loans bear interest at LIBOR plus (y) for revolving loans, 3.50% per annum, and (z) for term loans, 5.74% per annum, in each case, provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in cash on the last day of each applicable interest period (with rolling 30-day interest periods) and on the Maturity Date. We must pay certain fees to the administrative agent for the account of the lenders in connection with the First Lien Credit Agreement, including an unused fee for the account of the revolving lenders, which will accrue (i) 0.35% per annum on the daily amount of the unused revolving commitments when that amount is greater than or equal to 50% of the aggregate amount of revolving commitments, and (ii) 0.25% when that amount is less than 50% of the aggregate amount of revolving commitments. Accrued and unpaid unused fees will be payable quarterly in arrears during the term of the First Lien Credit
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Agreement and on the Revolving Termination Date (or any earlier date of termination of the revolving commitments or reduction of the revolving commitments to zero).
Letters of credit and the proceeds of revolving loans may be used (i) to refinance indebtedness under the Bridge Credit Agreement (which agreement was canceled and refinanced upon our entry into the Credit Agreements), (ii) for working capital and general corporate purposes (subject to certain exceptions set forth in the First Lien Credit Agreement, including limitations on investments in non-Borrowing Base Properties), and (iii) to fund professional fee payments and other fees and expenses subject to the provisions of the Plan and related confirmation order and for other uses permitted by the provisions of the First Lien Credit Agreement, Plan and confirmation order, in each case consistent with an approved annual business plan. The proceeds of term loans may only be used to refinance existing indebtedness under the 2018 Credit Agreement and the 7-Year Term Loan. We may terminate or reduce the amount of the revolving commitments at any time and from time to time without penalty or premium, subject to the terms of the First Lien Credit Agreement.
Second Lien Credit Agreement
On December 10, 2020, we also entered into a Second Lien Credit Agreement (the “Second Lien Credit Agreement”) with Wells Fargo Bank and the other financial institutions signatory thereto and their assignees for a $535.2 million secured second lien term loan facility (the “Second Lien Term Loan Facility”).
Amounts borrowed under the Second Lien Credit Agreement may be either Base Rate Loans or LIBOR Loans. Base Rate Loans bear interest at the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) the LIBOR Market Index Rate plus 1.0%, provided that the Base Rate will not be less than 1.50% per annum, in each case plus 7.00% per annum. LIBOR Loans bear interest at LIBOR plus 8.00% per annum, provided that LIBOR will not be less than 0.50% per annum. Interest is due to be paid in kind on the last day of each applicable interest period (with rolling 30-day interest periods) by adding the accrued and unpaid amount thereof to the principal balance of the loans under the Second Lien Credit Agreement and then accruing interest on the increased principal amount (provided that after the discharge of our Senior Debt Obligations, interest will be paid in cash). We must pay certain fees to the administrative agent for the account of the lenders in connection with the Second Lien Credit Agreement.
The proceeds of loans under the Second Lien Credit Agreement may only be used to refinance existing indebtedness under the 2018 Credit Agreement and the 7-Year Term Loan.
On February 8, 2021, the Company entered into the first amendment to the Second Lien Credit Agreement (“First Amendment”). The First Amendment provided for elimination of approximately $5.3 million of the disputed default interest that was capitalized into the principal balance of the Second Lien Term Loan Facility, reducing the outstanding principal amount of loans outstanding under the Second Lien Credit Agreement, retroactively as of December 10, 2020, to $535.2 million. The First Amendment also eliminated the disputed PIK interest that was capitalized through the date of the amendment.
On April 13, 2021, we entered into Agency Resignation, Appointment, Acceptance and Waiver Agreements pursuant to which Wells Fargo Bank resigned as Administrative Agent and Wilmington Savings Fund Society, FSB was appointed successor Administrative Agent under the First Lien Credit Agreement, the Second Lien Credit Agreement and, in each case, the related loan documents. There is currently no successor letter of credit issuer under the First Lien Revolving Facility, accordingly, the Company cannot currently access the letters of credit sub-facility.
See our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information on the Credit Agreements.
FDP Loan Agreement
As described in note 4 of our consolidated financial statements, PM Gallery LP, a Delaware limited partnership and joint venture entity owned indirectly by us and The Macerich Company (“Macerich”), previously entered into a $250.0 million term loan in January 2018 (as amended in July 2019 to increase the total maximum potential borrowings to $350.0 million) to fund the ongoing redevelopment of Fashion District Philadelphia and to repay capital contributions to the venture previously made by the partners. On December 10, 2020, PM Gallery LP, together with certain other subsidiaries owned indirectly by us and Macerich (including the fee and leasehold owners of the properties that are part of the Fashion District Philadelphia project), entered into an Amended and Restated Term Loan Agreement (the “FDP Loan Agreement”). In connection with the execution of the FDP Loan Agreement, a $100.0 million principal payment was made (and funded indirectly by Macerich) to pay down the existing loan, reducing the outstanding principal under the FDP Loan Agreement from $301.0 million to $201.0 million. In connection with the execution of the FDP Loan Agreement, the governing structure of PM Gallery LP was modified such that, effective as of January 1, 2021, Macerich is responsible for the entity’s operations and, subject to limited exceptions, controls major decisions.
The FDP Loan Agreement provides for (i) a maturity date of January 22, 2023, with the potential for a one-year extension upon the borrowers’ satisfaction of certain conditions, (ii) an interest rate at the borrowers’ option with respect to each advance of either (A) the Base Rate (defined as the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50%, and (c) the LIBOR Market Index Rate plus 1.00%) plus 2.50% or (B) LIBOR for the applicable period plus 3.50%, (iii) a full recourse guarantee of 50% of the borrowers’ obligations by PREIT Associates, L.P., on a several basis, (iv) a full recourse guarantee of certain of the borrowers’ obligations by The Macerich Partnership, L.P., up to a maximum of $50.0 million, on a several basis, (v) a pledge of the equity interests of certain indirect subsidiaries of PREIT and Macerich, as
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well as of PREIT-RUBIN, Inc. and one of its subsidiaries, that have a direct or indirect ownership interest in the borrowers, (vi) a non-recourse carve-out guaranty and a hazardous materials indemnity by each of PREIT Associates, L.P. and The Macerich Partnership, L.P., and (vii) mortgages of the borrowers’ fee and leasehold interests in the properties that are part of the Fashion District Philadelphia project and certain other properties. The FDP Loan Agreement contains certain covenants typical for loans of its type. As noted above, PREIT Associates L.P. has severally guaranteed its 50% share of the FDP Term Loan (see Note 3 to our consolidated financial statements), which had $194.6 million outstanding as of June 30, 2022 (our share of which is $97.3 million). The joint venture also has the outstanding Partnership Loan of $119.1 million outstanding as of June 30, 2022 (our share of which is $59.5 million) and the majority of the proceeds were used to pay down the FDP Term Loan in December 2020 and the remainder was used to fund ongoing capital expenditures at the property as well as accrued interest. We monitor the joint venture's cash flow and its ability to meet its debt service requirements. If the joint venture were unable to satisfy its obligations under the FDP Term Loan, and we were required to satisfy the payment obligations under the guarantee, this could have a material impact on our liquidity and available capital resources. There are also circumstances in which a default of the FDP Term Loan could give rise to an event of default under our Credit Agreements. See Going Concern Considerations section in Note 1 of our audited consolidated financial statements for further information.
Preferred Shares
We have 3,450,000 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares (the “Series B Preferred Shares”) outstanding, 6,900,000 7.20% Series C Cumulative Redeemable Perpetual Preferred Shares (the “Series C Preferred Shares”) outstanding and 5,000,000 6.875% Series D Cumulative Redeemable Perpetual Preferred Shares (the “Series D Preferred Shares”) outstanding. Upon 30 days’ notice, we may redeem any or all of the Series B Preferred Shares or Series C Preferred Shares at $25.00 per share plus any accrued and unpaid dividends. We may not redeem the Series D Preferred Shares before September 15, 2022, except to preserve our status as a REIT or upon the occurrence of a Change of Control, as defined in the Trust Agreement addendums designating the Series D Preferred Shares. On and after January 27, 2022 and September 15, 2022, we may redeem any or all of the Series C Preferred Shares or the Series D Preferred Shares, respectively, at $25.00 per share plus any accrued and unpaid dividends. In addition, upon the occurrence of a Change of Control, we may redeem any or all of the Series D Preferred Shares for cash within 120 days after the first date on which such Change of Control occurs at $25.00 per share plus any accrued and unpaid dividends. The Series B Preferred Shares, the Series C Preferred Shares and the Series D Preferred Shares have no stated maturity, are not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless we redeem or otherwise repurchase them or they are converted.
In 2020, the Company suspended payment of its preferred share dividends. Dividends on the Series B, Series C and Series D preferred shares are cumulative and therefore will continue to accrue at an annual rate of $1.8436 per share, $1.80 per share and $1.7188 per share, respectively. As of June 30, 2022, the cumulative amount of unpaid dividends on our issued and outstanding preferred shares totaled $54.7 million. This consisted of unpaid dividends per share on the Series B, Series C and Series D preferred shares of $3.69 per share, $3.60 per share and $3.44 per share, respectively.
Both the First Lien Credit Agreement and the Second Lien Credit Agreement prohibit any redemption of preferred shares so long as such agreements remain in effect.
Mortgage Loan Activity—Consolidated Properties
On December 10, 2021, we entered into an amendment to our mortgage loan secured by the property at Woodland Mall in Grand Rapids, Michigan, which provides for an extension of the maturity date until December 10, 2022 and has an outstanding balance of $111.7 million as of June 30, 2022. We capitalized $0.3 million of lender fees as additional debt issuance costs in connection with the amendment.
During the year ended December 31, 2020, we entered into forbearance and loan modification agreements for our consolidated properties Cherry Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall and for our unconsolidated partnership properties Metroplex and Springfield Mall. These arrangements allowed us to defer principal payments, and in some cases interest as well, on the mortgages between May and August of 2020 depending on the terms of the contract. At the end of each deferment period, the repayment period spans from four to six months to pay back the deferred amounts. The repayment periods ranged from August 2020 through February 2021 depending on the terms of the specific agreements. As of June 30, 2022, we had repaid all principal and interest deferrals.
In the second quarter of 2020, we defaulted on the mortgage loan secured by Valley View Mall due to a missed payment on June 1, 2020, and not paying the balloon payment of $27.2 million. In the third quarter of 2020, the operations of the property were transferred to a receiver and foreclosure was filed. We recorded a gain on derecognition of property during the third quarter 2020 and recorded the mortgage balance and an offsetting contract asset on our consolidated balance sheets. In May 2022, the foreclosure proceedings were completed and both the mortgage balance and contract asset were written off. As such, no mortgage balance or contract asset in relation to Valley View Mall remains on our consolidated balance sheet as of June 30, 2022.
Mortgage Loans
Our mortgage loans, which are secured by eight of our consolidated properties, are due in installments over various terms extending to the year 2025. Five of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 4.40% and had a weighted average interest rate of 4.02% at June 30, 2022. Three of our mortgage loans bear interest at variable rates and had a weighted average interest rate of 4.94% at June
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30, 2022. The weighted average interest rate of all consolidated mortgage loans was 4.24% at June 30, 2022. Mortgage loans for properties owned by unconsolidated partnerships are accounted for in “Investments in partnerships, at equity” and “Distributions in excess of partnership investments,” and are not included in the table below.
The following table outlines the timing of principal payments and balloon payments pursuant to the terms of our mortgage loans on our consolidated properties as of June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Total |
|
|
Remainder of
2022 |
|
|
2023-2024 |
|
|
2025-2026 |
|
|
Thereafter |
|
Principal payments |
|
$ |
22,548 |
|
|
$ |
5,150 |
|
|
$ |
12,992 |
|
|
$ |
4,406 |
|
|
$ |
— |
|
Balloon payments |
|
|
787,440 |
|
|
|
400,977 |
|
|
|
175,117 |
|
|
|
211,346 |
|
|
|
— |
|
Total |
|
|
809,988 |
|
|
$ |
406,127 |
|
|
$ |
188,109 |
|
|
$ |
215,752 |
|
|
$ |
— |
|
Less: unamortized debt issuance costs |
|
|
1,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value of mortgage notes payable |
|
$ |
808,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
The following table presents our aggregate contractual obligations as of June 30, 2022 for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands of dollars) |
|
Total |
|
|
Remainder of
2022 |
|
|
2023-2024 |
|
|
2025-2026 |
|
|
Thereafter |
|
Mortgage loans |
|
$ |
809,988 |
|
|
$ |
406,127 |
|
|
$ |
188,109 |
|
|
$ |
215,752 |
|
|
$ |
— |
|
Term Loans |
|
|
996,019 |
|
|
|
996,019 |
|
(1) |
|
|
|
|
— |
|
|
|
— |
|
First Lien Revolving Facility |
|
|
16,078 |
|
|
|
16,078 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest on indebtedness(2) |
|
|
59,780 |
|
|
|
26,222 |
|
|
|
27,177 |
|
|
|
6,381 |
|
|
|
— |
|
Operating leases |
|
|
9,087 |
|
|
|
501 |
|
|
|
1,859 |
|
|
|
1,689 |
|
|
|
5,038 |
|
Ground leases |
|
|
50,748 |
|
|
|
792 |
|
|
|
3,168 |
|
|
|
3,168 |
|
|
|
43,620 |
|
Finance leases |
|
|
5,427 |
|
|
|
493 |
|
|
|
1,932 |
|
|
|
1,854 |
|
|
|
1,148 |
|
Development and redevelopment commitments(3) |
|
|
4,321 |
|
|
|
2,440 |
|
|
|
1,881 |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
1,951,448 |
|
|
$ |
1,448,672 |
|
|
$ |
224,126 |
|
|
$ |
228,844 |
|
|
$ |
49,806 |
|
(1) Includes our First Lien Term Loan of $359.6 million and the anticipated maturity date balance of our Second Lien Term Loan Facility of $612.2 million, which includes estimated capitalized PIK interest based on current interest rates.
(2) Includes interest payments expected to be made on consolidated debt, including those in connection with interest rate swap agreements.
(3) The timing of the payments of these amounts is uncertain. We expect that a significant majority of such payments (of which we include 100% of our obligations related to Fashion District Philadelphia, which opened in September 2019) will be made prior to December 31, 2022, but cannot provide any assurance that changed circumstances at these projects will not delay the settlement of these obligations.
Interest Rate Derivative Agreements
As of June 30, 2022, we had interest rate swap agreements designated in qualifying hedging relationships outstanding with a weighted average base interest rate of 2.70% on a notional amount of $300.0 million, maturing in May 2023. We originally 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.
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 (loss) income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. Through December 10, 2020, all of our derivatives were designated and qualified as cash flow hedges of interest rate risk.
On December 10, 2020 as a result of the Financial Restructuring, we de-designated seven of our interest rate swaps which were previously designated cash flow hedges against the 2018 Credit Facility and 7-year Term Loan, as the hedged forecasted transactions were no longer probable to occur during the hedged time period due to the Financial Restructuring as described in Note 1. As such, the Company accelerated the reclassification of a portion of the amounts in other comprehensive (loss) income to earnings which resulted in a loss of $2.8 million that was recorded within interest expense, net in the consolidated statement of operations. Additionally, on December 10, 2020, the Company voluntarily de-designated the remaining thirteen interest swaps that were also previously designated as cash flow hedges against the 2018 Credit Facility and 7-year Term Loan. Upon de-designation, the accumulated other comprehensive (loss) income balance of each of these de-designated derivatives will be separately reclassified to earnings as the originally hedged forecasted transactions affect earnings. Through December 10, 2020, the changes in fair value of the derivatives were recorded to accumulated other comprehensive (loss) income in the consolidated balance sheets.
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On December 22, 2020, we re-designated nine interest rate swaps with a notional amount of $375.0 million as cash flow hedges of interest rate risk against the First Lien Term Loan Facility. These interest rate swaps qualified for hedge accounting treatment with changes in the fair value of the derivatives recorded through accumulated other comprehensive (loss) income.
As of June 30, 2022, we had 7 total derivatives which were designated as cash flow hedges.
We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets. Our derivative assets are recorded in “Deferred costs and other assets” and our derivative liabilities are recorded in “Fair value of derivative instruments.”
Over the next twelve months we estimate that $1.0 million will be reclassified as a decrease to interest expense in connection with our designated derivatives. The recognition of these amounts could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings.
Derivatives not designated as hedges are not speculative and are also used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. For swaps that were not re-designated subsequent to December 10, 2020, changes in the fair value of derivatives are recorded directly in earnings as interest expense in the consolidated statement of operations. During the six months ended June 30, 2022 we had no non-designated swaps mature. As of June 30, 2022, we had no derivatives which were non-designated.
CASH FLOWS
Net cash provided by operating activities totaled $31.2 million for the six months ended June 30, 2022 compared to net cash provided by operating activities of $34.7 million for the six months ended June 30, 2021. This decrease in cash provided by operating activities was due to changes in working capital between periods primarily as a result of strong collections of outstanding accounts receivable in the first half of the prior year, which are included in change in other assets in our statement of cash flows.
Cash flows provided by investing activities were $22.2 million for the six months ended June 30, 2022 compared to cash flows used in investing activities of $14.4 million for the six months ended June 30, 2021. Cash flows provided by investing activities for the six months ended June 30, 2022 included $28.1 million in proceeds from sales of real estate and equity method investment, and $2.4 million of proceeds from sale of preferred equity interest partially offset by $1.6 million of additions to construction in progress and $5.9 million of investments in real estate improvements.
Cash flows used in investing activities for the six months ended June 30, 2021 included $5.3 million of additions to construction in progress and $9.3 million of investments in real estate improvements.
Cash flows used in financing activities were $74.7 million for the six months ended June 30, 2022 compared to cash flows used in financing activities of $24.9 million for the six months ended June 30, 2021. Cash flows used in financing activities for the six months ended June 30, 2022 included $15.3 million of principal payments on mortgage loans, along with $0.4 million of deferred financing costs paid for our Woodland Mall mortgage extension. Aggregate repayments on our First Lien Revolving Facility and Term Loans were $38.5 million and $19.8 million, respectively, during the six months ended June 30, 2022. Additionally, the value of shares retired under the equity incentive plan, net of shares issued, was $5.3 million.
Cash flows used in financing activities for the six months ended June 30, 2021 included $14.7 million of principal payments on mortgage loans, $135.2 million in paydowns of Francis Scott Key and Viewmont Malls’ mortgages, along with $0.9 million of deferred financing costs paid for our Woodland Mall, Francis Scott Key Mall, and Viewmont Mall mortgage extensions. These were offset by $127.7 million proceeds from refinancing of the Francis Scott Key and Viewmont Malls mortgages. We also had $0.6 million of shares retired under our equity compensation plan, net of shares issued.
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 $10.0 million per occurrence and up to $10.0 million in the aggregate over our two year policy term. See our Annual Report on Form 10-K for the year ended December 31, 2021, in the section entitled “Item 1A. Risk Factors— Risks Related to Our Business and Our Properties—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 store and other tenants. Our malls and our other operating properties face competition
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from similar retail, destination dining and entertainment centers, including more recently developed or renovated centers that are near our 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. They also face competition for employees in the current largely constrained labor market, which could impact their operations and operation costs. 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, 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.
If we seek to make acquisitions, competitors (such as institutional investors, other REITs and other owner-operators of retail properties) 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. 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. 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. All of these factors have been exacerbated by the impact of the ongoing COVID-19 pandemic.
SEASONALITY
There is seasonality in the retail real estate industry. Retail property leases often provide for the payment of all or a portion of rent based on a percentage of a tenant’s sales revenue, or sales revenue over certain levels. Income from such rent is recorded only after the minimum sales levels have been met. The sales levels are often met in the fourth quarter, during the November/December holiday season. Also, many new and temporary leases are entered into later in the year in anticipation of the holiday season and a higher number of tenants vacate their space early in the year. As a result, our occupancy and cash flows are generally higher in the fourth quarter and lower in the first and second quarters. Our concentration in the retail sector increases our exposure to seasonality and has resulted, and is expected to continue to result, in a greater percentage of our cash flows being received in the fourth quarter.
INFLATION
Inflation can have many effects on financial performance. Retail property leases often provide for the payment of rent based on a percentage of sales, which might increase with inflation. Customers might spend less at our retailers, which might decrease our rent based on a percentage of sales, due to 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 June 30, 2022 , 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, including our expectations regarding the impact of COVID-19 on our business, that are not historical facts. These forward-looking statements reflect our current views about future events, achievements, results, cost reductions, dividend payments and the impact of COVID-19 and are subject to risks, uncertainties and changes in circumstances that might cause future events, achievements or results to differ materially from those expressed or implied by the forward-looking statements. In particular, our business might be materially and adversely affected by the following:
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•the effectiveness of our financial restructuring and any additional strategies that we may employ to address our liquidity and capital resources in the future;
•our ability to achieve forecasted revenue and pro forma leverage ratio and generate free cash flow to further reduce indebtedness;
•the COVID-19 global pandemic and the public health and governmental response, which have created periods of significant economic disruption and also have and may continue to exacerbate many of the risks listed herein;
•changes in the retail and real estate industries, including bankruptcies, consolidation and store closings, particularly among anchor tenants;
•changes in economic conditions, including unemployment rates and its effects on consumer confidence and spending, supply chain challenges, the current inflationary environment, and the corresponding effects on tenant business performance, prospects, solvency and leasing decisions;
•our inability to collect rent due to the bankruptcy or insolvency of tenants or otherwise;
•our ability to maintain and increase property occupancy, sales and rental rates;
•increases in operating costs that cannot be passed on to tenants, which may be exacerbated in the current inflationary environment;
•the effects of online shopping and other uses of technology on our retail tenants;
•risks related to our development and redevelopment activities, including delays, cost overruns and our inability to reach projected occupancy or rental rates;
•social unrest and acts of vandalism or violence at malls, including our properties, or at other similar spaces, and the potential effect on traffic and sales;
•our ability to sell properties that we seek to dispose of, which may be delayed by, among other things, the failure to obtain zoning, occupancy and other governmental approvals and permits or, to the extent required, approvals of other third parties;
•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, particularly in light of increasing interest rates, and our ability to remain in compliance with our financial covenants under our debt facilities;
•our ability to raise capital, including through sales of properties or interests in properties, subject to the terms of our Credit Agreements; 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, 2021 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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