NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
1. BASIS OF PRESENTATION
Nature of Operations
Pennsylvania Real Estate Investment Trust (“PREIT” or the “Company”) prepared the accompanying unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe that the included disclosures are adequate to make the information presented not misleading. Our unaudited consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto included in PREIT’s Annual Report on Form 10-K for the year ended December 31, 2019. In our opinion, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our consolidated financial position, the consolidated results of our operations, consolidated statements of comprehensive income (loss), consolidated statements of equity and our consolidated statements of cash flows are included. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year.
PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity real estate investment trusts (“REITs”) in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. As of June 30, 2020, our portfolio consists of a total of 26 properties operating in nine states, including 21 shopping malls, four other retail properties and one development property. The property in our portfolio that is classified as under development does not currently have any activity occurring.
We hold our interest in our portfolio of properties through our operating partnership, PREIT Associates, L.P. (“PREIT Associates” or the “Operating Partnership”). We are the sole general partner of the Operating Partnership and, as of June 30, 2020, we held a 97.5% controlling interest in the Operating Partnership (after the redemption of 6,250,000 OP Units (as defined below) during the first quarter of 2019, which is discussed in more detail in Note 5), and consolidated it for reporting purposes. The presentation of consolidated financial statements does not itself imply that the assets of any consolidated entity (including any special-purpose entity formed for a particular project) are available to pay the liabilities of any other consolidated entity, or that the liabilities of any consolidated entity (including any special-purpose entity formed for a particular project) are obligations of any other consolidated entity.
Pursuant to the terms of the partnership agreement of the Operating Partnership, each of the limited partners has the right to redeem such partner’s units of limited partnership interest in the Operating Partnership (“OP Units”) for cash or, at our election, we may acquire such OP Units in exchange for our common shares on a one-for-one basis, in some cases beginning one year following the respective issue dates of the OP Units and in other cases immediately. If all of the outstanding OP Units held by limited partners had been redeemed for cash as of June 30, 2020, the total amount that would have been distributed would have been $2.8 million, which is calculated using our June 30, 2020 closing price on the New York Stock Exchange of $1.36 per share multiplied by the number of outstanding OP Units held by limited partners, which was 2,022,635 as of June 30, 2020.
We provide management, leasing and real estate development services through two of our subsidiaries: PREIT Services, LLC (“PREIT Services”), which generally develops and manages properties that we consolidate for financial reporting purposes, and PREIT-RUBIN, Inc. (“PRI”), which generally develops and manages properties that we do not consolidate for financial reporting purposes, including properties owned by partnerships in which we own an interest and properties that are owned by third parties in which we do not have an interest. PREIT Services and PRI are consolidated. PRI is a taxable REIT subsidiary, as defined by federal tax laws, which means that it is able to offer an expanded menu of services to tenants without jeopardizing our continuing qualification as a REIT under federal tax law.
We evaluate operating results and allocate resources on a property-by-property basis, and do not distinguish or evaluate our consolidated operations on a geographic basis. Due to the nature of our operating properties, which involve retail shopping, we have concluded that our individual properties have similar economic characteristics and meet all other aggregation criteria. Accordingly, we have aggregated our individual properties into one reportable segment. In addition, no single tenant accounts for 10% or more of consolidated revenue, and none of our properties are located outside the United States.
COVID-19 Related Risks and Uncertainties
The 2020 global outbreak of a novel coronavirus (COVID-19) has adversely impacted and continues to impact our business, financial condition, liquidity and operating results, as well as our tenants’ businesses. The prolonged and increased spread of COVID-19 has also led to unprecedented global economic disruption and volatility in financial markets. Some of our tenants’ financial health and business viability have been adversely impacted and their creditworthiness has deteriorated. We anticipate that our future business, financial condition, liquidity and results of operations, including our results for 2020 and potentially in future periods, will continue to be materially impacted by the COVID-19 pandemic. It remains highly uncertain how long the global pandemic, economic challenges and restrictions on day-to-day life and business operations will last based on the current virus spread rate in the United States, which has resulted in a number of jurisdictions that previously relaxed restrictions
8
Table of Contents
implementing new or renewed restrictions. Given the unprecedented and continually evolving developments, we cannot reasonably predict or estimate its ultimate impact on us or our tenants, or on our ability or the ability of our tenants to resume more normal operations.
COVID-19 closures of our properties began on March 12, 2020 and continued through the reopening of our last property on July 3, 2020. These closures impacted most of our properties for the full second quarter of 2020. Certain jurisdictions where our properties are located that have relaxed restrictions or have experienced limited public adherence with suggested safety measures are now contemplating or implementing new or renewed restrictions. As such, as the pandemic continues or intensifies, it is possible that additional closures will occur.
During the mall closure period in the second quarter of 2020, the Company furloughed a significant portion of its property and corporate employee base and later made permanent headcount reductions for future cost savings.
As of the date of this filing, all of our properties have reopened and are employing safety and sanitation measures designed to address the risks posed by COVID-19, with many of our tenants operating at reduced capacity or not yet re-opened. The significance of COVID-19 on our business, however, will continue to depend on, among other things, the extent and duration of the pandemic, the severity of the disease and the number of people infected with the virus, the further effects on the economy of the pandemic and of the measures taken by governmental authorities and other third parties restricting daily activities and the length of time that such measures remain in place or are renewed, and implementation of governmental programs to assist businesses and consumers impacted by the COVID-19 pandemic.
Going Concern Considerations
Under the accounting guidance related to the presentation of financial statements, when preparing financial statements for each annual and interim reporting period, management has the responsibility to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. As a result of the considerations articulated below, we believe there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.
In applying the accounting guidance, management considered our current financial condition and liquidity sources, including current funds available, forecasted future cash flows and our conditional and unconditional obligations due over the next twelve months. Management specifically considered the following: (i) our senior unsecured facility, which includes a revolving facility maturing in 2022 with a balance of $375.0 million as of June 30, 2020 and term loans maturing in 2023 with a balance of $542.3 million as of June 30, 2020; (ii) our mortgage loans with varying maturities through 2025 with a principal balance of $893.8 million as of June 30, 2020; (iii) the financial covenant compliance requirements of our credit agreements; and (iv) recurring costs of operating our business.
On March 30, 2020, the Company amended its 2014 7-Year Term Loan and 2018 Credit Agreement (together with the 2014 7-Year Term Loan, the “Credit Agreements”) to provide certain debt covenant relief through September 30, 2020. The Company’s Credit Agreements were also amended on May 1, 2020 to extend the required delivery date of compliance certificates covering the fiscal quarter ended March 31, 2020 by six days. Further deterioration in our financial results due to COVID-19 has affected our covenant compliance prior to September 30, 2020. In anticipation of the Company not meeting certain financial covenants applicable under the Credit Agreements for the quarter ended June 30, 2020, on July 27, 2020, the Company further amended the Credit Agreements primarily to suspend certain debt covenants from and including June 30, 2020 until but excluding August 31, 2020, to reduce its minimum liquidity requirement during the Suspension Period (defined below) and to permit limited additional debt. If the Company fulfills certain conditions, including the execution of an additional secured loan and the non-binding agreement to terms of further amendments to the Credit Agreements in an effort to ensure continued compliance with the obligations thereunder and to permit additional financing, the debt covenant suspension period under the July 2020 amendments will be extended until but excluding September 30, 2020 (such period, including as and if extended, the “Suspension Period”). The Company is in discussions with members of its lender group regarding a secured loan and further modifications to the Credit Agreements to obtain a longer term financing solution prior to the expiration of the Suspension Period. Despite weak market conditions, the Company plans to complete the sale-leaseback of certain properties, sell certain real estate assets and continue to control certain operational costs. Due to the inherent risks, unknown results and significant uncertainties associated with each of these matters and the direct correlation between these matters and our ability to satisfy our financial obligations that may arise over the applicable twelve-month period, we are unable to conclude that it is probable that we will be able to meet our obligations arising within twelve months of the date of issuance of these financial statements under the parameters set forth in this accounting guidance.
9
Table of Contents
As a result, management evaluated whether this was mitigated by our approved plans and expectations for the applicable period under the second step of this accounting standard.
Our ability to satisfy obligations under our senior unsecured credit facility and mortgage loans, maintain compliance with our debt covenants and fund recurring costs of operations depends primarily on management’s ability to obtain additional relief from the lender group in regards to debt covenants, obtain a longer term financing solution, complete the sale-leaseback of certain properties, complete the sale of certain real estate assets which will provide cash from those sales, and continue to control operational costs. While controlling operational costs are within management’s control to some extent, executing the sale-leaseback transactions, selling real estate assets, and obtaining relief through modified debt covenant requirements and a longer term financing solution from the lender group involve performance by third parties and therefore cannot be considered probable of occurring.
Fair Value
Fair value accounting applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. Fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, these accounting requirements establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs might include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, and are typically based on an entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. We utilize the fair value hierarchy in our accounting for derivatives (Level 2) and financial instruments (Level 2) and in our reviews for impairment of real estate assets (Level 3) and goodwill (Level 3).
Impairment of Assets
Real estate investments and related intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the property might not be recoverable, which is referred to as a “triggering event.” The COVID-19 impact on the economy and market conditions, together with the resulting closures of our properties, was deemed to be a triggering event as of June 30, 2020 which led to an impairment review. In connection with our review of our long-lived assets for impairment, we utilize qualitative and quantitative factors in order to estimate fair value. The significant qualitative factors that we use include age and condition of the property, market conditions in the property’s trade area, competition with other shopping centers within the property’s trade area and the creditworthiness and performance of the property’s tenants. The significant quantitative factors that we use include historical and forecasted financial and operating information relating to the property, such as net operating income, occupancy statistics, vacancy projections and tenants’ sales levels.
If there is a triggering event in relation to a property to be held and used, we will estimate the aggregate future cash flows, net of estimated capital expenditures, to be generated by the property, undiscounted and without interest charges. In addition, this estimate may consider a probability weighted cash flow estimation approach when alternative courses of action to recover the carrying amount of a long-lived asset are under consideration or when a range of possible values is estimated.
The determination of undiscounted cash flows requires significant estimates by our management, including the expected course of action at the balance sheet date that would lead to such cash flows. Subsequent changes in estimated undiscounted cash flows arising from changes in the anticipated action to be taken with respect to the property could affect the determination of whether an impairment exists, and the effects of such changes could materially affect our net income. If the estimated undiscounted cash flows are less than the carrying value of the property, the carrying value is written down to its fair value.
Assessment of our ability to recover certain lease-related costs must be made when we have a reason to believe that a tenant might not be able to perform under the terms of the lease as originally expected. This requires us to make estimates as to the recoverability of such costs.
10
Table of Contents
An other-than-temporary impairment of an investment in an unconsolidated joint venture is recognized when the carrying value of the investment is not considered recoverable based on evaluation of the severity and duration of the decline in value. To the extent impairment has occurred, the excess carrying value of the asset over its estimated fair value is recorded as a reduction to income. We concluded that there was no impairment as of June 30, 2020.
New Accounting Developments
Effective January 1, 2020, we adopted Accounting Standards Update (“ASU”) ASU 2016-13, Financial Instruments - Credit Losses (“ASC 326”), and subsequently issued amendments to the initial and transitional guidance within ASU 2018-19, ASU 2019-04 and ASU 2019-05. ASU 2016-13 introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments, and will affect our accounting for trade receivables and notes receivable. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In April 2020, the Financial Accounting Standards Board (“FASB”) issued a Staff Question-and-Answer (“Q&A”) to clarify whether lease concessions related to the effects of COVID-19 require the application of the lease modification guidance under ASU 2016-02, Leases (Topic 842) (“ASC 842”). Under ASC 842, we would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant or an enforceable right and obligation within the existing lease. The Q&A allows for the bypass of a lease-by-lease analysis and for us to elect to either apply the lease modification accounting framework or not, to all of the lease concessions we make with similar characteristics and circumstances. The FASB staff suggested that, in the context of the COVID-19 crisis, under ASC 842, leases where the total lease cash flows will remain substantially the same or less than those under the original lease contract after the COVID-19 related effects, a company may choose to forgo the evaluation of the enforceable rights and obligations of the original lease contract. Instead, the company would account for rent concessions, either:
1. As if they are part of the enforceable rights and obligations under the existing lease contract. Under this approach, the rent concession would be treated as a variable lease payment (negative), resulting in negative variable rent in the affected period(s); or
2. As a lease modification. Under this approach, the resulting change in lease income will be recognized over the remainder of the post-modification lease term.
We have determined that we will apply the practical expedient and record negative variable rent, when applicable. This will be the case if the total amended lease payments are substantially the same as they would have been under the original lease terms. In addition, all abatements granted and recorded using this method must be related to the impact of COVID-19. Abatements that do not meet the above COVID-19 criteria will be treated as lease modifications under ASC 842 with the abatement being amortized as a reduction to rental income over the post-modification lease term.
Dividends Declared
On May 19, 2020, we announced that our Board of Trustees declared a quarterly cash dividend of $0.02 per common share payable on June 15, 2020 to common shareholders of record on June 1, 2020. Simultaneously, our Board of Trustees also declared quarterly cash dividends of $0.4609375 per share on our 7.375% Series B Cumulative Redeemable Perpetual Preferred Shares, $0.450000 per share on our 7.20% Series C Preferred Shares, and $0.4296875 per share on our 6.875% Series D Preferred Shares. These dividends were paid on June 15, 2020 to holders of record on June 1, 2020.
2. REAL ESTATE ACTIVITIES
Investments in real estate as of June 30, 2020 and December 31, 2019 were comprised of the following:
(in thousands of dollars)
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
Buildings, improvements and construction in progress
|
|
$
|
2,769,573
|
|
|
$
|
2,753,039
|
|
Land, including land held for development
|
|
|
466,557
|
|
|
|
457,887
|
|
Total investments in real estate
|
|
|
3,236,130
|
|
|
|
3,210,926
|
|
Accumulated depreciation
|
|
|
(1,259,740
|
)
|
|
|
(1,202,722
|
)
|
Net investments in real estate
|
|
$
|
1,976,390
|
|
|
$
|
2,008,204
|
|
11
Table of Contents
Capitalization of Costs
The following table summarizes our capitalized interest, compensation, including commissions, and real estate taxes for the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Development/Redevelopment Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (1)
|
|
$
|
445
|
|
|
$
|
2,325
|
|
|
$
|
1,355
|
|
|
$
|
4,329
|
|
Compensation
|
|
|
47
|
|
|
|
336
|
|
|
|
391
|
|
|
|
688
|
|
Real estate taxes
|
|
|
226
|
|
|
|
345
|
|
|
|
423
|
|
|
|
421
|
|
Leasing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation, including commissions (2)
|
|
|
-
|
|
|
|
156
|
|
|
|
164
|
|
|
|
476
|
|
(1)
|
Includes interest capitalized on investments in partnerships under development.
|
(2)
|
The definition of initial direct costs under ASC 842 includes only those incremental costs of a lease that would not have been incurred if the lease had not been obtained. Commissions paid for successful leasing transactions continue to be capitalized.
|
Dispositions
In November 2019, we entered into an agreement to sell 14 tenant occupied parcels across five properties — Magnolia Mall, Capital City Mall, Woodland Mall, Jacksonville Mall and Valley Mall — for total consideration of $29.9 million. As of December 31, 2019, we completed the dispositions on three outparcels at Capital City Mall and Magnolia Mall for total consideration of $5.2 million. In connection with these sales, we recorded a gain of $2.7 million. In January 2020, the sale of the outparcel at Woodland Mall for total consideration of $5.1 million was completed and in March 2020, the sale of two outparcels at Magnolia Mall for total consideration of $2.9 million was completed with a resulting gain on sale of $1.9 million which was recorded in March 2020. In June 2020, we completed the sale of six outparcels at Magnolia Mall, Valley Mall and Jacksonville Mall for total consideration of $14.4 million. In connection with these sales, we recorded a gain of $9.3 million. During June 2020, the tenant of the remaining two outparcels subject to this agreement filed for bankruptcy. As a result, the agreement was amended to terminate the sale of the final two outparcels.
In March 2019, we entered into an agreement of sale with a buyer to sell an undeveloped land parcel located in Gainesville, Florida for total consideration of $15.0 million and the sale transaction was split into four parcels. The first parcel was sold in March 2019 for $5.0 million. As a result of executing the agreement of sale, we recorded losses on impairment of assets of $1.5 million in the first quarter of 2019. Subsequently, we closed on the sale of two parcels in November 2019 and the sale of the final parcel closed in December 2019 for aggregate consideration of $10.0 million.
12
Table of Contents
3. INVESTMENTS IN PARTNERSHIPS
The following table presents summarized financial information of the equity investments in our unconsolidated partnerships as of June 30, 2020 and December 31, 2019:
(in thousands of dollars)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Investments in real estate, at cost:
|
|
|
|
|
|
|
|
|
Operating properties
|
|
$
|
923,709
|
|
|
$
|
883,530
|
|
Construction in progress
|
|
|
243,435
|
|
|
|
251,029
|
|
Total investments in real estate
|
|
|
1,167,144
|
|
|
|
1,134,559
|
|
Accumulated depreciation
|
|
|
(243,995
|
)
|
|
|
(229,877
|
)
|
Net investments in real estate
|
|
|
923,149
|
|
|
|
904,682
|
|
Cash and cash equivalents
|
|
|
19,685
|
|
|
|
34,766
|
|
Deferred costs and other assets, net
|
|
|
119,367
|
|
|
|
43,476
|
|
Total assets
|
|
|
1,062,201
|
|
|
|
982,924
|
|
LIABILITIES AND PARTNERS’ INVESTMENT:
|
|
|
|
|
|
|
|
|
Mortgage loans payable, net
|
|
|
495,426
|
|
|
|
499,057
|
|
FDP Term Loan, net
|
|
|
299,438
|
|
|
|
299,091
|
|
Other liabilities
|
|
|
125,673
|
|
|
|
79,166
|
|
Total liabilities
|
|
|
920,537
|
|
|
|
877,314
|
|
Net investment
|
|
$
|
141,664
|
|
|
$
|
105,610
|
|
Partners’ share
|
|
|
69,082
|
|
|
|
50,997
|
|
PREIT’s share
|
|
|
72,582
|
|
|
|
54,613
|
|
Excess investment(1)
|
|
|
17,921
|
|
|
|
17,464
|
|
Net investments and advances
|
|
$
|
90,503
|
|
|
$
|
72,077
|
|
Reconciliation to comparable GAAP balance sheet item:
|
|
|
|
|
|
|
|
|
Investment in partnerships, at equity
|
|
$
|
173,448
|
|
|
$
|
159,993
|
|
Distributions in excess of partnership investments
|
|
|
(82,945
|
)
|
|
|
(87,916
|
)
|
Net investment
|
|
$
|
90,503
|
|
|
$
|
72,077
|
|
_____________________
(1)
|
Excess investment represents the unamortized difference between our investment and our share of the equity in the underlying net investment in the unconsolidated partnerships. The excess investment is amortized over the life of the properties, and the amortization is included in “Equity in income of partnerships.”
|
We record distributions from our equity investments using the nature of the distribution approach.
The following table summarizes our share of equity in income of partnerships for the three and six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Real estate revenue
|
|
$
|
24,086
|
|
|
$
|
23,443
|
|
|
$
|
51,286
|
|
|
$
|
46,894
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating and other expenses
|
|
|
(10,731
|
)
|
|
|
(7,543
|
)
|
|
|
(21,960
|
)
|
|
|
(15,527
|
)
|
Interest expense(1)
|
|
|
(5,610
|
)
|
|
|
(5,843
|
)
|
|
|
(11,970
|
)
|
|
|
(11,651
|
)
|
Depreciation and amortization
|
|
|
(7,778
|
)
|
|
|
(4,705
|
)
|
|
|
(15,395
|
)
|
|
|
(9,358
|
)
|
Total expenses
|
|
|
(24,119
|
)
|
|
|
(18,091
|
)
|
|
|
(49,325
|
)
|
|
|
(36,536
|
)
|
Net income
|
|
|
(33
|
)
|
|
|
5,352
|
|
|
|
1,961
|
|
|
|
10,358
|
|
Partners’ share
|
|
|
(121
|
)
|
|
|
(2,900
|
)
|
|
|
(1,299
|
)
|
|
|
(5,587
|
)
|
PREIT’s share
|
|
|
(154
|
)
|
|
|
2,452
|
|
|
|
662
|
|
|
|
4,771
|
|
Amortization of and adjustments to excess investment, net
|
|
|
(204
|
)
|
|
|
(136
|
)
|
|
|
(201
|
)
|
|
|
(166
|
)
|
Equity in income of partnerships
|
|
$
|
(358
|
)
|
|
$
|
2,316
|
|
|
$
|
461
|
|
|
$
|
4,605
|
|
(1) Net of capitalized interest expense of $836 and $1,479 for the three months ended June 30, 2020 and 2019, respectively, and $1,927 and $2,951 for the six months ended June 30, 2020 and 2019, respectively.
13
Table of Contents
Dispositions
In March 2019, a partnership in which we hold a 25% interest sold an undeveloped land parcel adjacent to Gloucester Premium Outlets for $3.8 million. The partnership recorded a gain on sale of $2.3 million, of which our share was $0.6 million, which is recorded in gain on sales of real estate by equity method investee in the accompanying consolidated statement of operations.
Term Loan
In January 2018, our Fashion District Philadelphia redevelopment project joint venture entity entered into a $250.0 million term loan (the “FDP Term Loan”). We and our partner in the project, The Macerich Company (“Macerich”), each own a 50% partnership interest in Fashion District Philadelphia. The FDP Term Loan matures in January 2023, and bears interest at a variable rate of LIBOR plus 2.00%. PREIT and Macerich secured the FDP Term Loan by pledging their respective equity interests in the entities that own Fashion District Philadelphia. The entire $250.0 million available under the FDP Term Loan was drawn during the first quarter of 2018, and we received an aggregate $123.0 million as a distribution of our share of the draws in 2018. In July 2019, the FDP Term Loan was modified to increase the total potential borrowings from $250.0 million to $350.0 million. A total of $51.0 million was drawn during the third quarter of 2019 and we received aggregate distributions of $25.0 million as our share of the draws.
Mortgage Loan activity
As of June 30, 2020, we executed forbearance and loan modification agreements for Metroplex and Springfield Mall. These arrangements allow us to defer principal payments, and in some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period, repayment of deferred amounts will span from four to six months. The repayment periods will range from August 2020 through February 2021 depending on the terms of the specific agreements.
Significant Unconsolidated Subsidiary
We have a 50% ownership interest in Lehigh Valley Associates L.P. (“LVA”) and Fashion District Philadelphia (“FDP”). The financial information of LVA and FDP are included in the amounts above. Summarized balance sheet information as of June 30, 2020 and December 31, 2019, and summarized statement of operations information for the three and six months ended June 30, 2020 and 2019 for these entities, which are accounted for using the equity method, are as follows:
LVA
(in thousands of dollars)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Summarized balance sheet information
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
62,002
|
|
|
$
|
62,504
|
|
Mortgage loan payable, net
|
|
|
190,242
|
|
|
|
191,998
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Summarized statement of operations information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
6,971
|
|
|
$
|
8,184
|
|
|
$
|
14,850
|
|
|
$
|
16,583
|
|
Property operating expenses
|
|
|
(2,373
|
)
|
|
|
(1,887
|
)
|
|
|
(4,586
|
)
|
|
|
(4,213
|
)
|
Interest expense
|
|
|
(1,924
|
)
|
|
|
(2,019
|
)
|
|
|
(3,858
|
)
|
|
|
(4,028
|
)
|
Net income
|
|
|
1,739
|
|
|
|
3,471
|
|
|
|
4,661
|
|
|
|
6,709
|
|
PREIT’s share of equity in income of partnership
|
|
|
869
|
|
|
|
1,736
|
|
|
|
2,330
|
|
|
|
3,355
|
|
FDP
(in thousands of dollars)
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Summarized balance sheet information
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
720,520
|
|
|
$
|
641,377
|
|
FDP Term Loan, net
|
|
|
299,438
|
|
|
|
299,091
|
|
14
Table of Contents
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Summarized statement of operations information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,937
|
|
|
$
|
770
|
|
|
$
|
10,513
|
|
|
$
|
1,395
|
|
Property operating expenses
|
|
|
(3,929
|
)
|
|
|
(501
|
)
|
|
|
(8,055
|
)
|
|
|
(1,199
|
)
|
Interest expense
|
|
|
(414
|
)
|
|
|
-
|
|
|
|
(1,205
|
)
|
|
|
-
|
|
Net income
|
|
|
(3,682
|
)
|
|
|
(1,018
|
)
|
|
|
(7,134
|
)
|
|
|
(2,327
|
)
|
PREIT’s share of equity in income of partnership
|
|
|
(1,841
|
)
|
|
|
(508
|
)
|
|
|
(3,567
|
)
|
|
|
(1,163
|
)
|
4. FINANCING ACTIVITY
Credit Agreements
As of June 30, 2020, we have entered into two credit agreements (collectively, as amended, the “Credit Agreements”): (1) the 2018 Credit Agreement, which, as described in more detail below, includes (a) the $375 million 2018 Revolving Facility, and (b) the $300 million 2018 Term Loan Facility, and (2) the $250 million 2014 7-Year Term Loan. The 2018 Term Loan Facility and the 2014 7-Year Term Loan are collectively referred to as the “Term Loans.” As discussed further below and in Note 1 to our unaudited consolidated financial statements, on March 30, 2020, and again on July 27, 2020, we entered into amendments of our Credit Agreements. Our Credit Agreements were also amended on May 1, 2020 to extend the required delivery date of compliance certificates covering the fiscal quarter ended March 31, 2020 by six days. Among other things, the March 2020 amendments reduced the aggregate Revolving Commitments under the 2018 Revolving Facility by $25 million to $375 million. The $375 million aggregate Revolving Commitments under the 2018 Credit Agreement were permanently terminated pursuant to the July 2020 amendment to the 2018 Credit Agreement. As described further below the July 2020 amendments suspended certain financial covenants beginning on and including June 30, 2020 until but excluding August 31, 2020, provided that the Suspension Period may extend until September 30, 2020 if we meet certain conditions.
As of June 30, 2020, we had borrowed $544.0 million available under the Term Loans and the full $375.0 million under the 2018 Revolving Facility. The carrying value of the Term Loans on our consolidated balance sheet as of June 30, 2020 is net of $1.7 million of unamortized debt issuance costs.
Amounts borrowed under the Credit Agreements, either under the 2018 Revolving Facility or the Term Loans, which may be either LIBOR Loans or Base Rate Loans, bear interest at the rate specified below per annum, depending on our leverage, unless and until we receive an investment grade credit rating and provide notice to the Administrative Agent, as defined therein (the “Rating Date”), after which alternative rates would apply, as described in the Credit Agreements. During the Suspension Period, the Applicable Margin will be determined based on the Level 5 Ratio of Total Liabilities to Gross Asset Value (listed below). In determining our leverage (the ratio of Total Liabilities to Gross Asset Value), the capitalization rate used to calculate Gross Asset Value is (a) 6.50% for each property having an average sales per square foot of more than $500 for the most recent period of 12 consecutive months, and (b) 7.50% for any other property. The 2018 Revolving Facility is subject to a facility fee, which depends on leverage and was 0.35% as of June 30, 2020, which is recorded in interest expense in the consolidated statements of operations.
|
|
|
Applicable Margin
|
|
Level
|
Ratio of Total Liabilities to Gross Asset Value
|
|
Revolving
Loans that are
LIBOR Loans
|
|
|
Revolving
Loans
that are Base
Rate Loans
|
|
|
Term Loans
that are
LIBOR Loans
|
|
|
Term Loans
that are Base
Rate Loans
|
|
1
|
Less than 0.450 to 1.00
|
|
|
1.20
|
%
|
|
|
0.20
|
%
|
|
|
1.35
|
%
|
|
|
0.35
|
%
|
2
|
Equal to or greater than 0.450 to 1.00 but less than 0.500
to 1.00
|
|
|
1.25
|
%
|
|
|
0.25
|
%
|
|
|
1.45
|
%
|
|
|
0.45
|
%
|
3
|
Equal to or greater than 0.500 to 1.00 but less than 0.550
to 1.00
|
|
|
1.30
|
%
|
|
|
0.30
|
%
|
|
|
1.60
|
%
|
|
|
0.60
|
%
|
4
|
Equal to or greater than 0.550 to but less than 0.600 to 1.000
|
|
|
1.55
|
%
|
|
|
0.55
|
%
|
|
|
1.90
|
%
|
|
|
0.90
|
%
|
5
|
Equal to or greater than 0.600 to 1.000 (1)
|
|
|
1.90
|
%
|
(2)
|
|
0.90
|
%
|
|
|
2.25
|
%
|
(2)
|
|
1.25
|
%
|
|
(1)
|
The rates in effect under the Credit Agreements were based upon the Level 5 Ratio of Total Liabilities to Gross Asset Value as of June 30, 2020.
|
|
(2)
|
Under the July 2020 amendments, during the Suspension Period, the rate determined by adding LIBOR and the Applicable Margin for LIBOR Loans for Level 5 will be increased (but not decreased) to equal the rate determined by adding Base Rate and the Applicable Margin for Base Rate Loans on the date of conversion or continuation of any LIBOR Loan.
|
The Credit Agreements contain certain affirmative and negative covenants, several of which were amended on March 30, 2020. Pursuant to the July 2020 amendments, some of those covenants have been suspended for the duration of the Suspension Period. The affirmative and negative covenants, as amended by the March 2020 amendments, include, without limitation, requirements that PREIT maintain, on a consolidated basis: (1) Minimum Tangible Net Worth of $1,463.2 million, plus 75% of the Net Proceeds of all Equity Issuances effected at any time after March 31,
15
Table of Contents
2018; (2) maximum ratio of Total Liabilities to Gross Asset Value of 0.65:1 at any time prior to and including September 30, 2020, or 0.60:1 at any time thereafter, provided that it will not be a Default if after September 30, 2020, the ratio exceeds 0.60:1 but does not exceed 0.625:1 for more than two consecutive quarters on more than two occasions during the remainder of the term (which covenant has been suspended for the duration of the Suspension Period); (3) minimum ratio of Adjusted EBITDA to Fixed Charges of 1.40 to 1.00 for any period ending on or before September 30, 2020, or 1.50:1 for any period ending thereafter (which covenant has been suspended for the duration of the Suspension Period); (4) minimum Unencumbered Debt Yield of (a) 10.0% at any time prior to and including September 30, 2020, (b) 11.25% any time after September 30, 2020 through and including June 30, 2021, and (c) 11.50% any time thereafter (which covenant has been suspended for the duration of the Suspension Period); (5) minimum Unencumbered Net Operating Income to Unsecured Interest Expense of 1.75:1; (6) maximum ratio of Secured Indebtedness to Gross Asset Value of 0.60:1; and (7) Distributions may not exceed (a) with respect to our preferred shares, the amounts required by the terms of the preferred shares, and (b) with respect to our common shares, the greater of (i) 95.0% of Funds From Operations (FFO), and (ii) 110% of REIT taxable income for a fiscal year. Our Credit Agreements also require us to maintain unrestricted cash liquidity of $8.5 million at all times during the Suspension Period and $25 million following the end of the Suspension Period and through September 30, 2020, such liquidity to be comprised of unrestricted cash and cash equivalents undrawn availability under the 2018 Revolving Facility and undrawn availability under a future secured loan contemplated by the July 2020 amendments. The covenants and restrictions in the Credit Agreements limit our ability to incur additional indebtedness, grant liens on assets and enter into negative pledge agreements, merge, consolidate or sell all or substantially all of its assets, and enter into transactions with affiliates and the March 2020 amendments limit our ability to enter into sale-leaseback transactions with respect to Unencumbered Properties. The Credit Agreements are subject to customary events of default and are cross-defaulted with one another. The July 2020 amendments prohibit us from taking any action (or omitting from taking any action) during the Suspension Period where such action would be otherwise prohibited to be taken or omitted during the existence of a default or event of default, including but not limited to making certain Restricted Payments (as defined in the Credit Agreements), creating, assuming or incurring liens on our assets, income or profits, and engaging in certain transactions regarding mergers, acquisitions and sales of assets, in each case unless permitted by the Credit Agreements. Restricted Payments (as defined in the Credit Agreements) include cash dividends with respect to our shares, subject to exception for amounts required to be distributed for us to maintain our REIT status. As such, the Credit Agreements, as amended, restrict our ability to declare and pay dividends on our common shares and preferred shares for the duration of the Suspension Period.
We may prepay the amounts due under the Credit Agreements at any time without premium or penalty, subject to reimbursement obligations for the lenders’ breakage costs for LIBOR borrowings. We must make prepayments under the 2018 Term Loan Facility in an amount equal to 54.55% of any Net Cash Proceeds received from certain Capital Events (provided that any Net Cash Proceeds from Capital Events in excess of $150 million must be applied 50% toward repayment of outstanding amounts under the 2018 Revolving Facility with 54.55% of the remaining 50% applied to prepay amounts under the 2018 Term Loan Facility), subject to certain exceptions. If we have more than $50 million of unrestricted cash on our balance sheet for five consecutive days any time prior to September 30, 2020, we must prepay the 2018 Revolving Facility with our excess cash above $50 million. We must also make prepayments under the 7-Year Term Loan in an amount equal to 45.45% of any Net Cash Proceeds received from certain Capital Events (provided that any Net Cash Proceeds from Capital Events in excess of $150 million must be applied 50% toward repayment of outstanding amounts under the 2018 Revolving Facility with 45.45% of the remaining 50% applied to prepay the amounts outstanding under the 7-Year Term Loan), subject to certain exceptions. We also must make monthly principal amortization payments of $1.09 million of the term loan under the 2018 Credit Agreement and of $909 thousand of the term loan under the 7-Year Term Loan, in each case for the months of April, May, June, July, August and September of 2020.
Upon the expiration of any applicable cure period for an event of default (except with respect to bankruptcy as described in the next sentence), the lenders may declare all of the obligations in connection with the Credit Agreements immediately due and payable.
Upon the occurrence of a voluntary or involuntary bankruptcy proceeding of PREIT, PALP, PRI, any material subsidiary, any subsidiary that owns or leases an Unencumbered Property or certain other subsidiaries, all outstanding amounts would automatically become immediately due and payable. In the event of an involuntary bankruptcy proceeding, we have a limited time period to obtain a dismissal of the involuntary bankruptcy prior to the occurrence of an event of default.
Interest expense and deferred financing fee amortization related to the Credit Agreements for the three and six months ended June 30, 2020 and 2019 were as follows:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Revolving Facility:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
2,375
|
|
|
$
|
1,827
|
|
|
$
|
4,858
|
|
|
$
|
3,061
|
|
Deferred financing amortization
|
|
|
278
|
|
|
|
274
|
|
|
|
552
|
|
|
|
548
|
|
Term Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
5,793
|
|
|
|
5,127
|
|
|
|
11,299
|
|
|
|
10,265
|
|
Deferred financing amortization
|
|
|
196
|
|
|
|
190
|
|
|
|
387
|
|
|
|
379
|
|
The aggregate carrying values and estimated fair values of mortgage loans based on interest rates and market conditions at June 30, 2020 and December 31, 2019 were as follows:
16
Table of Contents
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
(in millions of dollars)
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
Mortgage loans(1)
|
|
$
|
893.8
|
|
|
$
|
895.4
|
|
|
$
|
899.8
|
|
|
$
|
873.9
|
|
|
|
(1)
|
The carrying value of mortgage loans is net of unamortized debt issuance costs of $1.4 million and $1.8 million as of June 30, 2020 and December 31, 2019, respectively.
|
The mortgage loans contain various customary default provisions.
Mortgage Loan Activity
As of June 30, 2020, we executed forbearance and loan modification agreements for Cherry Hill Mall, Cumberland Mall, Dartmouth Mall, Francis Scott Key Mall, Viewmont Mall, and Woodland Mall. These arrangements allow us to defer principal payments, and in some cases interest as well, between May and August 2020 depending on the terms of each agreement. At the end of the deferral period, repayment of deferred amounts will span from four to six months. The repayment periods will range from August 2020 through February 2021 pursuant to the terms of the specific agreements. Certain of these forbearance and loan modification agreements also impose certain additional informational reporting requirements during the applicable modification periods.
In the second quarter of 2020, we received a notice of transfer of servicing for the mortgage loan secured by Valley View Mall, which had a $27.3 million balance as of June 30, 2020. Subsequently, we failed to make the June 2020 monthly payment and our subsidiary that is the borrower under the mortgage also received a notice of default on the mortgage from the lender. Additionally, we have not paid the balloon payment of $27.3 million due at maturity on July 1, 2020. A foreclosure notice has been filed and we are in discussions with the lender to stipulate certain conditions in exchange for settlement of the mortgage.
In March 2019, we defeased a $58.5 million mortgage loan including accrued interest, secured by Capital City Mall in Camp Hill, Pennsylvania using funds from our 2018 Revolving Facility and the balance from available working capital. We recorded a loss on debt extinguishment of $4.8 million in March 2019 in connection with this defeasance.
Note Payable
In April 2020, in light of the impact of COVID-19 on our business and limited capital resources, we applied for and received proceeds from a potentially forgivable loan in the amount of $4.5 million under the Paycheck Protection Program (PPP) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. We entered into a note payable with our lender bank (“Note Payable”). The Note Payable will mature on April 15, 2022. Based on the CARES Act and the Note Payable, all payments of both principal and interest will be deferred until at least November 16, 2020. The Note Payable accrues interest at a rate of 1.00% per annum, and the interest will continue to accrue throughout the period the Note Payable is outstanding, or the forgiveness date. All or a portion of PPP loans are eligible for forgiveness pursuant to program guidelines to the extent the proceeds are used for qualifying purposes within a 24-week period following the loan funding. The proceeds are included in “Accrued expenses and other liabilities” in our consolidated balance sheet.
Interest Rate Risk
We follow established risk management policies designed to limit our interest rate risk on our interest bearing liabilities, as further discussed in Note 7 to our unaudited consolidated financial statements.
Subsequent Events
As discussed above, in July 2020, we entered into amendments to our Credit Agreements. Among other things, the amendments suspended certain financial covenants beginning on and including June 30, 2020 until but excluding August 31, 2020, provided that the Suspension Period may extend until September 30, 2020 if we meet certain conditions.
17
Table of Contents
5. CASH FLOW INFORMATION
Cash paid for interest was $30.5 million (net of capitalized interest of $1.4 million) and $26.9 million (net of capitalized interest of $4.3 million) for the six months ended June 30, 2020 and 2019, respectively.
In our statement of cash flows, we show cash flows on our Revolving Facilities on a net basis. Aggregate borrowings on our Revolving Facilities were $120.0 million and $150.0 million for the six months ended June 30, 2020 and 2019, respectively. Aggregate paydowns were $0.0 million and $33.0 million for the six months ended June 30, 2020 and 2019, respectively. Net and aggregate paydowns on our Term Loans were $6.0 million and $0.0 million for the six months ended June 30, 2020 and 2019, respectively.
Accrued construction costs decreased by $14.3 million in the six months ended June 30, 2020 and decreased by $15.5 million in the six months ended June 30, 2019, representing non-cash changes in investment in real estate and construction in progress.
In the first quarter of 2019, we issued 6,250,000 common shares of beneficial interest in the Company in exchange for a like number of OP Units in our Operating Partnership. The shares were issued to Vornado Investments LLC, an affiliate of Franconia Two, L.P., the holder of the OP Units.
The following table provides a summary of cash, cash equivalents, and restricted cash reported within the statement of cash flows as of June 30, 2020 and 2019.
|
|
June 30,
|
|
(in thousands of dollars)
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
41,418
|
|
|
$
|
15,227
|
|
Restricted cash included in other assets
|
|
|
7,473
|
|
|
|
11,305
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
|
$
|
48,891
|
|
|
$
|
26,532
|
|
Our restricted cash consists of cash held in escrow by banks for real estate taxes and other purposes.
6. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
As of June 30, 2020, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $52.1 million, including $31.3 million of commitments related to the redevelopment of Fashion District Philadelphia, in the form of tenant allowances and contracts with general service providers and other professional service providers. For purposes of this disclosure, the contractual obligations and other commitments related to Fashion District Philadelphia are included at 100% of the obligation and not at our 50% ownership share. In addition, our operating partnership, PREIT Associates, has jointly and severally guaranteed the obligations of the joint venture we formed with Macerich to develop Fashion District Philadelphia to commence and complete a comprehensive redevelopment of that property costing not less than $300.0 million within 48 months after commencement of construction, which was March 14, 2016. As of June 30, 2020, we believe we have satisfied this obligation.
Provision for Employee Separation Expenses
During the six months ended June 30, 2020 and 2019, we terminated the employment of certain employees and officers. In connection with the departure of those employees and officers, we recorded $1.0 million and $1.1 million, respectively of employee separation expenses in the three and six months ended June 30, 2020, compared to $0.1 million and $0.9 million, respectively, for the three and six months ended June 30, 2019. As of June 30, 2020, we had $1.1 million of severance accrued and unpaid related to the termination of employees.
Property Damage from Natural and Other Disasters
During September 2018, Jacksonville Mall in Jacksonville, North Carolina incurred property damage and an interruption of business operations as a result of Hurricane Florence. The property was closed for business during and immediately after the natural disaster, however, significant remediation efforts were quickly undertaken, and the mall was reopened shortly thereafter.
During the six months ended June 30, 2019, we recorded net recoveries of approximately $0.2 million. These net recoveries primarily relate to remediation expenses and business interruption claims. $0.1 million of the recoveries received relate to business interruption.
18
Table of Contents
During the six months ended June 30, 2020, Cherry Hill Mall in Cherry Hill, New Jersey experienced a power outage due to the failure of an underground high voltage cable, which required the use of backup generator power. We recorded net costs of approximately $0.6 million during the six months ended June 30, 2020 and received recoveries of $0.6 million in April 2020.
7. DERIVATIVES
In the normal course of business, we are exposed to financial market risks, including interest rate risk on our interest bearing liabilities. We attempt to limit these risks by following established risk management policies, procedures and strategies, including the use of financial instruments such as derivatives. We do not use financial instruments for trading or speculative purposes.
Cash Flow Hedges of Interest Rate Risk
For derivatives that have been designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in “Accumulated other comprehensive income” and subsequently reclassified into “Interest expense, net” in the same periods during which the hedged transaction affects earnings. As of June 30, 2020, all of our outstanding derivatives are designated as cash flow hedges. We recognize all derivatives at fair value as either assets or liabilities in the accompanying consolidated balance sheets.
During the next 12 months, we estimate that $14.7 million will be reclassified as a decrease to interest expense in connection with derivatives. The recognition of these amounts, however, could be accelerated in the event that we repay amounts outstanding on the debt instruments and do not replace them with new borrowings or that the debt becomes due under the terms of the agreements.
Interest Rate Swaps
As of June 30, 2020, we had interest rate swap agreements outstanding with a weighted average base interest rate of 2.13% on a notional amount of $794.8 million, maturing on various dates through May 2023. We entered into these interest rate swap agreements in order to hedge the interest payments associated with our issuances of variable interest rate long term debt. The interest rate swap agreements are net settled monthly.
During the second quarter of 2020, we modified the interest rate swap agreements related to Francis Scott Key Mall and Viewmont Mall to align with the mortgage deferral arrangements we executed with the respective mortgage lenders. We did not make any swap payments in May and June for these swaps and are not required to make payments in July and August 2020 during which period the interest rates will be zero percent. Beginning in September 2020, the monthly payments will resume at set strike rates and incorporate the deferred amounts.
The following table summarizes the terms and estimated fair values of our interest rate swap derivative instruments designated as cash flow hedges of interest rate risk at June 30, 2020 and December 31, 2019 based on the year they mature. The notional values provide an indication of the extent of our involvement in these instruments, but do not represent exposure to credit, interest rate or market risks. In the accompanying consolidated balance sheets, the carrying amount of derivative assets is reflected in “Deferred costs and other assets, net” and the carrying amount of derivative liabilities is reflected in “Accrued expenses and other liabilities.”
Maturity Date
|
|
Aggregate Notional
Value at June 30, 2020
(in millions of dollars)
|
|
|
Aggregate Fair Value at
June 30, 2020 (1)
(in millions of dollars)
|
|
|
Aggregate Fair Value at
December 31, 2019 (1)
(in millions of dollars)
|
|
|
Weighted Average
Interest Rate
|
|
Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 (2)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
0.2
|
|
|
-
|
|
2021
|
|
|
494.8
|
|
|
|
(9.9
|
)
|
|
|
(1.4
|
)
|
|
|
1.79
|
%
|
2022
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
2023
|
|
|
300.0
|
|
|
|
(21.9
|
)
|
|
|
(7.3
|
)
|
|
|
2.70
|
%
|
Total
|
|
$
|
794.8
|
|
|
$
|
(31.8
|
)
|
|
$
|
(8.5
|
)
|
|
|
2.13
|
%
|
|
(1)
|
As of June 30, 2020 and December 31, 2019, derivative valuations in their entirety were classified in Level 2 of the fair value hierarchy and we did not have any significant recurring fair value measurements related to derivative instruments using significant unobservable inputs (Level 3).
|
|
(2)
|
Five interest rate swaps matured in the second quarter of 2020. As of March 31, 2020, these swaps had a notional value that totaled $100 million, a weighted average interest rate of 1.23% and a de minimis fair value.
|
19
Table of Contents
The tables below present the effect of derivative financial instruments on accumulated other comprehensive income and on our consolidated statements of operations for the six months ended June 30, 2020 and 2019:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
Amount of Gain or
(Loss) Recognized in
Other Comprehensive
Income on Derivative
Instruments
|
|
|
Amount of Gain or
(Loss) Reclassified from
Accumulated Other
Comprehensive Income
into Interest Expense
|
|
|
Amount of Gain or
(Loss) Recognized in
Other Comprehensive
Income on Derivative
Instruments
|
|
|
Amount of Gain or
(Loss) Reclassified from
Accumulated Other
Comprehensive Income
into Interest Expense
|
|
(in millions of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate products
|
|
$
|
(2.3
|
)
|
|
$
|
(10.5
|
)
|
|
$
|
2.3
|
|
|
$
|
(1.2
|
)
|
|
$
|
(22.4
|
)
|
|
$
|
(15.8
|
)
|
|
$
|
2.6
|
|
|
$
|
(2.3
|
)
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
(in millions of dollars)
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded
|
|
$
|
(17.2
|
)
|
|
$
|
(15.6
|
)
|
|
$
|
(34.0
|
)
|
|
$
|
(31.5
|
)
|
Amount of loss reclassified from accumulated other comprehensive income into interest expense
|
|
$
|
2.3
|
|
|
$
|
(1.2
|
)
|
|
$
|
2.6
|
|
|
$
|
(2.3
|
)
|
Credit-Risk-Related Contingent Features
We have agreements with some of our derivative counterparties that contain a provision pursuant to which, if our entity that originated such derivative instruments defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations. As of June 30, 2020, we were not in default on any of our derivative obligations.
We have an agreement with a derivative counterparty that incorporates the loan covenant provisions of our loan agreement with a lender affiliated with the derivative counterparty. Failure to comply with the loan covenant provisions would result in our being in default on any derivative instrument obligations covered by the agreement.
As of June 30, 2020, the fair value of derivatives in a liability position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $31.7 million. If we had breached any of the default provisions in these agreements as of June 30, 2020, we might have been required to settle our obligations under the agreements at their termination value (including accrued interest) of $33.5 million. We had not breached any of these provisions as of June 30, 2020.
8. LEASES
As Lessee
We have entered into ground leases for portions of the land at Springfield Town Center and Plymouth Meeting Mall. We have also entered into an office lease for our headquarters location, as well as vehicle, solar panel and equipment leases as a lessee. The initial terms of these agreements generally range from three to 40 years, with certain agreements containing extension options for up to an additional 60 years. As of June 30, 2020, we included only those renewal options we were reasonably certain of exercising. Upon lease execution, the Company measures a liability for the present value of future lease payments over the noncancelable period of the lease and any renewal option period we are reasonably certain of exercising. Certain agreements require that we pay a portion of reimbursable expenses such as CAM, utilities, insurance and real estate taxes. These payments are not included in the calculation of the lease liability and are presented as variable lease costs.
We applied judgments related to the determination of the discount rates used to calculate the lease liability upon adoption of ASC 842 at January 1, 2019. In order to calculate our incremental borrowing rate under ASC 842, we utilized judgments and estimates regarding our implied credit rating using market data and made other adjustments to determine an appropriate incremental borrowing rate as of January 1, 2019.
20
Table of Contents
The following table presents additional information pertaining to the Company’s leases:
|
|
Three Months Ended June 30, 2020
|
|
|
Six Months Ended June 30, 2020
|
|
(in thousands of dollars)
|
|
Solar Panel
Leases
|
|
|
Ground Leases
|
|
|
Office,
equipment,
and vehicle
leases
|
|
|
Total
|
|
|
Solar Panel
Leases
|
|
|
Ground Leases
|
|
|
Office,
equipment,
and vehicle
leases
|
|
|
Total
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
412
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
412
|
|
Interest on lease liabilities
|
|
|
68
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68
|
|
|
|
147
|
|
|
|
—
|
|
|
|
—
|
|
|
|
147
|
|
Operating lease costs
|
|
|
—
|
|
|
|
437
|
|
|
|
333
|
|
|
|
770
|
|
|
|
—
|
|
|
|
873
|
|
|
|
675
|
|
|
|
1,548
|
|
Variable lease costs
|
|
|
—
|
|
|
|
42
|
|
|
|
39
|
|
|
|
81
|
|
|
|
—
|
|
|
|
85
|
|
|
|
82
|
|
|
|
167
|
|
Total lease costs
|
|
$
|
276
|
|
|
$
|
479
|
|
|
$
|
372
|
|
|
$
|
1,127
|
|
|
$
|
559
|
|
|
$
|
958
|
|
|
$
|
757
|
|
|
$
|
2,274
|
|
Other information related to leases as of and for the six months ended June 30, 2020 is as follows:
(in thousands of dollars)
|
|
|
|
|
Cash paid for the amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows used for finance leases
|
|
$
|
139
|
|
Operating cash flows used for operating leases
|
|
$
|
972
|
|
Financing cash flows used for finance leases
|
|
$
|
347
|
|
Weighted average remaining lease term-finance leases (months)
|
|
|
92
|
|
Weighted average remaining lease term-operating leases (months)
|
|
|
304
|
|
Weighted average discount rate-finance leases
|
|
|
4.37
|
%
|
Weighted average discount rate-operating leases
|
|
|
6.43
|
%
|
Future payments against lease liabilities as of June 30, 2020 are as follows:
(in thousands of dollars)
|
|
Finance leases
|
|
|
Operating leases
|
|
|
Total
|
|
July 1 to December 31, 2020
|
|
$
|
485
|
|
|
$
|
1,140
|
|
|
$
|
1,625
|
|
2021
|
|
|
970
|
|
|
|
2,508
|
|
|
|
3,478
|
|
2022
|
|
|
968
|
|
|
|
2,493
|
|
|
|
3,461
|
|
2023
|
|
|
964
|
|
|
|
2,448
|
|
|
|
3,412
|
|
2024
|
|
|
930
|
|
|
|
2,386
|
|
|
|
3,316
|
|
Thereafter
|
|
|
2,997
|
|
|
|
53,545
|
|
|
|
56,542
|
|
Total undiscounted lease payments
|
|
|
7,314
|
|
|
|
64,520
|
|
|
|
71,834
|
|
Less imputed interest
|
|
|
(1,111
|
)
|
|
|
(34,532
|
)
|
|
|
(35,643
|
)
|
Total lease liabilities
|
|
$
|
6,203
|
|
|
$
|
29,988
|
|
|
$
|
36,191
|
|
Future payments against lease liabilities as of December 31, 2019 were as follows:
(in thousands of dollars)
|
|
Finance leases
|
|
|
Operating leases
|
|
|
Total
|
|
Year ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
925
|
|
|
$
|
2,237
|
|
|
$
|
3,162
|
|
2021
|
|
|
925
|
|
|
|
2,730
|
|
|
|
3,655
|
|
2022
|
|
|
925
|
|
|
|
2,538
|
|
|
|
3,463
|
|
2023
|
|
|
925
|
|
|
|
2,485
|
|
|
|
3,410
|
|
2024
|
|
|
925
|
|
|
|
2,373
|
|
|
|
3,298
|
|
Thereafter
|
|
|
2,999
|
|
|
|
46,853
|
|
|
|
49,852
|
|
Total undiscounted lease payments
|
|
|
7,624
|
|
|
|
59,216
|
|
|
|
66,840
|
|
Less imputed interest
|
|
|
(1,242
|
)
|
|
|
(28,965
|
)
|
|
|
(30,207
|
)
|
Total lease liabilities
|
|
$
|
6,382
|
|
|
$
|
30,251
|
|
|
$
|
36,633
|
|
21
Table of Contents
As Lessor
As of June 30, 2020, the fixed contractual lease payments, including minimum rents and fixed CAM amounts, to be received over the next five years pursuant to the terms of noncancelable operating leases with initial terms greater than one year are included in the table below. The amounts presented assume that no leases are renewed and no renewal options are exercised, and do not include any rent deferral arrangements executed during the second quarter of 2020. Additionally, the table does not include variable lease payments that may be received under certain leases for percentage rents or the reimbursement of operating costs, such as common area expenses, utilities, insurance and real estate taxes. These variable lease payments are recognized in the period when the applicable expenditures are incurred or, in the case of percentage rents, when the sales data is made available.
(in thousands of dollars)
|
|
|
|
|
July 1 to December 31, 2020
|
|
$
|
117,214
|
|
2021
|
|
|
216,930
|
|
2022
|
|
|
196,276
|
|
2023
|
|
|
176,852
|
|
2024
|
|
|
155,204
|
|
Thereafter
|
|
|
536,995
|
|
|
|
$
|
1,399,471
|
|
22
Table of Contents