ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS O F 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 consolidated financial statements and the notes thereto included elsewhere in this report.
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 retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region.
We currently own interests in 23 properties, of which 22 are operating properties and one is a development property. The 22 operating properties include 19 shopping malls and three other retail properties, have a total of 18.3 million square feet and are located in eight states. We and partnerships in which we hold an interest, own 14.1 million square feet at these properties (excluding space owned by anchors or third parties).
There are 16 operating retail properties in our portfolio that we consolidate for financial reporting purposes. These consolidated properties have a total of 13.7 million square feet, of which we own 10.8 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, disposed of, under redevelopment or designated as a non-core property during the periods presented. “Core Malls” excludes Exton Square Mall and Valley View Mall, as well as power centers, and Cumberland Mall and our interest in Gloucester Premium Outlets, which were both sold in 2022. As discussed further in Note 2 to our consolidated financial statements, a foreclosure sale was completed in May 2022 for Valley View Mall and we no longer operate the property.
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.
We are a fully integrated, self-managed and self-administered REIT that has elected to be treated as a REIT for federal income tax purposes. In general, we are required each year to distribute to our shareholders at least 90% of our net taxable income and to meet certain other requirements in order to maintain the favorable tax treatment associated with qualifying as a REIT.
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.
Our net loss increased by $14.7 million to a net loss of $150.6 million for the year ended December 31, 2022 from a net loss of $135.9 million for the year ended December 31, 2021. The change in our 2022 results of operations was primarily due to (a) an increase of $34.2 million in impairment of assets due to the write down of Plymouth Meeting Mall and Cumberland Mall; and (b) an increase of $13.7 million of interest expense driven by higher interest rates on our Credit Agreements, partially offset by: (a) an increase in gain on sale of interest in real estate of $12.0 million; (b) an increase in gain on sales of non-operating real estate of $10.5 million; (c) an increase in gain on sale of equity method investment of $9.0 million; (d) an increase in gain on sale of preferred equity interest of $3.7 million; and (e) an increase in lease revenue of $1.7 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.
We hold our interest in our portfolio of properties through the Operating Partnership. We are the sole general partner of the Operating Partnership and, as of December 31, 2022, held a 98.7% controlling interest in the Operating Partnership, and consolidated it for reporting purposes. We hold our investments in six of the 22 operating retail properties and the one development property in our portfolio through unconsolidated partnerships with third parties in which we own a 40% to 50% interest.
Acquisitions and Dispositions
See Note 2 to our consolidated financial statements for a description of our dispositions and acquisitions in 2022 and 2021.
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. In particular, current conditions in the economy have caused fluctuations in unemployment rates, and together with supply chain challenges, the current inflationary environment, overall economic uncertainty and the potential for recession, have impacted consumer confidence and spending. The economic factors have had corresponding effects on tenant business performance, prospects, solvency and leasing decisions. 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, 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. We anticipate that our future business, financial condition, liquidity and results of operations, and potentially in future periods, will continue to be materially impacted by these conditions. All of these factors have been by the ongoing impact of the COVID-19 pandemic, the ongoing impact of which remains uncertain, and more recently by inflationary pressures and substantial increases in interest rates.
The table below sets forth information related to our tenants in bankruptcy for our consolidated and unconsolidated properties (excluding tenants in bankruptcy at sold properties):
Pre-bankruptcy
Units Closed
Year
Number of
Tenants (1)
Number of
locations
impacted
GLA (2)
PREIT’s
Share of
Annualized
Gross Rent (3)
(in thousands)
Number of
locations
closed
GLA (2)
PREIT’s
Share of
Annualized
Gross Rent (3)
(in thousands)
2022 (Full Year)
Consolidated properties
Unconsolidated properties
Total
2021 (Full Year)
Consolidated properties
Unconsolidated properties
Total
(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 December 31, 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 .
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 North 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.
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 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. Sears at Francis Scott Key Mall closed in 2023; Sears remains financially obligated for this space and has plans to repurpose the building.
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. The former J.C. Penney location at Willow Grove Park has been leased to Tilted 10 and is expected to open fully in mid 2023.
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 27.7% 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 $42.7 million as of December 31, 2022.
As of December 31, 2022, we had contractual and other commitments related to our capital improvement projects and development projects at our consolidated and unconsolidated properties of $3.7 million, including $1.0 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. 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 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. In January 2023, the FDP Loan Agreement was amended to replace the interest rate benchmark from LIBOR to SOFR. The Base Rate is defined as the of (a) the Prime Rate, (b) the Federal Funds Rate plus one half (0.50%) and (c) Adjusted Term SOFR for a one-month tenor plus one percent (1.00%). The FDP Loan Agreement contains certain covenants typical for loans of its type. In August 2022, the joint venture paid down the FDP Loan Agreement balance by $83.1 million in order to comply with the financial covenants. In November 2022, the joint venture paid down the FDP Loan Agreement balance by $7.1 million in order to comply with the financial covenants. As of December 31, 2022, the required debt yield threshold under the FDP Loan Agreement is 9%. In January 2023, the joint venture paid down an additional $26.1 million of the FDP Loan Agreement balance as part of the option that it exercised to extend the FDP Loan Agreement maturity date to January 22, 2024. If the joint venture to meet the debt yield requirement as of any quarter end measurement date and does not pay down the term loan to compliance, the term loan could become due and payable at that time.
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 consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and expenses during the reporting periods. In preparing the consolidated financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Management has also considered events and changes in property, market and economic conditions, estimated future cash flows from property operations and the risk of loss on specific accounts or amounts in determining its estimates and judgments. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may affect comparability of our results of operations to those of companies in a similar business. The estimates and assumptions made by management in applying critical accounting policies have not changed materially during 2022 and 2021, except as otherwise noted, and none of these estimates or assumptions have proven to be materially 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.
Set forth below is a summary of the accounting policy that management believes is critical to the preparation of the consolidated financial statements. This summary should be read in conjunction with the more complete discussion of our accounting policies included in Note 1 to our consolidated financial statements.
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.
Revenue and Receivables
We derive over 97% 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 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, 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.
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.
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.
Other real estate revenue includes income generated from seasonal events at our properties, partnership promotional initiatives, miscellaneous services to tenants and solar revenue.
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.
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 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 consolidated financial statements for descriptions of new accounting developments.
RESULTS OF OPERATIONS
Overview
Our net loss increased by $14.7 million to a net loss of $150.6 million for the year ended December 31, 2022 from a net loss of $135.9 million for the year ended December 31, 2021. The change in our 2022 results of operations was primarily due to: (a) an increase of $34.2 million in impairment of assets due to the write down of Plymouth Meeting Mall and Cumberland Mall; and (b) an increase of $13.7 million of interest expense driven by higher interest rates on our Credit Agreements, partially offset by: (a) an increase in gain on sale of interest in real estate of $12.0 million; (b) an increase in gain on sales of non operating real estate of $10.5 million; (c) an increase in gain on sale of equity method investment of $9.0 million; (d) an increase in gain on sale of preferred equity interest of $3.7 million; and (e) an increase in lease revenue of $1.7 million.
Occupancy
The table below sets forth certain occupancy statistics for our properties as of December 31, 2022 and 2021:
Occupancy (1) at December 31,
Consolidated
Properties
Unconsolidated
Properties
Combined (2)
Retail portfolio weighted average (3) :
Total excluding anchors
Total including anchors
Core Malls weighted average: (4)
Total excluding anchors
Total including anchors
(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, Valley View Mall, Cumberland Mall, Gloucester Premium Outlets and power centers.
From 2021 to 2022, total occupancy for our retail portfolio, including consolidated and unconsolidated properties (and including all tenants irrespective of the term of their agreement), increased 240 basis points to 92.8%.
From 2021 to 2022, total occupancy for our Core Malls, including consolidated and unconsolidated properties, increased 150 basis points to 94.8%.
Leasing Activity
The table below sets forth summary leasing activity information with respect to our consolidated and unconsolidated properties for the year ended December 31, 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")
Over 10k sf
Total New Leases
Renewal Leases
Under 10k sf
Over 10k sf
Total Fixed Rent
Total Percentage in Lieu
Total Renewal Leases (4)
Total Non Anchor
Anchor
New Leases
Renewal Leases
Total
(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 27 leases and 91,407 square feet of GLA with respect to our unconsolidated partnerships. We own a 40% 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.
See “Item 2. Properties—Retail Lease Expiration Schedule - Anchors” and “Item 2. Properties—Retail Lease Expiration Schedule – Non-Anchors” for information regarding average minimum rent on expiring leases.
The following table sets forth our results of operations for the years ended December 31, 2022 and 2021:
Year Ended
December 31,
% Change
(in thousands of dollars)
Real estate revenue
Property operating expenses
Other income
Depreciation and amortization
General and administrative expenses
Other (expenses) income
Interest expense, net
Reorganization expenses
Gain on debt extinguishment, net
Impairment of assets
Equity in loss of partnerships
Gain (loss) on sales of interests in real estate
Gain on sale of equity method investment
Gain on sales of real estate by equity method investee
Gain on sales of non operating real estate
Gain on sale of preferred equity interest
Net loss
The amounts in the preceding table 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 years ended December 31, 2022 and 2021:
For the Year Ended December 31,
(in thousands of dollars)
Contractual lease payments:
Base rent
CAM reimbursement income
Real estate tax income
Percentage rent
Lease termination revenue
Credit recoveries
Lease revenue
Expense reimbursements
Other real estate revenue
Total real estate revenue
Real Estate Revenue
Real estate revenue decreased by $0.5 million, or less than 2%, in 2022 as compared to 2021, primarily due to:
a decrease of $2.4 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 in 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 $2.0 million in same store credit losses compared to 2021 when we collected receivables related to the resolution of COVID-19 related issues with tenants across our portfolio in 2021:
a decrease of $1.9 million at Cumberland Mall that is a non same store property, which was sold on October 31, 2022; and
a decrease of $0.3 million in same store real estate tax reimbursements due to rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements, partially offset by higher occupancy at some properties; partially offset by
an increase of $1.8 million in same store base rent due to an increase of $5.9 million from net new store openings over the previous twelve months, partially offset by a decrease of $2.2 million from comparable tenants paying a percentage of sales in lieu of minimum rent and a decrease of $1.9 million from the treatment and amortization of Covid-related rent credits;
an increase of $1.7 million in same store utility reimbursements related to the increase in same store utility expense (see “-Property Operating Expenses”);
an increase of $1.2 million in same store other real estate revenue due to marketing revenues and promotional revenues related to activities in the common areas and parking lots;
an increase of $1.0 million in same store lease termination revenue, including $2.4 million from the termination of leases with seven tenants during 2022, partially offset by $1.4 million received from nine tenants during 2021;
an increase of $0.3 million in same store common area expense reimbursements due to increased occupancy and abatements recorded in the prior year, partially offset by rental concessions made to some tenants under which the terms of their leases were modified such that they no longer pay expense reimbursements; and
an increase of $0.1 million in same store percentage rent.
Property Operating Expenses
Property operating expenses increased by $3.7 million, or 2.9%, in 2022 as compared to 2021, primarily due to:
an increase of $2.4 million in same store tenant utility expense due to a combination of higher electricity usage and electricity rates;
an increase of $2.3 million in same store common area maintenance expense, including a $0.6 million increase in utility expense due to a combination of higher electricity usage and electricity rates, a $0.5 million increase in insurance expense, a $0.4 million increase in personnel costs due to a payroll tax credit in the prior year, a $0.4 million increase in repairs and maintenance expense and a $0.3 million increase in cleaning expense;
an increase of $0.4 million in same store other property operating expenses due to an increase in marketing expenses and anchor repairs, partially offset by a decrease in property legal expense; and
an increase of $0.3 million in same store real estate tax expense due to a combination of increases in the real estate tax assessment value and the real estate tax rate; partially offset by
a decrease of $1.0 million at Cumberland Mall which was sold on October 31, 2022; and
a decrease of $0.7 million at non-same store properties Valley View Mall and Exton Square Mall.
Depreciation and Amortization
Depreciation and amortization expense decreased by $4.9 million, or 4.2%, in 2022 as compared to 2021, primarily due to:
a decrease of $2.5 million resulting from accelerated amortization of capital improvements associated with store closings during 2021 and a lower net asset base resulting from fully amortized assets;
a decrease of $1.4 million at non-same store properties Exton Square Mall and Valley View Mall; and
a decrease of $1.0 million at Cumberland Mall which was sold on October 31, 2022.
General and Administrative Expenses
General and administrative expenses decreased by $5.8 million or 11.7%, in 2022 as compared to 2021, due to lower incentive compensation offset by an increase in professional fees.
Interest Expense
Interest expense increased by $13.7 million, or 10.7%, in 2022 as compared to 2021 due to higher weighted average effective interest rates (8.28% in 2022 compared to 6.10% in 2021) offset slightly by declining debt balances throughout the year (2022 ending balance of $2,112.7 million compared to $2,253.7 million in 2021).
Gain on Debt Extinguishment
For the year ended December 31, 2022, we did not record any gain on debt extinguishment.
During the second quarter of 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, which is included in our results of operations for the year ended December 31, 2021.
Impairment of Assets
During the year ended December 31, 2022 and 2021, we recorded impairment of assets of $44.1 million and $9.9 million, respectively. The assets that incurred impairments and the amount of such impairments are as follows:
For the Year Ended December 31,
(in thousands of dollars)
Plymouth Meeting Mall
Cumberland Mall
Exton Square Mall
Valley View Center
Monroe Marketplace
Total impairment of assets
See Note 2 to our consolidated financial statements for a further discussion of impairment of assets.
Reorganization Expenses
For the year ended December 31, 2022, we have not incurred any reorganization expenses.
During the year ended December 31, 2021, we incurred costs of $0.3 million in connection with our efforts to finalize our financial restructuring that were directly attributable to our 2020 bankruptcy proceedings.
Equity in Loss of Partnerships
Equity in loss of partnerships increased by $2.4 million, or 64.7%, in 2022 as compared to 2021. This increase in loss was primarily due to higher interest expense and the sale of our 25% interest in Gloucester Premium Outlets.
Gain on Sale of Equity Method Investment
During the year ended December 31, 2022, there was a $9.0 million net 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 and a subsequent working capital adjustment loss of $0.1 million was recorded in the third quarter of 2022.
There was no gain on sale of equity method investment for the year ended December 31, 2021.
Gain on Sales of Real Estate by Equity Method Investee
In May 2021, PM Gallery LP, a joint venture entity owned directly by us and The Macerich Company, sold a portion of an asset at Fashion District Philadelphia for $5.3 million. In connection with the sale, a gain of $2.6 million was recognized by the joint venture and we recorded a related gain of $1.3 million at our share of 50%.
Gain on Sales of Interests in Non-Operating Real Estate
During the year ended December 31, 2022, there was a $10.5 million gain on sales of interests in non-operating real estate. In September 2022, we sold an outparcel at Moorestown Mall in Moorestown, New Jersey for $3.4 million. The resulting gain was $1.7 million. 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 year ended December 31, 2021.
Gain (Loss) on Sales of Interests in Real Estate, net
During the year ended December 31, 2022, there was a $10.8 million gain on sales of interests in real estate. 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 August 2022, we closed on the sale of two outparcels at The Mall at Prince George's and Magnolia Mall and recorded a gain on sales of real estate of $2.8 million. In September 2022, we closed on the sale of three outparcels at The Mall at Prince George's and recorded a gain on sales of real estate of $4.7 million. In December 2022, we closed on the sale of a retail space at Valley View Mall for $2.6 million and recorded a gain of $1.6 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 for net proceeds of $0.8 million. We recorded a loss on sale of real estate of $1.0 million in connection with the sale. In August 2021, we closed on the sale of Valley View Center for $3.5 million, and recorded a loss on sale of real estate of approximately $0.2 million in connection with the transaction.
Gain on Sale of Preferred Equity Interest
In February 2022, we recorded 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.
There was no gain on sale of preferred equity interest for the year ended December 31, 2021.
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 40% 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.
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 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, other expenses (which includes provision for employee separation, expense and project costs), interest expense, reorganization expenses, impairment of assets, equity in loss/income of partnerships, on extinguishment of debt, / on sales of real estate, on sale of activity method investee and / 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 years ended 2022 and 2021:
Year Ended December 31,
(in thousands of dollars)
Net loss
Other income
Depreciation and amortization
General and administrative expenses
Other expenses
Interest expense, net
Reorganization expenses
Impairment of assets
Equity in loss of partnerships
Gain on extinguishment of debt
(Gain) loss on sales of interests in real estate
Gain on sale of equity method investment
Gain on sales of real estate by equity method investee
Gain on sales of non-operating real estate
Gain on sale of preferred equity interest
NOI from consolidated properties
The table below reconciles equity in (loss) income of partnerships to NOI of our share of unconsolidated properties for the years ended 2022 and 2021:
Year Ended December 31,
(in thousands of dollars)
Equity in loss of partnerships
Depreciation and amortization
Impairment of assets
Interest and other expenses
NOI from equity method investments at ownership share
The table below presents total NOI and total NOI excluding lease termination revenue for the years ended December 31, 2022 and 2021:
Same Store
Non Same Store
Total (non-GAAP)
(in thousands of dollars)
NOI from consolidated properties
NOI from equity method investments at ownership share
Total NOI
Less: lease termination revenue
Total NOI excluding lease termination revenue
Total NOI decreased by $5.6 million, or 2.8%, in 2022 as compared to 2021. NOI from Non Same Store properties decreased by $4.0 million. This decrease was primarily due to the sale of Cumberland Mall and our interest in Gloucester Premium Outlets. NOI from Same Store properties decreased by $1.6 million is primarily due the reasons described in “—Results of Operations—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 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 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 years ended December 31, 2022 and 2021, respectively, to show the effect of such items as gain or loss on debt extinguishment (including accelerated amortization of financing costs), provision for employee separation expense, insurance recoveries or losses, net, 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 years ended December 31, 2022 and 2021:
For the Year Ended December 31,
(in thousands, except per share amounts)
% Change
Net loss
Depreciation and amortization on real estate:
Consolidated properties
PREIT’s share of equity method investments
(Gain) loss on sales of interests in real estate, net
Impairment of assets
Gain on sales of real estate by equity method investee
Gain on sale of equity method investment
Funds from operations attributable to common shareholders and OP Unit holders
Provision for employee separation expense
Insurance recoveries, net
Reorganization expenses
Gain on debt extinguishment, net
Gain on sale of preferred equity interest
Gain on hedge ineffectiveness
Funds from operations attributable to common shareholders and OP Unit holders, as adjusted
Funds from operations attributable to common shareholders and OP Unit holders per diluted share and OP Unit
Funds from operations attributable to common shareholders and OP Unit holders, as adjusted, per diluted share and OP Unit
Weighted average number of shares outstanding
Weighted average effect of full conversion of OP Units
Effect of common share equivalents
Total weighted average shares outstanding, including OP Units
FFO attributable to common shareholders and OP Unit holders was $(3.0) million for 2022, a decrease of $7.4 million, or -167.1%, compared to $4.4 million for 2021. This decrease was primarily due to:
a $5.8 million decrease in general administrative expense primarily due to decreased incentive compensation partially offset by increased professional service costs;
a $3.7 million increase in gain on sale of preferred equity interest;
a $10.5 million increase in gain on sales of interests in non operating real estate;
a $4.0 million decrease in Non Same Store NOI resulting and a $1.6 million decrease in Same Store NOI;
a $14.6 million increase in interest expense;
a $4.6 million decrease in gain on debt extinguishment; and,
a $2.7 million decrease in gain on hedge ineffectiveness.
FFO attributable to common shareholders and OP Unit holders per diluted share and OP Unit decreased $(1.36) per share to $(0.55) per share for 2022, compared to $0.81 per share for 2021 due to the factors noted above.
FFO, as adjusted, attributable to common shareholders and OP Unit holders per diluted share and OP Unit decreased $(0.62) per share to $(1.18) per share for 2022, compared to $(0.56) per share for 2021 due to the factors noted above.
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.” 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 liquidity requirements, including operating expenses, recurring capital expenditures, tenant improvements and leasing commissions, generally through our available working capital and our First Lien Revolving Facility, which matures in 2023 and otherwise 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. As discussed below, our loans under our Credit Agreements mature and come due in December 2023, the FDP Term Loan (our 50% share of which we have guaranteed) matures and comes due in January 2024, and mortgages secured by three of our properties are due in 2023, and we do not have, nor do we expect to have sufficient cash flow to repay this indebtedness at maturity. We are exploring all options to address the upcoming maturities, including, refinancing, selling assets and engaging in discussions with the lenders, but no assurance can be provided that we will be able to refinance or repay the indebtedness at maturity. See “Item 1A. Risk Factors - Risks Related to Our Indebtedness and Our Financing - We have determined that there is substantial doubt about our ability to continue as a going concern.”
We expect to spend approximately $3.7 million related to our capital improvements and development projects in 2023. 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, and general economic conditions.
During 2022, our capital raised includes cash proceeds of $89.7 million from our share of asset sales by us and our unconsolidated subsidiaries, and through our operations, we generated $69.3 million for the year ended December 31, 2022.
We have availability under our revolving facility of $107.5 million as of December 31, 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 a number of properties including Cumberland Mall, various outparcels across multiple properties and a former Sears Tire Battery and Auto location. The proceeds from our anticipated property sales pursuant to these mall and retails space sale agreements, along with previously executed sale agreements that had not yet closed as of December 31, 2022 are expected to provide approximately $67.0 million in gross proceeds, which 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 outparcel assets and the sale of land parcels for hotel development. Each of these transactions is subject to numerous conditions, including the completion of due diligence and securing of entitlements, which in most cases requires zoning variances and similar approvals. The of these transactions and the timing of completion cannot be estimated with certainty, in particular not all transactions are expected to close in 2023, and certain of them are expected to extend into 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, inflationary pressures including increased interest rates 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, which have been exacerbated by the extended impacts of the COVID-19 pandemic and may be further impacted by overall economic conditions, weak consumer confidence and the possibility of recession, 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 or agreements are terminated and new transactions must be pursued;
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 continue to monitor the COVID-19 pandemic 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, financial condition and results of operations in 2020 and 2021. While we continue to record rental revenue, the reduced collection levels had impacted our liquidity position and may continue to do so. See “Item 1A. Risk Factors—Risks Related to Our Business and Properties.” 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.
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.
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. We have transitioned two of our mortgage agreements to SOFR during 2022. Our Credit Agreements, which represent a significant portion of our debt, include fallback language governing the transition.
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. When 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 through mid 2023, 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”). Capitalized terms used in this section and not otherwise defined in this Annual Report on Form 10-K have the meanings ascribed to such terms in the applicable Credit Agreement.
As of December 31, 2022, we had borrowed $979.2 million under the Term Loans and $22.5 million under the First Lien Revolving Facility. The carrying value of the Term Loans on our consolidated balance sheet as of December 31, 2022 is net of $2.3 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 December 31, 2022 was $107.5 million. In February 2023, we used net proceeds from the sale of a retail parcel at Plymouth Meeting Mall to pay down our First Lien Term Loan by $26.3 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.
In 2022, we exercised our option and satisfied the conditions to extend the maturity date of our Credit Agreements, such that the maturity is now December 10, 2023 (the "Maturity Date"). See "Item 1A. Risk Factors - Risks Related to Our Indebtedness and Our Financing - We have determined that there is substantial doubt about our ability to continue as a going concern."
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 Agreement and on the Revolving Date (or any earlier date of 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 were only 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 were 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.
Wilmington Savings Fund Society, FSB is 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 letter of credit issuer under the First Lien Revolving Facility, accordingly, we cannot currently access the letters of credit sub-facility.
Similar terms of the Credit Agreements
Each of the Credit Agreements contains certain affirmative and negative covenants and other provisions, which substantially align with those contained in the other Credit Agreements, and which are described in detail below.
Covenants
Each of the Credit Agreements contains, among other restrictions, certain affirmative and negative covenants, including, without limitation, requirements that we:
maintain liquidity of at least $25.0 million, to be comprised of unrestricted cash held in certain deposit accounts subject to control agreements, up to $5.0 million held in a certain other deposit account excluded from the collateral, the unused revolving loan commitments under the First Lien Credit Agreement (to the extent available to be drawn), and amounts on deposit in a designated collateral proceeds account and amounts on deposit in a cash collateral account;
maintain a minimum senior debt yield of 11.35% from and after June 30, 2021;
maintain a minimum corporate debt yield of: (a) 6.50% from June 30, 2021 through and including September 30, 2021 and (b) 7.25% from and after October 1, 2021;
provide to the administrative agent, among other things, PREIT and its subsidiaries’ quarterly and annual financial statements, annual budget, reports on projected sources and uses of cash, and an updated annual business plan, as well as quarterly and annual operating
statements, rent rolls, and certain other collections and tenant reports and information as the administrative agent may reasonably request with respect to each Borrowing Base Property;
maintain PREIT’s status as a REIT;
use commercially reasonable efforts to obtain subordination, non-disturbance and attornment agreements from each tenant under certain Major Leases as well as ground lease estoppel certificates from each ground lessor of a Borrowing Base Property;
comply with the requirements of the various security documents and, at the administrative agent’s request, promptly notify the administrative agent of any acquisition of any owned real property that is not subject to a mortgage and grant liens on such real property to secure our obligations under the applicable Credit Agreement;
not amend any existing sale agreements with respect to Borrowing Base Properties to result in a reduction of cash consideration by 20% or more; and
not retain more than $6.5 million of cash in property-level accounts held by our subsidiaries that are owners of real property (subject to certain exceptions).
Each of the Credit Agreements also limits our ability, subject to certain exceptions, to make certain restricted payments (including payments of dividends and voluntary prepayments of certain indebtedness which includes, with respect to the First Lien Credit Agreement, voluntary prepayments under the Second Lien Credit Agreement), make certain types of investments and acquisitions, issue redeemable securities, incur additional indebtedness, incur liens on our assets, enter into agreements with a negative pledge, make certain intercompany transfers, merge, consolidate or sell all or substantially all our assets or the equity interests of our subsidiaries, amend our organizational documents or material contracts, enter into transactions with affiliates, or enter into derivatives contracts. We are also prohibited from selling certain properties unless certain conditions are satisfied with respect to the terms of the sale agreement for such property or, in the case of Borrowing Base Properties, payment of certain release prices.
The First Lien Credit Agreement and, after our Senior Debt Obligations are discharged, the Second Lien Credit Agreement, each prohibit us from: (i) entering into Major Leases, (ii) assigning leases, (iii) discounting any rent under leases where the leased premises is at least 7,500 square feet at a Borrowing Base Property and the discounted amount is more than $750,000 and more than 25% of the aggregate contractual base rent payable over the initial term (not including any extension options), (iv) collecting rent in advance, (v) terminating or modifying the terms of any Major Lease or releasing or discharging tenants from any obligations thereunder, (vi) consenting to a tenant’s assignment or subletting of a Major Lease, or (vii) subordinating any lease to any other deed of trust, mortgage, deed to secure debt or encumbrance, other than the mortgages already encumbering the applicable Borrowing Base Property and the mortgages entered into in connection with the other Credit Agreement. Under the First Lien Credit Agreement and, under the Second Lien Credit Agreement after the First Lien Termination Date, any amounts equal to or greater than $2.5 million but less than $3.5 million received by or on behalf of a guarantor in consideration of any termination or modification of a lease (or the release or discharge of a tenant) are subject to restrictions on use, and such amounts that are equal to or than $3.5 million must be applied to reduce our outstanding obligations under the applicable Credit Agreement.
As of December 31, 2022, we were in compliance with all terms under the Credit Agreements.
Voluntary and Mandatory Prepayments
Subject to certain conditions, we may prepay loans under the First Lien Credit Agreement, and under the Second Lien Credit Agreement after the First Lien Termination Date, without premium or penalty. Under the First Lien Credit Agreement, if at any time the aggregate principal amount of all outstanding revolving loans, together with the aggregate amount of all letter of credit liabilities, exceeds the aggregate amount of the revolving commitments, we must make a payment of that excess amount. Under the First Lien Credit Agreement, at any time, and under the Second Lien Credit Agreement, at any time after the First Lien Termination Date, if we receive net cash proceeds from certain capital events, subject to certain exceptions, we must prepay loans under the applicable Credit Agreement (and under the First Lien Credit Agreement, we must either prepay loans or cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows:
in the event of any debt issuance, in an amount equal to 100% of net cash proceeds;
in the event of any equity issuance, in an amount equal to 50% of net cash proceeds (with the other 50% of such net cash proceeds required to prepay the loans (under the First Lien Credit Agreement, the revolving loans) or be deposited into a designated collateral proceeds account);
in the event of any asset disposition (other than an asset disposition of all or any portion of a Borrowing Base Property), in an amount equal to 70% of net cash proceeds (with the other 30% of net cash proceeds required to either prepay the loans (under the First Lien Credit Agreement, the revolving loans) or be deposited into a designated collateral proceeds account);
in the event of any insurance and condemnation event with respect to collateral that is not a Borrowing Base Property, 100% of net cash proceeds, except for such amounts that we have elected to reinvest for reconstruction of property in accordance with the terms of the applicable Credit Agreement; and
in the event of any insurance and condemnation event at a Borrowing Base Property, all net cash proceeds at the request of the administrative agent, provided that the administrative agent is required to release all or a portion of the funds to us for specified uses depending on the amount of net cash proceeds.
In the event of certain non-guarantor prepayment events resulting in the receipt of net cash proceeds by a borrower or guarantor from our non-guarantor subsidiaries or joint ventures, those amounts are required to prepay loans (and under the First Lien Credit Agreement, prepay loans or be used to cash collateralize the letter of credit liabilities or specified derivatives obligations, as applicable) as follows (subject to certain exceptions): (a) 100% of net cash proceeds received if the event constitutes a debt issuance, (b) 50% of net cash proceeds received if the event constitutes an equity issuance, (c) 100% of net cash proceeds received if the event constitutes an insurance condemnation event, and (d) 70% of net cash proceeds received if the event constitutes an asset disposition, provided, in each case (subject to certain exceptions), that the net cash proceeds received and not otherwise required to prepay loans must either prepay loans (under the First Lien Credit Agreement, the revolving loans) or be deposited into a designated collateral proceeds account.
In the event we receive net cash proceeds from an asset disposition of all or any portion of a Borrowing Base Property in accordance with the terms of the applicable Credit Agreement (each of which allows for the release of certain properties from the liens created by the security documents applicable thereto upon our request and subject to our satisfaction of certain specified conditions with respect to such property), such net proceeds must prepay the loans as follows (subject to certain exceptions):
in the event a Borrowing Base Property is released, the greater of (x) 110% of the property’s closing date appraised value, as reduced by any prepayment made in connection with the release, and (y) 100% of the net cash proceeds received from the sale of the property;
in the event an income producing parcel is released, 100% of net cash proceeds; and
in the event a non-income producing parcel is released, 70% of net cash proceeds (with the other 30% required to either (i) prepay loans (under the First Lien Credit Agreement, the revolving loans) or (ii) be deposited into a designated collateral proceeds account).
Under the Second Lien Credit Agreement, any net cash proceeds applied to the obligations under the First Lien Credit Agreement or to cash collateralize certain letter of credit liabilities or specified derivatives obligations under the First Lien Credit Agreement or deposited into the designated collateral proceeds account will reduce, on a dollar-for-dollar basis, any net cash proceeds required to be applied as a principal prepayment of the loans under the Second Lien Credit Agreement. In the event net cash proceeds are applied under the First Lien Credit Agreement resulting in its termination and the automatic release of the security interest in the collateral thereunder, to the extent any excess net cash proceeds remain, 100% of such remaining proceeds are required to be applied to the loans under the Second Lien Credit Agreement.
We may request disbursements from the designated collateral proceeds account subject to the same terms and conditions applicable to a disbursement of loans (or in the case of the First Lien Credit Agreement, revolving loans), the proceeds of which must be used in a manner consistent with an approved annual business plan. Under the First Lien Credit Agreement, no revolving loans will be disbursed at any time that designated collateral proceeds are on deposit and we may elect to apply designated collateral proceeds as a principal prepayment of the revolving loans at any time. Under the Second Lien Credit Agreement, amounts in the designated collateral proceeds account in accordance with the First Lien Credit Agreement are held by the administrative agent as additional collateral securing our obligations under the Second Lien Credit Agreement.
Under the First Lien Credit Agreement, we have pledged and granted to the administrative agent an additional security interest in a letter of credit collateral account.
Additionally, under the First Lien Credit Agreement, in the event our senior debt yield is less than 12.06% for the calendar quarter ending June 30, 2021 or any calendar quarter thereafter, concurrently with the delivery of a compliance certificate and thereafter once per calendar month until the ratio is equal to or greater than 12.06% for a subsequent quarter (as shown in a compliance certificate), we must either make prepayments, or deposits into a cash collateral account, of all excess cash flow generated during the month preceding such required deposit date. So long as no default or event of default exists, in the event the excess cash flow for any given month is negative and would cause our liquidity to fall below $12.5 million (provided that we deliver evidence of the operating shortfall deficiency to the administrative agent), we may request a disbursement of funds on deposit in the cash collateral account to fund or reimburse us for such deficiency. We may also request disbursement of the funds in the cash collateral account following the termination of a cash sweep period, subject to certain conditions.
Under the First Lien Credit Agreement, if at any time, and under the Second Lien Credit Agreement, if at any time after the First Lien Termination Date, our unrestricted cash or cash equivalents exceed $40.0 million for five consecutive days, we must make prepayments of the amount in excess of $40.0 million. Under the First Lien Credit Agreement, those prepayments will be applied first to the revolving loans until the principal balance is reduced to zero, then to the term loans.
Events of Default
In addition to customary events of default including, among other things, non-payment or non-performance under each of the Credit Agreements, events of default include: our (i) failure to pay Material Indebtedness (defined as indebtedness with an aggregate outstanding
principal amount of $25.0 million or more, or $250.0 million in the case of Nonrecourse Indebtedness), and (ii) the acceleration of such Material Indebtedness (or the occurrence of any event that would permit the holders of such Material Indebtedness to accelerate such Material Indebtedness), in each case, provided that no event of default will result from a default, event of default, acceleration or other action in connection with a guaranty by a loan party of indebtedness secured by a mortgage on a non-Borrowing Base Property until the earliest to occur of (x) commencement of a related court proceeding, (y) in the event such loan party has agreed that an event permitting acceleration of the guaranty has occurred, 45 days following the expiration or termination of a related forbearance agreement, subject to certain conditions, or (z) such loan party makes or agrees to make a payment in satisfaction of any claim made on the guaranty in connection with the event of default, acceleration or other action. The First Lien Credit Agreement also provides that the non-subordination of second priority liens is an event of default.
Upon the occurrence of 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 applicable Credit Agreement (including an amount equal to the outstanding letters of credit under the First Lien Credit Agreement) immediately due and payable and may terminate the lenders’ commitments thereunder (including the obligation of the issuing banks to issue letters of credit under the First Lien Credit Agreement). Upon the occurrence of a voluntary or involuntary bankruptcy proceeding, all outstanding amounts (including an amount equal to the outstanding letters of credit under the First Lien Credit Agreement) would automatically become immediately due and payable and the lenders’ commitments under the applicable Credit Agreement (including the obligation of the issuing banks to issue letters of credit under the First Lien Credit Agreement) would automatically terminate. The First Lien Credit Agreement also provides certain specified derivatives providers with specific remedies with respect to specified derivatives contracts thereunder.
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 addition, subsequent payments were made on the FDP Loan Agreement as indicated below. 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, 2024 (having been extended by one year upon satisfaction of the required conditions to extension), (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. In January 2023, the FDP Loan Agreement was amended to replace the interest rate benchmark from LIBOR to SOFR. The Base Rate is defined as the of (a) the Prime Rate, (b) the Federal Funds Rate plus one half (0.50%) and (c) Adjusted Term SOFR for a one-month tenor plus one percent (1.00%). The FDP Loan Agreement contains certain covenants typical for loans of its type. The joint venture paid down the FDP Loan Agreement balance by $83.1 million in August 2022 and $7.1 million in November 2022. In January 2023, the joint venture paid down an additional $26.1 million of the FDP Loan Agreement balance as part of the option that it exercised to extend the FDP Loan Agreement maturity date to January 22, 2024. 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 $104.4 million outstanding as of December 31, 2022 (our share of which is $52.2 million). The joint venture has an outstanding balance on its 2020 Partnership Loan of $200.0 million and an outstanding balance on its 2022 Partnership Loan of $14.0 million (of which our total share for both Partnership Loans is $107.0 million) as of December 31, 2022 and the majority of the proceeds were used to pay down the FDP Term Loan since 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 and to comply with the financial covenants under the FDP Loan Agreement. If the joint venture were to its obligations under the FDP Term Loan, and we were required to the payment obligations under the guarantee, we anticipate that we would be to such obligation and that these events would have a material impact on our liquidity and available capital resources. There are also circumstances in which a of the FDP Term Loan could give rise to an event of under our Credit Agreements.
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, Series C Preferred Shares, or Series D Preferred Shares 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 accumulate in arrears at an annual rate of $1.8436 per share, $1.80 per share and $1.7188 per share, respectively. As of December 31, 2022, the cumulative amount of unpaid dividends on our issued and outstanding preferred shares totaled $68.4 million. This consisted of unpaid dividends per share on the Series B, Series C and Series D preferred shares of $4.61 per share, $4.50 per share and $4.30 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
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. The repayment periods ranged from August 2020 through February 2021 depending on the terms of the specific agreements. As of December 31, 2022, we had repaid all principal and interest deferrals.
In the second quarter of 2020, our subsidiary on the mortgage loan secured by Valley View Mall defaulted 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. In May 2022, the foreclosure proceedings were completed and both the mortgage balance and contract asset related to this mortgage loan 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 December 31, 2022.
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 provided for an extension of the maturity date until December 10, 2022. The mortgage was then amended in December 2022 to extend the maturity date to June 10, 2023 with one option to extend by an additional four-month period through October 5, 2023. The Woodland Mall mortgage had an outstanding balance of $106.1 million as of December 31, 2022. We capitalized $0.4 million of lender fees as additional debt issuance costs in connection with the amendment.
Our subsidiary on the mortgage loan secured by Cumberland Mall defaulted due to a missed balloon payment of $38.2 million on August 1, 2022. In October 2022, we sold Cumberland Mall and the mortgage loan was paid off in full using net proceeds from the sale.
On August 31, 2022, certain of our consolidated subsidiaries entered into an amendment and extension to our mortgage loan secured by the property at Cherry Hill Mall, which had a maturity date of September 1, 2022. The maturity date was extended by one month and subsequently for an additional month through November 1, 2022. On October 31, 2022, certain of our consolidated subsidiaries entered into a second amendment and extension agreement to extend the maturity date for three months through February 1, 2023 with one option to extend by an additional three month period through May 1, 2023. On January 13, 2023, we exercised the option to extend the maturity date to May 1, 2023. The Cherry Hill Mall mortgage had an outstanding balance of $243.7 million as of December 31, 2022. We capitalized $2.5 million of lender fees as additional debt issuance costs in connection with the amendment.
See Part I, Item 1A, Risk Factors - Risks Related to Our Indebtedness and Our Financing - “Secured indebtedness exposes us to the possibility of foreclosure, which could result in the loss of our investment in certain of our subsidiaries or in a property or group of properties or other assets subject to the indebtedness,” and "We might not be able to refinance our existing obligations or obtain the capital required to finance our activities."
Mortgage Loans
Our mortgage loans, which are secured by seven our consolidated properties, are due in installments over various terms extending to the year 2025. Six of these mortgage loans bear interest at fixed interest rates that range from 3.88% to 7.19% and had a weighted average interest rate of 4.49% at December 31, 2022. Three of our mortgage loans bear interest at a variable rates, a portion of which has been swapped to fixed rates, and has a weighted average interest rate of 7.97% at December 31, 2022. The weighted average interest rate of all consolidated mortgage loans was 5.07% at December 31, 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 December 31, 2022:
Payments by Period
(in thousands of dollars)
Total
Thereafter
Consolidated mortgage loans
Principal payments
Balloon payments (1)
Total consolidated mortgage loans
Less: Unamortized debt issuance costs
Carrying value of mortgage notes payable
For secured mortgage loans with balloon payments due in 2023, we expect to refinance on similar terms or extend the maturities, but cannot provide any assurance that we will be able to do so.
Contractual Obligations
The following table presents our consolidated aggregate contractual obligations as of December 31, 2022 for the periods presented:
(in thousands of dollars)
Total
Thereafter
Mortgage loans
Term Loans
First Lien Revolving Facility
Interest on indebtedness (2)
Operating leases
Ground leases
Finance leases
Development and redevelopment commitments (3)
Total
(1) Includes our First Lien Term Loan of $332.1 million and the anticipated maturity date balance of our Second Lien Term Loan Facility of $647.1 million, which includes estimated capitalized PIK interest based on current interest rates. The Credit Agreements' maturity date was extended through December 2023.
(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, 2023, 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 December 31, 2022, we had interest rate swap agreements designated in qualifying hedging relationships outstanding with a weighted average base interest rate of 2.92% on a notional amount of $400.0 million, maturing in May 2023 or May 2024. We originally entered into these interest rate swap agreements in 2020 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 for the year ended December 31, 2020. 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 were 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 () income in the consolidated balance sheets.
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.
On August 24, 2022, we entered into two interest rate swap agreements with a weighted average interest swap rate of 3.59% on a notional amount of $100.0 million maturing on May 24, 2024. We entered into these interest rate swap agreements to hedge the interest payments associated with our variable interest rate mortgage loans. We have assessed the effectiveness of these interest rate swap agreements as hedges at inception and will do so on a quarterly basis.
As of December 31, 2022, we had 9 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 $3.6 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 and matured during 2021. During the year end December 31, 2022, we had no non-designated swaps mature and as of December 31, 2022, we have no derivatives which were non-designated.
As of December 31, 2022, the fair value of derivatives in an asset position, which excludes accrued interest but includes any adjustment for nonperformance risk related to these agreements, was $3.9 million. If we had breached any of the default provisions in these agreements, the derivatives may be required to settled at their termination value, which at December 31, 2022, was in an asset position (including accrued interest) of $4.3 million. We had not breached any of these provisions as of December 31, 2022.
CASH FLOWS
Net cash provided by operating activities totaled $69.3 million for 2022, compared to $69.0 million for 2021.
This increase in cash provided by operating activities was due to changes in working capital between periods primarily as a result of strong collection of outstanding accounts receivable in the current year.
Cash flows provided by investing activities were $68.2 million for 2022, compared to $21.7 million used in investing activities for 2021.
Cash flows provided by investing activities for the year ended December 31, 2022 included $89.7 million in proceeds from sales of real estate, and $2.4 million of proceeds from sale of preferred equity interest partially offset by $4.5 million of additions to construction in progress and $18.6 million of investments in real estate improvements.
Cash flows used in investing activities in 2021 included investment in construction in progress of $8.2 million, investments in partnerships of $1.7 million and real estate improvements of $16.5 million (primarily related to capital improvements at our properties, including tenant allowances), partially offset by proceeds from sales of real estate of $5.0 million.
Cash flows used in financing activities were $160.8 million for the year ended December 31, 2022 compared to cash flows used in financing activities of $40.4 million for the year ended December 31, 2021.
Cash flows used in financing activities for the year ended December 31, 2022 included $35.7 million of principal payments on mortgage loans and repayment on the Cumberland Mall mortgage of $38.2 million. Aggregate repayments on our First Lien Revolving Facility and Term Loans were $32.1 million and $47.4 million, respectively, during the year ended December 31, 2022. Deferred financing costs of $6.0 million were paid as a result of mortgage loans and Term Loan maturity date extensions, during the year ended December 31, 2022.
Cash flows used in financing activities for 2021 included repayments of mortgage loans of $135.1 million, principal installments on mortgage loans of $25.5 million and deferred financing costs of $1.1 million, repayments of first lien term loan by $4.7 million, offset by $127.7 million of proceeds from mortgage loans.
See Note 1 to our consolidated financial statements for details regarding costs capitalized during 2022 and 2021.
COMMITMENTS
As of December 31, 2022, we had unaccrued contractual and other commitments related to our capital improvement projects and development projects of $3.7 million in the form of tenant allowances, lease termination fees, and contracts with general service providers and other professional service providers.
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 “Item 1A. Risk Factors—We might incur costs to comply with environmental laws, which could have an adverse effect on our results of operations.”
COMPETITION AND TENANT CREDIT RISK
Competition in the retail real estate market is intense. We compete with other public and private retail real estate companies, including companies that own or manage malls, power centers, strip centers, lifestyle centers, factory outlet centers, theme/festival centers and community centers, as well as other commercial real estate developers and real estate owners, particularly those with properties near our properties, on the basis of several factors, including location and rent charged. We compete with these companies to attract customers to our properties, as well as to attract anchor and non-anchor store and other tenants. Our malls and our other operating properties face competition from similar retail, destination dining and entertainment centers, including more recently developed or renovated centers that are near our retail properties. We also face competition from a variety of different retail formats, including internet retailers, discount or value retailers, home shopping networks, mail order operators, catalogs, and telemarketers. Our tenants face competition from companies at the same and other properties and from other retail formats as well, including internet retailers. 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 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 or store of those tenants might be more significant to us than the or store of other tenants. See “Item 2. Properties—Major 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, in these tenants’ sales directly affect our results of operations. Also, if tenants are 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 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 law have had in obtaining debtor-in-possession financing, which has decreased the likelihood that such retailers will emerge from protection and has limited their alternatives. All of these factors have been 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.
ITEM 7A. QUANTITATIVE AND QUALITA TIVE DISCLOSURES ABOUT MARKET RISK.
The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates. As of December 31, 2022, our consolidated debt portfolio consisted of $749.4 million of fixed and variable rate mortgage loans (net of debt issuance costs), $22.5 million outstanding under our First Lien Revolver, which bore interest at a rate of 7.62%, $332.1 million borrowed under our First Lien Term Loan Facility, which bore interest at a weighted average rate of 8.57%, and $647.1 million borrowed under our Second Lien Term Loan Facility, which bore interest at a rate of 12.3%.
Our mortgage loans, which are secured by seven of our consolidated properties, are due in installments over various terms extending to October 2025. Our seven properties exclude Valley View Mall, which was assigned to a receiver in the third quarter 2020 and was sold in a foreclosure sale in May 2022 which resulted in the mortgage liability being written off. Six of our mortgage loans bear interest at fixed interest rates that range from 3.88% to 7.19%, and had a weighted average interest rate of 4.49% at December 31, 2022. Three of our mortgage loans bear interest at variable rates, a portion of which has been swapped to fixed rates, and had a weighted average interest rate of 7.97% at December 31, 2022. The weighted average interest rate of all consolidated mortgage loans was 5.07% at December 31, 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” on the consolidated balance sheets and are not included in the table below.
Our interest rate risk is monitored using a variety of techniques. The table below presents the principal amounts of the expected annual maturities due in the respective years and the weighted average interest rates for the principal payments in the specified periods:
Fixed Rate Debt
Variable Rate Debt
(in thousands of dollars)
For the Year Ending December 31,
Principal
Payments
Weighted
Average
Interest Rate
Principal
Payments
Weighted
Average
Interest Rate (1)
2027 and thereafter
Based on the weighted average interest rate in effect as of December 31, 2022 and does not include the effect of our interest rate swap derivative instruments as described below.
Includes term loan debt of $979.2 million under our First Lien Term Loan Facility and Second Lien Term Loan Facility with a weighted average interest rate of 11.02% as of December 31, 2022.
As of December 31, 2022 and 2021, we had $827.4 million and $1,082.7 million, respectively, of variable rate debt. To manage interest rate risk and limit overall interest cost, we may employ interest rate swaps, options, forwards, caps and floors, or a combination thereof, depending on the underlying exposure. Interest rate differentials that arise under swap contracts are recognized in interest expense over the life of the contracts. If interest rates rise, the resulting cost of funds is expected to be lower than that which would have been available if debt with matching characteristics was issued directly. Conversely, if interest rates fall, the resulting costs would be expected to be, and in some cases have been, higher. We may also employ forwards or purchased options to hedge qualifying anticipated transactions. Gains and losses are deferred and recognized in net loss in the same period that the underlying transaction occurs, expires or is otherwise terminated. See Note 6 of the notes to our consolidated financial statements for further information.
As of December 31, 2022, we had interest rate swap agreements outstanding with a weighted average base interest rate of 2.92% on a notional amount of $400.0 million, maturing on various dates through May 2023 and May 2024. See Item 7. Management’s Discussion and Analysis—Liquidity and Capital Resources—Interest Rate Derivative Agreements.
As of December 31, 2021, we had interest rate swap agreements outstanding with a weighted average base interest rate of 2.70% on a notional amount of $300.0 million, maturing on various dates through May 2023.
Changes in market interest rates have different effects on the fixed and variable rate portions of our debt portfolio. A change in market interest rates applicable to the fixed portion of the debt portfolio affects the fair value, but it has no effect on interest incurred or cash flows. A change in market interest rates applicable to the variable portion of the debt portfolio affects the interest incurred and cash flows, but does not affect
the fair value. The following sensitivity analysis related to our debt portfolio, which includes the effects of our interest rate swap agreements, assumes an immediate 100 basis point change in interest rates from their actual December 31, 2022 levels, with all other variables held constant.
A 100 basis point increase in market interest rates would have resulted in a decrease in our net financial instrument position of $3.0 million at December 31, 2022. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position of $7.0 million at December 31, 2022. Based on the variable rate debt included in our debt portfolio at December 31, 2022, a 100 basis point increase in interest rates would have resulted in an additional $8.3 million in interest expense annually. A 100 basis point decrease would have reduced interest incurred by $8.3 million annually.
A 100 basis point increase in market interest rates would have resulted in a decrease in our net financial instrument position of $31.8 million at December 31, 2021. A 100 basis point decrease in market interest rates would have resulted in an increase in our net financial instrument position of $23.2 million at December 31, 2021. Based on the variable rate debt included in our debt portfolio at December 31, 2021, a 100 basis point increase in interest rates would have resulted in an additional $4.8 million in interest expense annually. A 100 basis point decrease would have reduced interest incurred by $4.8 million annually.
Because the information presented above includes only those exposures that existed as of December 31, 2022, it does not consider changes, exposures or positions which have arisen or could arise after that date. The information presented herein has limited predictive value. As a result, the ultimate realized gain or loss or expense with respect to interest rate fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time and interest rates.
ITEM 8. FINANCIAL STATEME NTS AND SUPPLEMENTARY DATA.
Our consolidated balance sheets as of December 31, 2022 and 2021, and the related consolidated statements of operations, comprehensive income, equity and cash flows for the years ended December 31, 2022 and 2021, and the notes thereto, our report on internal control over financial reporting, the reports of our independent registered public accounting firm thereon, and the financial statement schedule begin on page F-1 of this report.
