Pennsylvania Real Estate Investment Trust 2006 Annual Report 17
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2006 ANNUAL REPORT PENNSYLVANIA REAL ESTATE INVESTMENT TRUST opportunity to reality Pennsylvania Real Estate Investment Trust, founded in 1960 and one of the first equity REITs in the U.S., has a primary investment focus on retail shopping malls and power centers. As of December 31, 2006, the Company’s portfolio consisted of 57 retail properties including 39 shopping malls, 11 strip and power centers, and seven properties under development. The Company’s properties are located primarily in the Mid-Atlantic region and eastern half of the United States. PREIT is headquartered in Philadelphia, Pennsylvania, and its website can be found at www.preit.com. PREIT is publicly traded on the NYSE under the symbol PEI. PENNSYLVANIA REAL ESTATE INVESTMENT TRUST FINANCIAL HIGHLIGHTS (in thousands, except per share amounts) Patrick Henry Mall, Newport News, VA Lifestyle wing completed in 2006. Cover: New River Valley Mall, Christiansburg, VA In 2006, PREIT redeveloped more malls than in any other year in its history. Redevelopment projects or renovations at eight of our malls have already led to increased occupancy and sales. These early results validate the opportunity that we recognized when we decided to acquire these properties. These completed projects illustrate the potential impact of redevelopment on our other major projects currently in progress. We are confident that our investments today will increase the value of our portfolio in the future. 1 advancing opportunity As we celebrated the completion of our redeveloped and renovated properties in 2006, we also made significant progress in advancing other major redevelopment projects that are underway. 2006 2007 2008+ Capital Ciity Mall Beaver Valley Mall Cherry Hill Mall Cumberlaand Mall Francis Scott Key Mall Moorestown Mall Lycomingg Mall Lehigh Valley Mall Plymouth Meeting Mall Patrick HHenry Mall Magnolia Mall Voorhees Town Center (Echelon Mall) The Mall at Prince Georges New River Valley Mall Willow Grove Park Valley View Mall Viewmonnt Mall Wyomingg Valley Mall 2 DeaDearr FFellowellow SShareholders,hareholders, We area delivering on our promises. Inn 2006, exceeding $350 per square foot, compared to 13 we advanceda and expanded our straategy of a year ago. The early results from our completed creaeating value by redeveloping a groupg of projects demonstrate the potential value creation ouur properties. We substantially comompleted from our efforts. redevelopmentre and renovation workw at eigght We’re getting it done. Some of our largest projects malls, realizing the untapped potentialpo thatth we are just underway, but already we have made recognized when we acquireded these proroperties. critical progress on these as well. We forged an This was the first leg of thee mostm compmprehensive agreement with Nordstrom, Inc., to create a new and ambitious asset imprprovementnt initiative in store at the Cherry Hill Mall, securing the mall’s our history — to redevevelop, renonovate, and position as a premiere shopping destination in re-merchandise approximatap mately half of our malls. southern New Jersey. This redevelopment will We aree confidentcon nt thattha this is the best strategy in add a two-story, 140,000 square foot Nordstrom this market cyclec to maximize long-term returns. store, two free-standing buildings for Crate & Already, occupancy and 2006 holiday sales were Barrel and The Container Store, a 120,000 square up at our newly redeveloped properties. At the foot expansion of specialty store space including end of the year, 16 of our properties had sales a “Bistro Row,” a line-up of upscale dining 3 Capital City Mall Cumberland Mall Lycoming Mall Patrick Henry Mall establishments, a new parking structure, and for Holiday 2007 with the anticipated grand a complete interior mall renovation. Work has reopening scheduled for Summer 2008. begun on the Crate & Barrel and The Container We received enthusiastic community approval Store sites with expected opening for Holiday for a plan to remake Echelon Mall into the mixed- 2007. Demolition of the former Strawbridge’s use Voorhees Town Center. Demolition of two building will take place this Spring. Cherry Hill vacant department stores is underway to make Mall’s grand reopening is anticipated to coincide way for a renovated mall with 250,000 square feet with the opening of Nordstrom in Spring 2009. of small specialty shops anchored by Macy’s and At Plymouth Meeting Mall, we have received Boscov’s. New construction will include 425 luxury approvals and initiated construction on our residential units to be built by our residential major redevelopment project. This will include a partner, a supermarket, and 130,000 square feet 200,000 square foot, open-air addition, anchored of street retail stores along a new, landscaped by a 70,000 square foot Whole Foods Market, boulevard. The mall will remain open during and several new restaurants including P.F. renovations and is expected to be completed for Chang’s, Redstone Grille, California Pizza Kitchen, Holiday 2007. The grand opening for Voorhees and Benihana. The former IKEA structure was Town Center is scheduled for Summer 2008. demolished in order to facilitate construction of These flagship projects have been a catalyst for the mall addition. Initial occupancy is expected enhancing the merchant mix across our entire portfolio. In the past year, we established or expanded relationships with top retailers such as Nordstrom, Best Buy, Barnes & Noble, Borders, Crate & Barrel, Dick’s Sporting Goods, Boscov’s, Old Navy, and Whole Foods. The size and depth of our portfolio, the success of our past projects, and the excitement of our new redevelopment initiatives have attracted the nation’s best retailers. These relationships have created the opportunity to further enhance the merchant mix " ! !! and add value across our entire portfolio. ! !#! ! !$!! "! ! ! ! 4 The Mall at Prince Georges Valley View Mall Viewmont Mall Wyoming Valley Mall Although our primary focus was on We appreciate the support of our employees redevelopment, we also moved forward with who have joined us over the years to create the seven ground-up development projects. In foundation for continued strong performance particular, our construction of power centers far into the future. We are grateful to our adjacent to our Magnolia and New River Valley employees for their strong involvement in the Malls creates retail hubs for their respective local communities in which we operate. We regions. We also completed the $21.5 million recognize that retail properties are more than acquisition of approximately 540 acres in centers of commerce; they are often the Gainesville, Florida. The site, known as Springhills heart of a community. We also are thankful and located in the commercial center of for the expert guidance of our trustees in helping North Central Florida, will include single and us to realize our plans to achieve the highest multifamily housing, retail and commercial value from our portfolio. development, office and institutional facilities, PREIT has paid dividends steadily, year after year. hotel rooms, and industrial space. We expect to In March 2007, we paid our 120th consecutive partner with other developers for some of dividend. This dividend has never been omitted or these uses. reduced in more than four decades. Our perspective is long-term. As one of the nation’s Thank you for your continued support. first REITs, we are in this for the long run. We are committed to doing the right thing for the Com- pany and our investors, but sometimes long-term value creation does not fit neatly into quarterly Ronald Rubin market cycles. We believe that value-added rede- Chairman and Chief Executive Officer velopment and its higher-than-average potential return is the best use of our capital. Our strategic investments are on target and beginning to show signs of success. Edward A. Glickman President and Chief Operating Officer April 12, 2007 5 a path from opportunity to profit Redevelopment is a complex process that requires orchestrating many steps, as illustrated by the Lycoming Mall redevelopment timeline below. 3Q-2003 2Q-2004 3Q-2004 1Q-2005 2Q-2005 3Q-2005 Began discussions Began discussions Developed initial Began discussions Board approved Executed lease with with Dick’s Sporting with Borders investment analysis with Best Buy and project Dick’s Sporting Goods Goods Old Navy Lycoming Mall, Pennsdale, PA 6 4Q-2005 1Q-2006 2Q-2006 3Q-2006 4Q-2006 Lyycoming Mall. Throughout most of its history, Lycoming Mall was overbuilt and underleased. When PREIT acquired the mall in 2003, we saw the opportunity to fill it with retailers and customers. Thhis year, in response to consumer demand for specific tenants, we opened a Best Buy, Dick’s Sporting Goods, Old Navy, and Borders stores. The redevelopment fended off potential competition and solidified Lycoming Mall’s position as the dominant retail center in its market. By the end of 2006, in-line occupancy increased to 93.6 percent from only 78.1 percent at the end of 2005. December comparable store sales rose 8 percent over 2005, and sales per square foot for the year inncreased 4.1 percent. 7 8 realizing opportunity The Mall at Prince Georges. PREIT purchased The Mall at Prince Georges in 1998. The mall is located six miles outside of Washington, DC, home to half a million people in a five- mile radius. In 1999, one of the mall’s three anchors left and a second was threatening to leave. Recognizing the potential value, we executed a plan to realize the opportunity to its fullest. After renovating the interior, we brought Target in as a new anchor to join JCPenney and Macy’s, created 65,000 square feet of additional space, and introduced Ross and Marshalls. We also added restaurants including Outback Steakhouse and Olive Garden. Sales at the mall, which were approximately $270 per square foot when acquired in 1998, ended 2006 above $450 per square foot.