| PENNSYLVANIA REAL ESTATE INVESTMENT TRUST ITEM 1A RISK FACTORS RISKS RELATED TO OUR BUSINESS AND OUR PROPERTIES Our retail properties are concentrated in the Mid-Atlantic region of the United States, and adverse market conditions in that region might affect the ability of our tenants to make lease payments and to renew leases, which might reduce the amount of income generated by our properties |
| Our retail properties currently are concentrated in the Mid-Atlantic region of the United States, including several properties in the Philadelphia, Pennsylvania area |
| To the extent adverse conditions affecting retail properties, such as economic conditions, population trends and changing demographics, income, sales and property tax laws, availability and costs of financing, construction costs and weather conditions, are particularly adverse in Pennsylvania or in the Mid-Atlantic region, our results of operations will be affected to a greater degree |
| If the sales of stores operating at our properties were to decline significantly due to adverse conditions, the risk that our tenants, including anchors, will be unable to fulfill the terms of their leases or will enter into bankruptcy might increase |
| Furthermore, such adverse conditions might affect the timing of lease commitments by new tenants or lease renewals by existing tenants as such parties delay their leasing decisions in order to obtain the most current information possible about trends in their businesses or industries |
| If, as a result of prolonged adverse regional conditions, occupancy at our properties decreases or our properties do not generate sufficient income to meet our operating and other expenses, including debt service, our financial position, results of operations, cash flow and ability to make capital expenditures and distributions to shareholders would be adversely affected |
| Our investments in developing new properties and redeveloping older properties in need of renovation might not yield the returns we anticipate, which would harm our operating results and reduce the amount of funds available for distributions to shareholders |
| As a component of our growth strategy, we plan to continue to develop new properties and redevelop existing properties, and we might develop or redevelop other projects as opportunities arise |
| Some of our retail properties were constructed or last renovated more than 10 years ago |
| Older properties might generate lower rents and might require significant expense for maintenance or renovations to maintain competitiveness, which could harm our results of operations |
| As of December 31, 2005, we were engaged in, or had developed plans for, the redevelopment of 10 of our 39 mall properties |
| To the extent we continue current development or redevelopment projects or enter into new development or redevelopment projects, they will be subject to a number of risks, including, among others: • expenditure of money and time on projects that might be significantly delayed or might never be completed; • inability to reach projected occupancy and rental rates and profitability; • inability to obtain mortgage lender, anchor tenant or other property partner approvals, if applicable, for redevelopments; • higher than estimated construction costs, cost overruns and timing delays due to lack of availability of materials and labor, weather conditions and other factors outside our control; • inability to obtain permanent financing upon completion of development or redevelopment activities or to refinance construction loans, which are generally recourse to us; and • inability to obtain, or delays in obtaining, required zoning, occupancy and other governmental approvals |
| Governmental requirements and local zoning and land use laws restrict our development, redevelopment, expansion and renovation activities |
| The requirement that our projects comply with these provisions could delay or prevent our continuation or completion of a project |
| Such delays or prohibitions would have an adverse effect on our financial condition and results of operations |
| Unanticipated delays or expenses associated with our development or redevelopment projects could result in losses and adversely affect the investment returns from these projects and adversely affect our financial condition and results of operations |
| We might be unable to manage effectively our rapid growth, our simultaneous redevelopment projects or our new development projects, including any proposed mixed use projects, which might result in disruptions to our business and additional expense |
| We have experienced rapid growth and we continue to pursue, in an opportunistic and disciplined manner, acquisitions of additional properties or portfolios of properties that meet the investment criteria we apply, given economic, market and other circumstances |
| We might not be able to adapt our management and operational systems to our larger size and our increased number of retail properties |
| In November 2003, we completed the acquisition of 26 retail properties (five of which were subsequently sold) through our merger with Crown American Realty Trust (“Crown”) and the acquisition of six shopping malls from The Rouse Company |
| The Crown merger has required the integration of two large and complex real estate businesses that formerly operated independently |
| Following the merger and the acquisition of the six malls, the gross leasable area (GLA) of our owned, managed or leased retail properties is significantly greater than it was before those transactions |
| In 2004, we acquired two additional properties and the remaining minority portion of one property already in our portfolio |
| In 2005, we acquired three more retail properties and a 50prca ownership interest in one additional property |
| 17 ______________________________________________________________________ [92]Back to Contents Specific risks for our ongoing operations posed by acquisitions we have completed or that we might complete in the future include: • we might not achieve the expected operating efficiencies, value-creation potential, economies of scale or other benefits of such transactions; • we might not have adequate personnel and financial and other resources to successfully handle our substantially increased operations; • we might not be successful in leasing space in acquired properties; • the combined portfolio might not perform at the level we anticipate; • we might experience difficulties and incur unforeseen expenses in connection with assimilating and retaining employees working at acquired properties, and in assimilating any acquired properties; • we might experience problems and incur unforeseen expenses in connection with upgrading and expanding our systems and processes; and • we might incur unexpected liabilities in connection with the properties and businesses we have acquired |
| If we fail to successfully integrate any properties, assets or companies we acquire, or fail to handle our increased operations or realize the intended benefits of any such transactions, our financial condition and results of operations, and our ability to make distributions to shareholders at historical levels, if at all, might be adversely affected |
| In addition, we might not have sufficient management resources to successfully manage our 10 current redevelopment projects simultaneously |
| Also, some of our development and redevelopment projects currently or in the future might contemplate mixed uses of the properties, including residential, office, and other uses |
| We might not have all of the necessary or desirable skill sets to manage such projects |
| The lack of sufficient management resources, or of the necessary skill sets to execute our plans, could prevent us from realizing our expectations with respect to these projects and could adversely affect our results of operations and financial condition |
| The retail real estate industry is highly competitive, and this competition could harm our ability to operate profitably |
| Competition in the retail real estate industry is intense |
| We compete with other public and private retail real estate companies, including companies that own or manage malls, power centers, lifestyle centers, strip centers, factory outlet centers, or theme/festival centers and community centers, as well as other commercial real estate developers and real estate owners |
| We compete with these companies to attract customers to our properties, as well as to attract anchor and in-line store tenants |
| Our malls and our power and strip centers face competition from similar retail 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 discount or value retailers, home shopping networks, mail order operators, catalogs, telemarketers and internet retailers |
| This competition could have a material adverse effect on our ability to lease space and on the level of rent that we receive |
| Also, a significant amount of capital has and might continue to provide funding for the development of properties that might compete with our properties |
| The development of competing retail properties and the related increased competition for tenants might require us to make capital improvements to properties that we would have deferred or would not have otherwise planned to make and affects the occupancy and net operating income of such properties |
| Any such redevelopments, undertaken individually or collectively, involve costs and expenses that could adversely affect our results of operations |
| Changes in the retail industry, particularly among retailers that serve as anchor tenants, could adversely affect our results of operations |
| The income we generate from our retail properties depends in part on the ability of our anchor tenants to attract customers to our properties |
| The ability of anchor tenants to attract customers to a property has a significant effect on the ability of the property to attract in-line tenants and, consequently, on the revenues generated by the property |
| In recent years, the retail industry and retailers that serve as anchor tenants have experienced or are currently experiencing operational changes, consolidation and other ownership changes |
| In 2005, Federated Department Stores, Inc, operator of stores including Bloomingdale’s and Macy’s, acquired The May Department Stores Company, operator of stores including Marshall Field’s, Filene’s, Hecht’s and Strawbridge’s |
| These combinations are expected to offer these companies even greater economies of scale, increasing their leverage with suppliers and enabling them to be more efficient |
| The mergers are intended to help department stores better compete with mass discounters and specialty stores |
| Such transactions and any similar transactions in the future might result in the restructuring of these companies, however, which could include closures or sales of anchor stores operated by them |
| For example, Federated has announced that it intends to close some of its stores at properties where it now operates two or more stores |
| In particular, Federated intends to close the Strawbridge’s stores it owns at the following malls in the PREIT portfolio: Cherry Hill, Lehigh Valley, Springfield and Willow Grove Park |
| Federated has also announced plans to close the Strawbridge’s store at The Gallery at Market East I The closure of an anchor store might have a negative effect on a property |
| In addition, for anchors that lease their space, the loss of any rental payments from an anchor, a lease termination by an anchor for any reason, a failure by that anchor to occupy the premises, or any other cessation of operations by an anchor could result in lease terminations or reductions in rent by other tenants of the same property whose leases permit cancellation or rent reduction if an anchor’s lease is terminated or it otherwise ceases occupancy or operations |
| In that event, we might be unable to re-lease the vacated space in a timely manner, or at all |
| The transfer to a new anchor could cause customer traffic in the property to decrease or to be composed of different types of customers, which could reduce 18 ______________________________________________________________________ [93]Back to Contents the income generated by that property |
| A transfer of a lease to a new anchor also could allow other tenants to make reduced rental payments or to terminate their leases at the property, which could adversely affect our results of operations |
| Rising operating expenses could reduce our cash flow and funds available for future distributions |
| Our properties are, and any properties we acquire in the future will be, subject to operating risks common to real estate in general, any or all of which might negatively affect us |
| The properties will be subject to increases in real estate and other tax rates, energy and other utility costs, operating expenses, insurance costs, repair and maintenance costs and administrative expenses |
| Although some of our properties are leased on terms that require tenants to pay a portion of the expenses associated with the property, we might not be able to pass along the increased costs, and renewals of leases or new leases might not be negotiated on that basis, in which event we will have to pay those costs |
| If we are unable to lease properties on a basis requiring the tenants to pay all or some of the expenses associated with the property, or if tenants fail to pay required tax, utility and other impositions, we could be required to pay those costs, which could adversely affect our results of operations |
| Similarly, if a property is not fully occupied, we would be required to pay a portion of the expenses that are typically paid by our tenants |
| We cannot assure you that increases in these expenses will not lead our tenants, or prospective tenants, to seek retail space elsewhere |
| If operating expenses increase, the availability of other comparable retail space in our specific geographic markets might limit our ability to pass these increases through to our tenants, which could adversely affect our results of operations and limit our ability to make distributions to shareholders |
| We face increasing competition for the acquisition of properties and other assets, which might impede our ability to make future acquisitions or might increase the cost of these acquisitions |
| We compete with many other entities engaged in real estate investment activities for acquisitions of malls, other retail properties and other prime development sites, including institutional pension funds, other REITs and other owner-operators of retail properties |
| These competitors might drive up the price we must pay for properties, other assets or other companies we seek to acquire or might themselves succeed in acquiring those properties, assets or companies |
| In addition, our potential acquisition targets might find our competitors to be more attractive suitors because they might have greater resources, might be willing to pay more, or might have a more compatible operating philosophy |
| In particular, larger REITs might enjoy significant competitive advantages that result from, among other things, a lower cost of capital, a better ability to raise capital, and enhanced operating efficiencies |
| Also, the number of entities, as well as the available capital resources competing for suitable investment properties or desirable development sites, have increased and might continue to increase, resulting in increased demand for these assets and therefore increased prices paid for them |
| We might not succeed in acquiring retail properties or development sites that we seek, or, if we pay higher prices for properties, 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 might not be successful in identifying suitable acquisitions that meet the criteria we apply, given economic, market or other circumstances, which might impede our growth |
| Integral to our business strategy have been our strategic acquisitions of retail properties |
| Our ability to expand by means of acquisitions requires us to identify suitable acquisition candidates or investment opportunities that meet the criteria we apply, given economic, market or other circumstances, and are compatible with our growth strategy |
| We analyze potential acquisitions on a property-by-property and market-by-market basis |
| We might not be successful in identifying suitable properties or other assets in our existing geographic markets or in markets new to us that meet the acquisition criteria we apply, given economic, market or other circumstances, or in consummating acquisitions or investments on satisfactory terms |
| An inability to identify or consummate acquisitions could reduce the number of acquisitions we complete and impede our growth, which could adversely affect our results of operations |
| Any tenant bankruptcies or leasing delays or terminations we encounter could adversely affect our financial condition and results of operations |
| We receive a substantial portion of our operating income as rent under long-term leases with tenants |
| These tenants might defer or fail to make rental payments when due, delay lease commencement, voluntarily vacate the premises or declare bankruptcy, which could result in the termination of the tenant’s lease, and could result in material losses 19 ______________________________________________________________________ [94]Back to Contents to us and harm to our results of operations |
| Also, it might take time to terminate leases of underperforming or nonperforming tenants and we might incur costs to remove such tenants |
| Some of our tenants occupy stores at multiple locations in our portfolio, and so the effect of any bankruptcy of those tenants might be more significant to us than the bankruptcy of other |