SHARE BASED COMPENSATION

Share Based Compensation Plans

As of December 31, 2013, we make share based compensation awards using our Second Amended and Restated 2003 Equity Incentive Plan, which is a share based compensation plan that was approved by our shareholders in 2012. Previously, we maintained five other plans pursuant to which we granted equity awards in various forms. Certain restricted shares and certain options granted under these previous plans remain subject to restrictions or remain outstanding and exercisable, respectively. In addition, we previously maintained two plans pursuant to which we granted options to our non-employee trustees.

We recognize expense in connection with share based awards to employees and trustees by valuing all share based awards at their fair value on the date of grant, and then expensing them over the applicable vesting period.

For the years ended December 31, 2013, 2012 and 2011, we recorded aggregate compensation expense for share based awards of $7.3 million (including $0.7 million of accrued amortization relating to employee separation), $11.1 million (including $2.1 million of accrued amortization relating to employee separation) and $9.1 million, respectively, in connection with the equity incentive programs described below. There was no income tax benefit recognized in the income statement for share based compensation arrangements. For each of the years ended December 31, 2013, 2012 and 2011, we capitalized compensation costs related to share based awards of $0.1 million, respectively.

2003 Equity Incentive Plan

Subject to any future adjustments for share splits and similar events, the total remaining number of common shares that may be issued to employees or trustees under our Second Amended and Restated 2003 Equity Incentive Plan (the “2003 Equity Incentive Plan”) (pursuant to options, restricted shares, shares issuable pursuant to current or future RSU Programs, or otherwise) was 1,775,584 as of December 31, 2013. Other than a portion of the 2012 annual awards to trustees, the share based awards described below in this section were all made under the 2003 Equity Incentive Plan.

Restricted Shares

The aggregate fair value of the restricted shares that we granted to our employees in 2013, 2012 and 2011 was $4.1 million, $6.2 million and $4.7 million, respectively. As of December 31, 2013, there was $4.6 million of total unrecognized compensation cost related to unvested share based compensation arrangements granted under the 2003 Equity Incentive Plan. The cost is expected to be recognized over a weighted average period of 0.8 years. The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was $5.4 million, $7.5 million and $5.6 million, respectively.

A summary of the status of our unvested restricted shares as of December 31, 2013 and changes during the years ended December 31, 2013, 2012 and 2011 is presented below:



	Shares		Weighted Average Grant Date Fair Value
Unvested at January 1, 2011	1,159,749		$	11.39
Shares granted	358,234		14.50
Shares vested	(525,202	)	11.20
Shares forfeited	(42,555	)	11.89
Unvested at December 31, 2011	950,226		$	12.65
Shares granted	459,526		14.46
Shares vested	(664,574	)	11.50
Shares forfeited	(20,442	)	14.22
Unvested at December 31, 2012	724,736		$	14.81
Shares granted	253,920		18.54
Shares vested	(392,917	)	13.74
Shares forfeited	(2,300	)	16.41
Unvested as of December 31, 2013	583,439		$	17.15

Restricted Shares Subject to Time Based Vesting

In 2013, 2012 and 2011, we made grants of restricted shares subject to time based vesting. The awarded shares vest over periods of two to three years, typically in equal annual installments, provided the recipient is our employee on the vesting date. For all grantees, the shares generally vest immediately upon death or disability. Recipients are entitled to receive an amount equal to the dividends on the shares prior to vesting. We granted a total of 222,664, 425,462 and 330,610 restricted shares subject to time based vesting to our employees in 2013, 2012 and 2011, respectively. The weighted average grant date fair values of time based restricted shares, which were determined based on the average of the high and low sales price of a common share on the date of grant, was $18.29 per share in 2013, $14.57 per share in 2012 and $14.36 per share in 2011. Compensation cost relating to time based restricted share awards is recorded ratably over the respective vesting periods. We recorded $4.3 million (including $0.5 million of accelerated amortization relating to employee separation), $6.0 million (including $1.0 million of accelerated amortization relating to employee separation) and $6.1 million of compensation expense related to time based restricted shares for the years ended December 31, 2013, 2012 and 2011, respectively.

We will record future compensation expense in connection with the vesting of existing time based restricted share awards as follows:



(in thousands of dollars) For the Year Ending December 31,	Future Compensation Expense
2014	$	3,044
2015	1,336
2016	176
Total	$	4,556

On February 26, 2014, the Company granted 224,974 time-based restricted shares to employees with a grant date fair value of $4.3 million that vest over periods of two to three years in annual installments (the future expenses associated with this vesting are not reflected in the table above).

Restricted Share Unit Programs

In 2013, 2012 and 2011, our Board of Trustees established the 2013-2015 RSU Program, the 2012-2014 RSU Program and the 2011-2013 RSU Program, respectively (the “RSU Programs”). Under the RSU Programs, we may make awards in the form of market based performance-contingent restricted share units, or RSUs. The RSUs represent the right to earn common shares in the future depending on our performance in terms of total return to shareholders (as defined in the RSU Programs) for the three year periods ending December 31, 2015, 2014 and 2013 or a shorter period ending upon the date of a change in control of the Company (each, a “Measurement Period”) relative to the total return to shareholders, as defined, for the applicable Measurement Period of companies comprising an index of real estate investment trusts (the “Index REITs”). Dividends are deemed credited to the participants’ RSU accounts and are applied to “acquire” more RSUs for the account of the participants at the 20-day average price per common share ending on the dividend payment date. If earned, awards will be paid in common shares in an amount equal to the applicable percentage of the number of RSUs in the participant’s account at the end of the applicable Measurement Period.

The aggregate fair values of the RSU awards in 2013, 2012 and 2011 were determined using a Monte Carlo simulation probabilistic valuation model and were $2.0 million (a weighted average of $17.40 per share), $4.0 million ($18.41 per share) and $3.5 million ($15.98 per share), respectively.

The table below sets forth the assumptions used in the Monte Carlo simulations used to determine the aggregate fair values of the RSU awards in 2013, 2012 and 2011 by grant date:



	RSUs and assumptions by Grant Date
	February 27, 2013		April 23, 2012		April 9, 2012		March 10, 2011
RSUs granted	112,898		80,744		134,761		220,766
Volatility	44.7	%	57.2	%	61.5	%	95.3	%
Risk free interest rate	0.36	%	0.39	%	0.46	%	1.13	%
PREIT Stock Beta compared to Dow Jones US Real Estate Index	1.472		1.457		1.495		1.280

Compensation cost relating to the RSU awards is expensed ratably over the applicable three year vesting period. We recorded $2.3 million (including $0.2 million of accelerated amortization relating to employee separation), $4.5 million (including $1.1 million of accelerated amortization relating to employee separation) and $2.7 million of compensation expense related to the RSU Programs for the years ended December 31, 2013, 2012 and 2011, respectively. We will record future compensation expense of $2.5 million related to the existing awards under the RSU Programs.

On February 26, 2014, the Board of Trustees established the 2014-2016 RSU program and the Company granted 127,353 RSUs to employees (the “2014 RSUs”). The 2014 RSUs have a three year measurement period that ends on December 31, 2016 or a shorter period ending upon the date of a change in control of the Company. The aggregate fair value of the 2014 RSUs will be determined during the first quarter of 2014.

Service Awards

In 2012 and 2011, we issued 1,875 and 1,950 shares, respectively, without restrictions to non-officer employees as service awards. The aggregate fair values of the awards of $29,000 and $31,000 in the years ended December 31, 2012 and 2011, respectively, were determined based on the average of the high and low share price on the grant date and recorded as compensation expense. Beginning in 2013, we have converted our service awards to a cash based program.

Restricted Shares Awarded to Non-Employee Trustees

As part of the compensation we pay to our non-employee trustees for their service, we grant restricted shares subject to time based vesting. The 2003 Equity Incentive Plan provides for the granting of restricted share awards to our non-employee trustees. The 2008 Restricted Share Plan for Non-Employee Trustees previously provided for the granting of restricted share awards to our non-employee trustees. In 2013 and 2011, all of these annual awards were made under the 2003 Equity Incentive Plan. In 2012, a portion of these annual awards was made under the 2008 Restricted Share Plan for Non-Employee Trustees, and a portion was made under the 2003 Equity Incentive Plan. The aggregate fair value of the restricted shares that we granted under both plans to our non-employee trustees in 2013, 2012 and 2011 was $0.6 million, $0.4 million and $0.4 million, respectively. We recorded $0.8 million, $0.5 million and $0.3 million of compensation expense related to time based vesting of non-employee trustee restricted share awards in 2013, 2012 and 2011, respectively. As of December 31, 2013, there was $0.5 million of total unrecognized compensation expense related to unvested restricted share grants to non-employee trustees. Compensation expense will be recognized over a weighted average period of 0.3 years. The total fair value of shares granted to non-employee trustees that vested was $0.5 million, $0.1 million, and $0.4 million for the years ended December 31, 2013, 2012 and 2011, respectively. We will record future compensation expense in connection with the vesting of existing non-employee trustee restricted share awards as follows:



(in thousands of dollars) For the Year Ending December 31,	Future Compensation Expense
2014	$	477
2015	55
Total	$	532

Options Outstanding

Options, when granted, are typically granted with an exercise price equal to the fair market value of the underlying shares on the date of the grant. The options vest and are exercisable over periods determined by us, but in no event later than ten years from the grant date. We have six plans under which we have historically granted options. We have not granted any options to our employees since 2003, and, since that date, have only made option grants to non-employee trustees on the date they became trustees in accordance with past practice. In each of 2013 and 2012, 5,000 options were granted to a non-employee trustee. No options were granted to non-employee trustees in 2011. In 2013, the Board of Trustees determined that it would no longer grant options to new non-employee trustees. In 2012, 5,000 options were exercised. The following table presents the changes in the number of options outstanding from January 1, 2011 through December 31, 2013:



	Weighted Average Exercise Price/ Total		2003 Equity Incentive Plan			1990 Non-Employee Trustee Plan
Options outstanding at January 1, 2011	44,793		17,293			27,500
Options forfeited	$	21.19	(1,361		)	(12,500		)
Options outstanding at December 31, 2011	30,932		15,932			15,000
Options forfeited	$	22.55	(932		)	—
Options granted	$	12.87	5,000			—
Options exercised	$	5.41	(5,000		)	—
Options outstanding at December 31, 2012	30,000		15,000			15,000
Options forfeited	$	32.89	—			(15,000		)
Options granted	$	20.40	5,000			—
Options outstanding at December 31, 2013⁽¹⁾	20,000		20,000			—
Outstanding exercisable and unexercisable options
Average exercise price per share	$	26.45	$	26.45		$	—
Aggregate exercise price⁽²⁾	$	529	$	529		$	—
Intrinsic value of options outstanding⁽²⁾	$	31	$	31		$	—
Outstanding exercisable options at December 31, 2013
Options	11,250		11,250			—
Average exercise price per share	$	33.67	$	33.67		$	—
Aggregate exercise price⁽²⁾	$	379	$	379		$	—
Intrinsic value of options outstanding⁽²⁾	$	8	$	8		$	—


⁽¹⁾	The weighted average remaining contractual life of these outstanding options is 8.94 years (weighted average exercise price of $26.45 per share and an aggregate exercise price of $0.5 million).


⁽²⁾	Amounts in thousands of dollars.

The following table summarizes information relating to all options outstanding as of December 31, 2013:



	Options Outstanding as of December 31, 2013			Options Exercisable as of December 31, 2013
Range of Exercise Prices (Per Share)	Number of Shares	Weighted Average Exercise Price (Per Share)		Number of Shares	Weighted Average Exercise Price (Per Share)		Weighted Average Remaining Life (Years)
$12.87-$18.99	5,000	$	12.87	1,250	$	12.87	8.3
$19.00-$28.99	5,000	$	20.40	—	$	—	9.3
$29.00-$38.00	10,000	$	36.28	10,000	$	36.28	1.3