Pennsylvania Real Estate Investment Trust (PREIT) is seizing control of the Philadelphia retail market and selling off its multifamily properties. The company announced today that it has reached an agreement to purchase six malls (5.6 million square feet) from Columbia, Md.-based The Rouse Co. The shoppping centers, all located in the Philadelphia metropolitan area, include Cherry Hill Mall, Moorestown Mall, Plymouth Meeting Mall, The Gallery at Market East, Exton Mall and Echelon Mall.
Under the terms of the documentation being finalized for execution, PREIT will acquire the six properties for total consideration of $548 million. Assuming completion of the transactions, PREIT will be the largest retail owner/operator in the Philadelphia market, the 4th largest retail market in the United States. The boards of trustees/directors of both companies have approved the transaction.
In the Rouse mall acquisition, PREIT expects to acquire four properties directly from Rouse and two properties from New Castle Associates, which has agreed to acquire those properties from Rouse in exchange for its interest in the Christiana Mall, located in Newark, Del. New Castle Associates is a partnership including Ronald Rubin, PREIT chairman and CEO, and George Rubin, president of PREIT's management subsidiaries and a PREIT trustee.
PREIT also announced that it has signed an agreement with an affiliate of Morgan Properties of King of Prussia, Pa. to sell its multifamily portfolio for $420 million. The transaction, if consummated, will result in PREIT's exit from the multifamily business. A substantial portion of the expected gain from the sale of the Company's multifamily portfolio is expected to meet the requirements for a tax deferred exchange with the Rouse mall acquisition.
Upon completion of the transactions, PREIT's retail portfolio will consist of 28 properties, including 14 shopping malls and 14 strip and power centers, totaling approximately 17.4 million square feet in seven states. The Rouse transaction will increase the Company's gross leasable retail space by approximately 47% from its current total of 11.8 million square feet in 22 properties.
As part of the Company's strategy to transform its focus to the retail sector, PREIT also announced that it intends to pursue acquisitions of additional shopping malls and is in discussions with another party to acquire a significant shopping mall portfolio.
In a prepared statement, Ronald Rubin said, "The Rouse mall acquisition together with the sale of our multifamily portfolio will firmly secure PREIT in the retail sector and solidify our position as the leading shopping mall REIT in the Philadelphia market. The Rouse transaction presented us with a unique opportunity to further penetrate our core market and significantly strengthen our existing retail portfolio. These high quality assets will, together with Willow Grove Park, serve as an anchor to PREIT's regional mall portfolio. In addition, the expansion of our regional mall portfolio should offer cross-selling opportunities to enhance our existing portfolio."
For modeling purposes, PREIT has assumed that both the Rouse and multifamily transactions close at the end of the second quarter of this year. The transactions are expected to be $0.66 per share accretive to funds from operations (FFO) during the first full 12 months following closing. On a calendar year basis, PREIT expects its FFO per share for 2003 to be in the range of $3.16 to $3.28, resulting in approximately $0.38 per share of FFO accretion.
As part of the Rouse transaction PREIT will assume approximately $285 million of non-recourse mortgage debt, of which approximately $235 million is fixed-rate with a weighted average interest rate of approximately 7.6%. In accordance with GAAP, PREIT expects to record this debt at a premium (in aggregate, approximately $15.3 million) to the current principal balance of the loans. The premium associated with each affected loan will be amortized over such loan's remaining term resulting in an offset to interest expense that will increase FFO. This impact is $0.25 per share for the first full 12 months following closing and $0.13 on a calendar year 2003 basis.
Excluding this FFO adjustment, the transactions are expected to be $0.41 per share accretive to FFO for the first full 12 months following closing and $0.25 per share on a calendar year 2003 basis. Please see Exhibit I to this release for an overview of assumptions related to FFO guidance.