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NEWS: Goodbye Multifamily, Hello Retail

After more than 40 years concentrated in multifamily, Pennsylvania Real Estate Investment Trust (PREIT) is changing its stripes. It is exiting the apartment business and, through a pending deal to buy six malls from The Rouse Co., it will become an all-retail REIT.

That's not all. Even before the $548 million Rouse deal closes, Chief Financial Officer Edward A. Glickman says that the company is negotiating another deal for “a significant shopping mall portfolio” that would make it a major player in East Coast retail. “We view ourselves as opportunists,” he says.

The most likely target is Crown American Realty Trust, says Salomon Smith Barney analyst Jonathan Litt. The Johnstown, Pa. company owns and operates 28 enclosed malls in Pennsylvania, Virginia, Maryland, West Virginia and Tennessee with a total of 17 million square feet of retail space. Neither Glickman nor a Crown spokesman would comment.

PREIT: Before and After
2001 Population Population Growth Rate Mall GLA Per Capita Household Income Income/GLA
PREIT's Old Demographics 547,550 0.20% 8.0 $58,187 $3,109
Newly Acquired Assets 888,197 0.30% 8.4 $82,399 $3,760
PREIT's New Demographics 758,697 0.25% 8.3 $73,171 $3,513
Source: Claritas
How the Deals Went Down
Mall Acquisition Multifamily Sale
Purchase Price ($ mils) $559.19 $413.70
Square Feet (000)/Units 5,570 7,242
Cap Rate (NOI) 9.79% 8.59%
Cap Rate (After Reserves/Sline) 8.58% 7.86%
Assumed Debt ($ mils)
Amount $285 $200
Rate 7.60% 6.90%
Buyer PREIT Morgan Properties
Seller Rouse PREIT
Source: Company Documents

In early March, PREIT announced plans to buy the six malls from Columbia, Md.-based Rouse for cash and assumed debt and to sell its multifamily properties to Morgan Properties of King of Prussia, Pa., for $420 million. Rouse, meanwhile, gets a 50 percent interest in Christiana Mall in Newark, Del., from PREIT affiliate New Castle Associates.

The result: PREIT, which owns interests in 23 shopping centers in seven eastern states, doubles its gross leasable space to 11.8 million square feet. Rouse upgrades its property mix and gets cash to pay down debt and/or pay for expansion. Morgan adds 7,240 apartment units to its multifamily portfolio.

Glickman says PREIT was dissatisfied with the apartment business, which Lehman Brothers analyst David Shulman says was a holdover from PREIT's old regime. In 1997, PREIT, founded by the late Sylvan Cohen in 1960, merged with The Rubin Organization.

“We had the opportunity to do a tax-advantaged transaction on the multifamily, that made sense for us,” says Glickman, “and by virtue of that sale we've become a retail company.”

Also, says Schulman, the price for the apartment portfolio “was more than we thought they would get.”

After the transaction was announced, Legg Mason upgraded its PREIT rating to “buy” from “hold.”

Glickman says PREIT will take advantage of its experience in the value-oriented shopping sector to expand and improve the properties, but he wouldn't provide specific details.

Meanwhile, Rouse gets to updgrade its mall portfolio, says David Tripp, Rouse vice president and director of investor relations. He says the firm has had a 10-year strategy to increase its focus on the “A” mall business, and decrease its exposure to “B” malls.

Rouse is divesting Cherry Hill Mall in Cherry Hill, N.J.; Echelon Mall in Voorhees, N.J.; Exton Square in Exton, Pa.; The Gallery at Market East in Philadelphia; Moorestown Mall in Moorestown, N.J.; and Plymouth Meeting Mall in Plymouth Meeting, Pa., for a post-divestiture total of more than 5.5 million square feet. The six properties have an average occupancy rate of 90 percent, and average sales per square foot of $328.

Many of the centers are anchored by JCPenney, Sears or Boscov's, which are already PREIT's three largest anchor tenants in its existing portfolio. After the acquisition, JCPenney will anchor 12.8 percent of PREIT's portfolio and provide 2.2 percent of base rents; Sears will anchor 10.1 percent of the portfolio and pay 1.7 percent of base rents, according to U.S. Bancorp Piper Jaffray research.

Rouse lands a big one in this transaction with “A” mall Christiana, which, according to Shulman, does $600 a square foot in sales. The 1 million-square-foot super regional is anchored by JCPenney, Strawbridge's, Macy's and Lord & Taylor.

“Its multiple department stores and high square-foot sales clearly make Christiana a home run,” agrees Tripp, noting, however, that he “hated to give up” Cherry Hill, which he describes as an “A” property, too. Anchored by Macy's, JCPenney and Strawbridge's, the 1.2 million-square-foot center is 94.5 percent leased and bringing in $404 per square foot in annual sales.

As for the huge influx of cash, says Tripp, “There's always demand for capital. I'm sure we can put it to good use — at very minimum, to pay down debt.”

The bottom line is that these transactions help the strategic focus of both companies. “This makes PREIT a serious mall company, although they are not big enough to be a national player,” says Shulman.

But that may be temporary, Glickman hints. “We are, for the time being, one of the smaller mall companies,” he says. But given future opportunities to grow through acquisition, he says, “We will.”

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