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Crown American banks onacquisitions for growth

Crown American Realty Trust remains a retail REIT underdog in spite of gains in occupancy, funds from operations (FFO) and same-center net operating income (SSNOI) for second quarter 2002. With a portfolio of more than 16 million sq. ft., the Johnstown, Pa.-based trust ranked 28th in Shopping Center World’s 2002 ranking of top owners.

After an unsuccessful attempt to sell the company, Crown American management is establishing an acquisition-based external growth strategy driven by a $50 million equity offering last month. Analysts say the move could potentially be a net-positive for shareholders, but will definitely stall Crown American earnings growth during the next two years.

"While the 10.4% (second-quarter) dividend yield is tempting, we believe that is all Crown American investors may receive over the next 12-18 months," states Salomon Smith Barney analyst Jonathan Litt in a written report on the company’s earnings.

In its second quarter 2002 earnings report, the REIT says second-quarter FFO is up 3.1% to $0.33. Higher base rents, lower interest expense and higher tenant reimbursement of operating expenses drove the gain. Occupancy at Crown American properties is also up to 86% —100 basis points more than the company’s first quarter figure. Tenant reimbursements were up as well, at 67.1% of operating expenses vs. 63.1% in 2001.

These factors influenced a temporary growth spurt in same-center NOI for the company, up to 3.6%. But the party won’t last long, Litt says. "While the 3.6% same-center NOI growth seen in the second quarter is a good result in this environment, we do not believe it is sustainable as we believe tenant reimbursements should return to more typical run rates in the second half of the year. Moreover, the occupancy comparison becomes more difficult in the back half of the year given strong gains seen last fall and winter. That should lead to same-center NOI growth between 1.5% and 2.0%."

The company’s growth strategy is already in play. Crown American is under contract to buy LaCrosse, Wisc.’s 587,000-sq.-ft. Valley View mall for an estimated $50 million. The Wisconsin purchase could indicate a move to diversify the company’s portfolio, which is concentrated in Pennsylvania, presenting an above-average geographical risk level.

Litt says the company shouldn’t have trouble investing all the proceeds from June’s equity offering in the next few quarters. "Assuming Crown American levers mall acquisitions at 60% LTV (loan-to-value), the $50 million of equity would buy $125 million of assets, implying Crown American can still purchase one or two malls before the powder runs dry."

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