Deals Boost PREIT’s Makeover

Last week’s announcement by Pennsylvania Real Estate Investment Trust that it would be selling three malls was just the latest deal in the REIT’s ongoing repositioning.
Steven Marks, Fitch

Steven Marks, Fitch

Last week’s announcement by Pennsylvania Real Estate Investment Trust that it would be selling three malls, two in Alabama and one in Virginia, for $95.4 million was just the latest deal in PREIT’s ongoing repositioning. (The three properties, Gadsden Mall in Gadsden, Ala.; Wiregrass Commons Mall in Dothan, Ala.; and New River Valley Mall in Christiansburg, Va., are to be sold to an unidentified institutional investor.)

In the same announcement, PREIT stated that it’s negotiating sale agreements on “two additional non-core malls” and expects to execute those within several weeks.

And in another release the same day, the REIT reported its second-quarter results and referenced its sale of Uniontown Mall, in Uniontown, Pa., for $23 million and the sale of PREIT’s 50 percent interest in Springfield Park, an open-air center in Springfield, Pa., for $20.2 million.

“The progress we have made in improving our portfolio is yielding standout results,” CEO Joseph Coradino said in a prepared statement. “We will have sold seven non-core malls with three more under contract, two additional agreements of sale being negotiated and double-digit portfolio sales growth, creating a higher-quality portfolio that is more compelling to retailers and investors.”

But PREIT has been doing more than just selling. The company is redeveloping, in partnership with The Macerich Co., The Gallery in Philadelphia (to be renamed Fashion Outlets of Philadelphia at Market East), a project that will include $55 million in TIF funding.

And as Commercial Property Executive reported in April, PREIT bought the newly redeveloped 1.4-million-square-foot Springfield Town Center in Springfield, Va., from Vornado Realty Trust for $465 million.

In its financial results, PREIT highlighted some key figures as of June 2012 versus where the company’s portfolio will stand once the current dispositions are completed:

  • Sales per square foot will rise from $378 to more than $450.
  • The percentage of properties in Top 10 MSAs will increase from 30 percent to 50 percent.
  • The number of Sears stores will fall from 29 to 16.
  • The number of JC Penney stores will decrease from 30 to 20.

“Upon completion of these transactions, our evolution into a high-quality mall REIT is nearly complete,” said Coradino.

One interpretation of PREIT’s strategy comes from Garrick Brown, vice president of research, West Region for DTZ, who told CPE, “They are basically reacting to the bifurcation … that has developed between the performance of Class A shopping centers and everything else. Retailer demand now, in virtually every marketplace in the United States, is overwhelmingly focused on higher-quality Class A space, and that is where the rents are growing.”

“It appears to me that PREIT is taking the conservative route and focusing their redevelopment assets on the properties where they know there is a much better chance of boosting their performance,” he said.

The weaker properties being sold off, meanwhile, are attractive to investors who are “willing to take on riskier assets if they can find the right price,” Brown noted, adding: “So the marketplace is ideal for [PREIT] to sell off their non-core assets and streamline and strengthen their portfolio, and there is an increasing number of buyers … willing to buy those assets, mostly with the idea of renovating and upgrading them as well.”

A different, perhaps complementary, take on PREIT comes from Steven Marks, managing director and head of U.S. REITs at Fitch Ratings, who focuses on PREIT’s stock trading at a discount to the company’s NAV and on the efforts of activist investor Jonathan Litt, founder & CIO of hedge fund Land and Buildings, who has been pushing PREIT to sell off certain assets.

(Last October, Litt called for PREIT’s board to rapidly sell 17 of its 33 malls, a strategy that, he contended, would boost the stock price substantially. The company firmly declined, saying that Litt’s proposal was flawed and that it would pursue a “deliberate and orderly” disposition process.)

Looking more broadly, Marks said, the stocks of several other REITs, such as CBL & Associates Properties, a retail REIT of similar size to PREIT, have also been selling at NAV discounts. This theme is becoming more acute in the past several months, he said, especially as interest rates rise.

As PREIT continues trading for higher-growth assets, Marks concluded, “That does come at a price” and will be a long-term process.