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Value-add mall marketplace short on buyers, weak on financing, PREIT CEO says

CEO Joseph Coradino hopes to shed the company's B-mall reputation and legacywith its ongoing repositioningplan, now nearing completion.

S&P Global MarketIntelligence caught up with the executive to get his read on the company'sprogress redefining its place in the mall REIT pantheon. What follows isan edited transcript of that conversation.

Joseph Coradino
Pennsylvania REIT CEO
Source: Pennsylvania REIT

S&P Global MarketIntelligence: It seems like you more or less have wrapped up what you hadplanned to do with your repositioning. How far are you from where you want tobe?

Joseph Coradino: We still have anotherproperty to sell, but we are confident we will be able to sell it, given thatit's been re-tenanted with outdoor center-type tenants. But we are just aboutat the end of the dispositions.

Whenwe set out to do this portfolio improvement three and a half years ago, therewere a couple of legs to the stool: dispositions — which have been no easytask, but our team got it done. The other was remerchandising and repositioningthe rest of our portfolio. And then there was an acquisition that was accretiveto our sales performance.

Withdispositions, we are just about there. With the acquisition of Springfield TownCenter, we are moving toward stabilization at about 90% leased and 94%committed, and with sales of more than $500 per square foot.

Ourreach goal was to achieve $500 per square foot in sales on average across theportfolio. Today we see a pretty clear and realizable path to get there. It'sno longer a reach for us. It's achievable.

That $500 in sales per squarefoot would seem to put you firmly outside the boundaries of the so-calledB-mall category.

Wehave worked hard not to be a B-mall company. I tend to shy away from the A, Band C mall designations. One analyst out there breaks it down into 19 differentcategories: A+, A, A-, B+ etc. I probably put more weight on that arrangement.

Wethink we are going to end up being an A or B+ mall company, if I had to give ita grade. Right now, we are at $458 a foot, on our way to $500. With that Ithink we put some distance between our company and ,WP Glimcher Inc. andRouse Properties Inc.We see our company right now as being in that white space between the lower-and higher-quality mall REITs: General Growth Properties Inc., and

What do you mean byremerchandising?

Imean re-tenanting and maximizing efficiency of the space. We research themarket to determine exactly what the customer needs or wants, and then weactively find relevant tenants and put them in the malls.

Thecompany has seven H&M stores under construction today that will open upthis year. That was a big part of that re-tenanting that will take effect thisyear to drive customer traffic and, ultimately, sales.

It sounds like apparel hasbeen a big component of your repositioning.

Restaurantsand entertainment are a big part of what we have been doing as well. I don'twant to discount that. We have added dozens of restaurants, which have become areal anchor for our business today, to our portfolio. People love to dine out.

Whenyou get rid of the lower-quality properties, you attract retailers that neverreally thought of PREIT as a place for them. In addition to Legoland [DiscoveryCenter at Plymouth MeetingMall], we added this year our first Tumi store, our first Lululemonstore. We've been really active with first-to-property retailers.

So there's been a sizableupscale, or luxury, dimension to the repositioning?

Yes.

You've sold 13 malls. I recallthat an activist in the space, Land & Buildings' Jonathan Litt, had for even more. Do youfeel comfortable with where you are at with the sales? Have you reached a pointwhere people like Litt are not pushing you so strongly?  

Wehave another lower-quality asset to sell. Are we done with dispositions? Prettymuch so. Will we ever sell another mall? We might. Never say never.

Whatassets remain we are constantly improving. Almost all of the properties in ourcore group have various value-add tenants going in. So I would say we feelcomfortable with where we are at.

Wedid not disagree with the activists' recommendations, to be clear. We disagreedwith putting them all on the market at once. Buyers are fairly sophisticated,and they're going to want to buy the best properties. If I put 10 properties onthe market, they're going to want to buy the two best out of that 10, and I'mgoing to end up, at the end of that sale effort, trying to sell the worst. Wehad that concern.

Also,there really was not a buyer out there that had the capital to buy so large aportfolio. We have sold the properties on a one-off basis, with the exceptionof this recent group of three.  

Do you think you fetchedbetter prices in the one-property deals?

Pricingwas certainly part of it. But again, the buyers did not have the capital.You're not selling to institutions or hedge funds. You're selling toindividuals. You're selling to, basically, cash-flow buyers that have a dream —that I hope they realize.

With respect to the propertyleft to sell, WashingtonCrown Center in Washington, Pa., is there an expected time frame onthat?

Asmuch as I would love to give you a certain time frame, the simple answer is: assoon as we can. It's on the market, bidding is due in soon, but there's a lotthat needs to happen to get to a close.

You've mentioned that it'snot been easy to sell these malls. Would you address marketplace conditions?

Thenumber of buyers is clearly getting thinner and thinner. To a certain extent,that's being driven by the real difficulty people are having securingfinancing.

Themarket has changed a lot since we sold the first asset around three years ago.Cap rates of the lower-quality assets are on the rise. Financing is moredifficult. There is no CMBS market for anything more than $350 a square foot —maybe even higher. And typically the buyer, when there is one, has a significantamount of equity capital and is coming to the table with a relationship bank.Not a little bit tougher than three years ago — a lot.

And it looks like you had todrop the price on the portfolio of three properties you recently sold. Theoriginal announcedprice was $95.4 million, and it closed for $66 million, inclusive of $17 million inseller financing.

Yes,one of the tenants, Hancock Fabrics, had filed for bankruptcy. We had severalother in-line tenants vacate the property. And there were some rent-reliefrequests. That is what I mean when I said it's been difficult to sell. That iswhy it is good to be out of that business.

Ultimately I want to arriveat a clearer picture of the extent to which we're in a buyer's market presentlyas regards B malls.

Well,it's worth pointing out that these malls were clearly in the C-mall space.These weren't B malls. The average tenant sales for the 14 assets to be soldwas $267 per square foot — that's not a B mall.

The cap rates also were veryhigh.

Theaverage cap rate for all the assets sold was 14.2%.

What was the high end and lowend of the range?

Wedidn't give out that information.

Clearly it's a buyer'smarket. But I suppose the fact that you were even able to sell these assetsreflects, to some degree, a seller's market.

Findingbuyers for these kinds of properties is extremely difficult. We are ecstaticabout these deals and the fact that we do not own these assets anymore. Whenyou are really happy about selling something, and you get a deal, I would saythat's a seller's market. This is stuff you just don't want to own.