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PREIT GROWS, CROWN GOES

BY DEBRA HAZEL

Pennsylvania Real Estate Investment Trust’s $1.3 billion acquisition of Crown American Realty Trust raises PREIT’s profile in the mid-Atlantic region — and marks the final chapter of another pioneering mall development firm.

The deal, announced May 14, is only one part of a concerted expansion effort by PREIT, executives say.

“We see this as a step in the growth of the company,” PREIT President and COO Jonathan B. Weller told SCT shortly after the announcement.

Philadelphia-based PREIT is on a buying binge. In March it agreed to acquire six malls from The Rouse Co. The purchase of four of those — Cherry Hill (N.J.) Mall; Exton (Pa.) Square Mall; The Gallery at Market East, Philadelphia; and Moorestown (N.J.) Mall — was completed in late April, and the other two closed in June.

Now PREIT will add the Crown portfolio of 26 wholly owned regional malls, as well as the other half of its 50-50 joint venture with Crown in Palmer Park Mall, Easton, Pa. In exchange, Crown stockholders will receive 0.3589 of a PREIT common share for each share of Crown. PREIT will also assume $619 million in Crown debt. The parties expect to close the deal, which has an overall capitalization rate of 10.2 percent, in the fourth quarter.

The combined entity’s 33.4 million-square-foot portfolio will include 37 wholly owned regional malls and partial interests in three others, with a combined occupancy rate of 89.9 percent and sales of $358 per square foot. The portfolio will also include eight neighborhood and power centers, and interests in six others. Market cap will be about $2.7 billion.

“Our merger with Crown significantly strengthens our position in the retail sector,” said Ronald Rubin, PREIT chairman and CEO, during a conference call.

The move means that 82 percent of the merged company’s portfolio will be located in Delaware, Maryland, New Jersey and Pennsylvania, and also that PREIT will become a force in regional mall consolidation. Before the Rouse acquisition, PREIT’s portfolio consisted of four regional malls and interests in four others, as well as some multifamily and industrial properties. PREIT is selling those multifamily properties for $420 million. (At press time the company expected to close that deal at the end of the second quarter.)

Frank Pasquerilla

Mark Pasquerilla

“The merger with Crown will be an important step in the strategic transformation of our company from a diversified REIT to an enterprise with a single focus on becoming a leading owner of value-operated retail properties in the mid-Atlantic states,” said Rubin in a news release. “The concentration of our portfolio in our home market — the mid-Atlantic region — will further enhance our relationships with today’s most dynamic retailers.”

PREIT, founded in 1960, was one of the first equity REITs in the United States. Crown American was established in 1950 as Crown Construction Co. In 1961 Frank J. Pasquerilla acquired the company, which became a REIT in 1993. Frank Pasquerilla died in 1999, and son Mark became chairman and CEO.

In an era of rapid consolidation, small REITs are at a disadvantage, Pasquerilla told SCT. Given PREIT’s geographic focus in the mid-Atlantic, it was the perfect match to expand Crown American’s own presence in the region, he said. Pasquerilla, an ICSC trustee, will join the PREIT board, as will one Crown American board member, though at press time that person had yet to be selected.

“Both companies are a similar size, and it’s very important for a mall company to have external growth,” Pasquerilla said, citing as an example the rise in The Macerich Co.’s funds from operations since it acquired Westcor Partners last year. “For both companies to compete, you have to have a better capital-raising program to be relevant. And with consolidation, it’s a struggle to stay relevant.”

The decision to sell his company was “tough,” Pasquerilla acknowledges, though he said the personalities involved made the transaction and the negotiations easier.

“I’ve got to live with the people and the company,” Pasquerilla said. “I was very impressed with Ron Rubin. He’s one of the giants in the real estate industry. He’s a very cool customer, a very good deal maker and, quite honestly, very trustworthy.”

As a bigger company, PREIT will be able to access capital more easily. It can also continue to grow in a segment that other consolidators are not pursuing strenuously: turnaround opportunities in middle markets.

“A certain segment of the industry is looking for trophy, fortress malls,” PREIT’s Weller said. Not PREIT. “We see opportunities in the next tier of projects.”

The Crown malls can also take advantage of PREIT’s relationships with big-box retailers in its open-air centers. And significant value can be created from increasing sales at a mid-market center from $250 per square foot to $300 per square foot, Weller says.

“We like those numbers,” he said. “That’s our core competency.”

Six Crown malls will be placed into a separate entity, probably to be sold. These are Bradley Square Mall, Cleveland, Tenn.; Mount Berry Square, Rome, Ga.; Schuylkill Mall, Frackville, Pa.; Shenango Valley Mall, Sharon, Pa.; Uniontown (Pa.) Mall; and West Manchester Mall, York, Pa. Those centers have an in-line occupancy rate of 72.6 percent and sales per square foot of $218, versus occupancy of 90.5 percent and sales per square foot of $285 for the rest of the Crown portfolio.

“We’ve taken challenging assets and turned them around, though we’re not saying that’s going to happen here,” Weller said. “We have a bias to a disposition of these properties. Once a project is turned around, it may make sense to sell it.”

PREIT will also get 16 undeveloped sites next to three Crown malls from Crown Investments Trust, an entity that Pasquerilla owns.

The enlarged company will be based at PREIT’s Philadelphia headquarters, while Crown’s operations and “finance functions” will remain at its offices in Johnstown, Pa., “at least through the first quarter of 2004,” according to the company news release announcing the transaction.

Wall Street favors the deal, according to some analysts.

“There is a significant upside under [PREIT’s] management and liquidity,” argued Elizabeth L. Watson, a REIT analyst at Baltimore-based Legg Mason Wood Walker, the financial services firm.

Nor is there any real concern among observers that PREIT is growing too much, too fast.

“I don’t believe so,” Watson said. “With the Rouse and Crown American transactions, PREIT will very much be a dominant factor in the mid-Atlantic states and have the ability to enhance the value of the assets.”

And more acquisitions are possible. The larger REITs are tending to sell projects in mid-markets that fit right into the PREIT strategy.

“We’re always looking,” Weller said. “We’re looking for good opportunities, for entities that fit into our platform.”

Media speculation had abounded for months before the May 14 announcement.

“Sometimes,” Weller said, “good things take time.”

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