Prime Retail profit up 18%

REIT also sells stake in three outlet malls for $274 million

One mall is in Hagerstown

Real estate trusts

August 13, 1999|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Prime Retail Inc. announced plans yesterday to sell a stake in three of its factory outlet centers for $274 million, even as the Baltimore-based real estate investment trust said its earnings rose nearly 19 percent in the second quarter.

Prime Retail's agreement with German-based Estein & Associates USA Ltd. calls for the real estate investment trust (REIT) to sell a 70 percent interest in outlet malls in Hagerstown; Williamsburg, Va.; and Birch Run, Mich.

"In order to continue to grow, we always need capital," said Abraham Rosenthal, chief executive officer of the Baltimore real estate trust. "And since equity markets are very expensive for REITs right now for common stock, we've found that the more attractive capital is at the asset level."

Prime Retail expects the Estein deal to produce $78 million in cash. Related refinancing is expected to generate an additional $10 million.

As part of the deal with Estein, Prime Retail has the right to buy back the stakes in the three projects -- together with any future expansions -- beginning in January 2009. Estein is the nation's largest foreign owner of outlet centers, with seven projects totaling 3.3 million square feet.

"We are pleased to become a long-term partner with Prime Retail, who is a recognized market leader in the industry, and we look forward to expanding our relationship with Prime in the future," said Lothar Estein, the German company's chief executive.

Prime Retail will retain management and leasing of the projects, and receive $14 million in noncompete and licensing payments from Estein.

The three centers generate $21.7 million, or 10.2 percent, of Prime Retail's net operating income annually, and make up 9.2 percent of its total square footage.

Prime Retail expects to complete the deal in phases beginning in November. The deal is contingent, however, on Prime Retail's ability to arrange $151.5 million in new first mortgage debt.

A top real estate analyst praised the move, despite its expected effect on future earnings.

"This is a very positive thing on a net basis for the company," said David M. Fick, principal and senior analyst at Legg Mason Wood Walker Inc.

"It sets a new valuation for the balance of their portfolio. Will it flatten their earnings somewhat? No question. But I think the market would rather have them devalue their earnings to help out their liquidity and balance sheet."

Rosenthal added that similar transactions could occur in the future.

The move is expected to dampen Prime Retail's future earnings, however.

In the second quarter, Prime Retail reported funds from operations -- a standard REIT financial yardstick -- of 38 cents per share, an 18.8 percent increase from the comparable period last year.

On a non-per share basis, the REIT's funds from operations rose 52 percent, to $26.3 million, but that gain was due to Prime Retail's $1 billion purchase of a Michigan outlet center owner. Revenue in the quarter rose 69 percent, to $76.1 million.

The acquisition of the Horizon Group Inc. doubled the size of Prime Retail's portfolio, which now contains 51 centers totaling 14.7 million square feet. The company's $1.9 billion in assets, in 26 states, are 94 percent leased.

But just as notable as the earnings gains was Prime Retail's second-quarter increase in funds from operations -- it was the fourth consecutive quarter the funds increased more than 15 percent.

With the loss of income from the three centers being sold to Estein, however, Prime Retail will likely generate growth of about 3.5 percent per quarter next year, Fick said.

Prime Retail's earnings gains occurred despite only a slight rise in same-space sales in the REIT's projects. Same-space sales -- the weighted average sales per square foot by merchants open and occupied since Jan. 1, 1998 -- rose 0.7 percent in the first half of the year.

Same-store sales, by contrast, the weighted average of sales per square foot by merchants in stores open and occupied in the same space since Jan. 1, 1998, fell 0.8 percent.

Shares of Prime Retail closed yesterday at $7.875, up 6.25 cents.

Pub Date: 8/13/99

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