Prime Retail to sell assets

Baltimore-based trust unloading properties to raise capital

REITs

August 14, 1999|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

Faced with an uphill battle to raise new equity and a desire not to take on additional debt, Prime Retail Inc. is turning to another weapon in its quest to raise new capital: its factory outlet centers.

The Baltimore-based real estate investment trust announced Thursday that it will sell a stake in three of its projects -- including one in Hagerstown -- to an affiliate of a German company for $274 million.

Prime Retail expects that the deal with Estein & Associates USA Ltd. will generate $78 million in cash, plus another $24 million from debt refinancing and other payments from the German concern.

"We've found that the more attractive capital is at the asset level," said Abraham Rosenthal, Prime Retail's chief executive.

Prime Retail's deal couldn't have come at a better time for the company, which saw its shares gain 6.25 cents yesterday to close at $7.9375. In addition to money for new projects and expansions, the company faces a Sept. 30 deadline to come up with $43.6 million needed to redeem its Series C preferred stock.

In November, another $39 million credit line comes due. Meanwhile, Prime Retail needs capital to fund expansions and new development.

Toward that end, the company also has committed to a short-term, $40 million line of credit required to launch a new online shopping venture it is expected to roll out in the coming weeks.

But the terms of that credit line offer a glimpse of how hard it is for REITs to get working capital these days.

While the loan with a lending consortium is expected to mature in nine months, Prime Retail will pay for the pleasure of borrowing: Its interest rate will be 11 percent and, with other fees, could go as high as 16.3 percent.

"Prime needs capital immediately to deal with upcoming debt maturities and ongoing development," David M. Fick, a Legg Mason Wood Walker Inc. principal and senior analyst, said of Prime Retail's capital dilemma. "We are not thrilled with this deal, because it is very expensive -- it is the corporate equivalent of financing capital needs using credit card debt."

Fick added that Prime Retail's loan "is probably the most expensive piece of debt paper ever issued by a publicly traded REIT."

But what's a REIT to do?

Prime Retail's need for more money comes when Wall Street has virtually shut off the secondary offering faucet.

"Every REIT is pretty much in the same boat," said David H. Tannehill, a Morgan Keegan & Co. REIT analyst in Memphis, Tenn. "But Prime's debt level is higher than most of its peers. Because a REIT has to pay out 95 percent of its income to shareholders, there's not the ability for capital retention as a cushion, [as] with other real estate companies."

Prime Retail's debt, fueled largely by a $1 billion merger with a Michigan company last summer, stood at $1.4 billion as of June 30, a more than 60 percent debt-to-market capitalization ratio.

By comparison, its assets total $1.9 billion. Most REITs maintain debt-to-market capitalization ratios of between 40 percent and 50 percent.

Still, the recent moves give Prime some breathing room, albeit temporarily.

Prime Retail says the pending sale of a 70 percent share in three of its centers, combined with the credit line, "provides us with ample financial flexibility to meet our near-term capital needs."

But faced with a continued capital crunch, Prime Retail executives say they won't rule out the possibility of again turning to its projects to generate capital for growth.

"This is a deal that could be replicated in the future," Rosenthal said.

Pub Date: 8/14/99

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