Investment firm Legg Mason Wood Walker Inc. lowered its rating on Prime Retail Inc.'s common stock yesterday, a day after the Baltimore-based outlet center owner reported third-quarter earnings.
Legg Mason said the change in its recommendation from "buy" -- its highest rating -- to "market perform" -- its next to lowest -- stemmed from the company's "balance sheet and sector risk."
In another ranking, the Baltimore investment firm continued to characterize Prime Retail's shares as "speculative," the lowest of four risk categories. Legg said the real estate investment trust had a "difficult capital environment that will continue to constrain its external growth."
"We have concerns about the risk surrounding their balance sheet," said David M. Fick, the Legg Mason principal who analyzes Prime Retail. "We find that they are continually in a scramble mode."
Although Prime Retail was one of 22 real estate stocks Legg Mason revalued yesterday, the outlet center owner was only one of two that sunk from a "buy" recommendation to "market perform." The other stock to fall two notches on Legg Mason's rating scale was Cadillac Fairview Corp., a Canadian owner of malls and office buildings.
Legg Mason -- an early and vigorous supporter of Prime Retail -- also lowered the ranking on common stocks of Rouse Co., Storage USA Inc., Host Marriott Corp., Highwoods Properties Inc. and Kimco Realty Corp., primarily because of the beating REIT stocks have received over the past two years on Wall Street.
Legg Mason's rating system includes "buy," "outperform," "market perform" and "underperform" rankings. Its other scale ranks the risk rating of stocks from "low" -- shares carrying the least amount of risk -- to "speculative," stocks with the greatest risk.
In lowering the rating on Prime Retail, Legg Mason cited the real estate investment trust's apparent decision to wait to declare its fourth-quarter dividend until the last possible day; a relatively high-interest loan to pay off other corporate debt owed to Security Capital Corp.; and the potential that the REIT won't reap the $78 million it expects to receive from the sale of three outlet centers.
"This is not a sell signal," Fick said. "We're just recommending people not buy the stock right now."
Prime Retail on Monday reported third-quarter earnings of $26.1 million, 38 cents per share, down 4 percent and up 2.7 percent, respectively, when compared to the same period in 1998.
Prime Retail's chief executive said he had not seen Legg Mason's report on the change.
"One never wants to be downgraded," said Abraham Rosenthal, the REIT's chief executive. "They want to see some of the announcements we've made about the future come to fruition, and I feel comfortable that the things we are working on will happen."
Prime Retail is exploring other ways to boost its balance sheet. The company is exploring development in Europe and expansions to three local centers.
"I wouldn't be surprised if Prime Retail is a $10 or $11 stock in a year a from now," said Fick. Prime Retail's stock closed yesterday at $7.312 per share, down 18.75 cents per share.