Prime halts payment of dividends

Stock falls nearly 37% for world's largest outlet center operator

Taking `worst-case stance'

Corrective actions expected but severity rattles shareholders

Commercial real estate

January 19, 2000|By Robert Little | Robert Little,SUN STAFF

Prime Retail Inc., the world's largest outlet center operator, announced yesterday that it will suspend payment of dividends because it needs cash to improve low-end properties and reduce debt, a move that sent the company's stock plummeting nearly 37 percent.

Investors had anticipated changes in the Baltimore-based company's dividend payment since last week, when speculation from a key analyst sent shares tumbling nearly 25 percent.

But analysts said yesterday's announcement was more severe than anticipated. It caused a rush of defections from the once highly praised stock, and shares fell $1.50 to close at $2.625. Prime Retail's stock is now trading at roughly 30 percent of the value of its shares a year ago.

"You're seeing a lot of traditional investors just dumping it because of this," said David H. Tannehill, an analyst for Morgan Keegan & Co. "That was pretty much the only reason to own this stock -- for the dividend."

Prime Retail is a real estate investment trust, requiring it to distribute most of its net income to investors, and as such, the company's regular dividend payments have been a prime attraction to its stock.

David M. Fick, an analyst for Legg Mason Wood Walker, warned last week that Prime Retail appeared to be neglecting the "lower tier" properties in its portfolio of 51 outlet centers. In a report to investors, he said the company was at risk of losing a quarter of its leases up for renewal.

Prime Retail officials acknowledged yesterday that occupancy rates at some of its retail centers have dropped to uncomfortable levels. And they announced plans to use cash generated in 2000 to repay loans and to finance "various leasing and capital expenditures" for improving some retail centers.

In a statement, Chief Executive Officer Abraham Rosenthal said he was "disappointed" in the rise in vacancies but that yesterday's move should bring occupancy levels up within 15 months.

"In light of the company's various short-term obligations, our board of directors felt it prudent to discontinue distributions on our common stock in order to preserve cash resources and enhance the company's fiscal integrity and financial flexibility," he said.

Said Glenn D. Reschke, president and chief operating officer: "I am confident that we will improve the overall occupancy of our portfolio over the next 12 to 15 months to a level more consistent with our historical operating performance."

Company officials have scheduled a conference call tomorrow to discuss the plans, and would not comment further yesterday.

"What they've done is take the absolute worst-case stance to make sure that no more bad news comes out, and we think they've done the right thing," Fick said. "But I have real doubts about whether present management can survive this. I think their credibility is shot."

Prime Retail owns and operates more retail outlet centers than any company in the world, and once was in high favor with analysts and investors. A year ago its stock traded at $10.1875.

Prime Retail had net income of $17.5 million on revenue of $233.1 million in 1998. But the company's debt load from acquisitions and rising interest costs have rewritten its balance sheet.

Company officials estimated yesterday that Prime Retail's 1999 funds from operations -- a measure of cash flow -- will range from $1.23 to $1.30 a share, and that 2000 funds from operations will be about the same. The company had been expected to post more than $1.50 a share last year.

Prime Retail officials plan to distribute some type of payment to common stock shareholders in the fourth quarter in order avoid taxes under the laws governing real estate investment trusts, the company said in yesterday's statement. But they will not reconsider the suspension of quarterly common stock dividends until 2001.

"Until they get through this, I don't think this stock is going to do a lot," Tannehill said. "And given where the stock price is, I wouldn't be surprised if this company is for sale."

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