Time for Prime to mull its future

REIT's options include breaking up or selling company

Cash-strapped, debt-laden

Retailing giant has 2-pronged strategy to reassure investors


In a single leap in mid-1998, Prime Retail Inc. doubled its size to become the world's largest player in one of the hottest trends in American retailing. It bought the Horizon Group Inc. for nearly $1 billion, giving the Baltimore-based real estate investment trust more outlet shopping malls than any other company.

Now, a year and a half later, Prime's rosy expectations have turned sour. Last week, it lowered projections for this year's earnings and suspended its quarterly dividend to conserve cash to pay down debt -- moves that sent its already depressed share price plunging 42 percent to $2.375.

Cash-strapped and debt-laden, it announced that it was weighing options that include breaking up or selling the company.

The abrupt change in Prime's fortune is the result of declining occupancy and net operating income at some of its low-end properties as well as higher interest and marketing costs cutting into earnings.

Seeking to reassure analysts and investors after the spate of bad news, company officials outlined a two-pronged strategy in a conference call late Thursday.

First, Prime plans to bolster its balance sheet by selling some centers, closing pending asset sales and finalizing a construction loan for a mall that Prime is building in Puerto Rico.

On a second front, the REIT plans to increase local marketing and cosmetic improvements to 20 of its 51 centers that have performed poorly because of small size, competition or lack of an anchor tenant that's crucial to destination-driven shopping, said Abraham Rosenthal, chief executive officer.

"We're all very concerned about the current share price," said Chairman Michael W. Reschke. "We're moving as expeditiously as possible. Time is critical."

Analysts and investors are clearly worried as well. During the conference call, many questioned management's past strategies and planned solutions.

"It's great you guys are being proactive now," one caller said. "But where were we a year ago? The company is in crisis-management mode. Shouldn't the common dividend have been cut a year ago? You guys get paid a lot of money to have foresight."

Reschke said he agreed, in hindsight.

Looking back, analysts say the company's cash crunch stems primarily from Prime's acquisition of Michigan-based Horizon, paid for with nearly $1 billion in debt.

But problems arose more from what Prime failed to do after acquiring Horizon, said David M. Fick, an analyst with Legg Mason Wood Walker in Baltimore.

Little progress seen

Fick, who visited many of the malls after they were acquired in recent weeks, blamed a lack of attention to marketing and to remodeling or expanding malls to keep up with the competition. Many centers acquired from Horizon had potential but needed work, he said.

"At the time of the merger, the company had demonstrated the ability to develop a nice product," Fick said. "Everything they developed was doing fairly well. They'd proven an excellent management and marketing team for factory outlets in general.

"We saw the upside potential in the Horizon assets. [Prime] was as well positioned as anyone to see a return beyond what these properties were generating."

But Fick said he has seen little progress and has heard complaints from tenants about the upkeep of some centers. While about 30 of Prime's centers are performing well, with most tenants intending to renew their leases, a substantial number are in question, he said.

About 12 centers are on the fence because of competition and marginal population base, or location, Fick said. Another 10, including some that are only about half full, face more serious problems, he said. In a Jan. 14 report in which he downgraded Prime's stock to "underperform," he warned that Prime risked losing 25 percent of its expiring leases.

Merchants "pay their rent because of other relationships with Prime, but they aren't going to renew if they're not performing at a level that makes it profitable to stay there," he said.

One of the middle-tier properties is Prime Outlets at Queenstown, just off Route 50 on Maryland's Eastern Shore, he said.

"It was showing a lot of age and performing adequately, but it performed poorly compared to Rehoboth [outlets], which it competes with," Fick said. "At the time of the acquisition, they had recognized that it was looking tired and they needed to do a better job of capturing beach traffic, which meant adding 190,000 to 200,000 square feet" to make it more of a destination. "They're no further along."

Meanwhile, he said, the Rehoboth outlets have been remodeled and expanded. And a new threat is coming from Arlington-based Mills Corp., which is building a 1.4 million-square-foot outlet mega-mall near Baltimore-Washington International Airport.

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