Prime Retail's crisis deepens

Loan noncompliance leaves REIT `flirting with bankruptcy'

Real estate

April 04, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Shares of Prime Retail Inc. fell 14 percent yesterday, after the problem-plagued owner and operator of outlet malls said it has failed to comply with the terms of two loans because of a fourth-quarter loss from operations.

The company also lowered expectations for earnings in 2000.

The Baltimore real estate investment trust (REIT) said a waiver was worked out with one lender, bringing it into compliance. It hopes for a similar arrangement with the other lender. But analysts worried yesterday that the noncompliance, coupled with a heavy debt load, puts Prime in a precarious position.

"They're flirting with bankruptcy -- if they can't solve noncompliance with covenants in two credit facilities," said David M. Fick, an analyst with Legg Mason Wood Walker Inc. in Baltimore. "There is a risk that lenders could accelerate debt repayment. This is a huge wild card, because lenders could force the company into bankruptcy quickly if the debt is called and Prime is forced to liquidate its assets to repay debt."

Prime's stock, which lost 42 percent of its value in January as the company revealed the extent of its financial woes, closed yesterday at $1.875, down 31.25 cents.

"This company faces some monumental challenges, not only to get liquidity back in terms of getting enough money on the balance sheet to pay obligations, but -- [also to get] the portfolio to generate results that are favorable," said Robert F. Norfleet, an analyst with Davenport & Co.

The REIT released earnings after the stock market closed Friday, reporting a $12.8 million loss in funds from operations, or 42 cents per diluted share, for the three months that ended Dec. 31. The loss reflected nonrecurring charges and other expenses of $37.9 million, or 70 cents per diluted share. Excluding the charges, Prime earned $25.2 million, or 36 cents per diluted share, in funds from operations.

The $37.9 million in charges included a $15.8 million write-down of the company's two lowest-performing centers, plus $16 million for abandoned development projects -- part of the company's decision to halt pre-development of some proposed centers -- and a $3.1 million write-off for an expired option to buy a 50 percent ownership interest in a center in Phoenix. Prime also took a $3 million charge for start-up and organizational expenses of its eOutlets.com subsidiary, which it hopes to launch this summer.

The company also is closing its retail chain, Designer Connection, with seven stores in Prime outlet malls, including Hagerstown, at a cost of $3.7 million including employee terminations and lease obligations. The discontinued operation does not affect funds from operations.

In its earnings announcement, Prime said it is lowering expectations for funds from operations in 2000 for the second time this year, to between 98 cents per diluted share and $1.08 per diluted share. The company blamed severance costs, higher administrative costs, a scaled-back development schedule and higher interest expenses on floating rate loans.

In January, the company had first lowered projections for the year's earnings, while at the same time suspending its quarterly dividend to conserve much-needed cash and pay down debt -- now at $1.26 billion. The projected drop in earnings stemmed from declining occupancy and net operating income at some of Prime's low-end shopping centers, as well as higher interest and marketing costs, Prime had said.

At that time, it also announced that it was weighing options that include breaking up or selling the company. In February, former Chief Executive Officer and co-founder Abraham Rosenthal stepped down and was replaced on an interim basis by Glenn D. Reschke, former president and chief operating officer. Reschke was unavailable for comment yesterday.

A report on Prime by Legg Mason's Fick maintained the company's "underperform" rating and lowered his estimate for the year's earnings from $1.20 per share to 99 cents per share. The reported released yesterday also questioned the eOutlets business model.

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