Prime Retail to sell e-mall

Ailing REIT also expects to forgo dividend this year

Real estate

April 06, 2000|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Prime Retail Inc., the troubled outlet shopping mall owner, said yesterday that it expects to pay no common stock dividends this year and plans to spin off its Internet subsidiary,

The Baltimore company had suspended its quarterly dividend in January to conserve cash and reduce debt, saying that it would pay only the distributions necessary to keep its tax status as a real estate investment trust (REIT).

Prime said its board of directors -- which did not pay preferred stock dividends due Feb. 15 -- will decide each quarter whether to pay preferred dividends.

In an earlier announcement, said it has reached an agreement to break off from the parent company.

The subsidiary hopes to launch in the summer the first online mall selling brand-name merchandise at discounts.

"Both companies, [Prime] and eOutlets see this as a very positive outcome to continue to be able to develop something we started over eight months ago," said William H. Carpenter Jr., a Prime co-founder who last year became chief executive officer of the online venture.

"We're very optimistic about the future of this. Today, with lifestyle changes, it's another channel of distribution that the retailer has to embrace."

Carpenter said he is working with a group of investors to raise the estimated $50 million the company needs over the course of the year, mostly for marketing the new site.

Prime has signed up seven merchants, including Etienne Aigner, and Fitz and Floyd, and is negotiating with others. He said yesterday that he expects to market jointly with Prime Retail and other outlet center developers.

Prime invested about $7 million in its Internet business last year and has provided financing of about $2 million per month. But in light of its financial woes, it was expected to cut off funds at $15 million.

Prime has seen its shares plunge 70 percent this year as lower occupancy rates and higher interest expenses cut into earnings. The company said Monday that it is in technical default on two of its loans because of a loss from operations for the fourth quarter that ended Dec. 31.

The company also lowered expectations for earnings in 2000, blaming severance costs, higher administrative costs, a scaled-back development schedule and higher interest expenses on floating rate loans. Prime stock closed yesterday at $1.6875, down 12.5 cents.

Glenn D. Reschke, acting chief executive officer since the resignation of Prime co-founder Abraham Rosenthal in February, was unavailable for comment yesterday.

Analysts had expected that the company to consider forgoing the restoration of its common dividend this year in view of its lower based on projected taxable income.

But that could further hurt share value, especially if dividend cuts are extended, said David M. Fick, an analyst with Legg Mason Wood Walker in Baltimore.

"That will keep Prime's stock in the penalty box because REITs trade on their yield, and with no yield they'll have a hard time [attracting] investors," Fick said.

The decision to spin off eOutlets was of little surprise to analysts.

Fick said he viewed the announcement as a way for eOutlets to position itself with venture capitalists as an independent company.

Prime would retain a 10 percent equity interest in and the right to acquire additional stock after an initial public offering.

"The company really has little in free cash flow to fund this entity, and it will take a fair amount of cash to put it together," said Charles Post, a vice president with Friedman, Billings, Ramsey in Arlington, Va.

"Prime is not in a position to fund it internally. It's a positive move for Prime, but longer term, if it's hugely successful, maybe not."

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