Call it Prime Retail Inc.'s 70/30 gambit.
Grappling with more than $900 million in debt, Prime Retail, the nation's largest outlet center owner, has been struggling to generate cash and restructure its balance sheet. Failure to do so, it warned in November, would mean that the real estate investment trust could face "substantial risk" to its survival this year.
Rather than go on a selling binge, Prime Retail has sold 70 percent stakes in each of three outlet centers to Estein & Associates USA Ltd., a Florida real estate investment firm. Baltimore-based Prime Retail keeps a minority stake, as well as management and marketing fees, which keep cash coming in.
After more than two years of stop-start negotiations, Prime Retail Inc. this week announced the sale of a $23.5 million majority stake in its prized, 110-store Hagerstown Center to Estein.
It's the kind of deal - selling a portion of an asset in exchange for cash - that may be done in the future with other outlet properties, said Glenn D. Reschke, who took over as Prime Retail's chairman, president and chief executive in 2000.
A top priority for Prime Retail is paying off a costly $90 million loan that the company took out in December 2000, when it was on the brink of bankruptcy. The company applied $12.1 million from the Hagerstown deal toward that loan, the balance of which now stands at $49 million.
"Anytime you can pay off expensive debt, that's a good thing for the company," Reschke said. "We retain management and marketing, which will generate considerable fee income."
The Hagerstown transaction was particularly attractive, Reschke said, because the lender allowed Prime Retail to assign the existing $46.9 million mortgage debt to the joint venture with Estein.
The Hagerstown Center, with roughly 487,000 square feet of gross leaseable space, has a tenant-occupancy rate of 99.4 percent - compared with Prime Retail's 91.2 percent occupancy rate through Dec. 31 across all its outlet centers.
Prime Retail owns 44 centers in 25 states and Puerto Rico.
Before entering into the Hagerstown Center deal, Prime Retail had sold 70 percent stakes in two outlet centers - one in Birch Run, Mich., and one in Williamsburg, Va. - to Estein. The three deals combined have brought in $64 million in net cash proceeds.
"Transactions of this nature are exciting for our company and we'll continue to look for similar transactions in the future," Reschke said.
An Estein official declined comment.
Prime Retail's fate is tied to the retailers who occupy their outlet centers, and has been hurt by tenant bankruptcies and a weak retail environment.
"It's a very difficult retail climate for them to be successful," said Mark Millman, head of the Millman Search Group, a nationwide executive search and consulting firm in Lutherville. "It's not just Prime, it's the whole market. But Prime is affected more than other outlets because they're the biggest."
The past holiday shopping season holds some positive signs for Prime Retail. The company's vehicular traffic was up 5.6 percent across all its centers in December compared with December 2000, Reschke said.
The latest outlet industry sales figures released in November by the International Council of Shopping Centers reported that the same-store sales were down 3.3 percent.
Karin Nemetz, executive director of the Outlet Retail Merchants' Association, said retailers are telling her that they've seen a slight upturn lately.
"I think outlets are very well-positioned, given the economy," Nemetz said.
"The price of gas is at an attractive place so people are willing to make the drive" to outlets, many of which are located in more thinly populated areas.