Timing is everything, PREIT reckoned, as it evaluated a plan to dump all its residential properties and add regional malls to its portfolio. The transaction would have to take place when it could simultaneously line up a buyer for its multifamily units and a developer willing to sell malls in the $500 million range. By making the transaction a 1031 exchange, PREIT would save big on capital gains taxes.

In March 2003, the pieces fell into place. PREIT sold its apartments for $420 million to Morgan Properties of King of Prussia, Pa., while buying six regional malls from The Rouse Co. for $548 million. And that was just the start of its transition to a big-time mall owner. Including that deal, it has tripled its retail footprint to 31 million square feet.

Now it wants more properties to which it can add value with a little renovation. PREIT raised equity twice in 2003. It has a $500 million line of bank credit and income from the retail acquisitions. “We're constantly out there looking for property and we have very good capital sources,” says Edward Glickman, president and CEO. “We're constantly approached with opportunities to take capital into the business.”

Problem is, good candidates for renovation are hard to find. David Shulman, senior REIT analyst at Lehman Brothers, calls the mall market “very, very pricey.” PREIT agrees. “We're very cautious buyers,” Glickman says.

Fixer-Uppers

Why did PREIT abandon multifamily for retail? The multifamily sector was hit hard by a booming single-family housing market. At the same time, job losses nationwide made it hard for some to pay rent, forcing them to live with other family members or friends. Meanwhile, retail has been the hottest commercial sector.

Apartment income ebbs and flows; retail has been steadier. And malls, especially the big ones PREIT favors, mean more impact with the same staff. “You leverage the work of a smaller group of people,” says Glickman. “You can get everyone focused on managing one class of assets.” Meanwhile, PREIT still owns 10 strip and power centers and manages three others.

The company's expertise in retail began when it merged with Ronald Rubin's development, leasing and management company in 1997. Rubin, who remains PREIT chairman, brought with him an organization that specialized in repositioning malls.

PREIT now targets dominant properties in secondary markets — trade areas of 150,000 people. It looks for malls where it can increase market penetration by retenanting existing properties.

After its big first move, the Rouse acquisition, PREIT merged with Crown American Realty Trust of Johnstown, Pa., in a November 2003 stock deal. That added 27 more malls close to home and a presence outside Pennsylvania in the mid-Atlantic states. Then in October 2004, PREIT said it would pay $59.5 million for the 925,000-square-foot Cumberland Mall in Vineland, N.J. And it bought the 1.1-million-square-foot Orlando Fashion Square in Orlando, Fla., for $123.5 million — its first acquisition in the Sunshine State.

The series of deals over 24 months has launched PREIT into the big leagues in the retail world and transformed it from a smallish player to a company with a regional mall portfolio moving into other parts of the Northeast and the Southeast. With the change complete, the company is flush with cash and a new line of credit, and poised to take another leap forward.

But where does it look for large malls? Its big mid-Atlantic competitor, The Rouse Co., was acquired last year by General Growth Properties. General Growth hasn't announced any plans for its Rouse portfolio, so it's not known if more Rouse properties might become available.

PREIT has to be careful. Good candidates for renovation in the 500,000-square-foot range are hard to find. “It's easy to make a mistake,” says Glickman. “Not every mall can be turned around.” (See story on mall redevelopment on page 38.)

PREIT has 16 fixer-uppers in the pipeline. “I think we're capable of adding more to that list,” says Joseph Coradino, who is responsible for retail operations as president of PREIT services.

To be sure, redevelopment takes considerable time, money and attention. PREIT scrutinizes the demographics, freshens the tenant mix and renovates. It usually takes two or three years to show a significant gain in per-square-foot sales. “This is not an overnight game,” says Coradino.

But it can pay off. Prince George's Plaza in Hyattsville, Md., was aiming too low in a high-income African-American area when PREIT acquired it in 1998. “It was leased as a shopping center that appeals to a lower-income demographic,” says Coradino. PREIT added tonier shops including Old Navy and Children's Place and renovated the mall, in Washington, D.C.'s inner Beltway.

Last November, upscale discounter Target opened a 136,000-square-foot store as a third anchor. PREIT says sales at the rechristened Mall at Prince George's are pushing $400 a square foot, up from $300 in 1998. PREIT's experience with power centers makes it comfortable placing Wal-Mart and Target as anchors in regional malls. (See story on hybrid malls on page 26.)

Loose Floor Tiles

PREIT is running recent acquisitions through the same mill. The 1.1-million-square-foot Echelon Mall in Voorhees, N.J., was “run down,” says Rev. Eugene Wall, executive director of Echelon Mall Ministry, a church based in the mall. “A lot of stores moved out and it was really in a decline.” Wall remembers barriers up for days around loose floor tiles in public areas.

Loose floor tiles are only the beginning of the fix-up. Here's what PREIT is spending at other properties:

  • $25 million to turn Patrick Henry Mall in Newport News, Va., into a lifestyle center.

  • $12 million to renovate Echelon and add a mix of discounters and name-brand retailers. An anchor will be a new 147,000-square-foot Wal-Mart scheduled to be ready in spring 2006.

  • $11 million at the 609,000-square-foot Capital City Mall in Camp Hill, Pa. to move the food court and add two family restaurants to replace an undersize theater. The old food court will become a lifestyle wing with 30,000 square feet of retail.

  • $8 million at New River Valley Mall in Christiansburg, Va., to move a cineplex out of the mall to a larger, new adjacent location and demolish part of an old department store to add retail and restaurant space.

Tight Corner

By positioning itself in big malls, PREIT has wedged itself into a tight corner.“That market is smaller and more competitive,” says Joseph French, senior investment adviser with commercial real estate adviser Sperry Van Ness in White Plains, N.Y. “Not that many malls come available.”

Will it look elsewhere? PREIT knows the East and Southeast, where it owned apartments. Ideally, it wants malls in regional clusters to package media deals and to make managing more efficient. “I wouldn't say anything is off limits,” says Glickman. But the emphasis for now is on the Northeast and Southeast.

Where will PREIT be five or 10 years out? “We will have repositioned most of the properties we've just acquired and we will be far into the next thing,” says Glickman.

It may move beyond the East and the South and could even go farther afield — even across the Atlantic. Ultimately, depending on the returns, PREIT could return to residential-keeping retail as just another part of the mix, Glickman says.

Meanwhile, a bit of a breather wouldn't hurt. “We've just grown threefold,” says Glickman. “There's a little bit of sand in the gears as we try to reestablish the business at this three times scale.”

SMART GROWTH

PROBLEM:

PREIT wants to move into regional malls from a mix of power centers, strip malls and apartments. Growing by buying more multifamily properties is out, and selling its apartment asset value would mean significant tax liability.

SOLUTION:

PREIT waits patiently for the right deals and sells apartments and buys malls at about the same time to execute a 1031 exchange. It also buys and renovates big mall properties to leverage its existing staff to the max.

BUZZ:

PREIT must “fix New Jersey's Echelon Mall and improve Crown assets,” says David Shulman, senior REIT analyst at Lehman Brothers. “I think the market is giving them credit that they'll be able to execute reasonably well.” With a $500 million line of credit, it's eyeing other malls.

DATA:

PREIT, founded in 1960, is one of the oldest equity REITs. It now owns 36 regional malls and 13 strip and power centers. Its holdings have grown six-fold since 1997 to $2.4 billion. PREIT's 31 million square feet of retail is nearly triple its footprint just two years ago.

PREIT'S REGIONAL MALLS
Center City Size
Wiregrass Commons Mall Dothan, Ala. 632,875
Francis Scott Key Mall Frederick, Md. 708,822
Valley Mall Hagerstown, Md. 893,640
The Mall at Prince Georges Hyattsville, Md. 893,274
Dartmouth Mall Dartmouth, Mass. 616,712
Cherry Hill Mall Cherry Hill, N.J. 1,266,080
Moorestown Mall Moorestown, N.J. 1,054,242
Phillipsburg Mall Phillipsburg, N.J. 572,261
Echelon Mall Voorhees, N.J. 1,187,631
Jacksonville Mall Jacksonville, N.C. 474,455
South Mall Allentown, Pa. 403,735
Logan Valley Mall Altoona, Pa. 781,634
Capital City Mall Camp Hill, Pa. 608,660
Chambersburg Mall Chambersburg, Pa. 454,608
Palmer Park Mall Easton, Pa. 446,229
Exton Square Exton, Pa. 1,087,252
Schuylkill Mall Frackville, Pa. 726,634
North Hanover Mall Hanover, Pa. 449,186
Beaver Valley Mall Monaca, Pa. 1,162,746
Lycoming Mall Pennsdale, Pa. 781,476
The Gallery at Market East Philadelphia, Pa. 527,950
Plymouth Meeting Mall Plymouth Meeting, Pa. 973,220
Viewmont Mall Scranton, Pa. 743,666
Nittany Mall State College, Pa. 532,079
Uniontown Mall Uniontown, Pa. 698,420
Washington Crown Center Washington, Pa. 673,667
Wyoming Valley Mall Wilkes-Barre, Pa. 910,946
Willow Grove Park Willow Grove, Pa. 1,205,923
Magnolia Mall Florence, S.C. 562,696
New River Valley Mall Christiansburg, Va. 428,155
Patrick Henry Mall Newport News, Va. 640,375
Crossroads Mall Beckley, W.Va. 450,084
Valley View Mall La Crosse, Wis. 589,028
Total 24,138,361