Exton Square ‘doesn’t want to be a mall,’ PREIT CEO says on earnings call

The mall operator Pennsylvania Real Estate Investment Trust — which lost more than $137.7 million last year — is considering options for its Exton Square Mall in Chester County as it navigates a swiftly evolving retail landscape.

Analysts say the next few years will be pivotal for PREIT as it opens a major site this fall in Center City Philadelphia for the Fashion District and seeks to transform some other properties while traditional retailers in malls across the country try to compete with online retail giant Amazon.

Exton is “a property that in the longer term probably doesn’t want to be a mall, and we’re trying to sort through our options at this point, which could include moving the asset out of the company. It could include a joint venture,” PREIT chief executive officer Joseph Coradino said of Exton Square. He spoke last Thursday to Wall Street analysts on a conference call.

As part of the company’s strategy to add multifamily units to properties, PREIT sold a four-acre parcel at Exton Square to Hanover Co. for $8.1 million. Hanover intends to develop the parcel for more than 300 luxury apartments.

PREIT spokesperson Heather Crowell said Monday that the company had no more details to share regarding Exton Square Mall. The mall houses traditional retailers such as Macy’s and recently opened a Whole Foods Market to fill the former Kmart space — which will likely give the mall a lease on the future.

“I wouldn’t say by any means the mall is closing, because you wouldn’t have gone through the hassle of putting a pretty solid retailer like Whole Foods in it,” Patrick Wilson, an assistant portfolio manager for CenterSquare Investment Management’s real estate securities group, said of Exton.

PREIT, which owns major malls in the region, including in Cherry Hill, Willow Grove, and Plymouth Meeting, disclosed last week a full-year 2018 net loss attributable to common shareholders of $137.7 million, compared with $57.9 million the previous year. This loss was mostly driven by a decrease in property values. Its stock dropped almost 6 percent to $6.77 on last week’s news, compared with $7.20 a day earlier. It closed Tuesday at $6.81.

>>Tell us about your shopping habits. Take our survey here.

PREIT’s dividend of $0.84 yields an 11.7 percent dividend, a generous payout that indicates the stock’s risk to investors.

Given the changes in the mall retail industry, analyst Wilson said, PREIT has “done a commendable job of trying to make the best out of a very bad hand. Starting three years ago when the music really started to stop, they had to hustle really fast and so they did a great job of reducing their Sears exposure.”

Coradino emphasized 2019 as a “transition year” and told investors that the Fashion District opening along with anchor replacements are “really providing the springboard for growth in 2020 and further growth in 2021.” The Fashion District in Center City is the company’s “marquee project,” Coradino said. It will span three city blocks and has announced future tenants such as City Winery, Ulta Beauty, Forever 21, and a “Market Eats” food court.

>> READ MORE: City Winery music and dining venue coming to former Gallery mall now to reopen in Sept. 2019

Selling underperforming properties has been part of PREIT’s strategy to find a way to profits.

PREIT plans to shed the Wyoming Valley Mall in Wilkes-Barre Township and Valley View Mall in La Crosse, Wis., from its portfolio of 25 operating properties, which includes 21 malls, Coradino told investors. For the Wyoming Valley Mall, the company is “currently in discussions with the special servicer,” a firm that is hired when there is a default on a loan. Coradino also said he expects the Valley View Mall to “transition out of the portfolio at some point.”

PREIT has tried to get ahead of anticipated big-box retail closures by quickly replacing them with other tenants.

Since 2013, the company has axed nearly 40 percent of its portfolio, or 17 properties. In that same time, PREIT’s data show that average comparable sales per square feet have increased almost 30 percent, to $491 from $380.

“They’ve been really busy selling off the really bad properties and concentrating their efforts on the salvageable properties, but they’re not quite done,” said Merrill Ross, a senior REIT research analyst at Boenning & Scattergood. “Exton Mall looks like it’s on the list of properties they don’t want to own long term.”

Same-store net operating income, or NOI, is the rental revenue received from tenants, less the operating expenses. Analysts look at same-store NOI to evaluate a REIT’s performance because it disregards onetime factors that could skew comparisons over time, such as buying or selling a mall, construction, or natural disasters.

PREIT forecasted the same-store NOI to grow in the range of 1.25 percent to 2.25 percent in 2018, but missed badly, posting a 0.32 percent increase.

"They have better odds than the market expects at this point,” Ross said. “While I think they’ve done a massive amount of work ... things can still go sideways if they’re not successful with the Fashion District.”

Other mall operators have rebounded from the lows seen across the industry a decade ago. Simon Property Group (SPG), which owns the King of Prussia Mall and other popular properties, traded Tuesday in the low $180s, up from the $20s in the depth of the recession 10 years ago. Santa Monica, Calif.-based Macerich Co. (MAC), which is partnering with PREIT on the Fashion District project, trades in the mid-$40s, up from around $6.

But at less than $7, PREIT is little more than double its recession-era low. CBL, a Chattanooga, Tenn., mall operator, has not gained much ground, trading at around $2, similar to what it was trading in the recession.

Despite the poor performance, PREIT relayed some promising statistics to shareholders.

In its core mall portfolio, leased space totals 96.9 percent and has a low Sears exposure. Two of Macy’s top-grossing stores — Cherry Hill Mall and Springfield Town Center in Springfield, Va. — are located in its malls.

Coradino said the company is “marching toward stabilization.” He pointed to its diverse tenant mix, with retailers for fitness, entertainment, and co-working, and the September 2019 opening of the Fashion District, which he noted is “85 percent committed.”

“It’s a very dynamic space that’s faced a lot of headwinds over the last few years, so they have to keep moving,” Wilson explained. “They can’t tread water. They have to actually swim. So if you can bolt on a good-quality urban dense asset into your portfolio," he said, referring to the Fashion District, "then I think all the better.”

>> READ MORE: Black Friday deals more to shoppers than just discounts

The former Macy’s at PREIT’s Plymouth Meeting Mall is now occupied by a collection of tenants, including Dick’s Sporting Goods, Edge Fitness, Michaels arts and crafts, and Miller’s Ale House. A co-working facility, called 1776, also recently opened at the company’s Cherry Hill Mall.

The company’s top five malls include three in this region: the Willow Grove Park Mall, the Cherry Hill Mall, and the Lehigh Valley Mall.

“We have changed the definition of the mall," Coradino told investors, “and we’re agile enough to stay at the forefront of this evolving landscape.”