With Time Running Out On PREIT's $1B In Debt, Shareholders Revolt Over Alleged Lack Of Action, Accountability

As Pennsylvania Real Estate Investment Trust fights for its life in the face of a massive debt maturity, a second battle has broken out: between its board and its shareholders. As time runs out on the former, the latter is rapidly intensifying.

The seven longest-serving trustees on PREIT’s board were forced to resign as a result of a shareholder vote in early June, but all seven rejected each other’s resignations, claiming a wholesale change in leadership would be too disruptive. In the weeks since, several large shareholders have aired their discontent with the failed board shake-up and the overall direction of the company.

“I thought it was incredibly odd,” private investor Scott Bishins, who was among the signers of a July 6 letter calling for the resignation of the voted-out board members, told Bisnow in a phone call Wednesday. “I don’t think I’ve ever seen it in my history of investing.”

PREIT’s stock price sits below $1 per share, as it has since before the company was delisted from the New York Stock Exchange in December. Its share price was well over $150 as recently as five years ago. Even as its malls’ performance improves, PREIT still lost over $50M in Q1 due primarily to its high-interest debt, which required over $41M in interest payments alone in Q1, according to the company’s earnings statement.

With corporate debt of $995M due Dec. 10 and no remaining extensions, the mall REIT has raised relatively small sums of money through development deals and sales of outparcels around its malls, and claims to be exploring more dramatic options. But shareholders like Bishins say they haven’t seen proof of those efforts.

“It’s been stagnant for almost two years now, and we haven’t really seen any movement on their part to do anything as far as restructuring their debt,” Bishins said. “The only thing they keep saying is they’re doing everything possible as far as finding a way to restructure the debt, but we don’t believe it’s the case. We don’t believe they’ve tried to put up properties for sale; they have a lot of assets that could be sold to pay down the debt and take the heat off.”

PREIT CEO and Board Chair Joe Coradino and Chief Financial Officer Mario Ventresca declined to comment through a representative.

As a mall operator, PREIT has garnered few complaints. Its same-store net operating income rose 5.7% year-over-year in Q1, average occupancy at its core malls is 93%, up 4% over the past two years, and comparable sales at core malls stood at $603 per SF, compared with $539 per SF at the end of 2019.

PREIT sold $113M worth of assets last year and paid down its debt load by $157M, and it holds up recent entitlements around two of its malls as signals that further outparcel sales for development are on the way. But similar rezoning efforts have stalled for at least two other malls and a deal to sell one of its worst-performing properties fell through in May, the Philadelphia Inquirer reported.

So far, PREIT hasn’t publicly listed any of the malls it lists as core properties for sale. The only property sale it announced in Q1 was for an outparcel containing a Whole Foods at Plymouth Meeting Mall, in the suburbs of its home market of Philadelphia, for $27M.

Last August, PREIT’s failure to pay dividends for six consecutive quarters triggered the election of two new board members, both with real estate backgrounds: Cygnus Capital President and CEO Christopher Swann, who claims over a decade of distressed real estate debt restructuring experience, and Hart Capital Management principal Kenneth Hart.

After Swann and Hart were re-elected to the board this year, they sent an open letter to fellow shareholders on June 15 criticizing the rest of PREIT’s board for moving too quickly to reject each other’s resignations. Coradino and lead independent trustee Michael DeMarco, former CEO of Mack-Cali Realty, said in a public response the next day that their outside counsel had approved the move.

The July 6 letter, signed by Bishins, DLS Capital principal David Steinberg and private investor Michael Meyer, took a harsher tone than Swann and Hart had, calling the collective rejection of resignations “a blatant act of self-preservation and self-dealing at the expense of PREIT and its shareholders.” 

Coradino and DeMarco grew more defiant in their public reply on July 7, citing its hiring of investment bank PJT Partners as an outside consultant to explore strategic alternatives.

“While your letter engages in name-calling and blame-casting as if there were some magic solution that everyone is ignoring, the reality is that, in order to manage the company's impending debt maturities and the difficult state of the real estate and financing markets, management, the Board and PJT have been vigorously exploring all strategic alternatives, which has been broadly disclosed by the Company,” Coradino and DeMarco said in their letter.

Those strategic alternatives are hampered by restrictive covenants on some of its debt, exemplified by PREIT ceding control of Fashion District Philadelphia to joint venture partner Macerich in exchange for debt forgiveness. PREIT’s inability or unwillingness to take bigger swings is resulting in death by a thousand cuts, BET Investments President Michael Markman told Bisnow.

PREIT's Willow Grove Park mall in the Philly suburbs is over 96% occupied, opened a new entertainment venue this year and saw its average comparable sales rise over 6% year-over-year. But as a potential investment, it may not be worth as much as shareholders may assume.

“The [Willow Grove Park] mall is going to die,” Markman said when speaking at Bisnow’s Philadelphia Suburbs State of the Market event on June 28. “I've been watching that property just degrade, degrade, degrade, degrade forever. And it's got to be a major redo.”

From BET’s own experience with mall overhauls — it tore down much of the Granite Run Mall in the Philly suburbs to create the mixed-use Promenade at Granite Run — Markman said he sympathizes with PREIT. But as a private citizen of Abington Township, where PREIT’s Willow Grove Park Mall sits, he opposes the company’s attempt to sell an outparcel to raise funds.

“They asked me what I thought,” Markman said of Abington leadership at the June 28 event. “And I said, ‘Well, you should probably wait, because that's the nugget to redevelop the entire property. And if you give away the milk, they're not going to buy the cow.’ So I basically said to wait, and they listen to me, because they're my friends on the board.”

Both at the event and in a phone call with Bisnow, Markman specified that he only gave his opinion and did not officially influence the township’s decision. No public updates have been made regarding zoning changes around the Willow Grove Park Mall since last year.

“The truth is, they’re doing the best they can in their circumstances, because they’re cash-constrained,” Markman told Bisnow. “As we found at Granite Run, when you do overhauls at these properties, it’s really expensive. The cash is huge.”

The unfortunate timing of Fashion District Philadelphia’s reopening months before the pandemic meant the property never got a chance to stabilize. Its occupancy sits below 80%; PREIT doesn’t count it among its core properties. The cash outlay it required played a significant role in its current situation, likely leaving it dependent on bringing in other investors to transform any other properties, Markman said.

“People that own these properties are in for a really high basis, so it almost always takes someone to come in new, tear stuff down and rebuild,” he said. “And there’s a lot of tenants, so the question is whether to hold on to the tenants. As someone who has historically owned a mall, I know it’s really hard.”

Coradino’s public statements did little to quell shareholder discontent. On July 11, the board received another excoriating letter, this time from its largest shareholder, Saunders Property Co. President John Saunders. Saunders owns nearly 10% of PREIT’s common shares in addition to a chunk of preferred shares.

“The board seems content to let the company drift until it inevitably falls into the hands of its creditors, leaving little or nothing for the shareholders,” Saunders said in the letter, obtained by Bisnow. 

Saunders called for the seven embattled trustees to resign within 30 days and work with Swann and Hart to find new board members, calling failure to do so “unconscionable and unacceptable” and gesturing at the potential for legal action.

“The power to choose trustees rests with the shareholders, not the trustees themselves,” the letter read. “Parsing the relevant documents to evade their obvious intent and relying on a legal opinion to defend your actions doesn’t change that. I’m surprised that the outside trustees aren’t more concerned with personal liability than they apparently are.”

Coradino and DeMarco’s response to Saunders was less demonstrative, but insisted that to try to replace seven of nine trustees in one fell swoop would “result in disruption and an erosion in value.” The letter also chalked up the lack of demonstrable progress to the “frozen state of the real estate and financing markets.”

Refinancing has indeed been difficult to impossible across the board in commercial real estate the past few months, as instability and overexposure concerns among regional banks compounded the pressure of rising interest rates. But with lenders generally averse to the prospect of becoming property owners at the moment, reaching an extension to allow for conditions to improve doesn’t feel out of reach, Bishins said.

“They don’t need a lot to bring down the debt and make it manageable,” said Bishins, who concedes his background is not in real estate.

In office, where fundamentals are much more concerning than in the Class-A malls that PREIT owns, lenders have been happy to extend loans as long as borrowers show a willingness to put more equity into properties. The dynamics are different in the mall sector, but PREIT’s track record in property management and on-time debt payments could in theory make it a model candidate for an extension.

“It seems to me that everyone, including Swann and Hart, see a lot of value in these assets,” Bishins said. “The business has probably never done better.”

With a major chunk of its portfolio tied to its term loans as collateral, PREIT’s debt situation seems inextricable from its survival as a company. But foreclosures don’t happen overnight, so even if Dec. 10 comes and goes without an extension, PREIT wouldn’t necessarily be doomed.

But if PREIT is close to a loan extension or renegotiation deal, shareholders haven’t heard about it. 

“We haven’t seen anything they tried to do or anything that was proposed or needed to be voted on to restructure the debt,” Bishins said. “There’s not enough information out there that they’re doing anything for the shareholders. And we’re just afraid that time is running out.”