After PREIT Trustee’s Sudden Death, Disgruntled Shareholders Make Their Move

When Temple University acting President JoAnne Epps died after falling ill onstage on Sept. 19, she left a void at the institution and in her community.

She also left a void on Pennsylvania Real Estate Investment Trust's embattled board of trustees that has set off a fight over her open seat.

An ad hoc group of shareholders led by Saunders Property Co. President John Saunders and DLS Capital principal David Steinberg sent an open letter to PREIT's board Oct. 2 demanding to choose Epps' replacement by Oct. 9 under threat of legal action.

The letter was sent by Glenn Agre Bergman & Fuentes co-founder and Managing Partner Andrew Glenn, a bankruptcy and restructuring specialist who is representing the ad hoc group. The group has also hired finance advisers, shareholder Scott Bishins told Bisnow.

"The choice for the Board is clear: it can respect shareholders’ right to determine the Board’s composition or continue to ignore shareholders at its peril," Glenn said in the letter.

The group didn't disclose who it would name to the open board seat if given the chance, but it already has a corporate restructuring expert selected, Bishins said.

PREIT responded Wednesday with a letter of its own, a copy of which Bisnow obtained. The response letter rejected the ad hoc group's demand, asked that the group members identify themselves and denied any wrongdoing.

PREIT and CEO Joe Coradino declined to comment through spokesperson Jacqueline Tammaro. Steinberg declined to comment, while Glenn and Saunders didn't respond to requests for comment.

The exchange is the latest escalation in a power struggle that began in the wake of PREIT's annual shareholder meeting June 1. The Philadelphia-based mall REIT has a two-part term loan maturing Dec. 10 that had a balance over $1B as of PREIT's second-quarter earnings report, released Aug. 3.

The loan has no extension options remaining, having exhausted them in the past three years.

The approaching maturity has been a threat to PREIT's existence for years, in addition to being the cause of ballooning interest payments due to much of the term loan being floating-rate. A lack of concrete action or updates from PREIT's board or Coradino drove shareholders to withhold their support for all but the two newest trustees at the annual shareholder meeting this summer.

PREIT's corporate charter forced the voted-out board members, including Epps, to tender their resignations. But a week later, the board's nominating committee voted to reject those resignations. Although committee members couldn't vote on their own resignations, they constituted a majority of each other's votes — thereby violating the charter, the ad hoc group's letter claims.

PREIT's charter calls for only those trustees voted back in by shareholders to decide whether to accept resignations, Glenn wrote in the letter.

"With this factual backdrop, it is now clear that the Board is motivated by self-preservation rather than the best interests of the Company’s shareholders," the letter says. "The Ad Hoc Group will not tolerate this complete disregard of the shareholder vote."

The two new members, Cygnus Capital President and CEO Christopher Swann and Hart Capital Management principal Kenneth Hart, joined in public calls by Saunders and Steinberg in June and July for the other board members to step down and/or provide more transparency on efforts to address the impending debt maturity.

In the shareholder letter, Glenn directed PREIT's leadership to preserve all documents regarding the meeting, the decision to reject the resignations and everything related to its debt situation and attempts to rectify it. The letter warned that board members would be held personally liable.

"We put on record that we will go after them personally if we don’t get a board seat and can’t get things going," Bishins said. "There’s not a lot that can be done in 60 days, but one of the options is litigation. They could file for bankruptcy during litigation, so we would like not to go that route."

The ad hoc shareholder group met with attorneys and financial advisers Thursday afternoon to decide next steps and confirmed that it will move forward with litigation. Bishins said the primary aim would be penetrating what he called an information vacuum from PREIT leadership regarding what it is doing about its debt maturity in 65 days.

"We feel [PREIT's] assets are tremendous, and for whatever reason, they’re not communicating to us." he said. "We don’t know what’s going on, but at this point in time, it’s been silent for months."

PREIT hasn't made any public statements about its debt status since its Q2 report and subsequent earnings call, during which company leadership took no questions.

In the past year and a half, PREIT has only paid down a fraction of its corporate debt through the sale of outparcels at some of its malls. For the second half of the year, PREIT also owes an estimated $381M in balloon payments alone for mortgages against its malls, according to its quarterly report.

Despite its radio silence, PREIT did make a recent move addressing debt issues at one of its properties, but one that raised more questions than answers for the shareholder group.

On Sept. 27, PREIT drew $54M from its term loan's revolving credit facility to refinance a loan against its Dartmouth Mall property in Massachusetts and acquire an unspecified property, the company declared in a Securities and Exchange Commission filing first reported by the Boston Business Journal.

The Dartmouth Mall loan, which has been securitized in a CMBS package, had been in default since it matured in April with a $53M balance. As part of the deal struck with special servicer Wilmington Savings Fund Society, the 99% occupied, cash flow-positive Dartmouth Mall becomes collateral for the term loan, which still matures Dec. 10.

The refinancing deal triggered a new appraisal for the property, valuing it at $59M, or 55% of its $108M value when it was securitized in 2013, the BBJ reported. PREIT didn't disclose the terms of its refinancing deal, or even if it has closed, in its SEC filing.

Bishins understood the filing to mean that PREIT used the $54M to pay off Dartmouth Mall's loan, making the mall free of any mortgage, he said. The fact that PREIT didn't announce or celebrate progress on its debt situation only deepened the ad hoc group's suspicion of the PREIT board's lack of communication with shareholders, Bishins said.

Coradino has cited the collapse of the debt markets as a chief reason for PREIT's difficulty in refinancing its corporate debt or impending mortgage maturities early next year for Cherry Hill Mall, its most successful property, and Fashion District Philadelphia, its biggest boondoggle.

To the ad hoc group, the Fashion Center is perhaps PREIT's best chance at softening the blow of the Dec. 10 maturity, Bishins said.

The Philadelphia 76ers, through subsidiary 76 DevCo, are attempting to win political support to build an arena on a site occupied by the Center City mall. 76 DevCo has a handshake agreement in place regarding the property with Macerich, which co-owns Fashion District with PREIT in a 50-50 partnership but retains full decision-making control after helping PREIT pay down part of its mortgage against the three-block-long mall.

Macerich has declined to comment on the potential for an arena. 76 DevCo CEO David Adelman has said that the company would purchase the arena site and partner with Macerich to redevelop the two remaining blocks of the mall, but he has given no further details.

PREIT's name has been conspicuously absent from 76 DevCo's pitch for 76 Place, though it is responsible for 50% of the building's mortgage, per SEC filings. As of June 30, the loan had a $76M balance that comes due in January. In its Q2 report, PREIT disclosed that it "would not be able to satisfy the obligations" of the loan when it comes due.

The potential for PREIT to default on its half of the loan, or for its half to become tied up for years in a Chapter 11 bankruptcy proceeding, is a primary factor in the 76ers' urgency in getting necessary legislation passed by Philadelphia City Council, though Adelman now doesn't expect it to happen until after the maturity date passes. 

The ad hoc shareholder group believes that 76 DevCo and PREIT have been in closed-door negotiations to either buy out PREIT's ownership share or pay off its debt to prevent the property from being tied up in litigation, Bishins said. If that is the case, it would be an encouraging sign that PREIT has some negotiating leverage.

A deal between PREIT and the 76ers is "possibly already done, because PREIT could file for Chapter 11 at any point in time," Bishins said, stressing that he was only guessing based on following the news.

"The Sixers can’t possibly afford to deal with that, considering all the time and money they’ve spent trying to get this approved," he said.