Hamstrung By Debt Covenants, PREIT Warns It May Go Under Despite Record Q4
A day after PREIT released its earnings report for Q4, CEO Joe Coradino sounded an optimistic, even defiant tone as he declared the company "in great shape." The 2021 financial report it filed with the Securities and Exchange Commission the next day told a different story.
In its annual 10-K filing, PREIT issued a warning that due to the size of its debt and restrictions on its ability to afford repayment, it was announcing "substantial doubt about our ability to continue as a going concern." The shopping mall-focused REIT's primary barrier to remain in operation is the $194M outstanding balance on a loan tied to Fashion District Philadelphia, its newest development that opened months before the pandemic in Center City.
The REIT is also in imminent danger of being delisted by the New York Stock Exchange due to its value, which sits below $1 per share, with an August deadline to clear that bar. When trading opened on Thursday, PREIT was valued at 77 cents per share.
The FDP Loan Agreement, as PREIT referred to it in its reporting, comes due in January 2023, though it does have an option to extend the maturity date by a year if certain conditions are met. Though Coradino and a PREIT spokesperson separately declined to specify the conditions required to exercise the option, its earnings report states the loan includes a covenant requiring monthly debt yield of 10%, which PREIT has been unable to meet. That failure has already caused the lenders to "sweep cash" from the property and imperils PREIT's ability to secure the needed extension, though it is officially not a default, PREIT's filing stated.
The most encouraging sign for PREIT is that its malls have outperformed the sector on the whole over the past year, Coradino said on the earnings call. The company reported a record $614 in sales per SF in January after recording a 52.5% year-over-year improvement in net operating income in Q4. Cherry Hill Mall in South Jersey was PREIT's best-performing property in January, with more than $1K in sales per SF.
"The business is in excellent shape, customers are shopping, new tenants are opening, there's demand from a variety of users, including multifamily and hotels, and we believe we can opportunistically extract value to improve our balance sheet," Coradino said in prepared remarks on the call.
In the near term, PREIT hopes to raise capital for debt payments through property sales — both of land for development around malls it intends to keep and outright sales of malls it considers noncore properties. The company is nearing finalization on $180M worth of asset sales in the coming weeks, Coradino said, though it has struggled with securing zoning and entitlements for its development sales, Philadelphia Business Journal reports.
The company reached an agreement on March 14 to sell The Exton Square Mall to a developer for $27.5M in a deal set to close in 90 days, its annual filing reported. PREIT's owned portion of the 50% leased Chester County mall, with anchor tenants Macy's and Boscov's after Sears closed in 2019, is over 800K SF.
With only $35M in unrestricted cash and a further $76M in liquidity through a revolving credit facility, PREIT is far short of what it needs to repay the FDP loan, which is held by multiple creditors, a representative from PREIT told Bisnow. PREIT and Macerich, its 50-50 joint venture partner at Fashion District, originally secured the loan from Wells Fargo to finance the redevelopment of what had been the Gallery Mall.
In order to make payments on its half of the loan, PREIT borrowed $100M from Macerich in exchange for ceding control of major decisions at the mall, which has never reached 100% occupancy, according to the company's filing. The REIT now has a $57M balance on its loan with Macerich due on Dec. 31, and will not receive its share of cash proceeds from Fashion District until the balance is settled.
