Today Land and Buildings, an investment firm specializing in publicly
traded real estate and real estate related securities, and a shareholder
of Pennsylvania Real Estate Investment Trust (“PREIT”) (NYSE:PEI), sent
a letter to the CEO of PREIT.
The letter reiterates Land and Building’s proposal that selling the
Company’s 17 low productivity malls could result in a $700 million boost
to valuation, or over $9 per share. Land and Buildings also noted that
this move would reduce overhead costs, leaving the company with over
$600 million in excess cash and improved credit metrics.
The full text of the letter can be found below, and Land and Buildings’
previously-released presentation on PREIT can be accessed at www.landandbuildings.com.
Full text of the letter follows:
October 29, 2014
Joseph F. Coradino
Chief Executive Officer
Pennsylvania Real
Estate Investment Trust
200 South Broad Street
Philadelphia,
PA 19102-3803
Dear Joe:
Thank you for the response (“PREIT Comments on Land & Buildings' Press
Release,” October 20, 2014) to our proposal on how to maximize
shareholder value and unlock the estimated 50%+ upside to the private
market value of PREIT’s assets. We both agree that the Pennsylvania REIT
(NYSE: PEI) regional mall portfolio is likely misunderstood by the
investment community, given that 16 of your malls are highly productive,
generating an estimated $480 in annual sales per square foot, likely
driving strong net operating income growth and comprising ~80% of PEI
asset value.1
We strenuously disagree with your assertion that there would be no
“valuation uplift” if you sold the 17 lower productivity malls and other
non-core assets in your portfolio. Numerous PEI shareholders share our
view that the plan we outlined would unlock substantial value for
shareholders. We estimate there would be about a $700 million valuation
uplift or over $9 per share as the company would go from an
approximately 9% implied cap rate today to likely a 6% implied cap rate.
Value would be monetized at low quality assets that, in our view, is not
currently reflected in PEI share price and the remaining “Keeper”
portfolio of 16 high quality mall assets should trade toward NAV.
You cite execution as a risk; however, as recently as last month Michael
Glimcher, CEO of Glimcher Realty Trust (NYSE: GRT) declared victory in
achieving his goal of selling 13 lower productivity malls through the
sale to Washington Prime Group (NYSE: WPG) of his entire company. David
Simon, CEO of Simon Property (NYSE: SPG), the largest owner of regional
malls, stated earlier this year, “…there are buyers for everything right
now in any assets…our partner is selling a mall and the cap rate is
blowing me away in terms of what – in terms of how low it is. So, there
is a lot of capital for retail real estate in every bucket…I expect a
lot of trades to happen.”2 Given the significant amount of
capital seeking regional mall assets as well as yield, a larger scale
disposition program seems appropriate.
In your response to Land and Buildings, you brought up several
additional points which we disagree with and we believe may be the
result of your not fully understanding our proposal.3
Specifically, we believe the following:
-
Leverage implications – The liquidation of 17 malls would produce an
estimated $1 billion of gross proceeds and over $600 million of net
proceeds after repaying mortgage debt. Net debt plus preferred stock
to gross asset value would likely decline from 48% today to 34%.4
-
Liquidity implications – PREIT would retain nearly $600 million of
excess cash from the sales after the repayment of mortgage debt on the
17 malls sold to fund future investment activity and buy back shares.
-
Operating implications – Selling 17 malls would likely allow for the
company to reduce overhead costs by exiting certain markets, creating
an increased focus on the “Keeper” portfolio assets and driving even
superior net operating income growth.
-
Credit implications – With reduced secured debt and an improved
portfolio quality, credit metrics should improve, not deteriorate.
-
Transaction costs – Transaction costs would be minimal relative to the
$700 million of shareholder value creation that could be realized by
closing the discount to estimated net asset value.
In addition, in your letter you state a “strategy to dispose of selected
assets in a deliberate and orderly manner,” yet you have only two malls
as of the end of the third quarter that are denoted as “non core” and
otherwise have no stated plan to “dispose of selected assets in a
deliberate and orderly manner.” We believe an announcement of a plan to
liquidate the 17 least productive malls in a deliberate and orderly
manner over the next several quarters would meaningfully maximize
shareholder value. Further, should the discount to net asset value not
close, part of the stated strategy should include evaluating strategic
options.
We look forward to continuing to work with you and your team in a
constructive and friendly manner to maximize shareholder value.
All the best,
Jonathan Litt
Founder & CIO
Land and Buildings
cc:
Robert McCadden
Bruce Goldman
Heather Crowell
###
About Land and Buildings:
Land and Buildings is a registered investment manager specializing in
publicly traded real estate and real estate related securities. Land and
Buildings seeks to deliver attractive risk adjusted returns by
opportunistically investing in securities of global real estate and real
estate related companies, leveraging its investment professionals' deep
experience, research expertise and industry relationships.
Cautionary Statement Regarding Forward-Looking Statements
This communication contains “forward-looking statements” that involve
numerous risks and uncertainties. The statements contained in this
communication that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. All forward-looking statements included in this
document are based on information available to Land and Buildings on the
date hereof. In some cases, you can identify forward-looking statements
by terminology such as “may,” “will,” “seek,” “should,” "could,"
“expect,” “anticipate,” “project,” “estimate,” “intend,” “continue” or
“believe” or the negatives thereof or other variations thereon or
comparable terminology. Such statements are not guarantees of future
performance or activities. Due to various risks, uncertainties and
assumptions, actual events or results or actual performance may differ
materially from those reflected or contemplated in such forward-looking
statements. The opinions of Land and Buildings are for general
informational purposes only and do not have regard to the specific
investment objective, financial situation, suitability or particular
need of any specific person, and should not be taken as advice on the
merits of any investment decision. This material does not recommend the
purchase or sale of any security. Land and Buildings reserves the right
to change any of its opinions expressed herein at any time as it deems
appropriate. Land and Buildings disclaims any obligation to update the
information contained herein. Land and Buildings and/or one or more of
the investment funds it manages may purchase additional Pennsylvania
REIT shares or sell all or a portion of their shares or trade in
securities relating to such shares.
1 Please see Land and Buildings’ presentation titled,
“Pennsylvania REIT (PEI): 55% Upside to NAV” published October 20, 2014
for our detailed valuation assumptions and fundamental analysis, based
on second quarter 2014 financials.
2 Simon Property Group first quarter 2014 earnings conference
call
3 The proposal referenced in this letter refers to a
portfolio sale of PREIT’s 17 malls with sales productivity below $350
per square and other non-core assets, as described in Land and
Buildings’ presentation cited above. An alternative strategy to maximize
shareholder value, a spin-off of those same low productivity assets into
a C corp that liquidates, could achieve similar outcomes with limited
leverage, liquidity and credit complications if structured properly.
4 Balance sheet data as of the end of second quarter 2014 and
assumes all gross proceeds from dispositions are used to pay down net
debt.
Copyright Business Wire 2014