Fitch Affs Pref Stock Rtg For Crown American Realty Trust.

Business Editors

NEW YORK--(BUSINESS WIRE)--June 5, 2001

Fitch has affirmed its 'B+' rating for Crown American Realty Trust's outstanding $124 million perpetual preferred stock, and assigned a 'BB' issuer rating to the company. The Rating Outlook remains Negative.

Crown American is a $1.1 billion (market) self-advised real estate investment trust (REIT) that owns and operates enclosed regional malls in the Mid-Atlantic region. Fitch's rating reflects favorably on Crown American's continuing improvement in operating performance, realization of benefits from recent mall renovations and expansions, minimal development and acquisition activity, and moderate near-term debt refinancing requirements. The credit profile is tempered by average property quality, geographic concentration, constrained financial flexibility, and high dividend payout from cash flow after fixed charges.

Fitch's rating and outlook also recognize that a weaker economy and increasingly competitive retail environment have worsened many mall-based retailers' operating and credit fundamentals, resulting in an increase in store closings and reduction in new store openings. Notwithstanding Crown American's successful 1999 mall upgrades and anchor tenant replacements, Fitch considers the company's long-term exposure to department store closings to be higher than most peers owing to a focus on mid-priced department store chains with greater exposure to value retail formats. Fitch's concern is magnified by Crown American's limited ability to fund associated capital expenditures from operating cash flow, capital recycling activities, or incremental line borrowings. Improvement in Fitch's rating outlook will remain contingent on Crown American's ability to maintain current occupancy levels and positive trends in operating performance.

The Crown American portfolio currently totals 27 malls located in eight states, including 16 malls (59% of revenues) located in Pennsylvania. All but one are 100% owned by the company. The portfolio's trade areas are typically characterized by moderate population growth and household income levels, and are unlikely to experience competition from newly developed malls. The portfolio is well diversified by property, with the largest representing approximately 6% of revenues. Although revenues are well diversified among mall tenants, reliance on individual department store chains is high, with JCPenney and Sears each located in 21 of the malls.

Crown American's operating performance measures continue to improve, in part reflecting benefits of recent leasing initiatives and a significant mall expansion and renovation program, with capital expenditures totaling approximately $200 million over the past four years. Same-property net operating income grew a strong 7% during 1999 and 2000 and slowed to a more modest 2.5% during the first quarter of 2001. Mall tenant sales averaged $265 per square foot in 2000, similar to the national average for regional malls, and were up 4.5% during the first quarter on a same-store basis. Occupancy was 85% during the first quarter, down slightly from year-end and up from 84% one year prior, and remains at the low end of the range for publicly-owned mall operators.

The financial profile is characterized by somewhat higher debt leverage, limited financial flexibility, and a high dividend payout ratio. As of March 31, 2001, debt leverage was 58% based on undepreciated book capital (66% at market) with preferred stock representing another 10% of the capital structure. Leverage has been flat over the past several years, with increased borrowings under the company's $175 million secured revolving credit facility ($152 million available, $141 million outstanding) offset by mortgage debt reduction and proceeds from the sale of certain smaller assets. Fitch anticipates that leverage will remain stable over the intermediate term, providing satisfactory credit protection for preferred shareholders at the current rating level. EBITDA to interest and fixed charge coverage ratios increased slightly during the first quarter 2001 to 2.0X and 1.4X, respectively.

Potential sources of liquidity remain highly constrained, both externally through public capital markets or joint ventures and internally through asset sale or refinancing. Both the revolving credit facility, which was recently extended through November 2004 (secured by six malls), and $461 million in cross-collateralized mortgages maturing in 2008 (encumbered by 15 properties) include provisions that limit the company's ability to sell or refinance assets as a source of liquidity. Crown American's ability to refinance these debt instruments at maturity remains satisfactory, with current interest coverage under the credit facility at approximately 2.0x and loan-to-value under the larger mortgage pool in the 60% range. Although flexibility is somewhat greater for the remaining six properties that are mortgaged individually, Fitch anticipates that three properties secured by mortgages maturing prior to year-end 2003 will be sold or refinanced at break-even levels.

Crown American's inability to fund recurring capital expenditures, debt service, and common and preferred dividends from operating cash flow remains a primary ratings concern. Fitch estimates that in 2001 the company will be required to increase line of credit borrowings by $5-$10 million to fund these requirements. Incremental line borrowings, which could eventually pressure the company's ability to renew or refinance the facility, are offset by a scheduled $11 million in principal amortization. Fitch expects that management will maintain adequate capacity under the credit facility to fund unanticipated capital requirements necessary to maintain or upgrade the portfolio.