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Fitch Rts PREIT Preferred Stock 'B+'; W/draws Crown American Rating.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 25, 2003

Fitch Rating has assigned a 'B+' rating to PREIT's $124 million of 11% cumulative preferred stock, following the close of Pennsylvania Real Estate Investment Trust's (PREIT) merger with Crown American Realty Trust (Crown). Fitch's Rating Outlook is Stable. In addition, Fitch has withdrawn its 'B+' rating on a $124 million class of 11% cumulative preferred stock previously issued by Crown. The PREIT preferred shares were reissued at the time of the merger in exchange for the substantially similar Crown shares.

In general, Fitch views the credit profile of the newly merged entity as fundamentally stronger than that of the former stand-alone Crown entity. After adjusting for the stepped up cost basis of the Crown assets as a result of the merger, debt-plus-preferred leverage has been reduced to approximately 58% of undepreciated book capitalization in the new entity from 65% in the stand-alone Crown entity. Furthermore, unencumbered assets as a proportion of total assets have risen from nearly zero to one-quarter, fostering significantly better recovery rates for the preferred equity investors in the event of a liquidation. Lastly, with the closing of the $500 million credit facility, PREIT has grown its near-term liquidity to allow for as much as $220 million of additional borrowing availability.

Another noteworthy improvement to the credit profile stems from the larger market capitalization, which is expected to improve the company's access to capital markets by providing additional liquidity to investors. The successful equity offering conducted in August of this year, which resulted in $185 million in net proceeds for PREIT, underscores this point. Proceeds from that offering were used primarily to acquire a 70% outside interest in Willow Grove Park Mall, but also to pay down $94 million in outstanding line debt and fund merger closing costs. The closing of the credit facility with 16 different banks, compared to the single bank on Crown's secured facility, also illustrates this stronger capital markets access.

Despite these improvements to overall credit quality, Fitch continues to highlight a number of key concerns still endemic within the company. Geographic concentration, while certainly no worse than under Crown, remains high with 62% of the portfolio in Pennsylvania and 82% in the Mid-Atlantic region. Also, property-level and corporate-level integration risks remain a challenge due to the vast amount of transition that PREIT has undergone since the beginning of the year. Between the complete disposition of the 19-property multifamily portfolio in June and July 2003, the acquisition of six malls from The Rouse Company for $550 million in June and July 2003 and the 26-property Crown acquisition for $1.3 billion in November 2003, nearly three-quarters of the company's total assets are less than six months old to management. Although Fitch's multiple visits with PREIT's senior management team have offered ample evidence of its collective expertise in owning and managing malls, the strategic shift recently implemented would pose onerous demands on even the most seasoned team.

While near-term liquidity may have increased, near-term capital needs are expected to remain high, particularly as the company begins to execute on its active redevelopment plans for the former Crown assets. Also, despite currently low ground-up development exposure, Fitch anticipates a some increase in these projects over coming quarters. Debt maturities over the medium term are moderate, with the exception of more than 20% of total debt maturing in 2006 when the bank line expires. Over the longer term, Fitch would hope to see a terming out of the capital structure in order to reduce dependency on the bank line as the sole source of unsecured borrowing.

Following the merger, PREIT stands as a $2.6 billion (Fitch-estimated undepreciated book capitalization of PREIT as of Nov. 20, 2003) owner and manager of regional malls, community shopping centers and industrial properties located substantially in the Mid-Atlantic states. As of Nov. 20, 2003, the portfolio consisted of 58 properties in 14 states, including 40 shopping malls, 14 strip and power centers and four industrial properties.
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Publication:Business Wire
Date:Nov 25, 2003
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