Pennsylvania REIT Sheds Rest of Mall Laggards

People at the Fashion Square Mall in Orlando, Fla., which Pennsylvania Real Estate Investment Trust sold in 2013 as part of its effort to shed poorly performing assets. Photo: ZUMA Press

A retail real-estate company has sold four lower-quality malls for $92.3 million, completing its effort to unload the 13 worst-performing assets in its portfolio.

Pennsylvania Real Estate Investment Trust, PEI 4.81 % or PREIT, sold two malls in Alabama and one in Christiansburg, Va., to a fund managed by Farallon Capital Management LLC of San Francisco. It sold Lycoming Mall in Pennsdale, Pa., to Kohan Retail Investment Group of Great Neck, N.Y.

The deals, expected to be announced Wednesday, come as the mall world is splitting into prime properties, in which retailers pay high rents, and those that are struggling to survive. The vacancy rate of some malls has risen so high as retailers contract and competition from online competitors intensifies that owners are finding other uses for the structures, from call centers to community colleges to government offices.

Green Street Advisors LLC said there are about 1,000 malls in the U.S. “Close to 15% should either go away or be repurposed into something other than retail over the next 10 years,” said Daniel Busch, an analyst with Green Street.

Joseph Coradino, who launched the sales effort soon after he took over as chief executive of PREIT in 2012, said the malls, which had high vacancy rates and low sales per square foot compared with similar properties, hurt the company’s image with investors and retailers.

Meanwhile, PREIT’s prime properties, like the Cherry Hill Mall in New Jersey, weren’t getting the attention they deserved, he said. “If we were a car dealership, it would be like putting all our worst vehicles in front,” he said. The Aston Martins, Lamborghinis and Ferraris were being covered over by a bunch of junkers.”

Mr. Coradino said major department stores have announced plans to close stores in some of the malls PREIT sold early in its sales effort. Also, he said that owning the poorer-quality malls has hurt PREIT in negotiations with top retailers.

“National tenants would say, ‘I’ll stay in Lycoming if you give me a deal on one of your better assets,’ ” he said.

The buyers of PREIT’s castoffs paid bargain-basement prices for the malls. Top malls these days are selling at capitalization rates in the 4% range. In other words, the properties’ net income is equal to about 4% of the sales price.

The blended capitalization rate in the sale to Farallon was about 17%, while the Lycoming Mall deal had an 18% rate, PREIT executives said.

Rocky Fried, managing member of Farallon, said PREIT is among many REITs that have been selling lower-quality malls. That is creating opportunities for buyers like Farallon, which has experience in underwriting retail property, he said. “We’re not getting into this lightly,” Mr. Fried said.

Michael Kohan, managing member of Kohan Retail, said the price for the Lycoming Mall is so low that he can cut rents to keep and attract tenants. “I have flexibility if a tenant comes to me and says that sales are down,” he said.

Mr. Kohan also said malls in smaller markets aren’t hurt as much by Internet shopping as malls in big cities. “People don’t want to be sitting at home on Saturday night and shopping online,” he said.

PREIT and Farallon have differing views about the Alabama malls. Mr. Coradino said the markets they served were “terribly small.” Mr. Fried said Farallon likes them because they are “the only game in town” and “part of the social fabric of these communities.”

PREIT said it has sold about $600 million in assets since 2012, including land, power centers and a 50% stake in the Gallery, a redevelopment project in Philadelphia. About $250 million came from the sales of the 13 malls “we didn’t want to own,” Mr. Coradino said.

Other malls that PREIT has sold include the Chambersburg Mall in Chambersburg, Pa., and Nittany Mall in State College, Pa.

Mr. Busch, of Green Street, said PREIT has been more successful than other REITs in disposing of poorer-quality malls. “They deserve a big thumbs-up,” he said. “Selling C-quality mall is a very arduous process.”

Write to Peter Grant at [email protected]