2008 Interview with: Pennsylvania Real Estate Investment Trust (PREIT) (PEI-NYSE), CFO, Robert F. McCadden - featuring: their 55 properties, including 38 shopping malls, 13 strip and power centers, and four properties under development, located in 13 states in the eastern half of the United States, primarily in the Mid-Atlantic region..

Pennsylvania Real Estate Investment Trust (PREIT) (PEI-NYSE)

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Pennsylvania Real Estate Investment Trust ({PREIT) Is Positioned For Growth With Much Of The Redevelopment Of Recent Mall Acquisitions Behind Them

REIT - Retail

Pennsylvania Real Estate Investment Trust (PREIT)

200 South Broad Street
Philadelphia, PA 19102-3803
Phone: 215-875-0700

Robert F. McCadden
Chief Financial Officer

Interview conducted by:
Lynn Fosse, Senior Editor
Published – September 19, 2008


Bob McCadden joined PREIT in May 2004, as Executive Vice President and Chief Financial Officer. Before joining PREIT, Bob was an audit partner at KPMG LLP from May 2002. Prior to joining KPMG, Bob was an audit partner in Arthur Andersen’s real estate practice. 


Bob is a graduate of Temple University. He is a certified public accountant and is licensed in Pennsylvania, New Jersey and Florida. Bob is a member of the American and Pennsylvania Institutes of Certified Public Accountants, the National Association of Real Estate Investment Trusts (NAREIT) and the International Council of Shopping Centers (ICSC).


Company Profile:

Pennsylvania Real Estate Investment Trust, founded in 1960 and now the oldest equity REITs in the U.S., has a primary investment focus on retail shopping malls and power centers. Currently, the Company's retail portfolio is approximately 34 million square feet and consists of 55 properties, including 38 shopping malls, 13 strip and power centers, and four properties under development. The Company's properties are located in 13 states in the eastern half of the United States, primarily in the Mid-Atlantic region. PREIT is headquartered in Philadelphia, Pennsylvania. PREIT is publicly traded on the NYSE under the symbol PEI.

Mr. McCadden, will you tell us about your background with the company?

Mr. McCadden: “I have been with PREIT for about four years, having joined the company in May of 2004; prior to that I spent my career in public accounting, first with Arthur Andersen then the last few years with KMPG.”


CEOCFO: What attracted you to PREIT and how has it changed since you have been there?

Mr. McCadden: “When I joined PREIT, it had just completed a series of transforming transactions that had tripled the company’s size. I saw a tremendous opportunity to join a management team that had accomplished much in a relatively short period of time. After evaluating its strategic alternatives, PREIT’s management team decided to move away from a diversified portfolio, consisting of multiple property types, and focus solely on growing the retail portion of its business.”


CEOCFO: How has that worked out, and what is the focus today?

Mr. McCadden: “After PREIT merged with the Rubin Organization in 1997, management acquired a number of malls that the company repositioned or redeveloped to better serve the customers in the respective property’s trade area. The company’s value-add approach was tailored specifically to each location, but generally included a remerchandising of the property to bring in the right mix of new tenants. In other cases, the company completed a more fundamental redevelopment that included renovations of the respective mall’s common areas and physical alterations or expansions to accommodate new tenants.


In 2003, PREIT seized on an opportunity to acquire a number of properties where it had an opportunity to add value through its targeted redevelopment strategy. Initially, the redevelopment plans were modest, following the successful strategy the company used previously.


However, when Federated Department Stores (now Macy’s), acquired the May Company a few years later, the scope of our redevelopment plans changed dramatically. Federated and May had overlapping stores in a number of our properties, so we were faced with the challenge of finding replacement anchor tenants for these properties. On the plus side, the overlapping locations were in many of our better properties, providing us with an opportunity to make additional improvements to the merchandizing mix at these properties.  The most successful example of this can be found at Cherry Hill Mall in Cherry Hill, New Jersey, where we are adding a Nordstrom’s in place of a vacant Strawbridges.


Fast forward to today, we have either recently completed or have underway 22 properties that are subject to some kind of redevelopment.


We have properties in a number of different markets. We have malls in major metro areas such as Philadelphia and Washington, D.C. In the Philadelphia metropolitan area, our market share is approximately 40% of all malls.

We also own a number of malls in secondary and tertiary markets, such as Nittany Mall in State College, Pennsylvania and Lycoming Mall, which is just south of Williamsport, Pennsylvania, home to the Little League World Series. Many of these properties were acquired through our merger with Crown American Realty Trust in 2003. In these smaller markets, are malls are usually the only enclosed malls in those communities. The trade area is very broad, sometimes serving customers in a 50-mile radius around the property. The mall is where customers in the trade area satisfy their apparel and other needs.


Several of the properties acquired from Crown American were overbuilt for traditional mall tenants. In some cases, the properties suffered from chronic vacancy. A good example of this is Lycoming Mall, which had a sizeable vacancy rate when we acquired the property. It was a large mall in a community that already had a full complement of traditional retail mall tenants. The market was missing tenants such as Borders, Dick’s Sporting Goods and Best Buy, traditional big-box, power center tenants. As these types of tenants sought to expand into secondary and tertiary markets, we were able to accommodate their expansion plans by moving them into or around our malls. We do this by relocating some smaller, in-line tenants to existing vacant locations in the mall and aggregating vacancy in one area of the property. Then with a relatively small build-out, we are able to accommodate a larger format tenant that occupy 30 to 50 thousand square feet without having to go through an expensive and time consuming entitlement process. We have deployed this approach widely among our properties located in secondary and tertiary markets.”


CEOCFO: Is that working well?

Mr. McCadden: “Yes it is, for a couple of reasons; today, particularly with the high price of gasoline, having all these retailers in one location allows our customers to concentrate their shopping in one trip. The other benefit for us as a mall operator is it brings new customers to the mall. For example by introducing sporting goods or electronics into a property, it can serve to attract more male shoppers to the mall. Typically, women make up approximately two-thirds of a mall’s customers and it has been difficult to attract men to the mall. By putting in tenants like Barnes & Noble, Borders, Best Buy or Dick’s Sporting Goods, we can attract new customers to the property. Our investment thesis is that when these customers come to the new mall stores for the first time, they will be interested enough to explore other parts of the mall, which will lead to increased traffic and sales at the other mall stores.”


CEOCFO: Will you tell us about your geographic footprint?

Mr. McCadden: “We are primarily in the mid Atlantic but our geographic footprint ranges from as far north as Massachusetts, as far south as Florida, and we go west to Wisconsin. About 60% or so of our assets are based in the mid-Atlantic region which would include Pennsylvania, New Jersey, Delaware, Maryland and Virginia.”


CEOCFO: Would you like to see a change in your locations?
Mr. McCadden: “Over time, we would like to expand our geographic footprint to provide additional diversification in the portfolio. The properties acquired from Crown American and the Rouse Company back in 2003 had a heavy concentration in the mid-Atlantic region. Since then, we have acquired properties in other states, such as Florida, Michigan, and Alabama.”


CEOCFO: If I were in a mall that you owned, would I know the difference?

Mr. McCadden: “You would probably notice the difference in our redeveloped malls. We have tried to introduce new design elements that attempt to make the mall a friendlier place and a place where you might want to spend more time. For example, we have introduced new restaurants into some of our properties. We are adding features such as soft seating and fireplaces to create a more welcoming environment for shoppers.”


CEOCFO: How is business?

Mr. McCadden: “Business is mixed. We’re excited about all of the major redevelopments that are underway. We have added new tenants such as Crate & Barrel, Apple, Armani Exchange and others as part of our redevelopments.  By this time next year, new tenants such as Nordstrom and Whole Foods will be open for business. However, we have concerns about the health of the consumer. We saw our tenants’ comparable store sales decline in the last few quarters. We still see tenant interest in redeveloped properties, which is a very positive sign for us. While some tenants are suffering and scaling back, others are continuing with their expansion plans. We are hopeful that the consumer will continue to shop. The demise of the American consumer has been predicted many times before, but the consumers seem to show resiliency. We are hopeful that if we do have a recession it will be relatively shallow, and we will be able to maintain the momentum that we built through some of the redevelopment and carry that through to the retail tenants as well as the shopper.”


CEOCFO: What is occupancy like today?

Mr. McCadden: “Our mall occupancy rate is about 88% which is in line with our portfolio average over the past few years although it has improved modestly over the last twelve months.


We have a total of nine redevelopments underway, with major redevelopments in process at three of our malls in the Philadelphia suburbs. These redevelopments are unique in their own way, but share some common attributes. When we undertake a major redevelopment it involves a fair amount of physical construction. When that happens, we have to move tenants from place to place within the mall, put up construction fences in the parking lots and install barricades in some of the interior corridors. This disrupts the normal flow of customer traffic in and around the mall.


For example, Cherry Hill Mall in Cherry Hill, New Jersey, is among our more productive assets, generating sales per square foot in excess of $450. We are adding a Nordstrom to the mall, along with a number of new restaurants to complement the recently opened Crate & Barrel & Container stores. We are also relocating the food court in the mall and renovating the entire common area of the mall. In order to move the food court from one end of the mall to the other we have to move certain tenants around and take that space out of service temporarily to create the space necessary to build the new food court construction. We will then move all of the existing and new food court tenants down into the newly constructed food court. At that point, the former food court area will be converted into more traditional mall small shop space. At the same time, we have closed off the center court area in front of the new Nordstrom store so that construction can take place behind the barricade. In doing so, we are taking space off line and reducing the mall’s occupancy rate while all this work is being completed. By doing this, we experience temporary declines in occupancy to create the room to do the physical work. Our goal is to then lease that new space to a different caliber of tenants. By bringing Nordstrom to this mall, to complement the existing Macy’s and JC Penney store, we are attempting to add more upscale tenants to the property to serve the high end customers in the trade area who now go elsewhere to shop.”


CEOCFO: Will you tell us about specialty leasing?

Mr. McCadden: “Specialty leasing is an important part of our business model. Specialty leasing for us includes the carts and kiosks that you typically see in a mall concourse as well as temporary space that tenants occupy in traditional mall stores. Examples of these temporary tenants would include the Halloween costume stores or stores that sell Christmas decorations or calendars around the holidays. Specialty leasing is becoming a greater part of our business because it can serve as an incubator for new retail concepts. Some entrepreneurs may start operating out of a cart or kiosk and if they are successful they can either expand by operating additional carts or kiosks in other malls, or in some cases we have had specialty leasing tenants expand by opening permanent inline stores.”


CEOCFO: You are managing properties that are certainly geographically distributed; how do you do it well?

Mr. McCadden: “We have a general manager at each property to implement and oversee compliance with a standard set of policies and procedures. We also have a regional management structure with four regional managers who oversee individual property general managers. In all cases, our regional managers work in the field. They are in general geographic proximity to the other malls in the area to make periodic visits to make sure there is a standard level of quality.”


CEOCFO: What is ahead for PREIT?
Mr. McCadden: “We are going to continue to work on redevelopment. We have a handful of other properties that could represent significant redevelopment opportunities for us in the future that we are beginning to think about today. The projects we are working on today will carry us through to the middle of 2009. We are also looking at some other projects in our portfolio that would take us beyond 2009 and into the future. Over the past few years, we have also assembled a couple of large parcels of land that are suitable for mixed-use development.


One of the projects I didn’t talk about earlier was Voorhees Town Center in Echelon, New Jersey, about 25 minutes from downtown Philadelphia. This property was built by the Rouse Company in the early 1970’s as part of a planned mixed use community which includes residential, office, and retail development. Over time, the mall that was built in the center of the community started to suffer from neglect; it had at one time four anchor department stores. When we purchased the property in 2003, two of the department stores had closed and the property had a high vacancy rate.

We have been working with a residential developer to create a mixed-use development on this site. We have actually reduced the size of the mall back to its original footprint in the seventies. We are constructing an office building; we are adding restaurants and a spa to the property and creating more amenities around a new town center, which will contain 425 housing units. We see tremendous opportunities in mixed-use development or redevelopment in this country. This type of development has been going on in Europe in the last fifty years. Communities are looking to contain urban sprawl and consumers like the idea of living in communities with more amenities. 


We think there will be opportunities to introduce similar mixed-use elements to some of our other properties. That is how we envision the future, taking our existing assets and great locations and redeveloping them to include residential, office or other components.


We think this approach also makes sense when we develop the large land parcels that we already own. One parcel is just north of the Delaware border in Pennsylvania, another one right off of I-75 in Gainesville, Florida.”


CEOCFO: Is that an industry trend?

Mr. McCadden: “Many communities are requiring it for any new developments. For example, consider a development with a shopping center, Movie Theater and an office building. Typically, the office building’s tenants would be on the premises from nine to five during the day, but not likely to be on site empty during the evening and weekends. The movie theater would typically attract customers in the evenings and weekends. The shoppers would visit the retail site throughout the weekdays and evenings, with more frequent visits during the weekends. As a result, you are spreading out traffic and more effectively utilizing parking, which reduces sprawl. By concentrating these uses in a smaller area, you are more heavily utilizing the infrastructure much like you would in an urban environment. New communities are looking for mixed use developments as an integral part of their plan to control sprawl.”


CEOCFO: In closing, why should potential investors be interested n PREIT?

Mr. McCadden: “For the past few years, we have showed our investors conceptual drawings and lists of potential tenants for many of the redevelopments that are now underway. As we started the physical work on the properties, our financial performance was impacted by the disruption caused by the redevelopments. Today, construction work is underway, leases with key tenants have been signed, and opening dates announced. We are excited as we approach the end of this year and into early part of 2009, as we begin to realize the benefits of our redevelopment program. This should translate into improved financial performance for the company and hopefully higher returns for our shareholders.”


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“For the past few years, we have showed our investors conceptual drawings and lists of potential tenants for many of the redevelopments that are now underway. As we started the physical work on the properties, our financial performance was impacted by the disruption caused by the redevelopments. Today, construction work is underway, leases with key tenants have been signed, and opening dates announced. We are excited as we approach the end of this year and into early part of 2009, as we begin to realize the benefits of our redevelopment program.” - Robert F. McCadden


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