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Investor: Sell weak Moorestown, Exton, Voorhees, Plymouth Meeting malls

PREIT should keep C. Hill, Willow G, Gallery, Springfield, says Litts

LATEST: Don't get him wrong: "Joe (Corradino) and the team (at Pennsylvania REIT, the mall owner) have done a really good job" of buying and selling shopping centers, activist investor Jonathan Litt tells me. Though "they could be doing a better job" explaining how good some of their malls are to Wall Street investors, Litt added. Then maybe PREIT shares wouldn't trade at such a "persistent" discount to other mall owners. like Simon Property Group (they own King of Prussia) or General Growth (which, like Simon, has lately sold many of its properties.)

To boost PREIT's shares -- his firm owns not quite 1%, worth around $10 million -- Litt went public today with his proposal for PREIT to sell 17 of its 33 malls, including several in the suburbs around its Philadelphia headquarters.L

itt says PREIT should keep its malls in Cherry Hill, Willow Grove, Springfield, the Gallery at Market East, and 12 other high-performing locations -- while "liquidating" those at Moorestown, Plymouth Meeting, Exton, Voorhees and 13 other places with high vacancies/low rents. PREIT shares were up 3% in early trading to around $20.

PREIT says it makes more sense to keep selling them one deal at a time. Not good enough, says Litt.

Why would PREIT resist one big sale? "They may be trying to avoid overpromising and underdelivering," Litt suggested. He notes that Simon and General have both "hived off their lower-value assets in one fell swoop." He's also a director of Mack-Cali, the North Jersey office landlord, which last year unloaded most of its aging suburban Philadelphia office buildings to Bill Glazer's Keystone Properties.

If PREIT doesn't sell the properties soon, preferably in a packate, "the chorus of discontent from shareholders may accelerate," Litt warned. "They may be forced into a suitor's arms before they have a chance to right the ship." He added that "I like Joe (Corradino) a lot. He's very engaging. He's open minded. I hope he'll continue to speak with us." But it's rare, Litt concluded, to find a real estate stock so underpriced. With Litt going public, he figures other investors "will say, 'There's gotta be things management can do.'"

EARLIER: Responding to Litt's letter and proposal (read them here, highlights below), Philly-based mall owner PREIT says it's already talked to Litt's activist firm, Land & Buildings, about two of its schemes for bulk sales or spin-offs of PREIT's less-attractive properties -- and concluded that Litt's suggestions would not likely attract higher-priced offers.

Litt is right about one thing: The "quality" of PREIT malls "is misunderstood" by investors, PREIT adds. But PREIT says it's already been selling those out-of-town malls that don't fit its financial-improvement strategy: The firm has made deals in recent years to sell 12 "non-core" malls, for a total of $400 million, while signing mall investor Macerich Co. to help fund $200 million+ in improvements to PREIT's Gallery at Market East, following renovations elsewhere.

"We are confident that the continued execution of our strategy to dispose of selected assets in a deliberate and orderly manner, while strategically enhancing our other properties, is the best way to deliver long-term value," PREIT concludes.

But PREIT "is still largely viewed as a low-quality mall company" by investors, and is currently trading at less than the estimated value of its 16 best malls -- so it should "liquidate" the 17 less-profitable malls, writes Litt, founder of Connecticut investor Land and Buildings, in a letter today to PREIT ceo Joseph F. Coradino.

Sales at Cherry Hill are the chain's highest, at $627/sq. ft./year, Litt says in a presentation posted at his Website. Willow Grove ($430), Springfield (in Delco, $388) and the Gallery ($367) are also above average.

On the other side, Moorestown ($344), Plymouth Meeting ($307), Exton Square ($304), Cumberland (in Vineland, $298) and Voorhees ($206, the chain's lowest) are a drag on valuations, sales and earnings and should be dumped. All 17 outperformers could fetch around $400 million, or $6 a share, Litt figures.

PREIT's properties, counted all together, should be worth north of $2 billion -- or $30 a share, vs the sub-$20 price they've been fetching, Litt adds. It's as if Wall Street values half the company's malls at zero, he points out. PREIT needs to do more to protect investors from the deep discount that their assets now suffer for being part of PREIT, in Litt's view.

If PREIT can't find a buyer to take the lesser malls off its hands, it should "explore strategic alternatives, including a sale of the entire company," Litt concludes.

Besides selling malls as good offers come in, PREIT says it has paid down $500 million in debt over the past two years, dropping its liabilities/gross asset value below 50%, while boosting its shareholder dividend by one-third.

PREIT has added restaurants (with liquor) at Moorestown, medical facilities at Exton, housing at Voorhees (formerly Echelon), and other non-traditional mall attractions in an attempt to boost profits at higher-vacancy suburban centers.