PREIT Hedges Rates on $370M of Future Debt

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PHILADELPHIA-Pennsylvania Real Estate Investment Trust has entered into interest-rate swap agreements as hedges against expected interest payments on a portion of its anticipated need for long-term debt. The aggregate notional, or face amount of the agreements is $370 million.

“The spread between short-term and long-term rates is now narrow,” Robert McCadden, EVP and CFO of the locally based shopping center REIT, tells GlobeSt.com, “which makes it economical to lock in interest rates on debt we plan in 2007 and 2008.” The anticipated debt derives, he says, from known obligations that are likely to require financing on some assets in the Crown portfolio and Rouse properties that were encumbered at above-market rates when PREIT acquired them.

In addition, PREIT may also have strategic opportunities for other financings in 2007 and 2008, McCadden says. The swap agreements are intended to manage a portion of the interest rate risk associated with these future financings.

It may include the funding of the early redemption in 2007 of PREIT’s outstanding 11% preferred shares from the Crown acquisition, and the refinancing of a 15-property Real Estate Mortgage Investment Conduit, which matures in 2008. McCadden says PREIT can call the preferred stock issue early at a 5% premium, and, “our expectation is that we would likely put a mortgage on a property.”

In anticipation of these occurrences, PREIT locked in a blended 10-year swap rate of just under 4.7% on $120 million starting in 2007 and a blended 10-year swap rate of just over 4.8% on $250 million starting in 2008. PREIT has not locked in the swap spread component included in these blended rates, which was 0.42% at the time of the transaction and will vary until the respective settlement dates. Excluding the spread component, the underlying effective Treasury rates in the swap agreements would be close to 4.3% and 4.4%, respectively.

“We can’t lock in the credit spread, and we don’t know which properties we might encumber,” McCadden says, “and we might pick up a handful of other properties to encumber with debt. Yet, we have locked in the underlying rate.” Ultimately, the effective interest rate on the anticipated 2007 and 2008 debt issuances will depend on the swap spreads and the credit spreads in effect at those times.

McCadden notes that this is not an uncommon financing strategy in an environment in which the spread between short-term and long-term debt is narrow and he expects other companies will do the same. “We looked at it when the spreads were wider, and it was too expensive.” Chatham Financial served as PREIT’s financial advisor. The counterparties to the swaps are all financial institutions that participate in PREIT’s credit facility.