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PHILADELPHIA-Although it recorded a second-quarter loss of $2.9 million, Pennsylvania Real Estate Investment Trust’s chief officers report they remain optimistic and are moving forward with projects and plans to repay the real estate mortgage investment conduit.

“While the economic environment has changed substantially in the past year, the fundamentals of our business have not,” PREIT CEO Ronald Rubin said during the earnings call. “Despite the challenging economy, we’re working to advance our redevelopment and development projects to place stores in service, increase net operating income and occupancy and to generate positive leasing spreads.”

Net loss allocable to common shareholders for the quarter was reported to be $2.9 million compared with a net income available to common shareholders of $500,000 in Q2 2007. Net loss for the first six months of 2008 was $5 million versus an income of $6.2 million in the first six months of 2007.

According to Robert McCadden, PREIT’s CFO, several factors have contributed to the loss, most notably the closing of department stores at six PREIT-owned malls to facilitate the addition of new anchors. Former Value City locations in Chambersburg, Lycoming, Cumberland and Uniontown are being replaced with Burlington Coat Factory stores, most of which will open at the end of the month. In addition, two Duff stores were closed to make way for an 85,000-sf JCPenney and space was taken at the Wiregrass Mall in Dothan, AL to accommodate a new, larger Duff’s.

McCadden reports that 1.2 million sf of owned anchor space currently is vacant and an additional 120,000 sf has been decommissioned when the stores were demolished to make way for new construction. Replacement tenants have signed leases for almost all of the vacant spaces, according to McCadden. The closures resulted in a reduction in net operating income of $0.6 million.

McCadden also revealed that expenses have risen by $0.7 million due to the bankruptcies of Whitehall Jewelers, Steve & Barry’s and Goody’s Family Clothing. The company has experienced a higher depreciation and amortization expense due to several development and redevelopment projects for the portfolio.

Despite the downturn, officers remain optimistic and credit the company’s diverse tenant base and primary locations in the still-strong mid-Atlantic region as factors that will help PREIT ride out the downturn.

“Overall, we had a solid quarter given the environment in which we’re operating,” said PREIT president Edward Glickman. He reported 97,000 sf in 51 new leases and 246,000 sf in 97 renewals were signed in the second quarter. “We believe that our recently completed redevelopment work has strengthened many of our assets and has given us the positive momentum to mitigate the negative impact of declining consumer sentiment,” he continued. “We have, however, given up some of our expected growth conditions in the retail market.”

PREIT’s team is confident enough to move forward with repayment of a $400-million balance on its real estate mortgage investment conduit, which was assumed in connection with PREIT’s merger with Crown American Realty Trust. In order to repay the loan by Sept. 10, PREIT has refinanced three power centers, Creekview in Warrington and Paxton in Harrisburg, both in PA, and Christiana in Newark, DE for $119 million. The proceeds will be used to repay PREIT’s credit line to create liquidity ahead of the payoff.

PREIT also has secured commitments from financial institutions for almost $300 million in new mortgages for four properties tied to the conduit financing: Jacksonville Mall in Jacksonville, NC, Logan Valley Mall in Altoona and Wyoming Valley Mall in Wilkes-Barre, both in PA, and Patrick Henry Mall in Newport News, VA. Proceeds from the refinancing and the availability on the company’s credit line will be used to repay the conduit and leave PREIT’s net operating income 25% unencumbered. Today, the unencumbered NOI is 15%. Remaining liquidity will go toward development and redevelopment of some assets.

The officers assured investors that the latest rash of retail bankruptcies is unlikely to negatively affect the company. According to Joseph Coradino, president of PREIT Services LLC and PREIT-RUBIN Inc., the portfolio includes only one Goody’s, two Steve & Barry’s and three Linens ‘n Things. The REIT’s largest exposure is Boscov’s, which recently filed for Chapter 11 protection. PREIT has eight Boscov’s locations in its portfolio and an additional two under construction, but none of its locations are among those that the retailer plans to close.

PREIT’s officers noted some retailers are using the downturn and the bankruptcies as opportunities for expansion. According to Coradino, American Eagle Outfitters, Abercrombie & Fitch, Charlotte Russe, Forever 21, Sephora and Apple are taking advantage of vacancies in prime locations.

“We have seen continued leasing momentum during the second quarter,” Coradino said. “We remain confident that our strategy of redevelopment, remerchandising and renovating our portfolio will allow us to successfully weather the economic storm.”

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