Cedar Realty Trust: A State Of Equilibrium

Aug.14.12 | About: Cedar Realty (CDR)

Cedar Realty Trust (NYSE:CDR), a retail REIT focusing on grocery anchored shopping centers, has been host to some incredible market fluctuations. It opened in 1993 at $4.50 with a massive $1.20 annualized dividend for a yield of 26.6%. In today's yield hungry market the price would be driven up, but CDR remained in the vicinity of its opening price until 2000 when it stopped paying dividends. Since that time, CDR was a rollercoaster of splits, reverse splits, dividend hikes and cuts, and price volatility which culminated in the selection of new management just over a year ago.

While little information is released as to why new management was brought in, I would hypothesize it was to restore order from chaos. The new team is highly aligned with shareholders due to its 26.8% insider ownership and is dedicated to long term returns. With more long-term oriented management it would appear that CDR is about to defy history and become a stable security. Following is an explanation of why I believe Cedar Realty is in for a long streak of approximately market returns.

Dark anchors

In its second quarter earnings, CDR reported 91.9% leased occupancy and only 90.2% physical occupancy. The discrepancy is largely due to what it calls "dark anchors" which are leased but unused grocery stores that are supposed to draw customers to the shopping center. As the tenants are continuing to pay rent, there is no immediate financial harm, but the lost customer flowthrough reduces the value of the entire shopping center. In response, Cedar is terminating the leasing contracts associated with these and releasing to new anchor tenants. Most of the dark anchors are former Supervalu stores and are expected to be released with approximately the same rental rates on average.

Preferred swap

CDR is in the process of redeeming its 8.875% Series A preferred and funding it with the issuance of a 7.25% Series B preferred. This refinancing is rather standard practice as many other REITs have already done it this year, but CDR is doing it in a very intriguing way. It issued only 400,000 shares of the B initially at $23 per share, leaving the rest to be issued to an ATM offering. In this way, Cedar will only have to swallow the lower price of $23 on a small portion of the shares and should have no trouble releasing the rest at par. In fact, the market price of CDR-B has already climbed to $24.99. Through use of this intricate maneuver, CDR will be able to unlock the full value of its preferred refinancing.

Yield and market position

I mentioned the strange history of CDR's unsustainable dividends, but this pattern has ended with the new management team. The dividend has been resized to an annual $0.20, which is not all that enticing, but very stable at about 40% of estimated FFO. The rest of the stock's market position has become equally unremarkable as well.

Company

Recent Market Price $

Yield %

Price/est. FFO

EBIDTA/interest expense

Cedar Realty

$5.40

3.70%

13.3

2.0

Retail Sector Avg.

n/a

4.04%

16.1

2.8

Click to enlarge

Over the past year, CDR has achieved nearly 60% total returns to reflect the strong financial performance and excellent decisions of the new management. The resultant market price leaves it correctly valued, poised for stable returns approximating the market average.

Disclosure: This article is for informational purposes only. It is not a recommendation to buy or sell any security and is strictly the opinion of the writer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.