A new series of preferred stock was issued this morning by Pennsylvania Real Estate Investment Trust (NYSE:PEI) or PREIT.
PREIT, a Pennsylvania business trust founded in 1960 and one of the first equity REITs in the United States, has a primary investment focus on retail shopping malls located in the eastern half of the United States, primarily in the Mid-Atlantic region. The portfolio currently consists of a total of 31 properties in 11 states, including 23 operating shopping malls, four other operating retail properties and four development or redevelopment properties.
This note will focus on the relative valuation of the new preferred rather than an analysis of the REIT. I plan to publish a note on the REIT with Brad Thomas over the next couple of days (for those unfamiliar, I frequently write with Brad for his iREIT Investor).
The details of the new series of preferred stock are:
PREIT currently has three series of preferred stock outstanding, including the Series A which should be redeemed in a couple of months. The details of the outstanding issues are:
The following table contains the trading data associated with their outstanding preferred:
As I stated in the introductory bullet points, there may be another option when considering this preferred stock. That option would be the purchase of the Series B instead. The Series B has a stripped price (the market price less the accrued dividend) just below par ($24.99 is indeed just below par) and yields 18 basis points more than the Series C. The cost for this additional bit of income is 4.5 years of redemption protection. The Series B is redeemable in October of this year (the Series C in five years), which means just eight months of call protection. Mitigating this fact is a dividend rate of 19 basis points higher than the new Series C preferred, reducing the probability of redemption. If an investor is considering adding PREIT preferreds, the Series B is worth considering.
Of course, we don't invest in a vacuum, so a look at peer preferreds is in order. The peers being used are fellow mall REITs CBL & Associates (NYSE:CBL), Taubman Centers (NYSE:TCO) and General Growth Properties (NYSE:GGP) as well as EPR (NYSE:EPR) and National Retail Properties (NYSE:NNN). The peer information is:
As the table above (and charts below) shows, the only REIT in the peer group with a higher yield is CBL, which has been under pressure for the better part of a year (and heading lower for longer than that). PREIT/CBL, due to their B/C mall status, have traded at a higher yield for some time - additional yield has a cost, here it is additional risk due to property type.
All the REITs in the peer group have a positive yield-to-call, meaning the worst case (called when first permissible) is not a net negative return.
Only EPR has a stripped price over par:
The stripped yield of the group is over 6% and averages nearly 7% (thanks to CBL and PEI):
Versus the peer group, the new preferreds are higher yield by all measures (except CBL).
Sometimes it helps to know where you have been to know where you are. The stripped yield of the existing two PEI preferreds (A and B) over the last year looks like the following:
The yields on the preferreds increased going into the final stretch of the year and have almost flatlined since.
Interestingly, the following chart shows how the yield on the Series B (I used the series with more of a current coupon as it has not been experiencing significant time decay) did not increase with the spike in the ten-year Treasury, instead the spread was compressed:
Finally, if considering the new issue, they can typically be had under par (before they trade on the exchange). The following table shows the yield at various prices:
Finally, a chart showing the peer group from an equity perspective:
Bottom Line: The new PREIT preferred is attractive from a yield perspective, but an investor must understand that the quality of the assets backing the REIT are not comparable to Simon Property (NYSE:SPG) and B/C malls will continue to be under pressure. As I stated earlier, I will be covering PREIT in more depth in the next few days.
Term sheet here.
Disclosure: I am/we are long EPR, CBL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.