Cedar Realty Trust: Preferred And Common Shares That Have Been Thrown Out With The Bathwater

Summary

• CDR sits at a compelling valuation of ~1.84x 2019 YE FFO and at least 62% below NAV.
• Preferred share issuances also offer attractive risk reward ratios with 13% yields.
• CDR has a very stable tenant mix that should enable it to sail through the crisis and deliver strong returns to investors.

Introduction

Cedar Realty Trust, Inc. (CDR) currently sits at a compelling valuation at a price of $0.85/share and ~1.84x 2019 YE FFO and has a 4% forward looking yield. However, not only are the common shares trading at a compelling valuation, but so are the Class B (NYSE:CDR.PB) and C (NYSE:CDR.PC) preferred shares which both have yields at ~13% and trade at $12.65 and $14 per share respectively. Each with $0.01 par value and a $25/share liquidation value. Both series are however currently callable at $25/share.

There are many babies that have been thrown out with the bathwater in the current market sentiment. One such investment class is shopping center REITs. Not that all are created alike but CDR is one that has been "punished" far more than necessary (as though it is going bankrupt) and the current valuation is at an attractive entry point.

Data by YCharts

The stock first started plummeting in 2019 for a few reasons that have been discussed in previous articles:

• Leases renewed at flat or low leasing spreads to lock in the crucial anchor tenants.

Source: 2019 YE Supplemental Information

• YoY decline in revenue (5%) and rising G&A (11%) even though at 2019 YE FFO excluding financing and preferred share redemption costs only fell 6%.

Revenues were lower primarily as a result of (1) $5.4 million relating to a dark anchor tenant terminating its lease prior to the contractual expiration in 2018 at West Bridgewater Plaza, (2) a decrease of $3.4 million in rental revenues and expense recoveries attributable to properties that were sold or held for sale in 2019 and 2018, (3) a decrease of $0.8 million in rental revenues and expense recoveries attributable to same-center properties which was driven by the adoption of the new lease accounting standard.

General and administrative costs were higher primarily as a result of (1) an increase in payroll expense of $2.8 million predominantly relating to the adoption of the new lease accounting standard in 2019 which no longer permits the capitalization of initial direct leasing costs, and (2) an increase in legal and professional fees of $0.6 million, partially offset by the reversal of $1.5 million of accrued expenses related to the termination of the prior Chief Operating Officer.

Source: 2019 YEFS

• Leverage on a Net Debt/Adjusted EBITDAre basis increased YoY from 7.7x to 8.4x (we will address this later on).

The route in the stock price continued in 2020 for reasons in which we are all aware. As a precautionary measure to preserve liquidity in this uncertain environment, management decided to cut the quarterly dividend from $0.05/share to $0.01/share which caused a further acceleration in the stock price's downward trend as it fell ~75% from the end of February 2020 to its low of $0.65/share in early April.

Although there is some cause for concern, I believe this stock represents an attractive risk reward ratio, which is the purpose of this article and discussed below.

Background

CDR is a shopping center REIT that mostly focuses on grocery-anchored properties and differentiates itself through its geographic focus by owning properties in high-density urban markets.

At 2019 YE, the company owned and managed a portfolio of 56 operating properties (excluding properties "held for sale") totaling 8.3 million square feet of gross leasable area ("GLA").

Source: 2019 YEFS

The following information is derived from the below slide in the May 2019 Corporate Presentation.

Since 2011, CDR has disposed of portfolio properties to focus on serving urban markets with populations at least 255,000 within 3 miles. CDR has disposed of 17 properties since 2014 and reallocated the capital into higher-quality assets. Since 2011 CDR has cut the portfolio size from 12 million square feet to 5 million and increased annualized base rent (ABR) per square foot from $11.26 to $16.59.

Source: May 2019 Corporate Presentation

Asset Mix

As we can see below, CDR has a very scattered tenant mix where the top 20 only represent 39% of the tenant mix. More importantly large grocery chain supermarkets such as Giant Foods, Shop Rite, Stop and Shop, Big Y, Food Lion, Walmart Inc. (WMT), Shoppers Food Warehouse, etc. represent ~20% of the base rents. I foresee very little issue with those tenants defaulting as the only changes occurring in consumers' grocery store habits is just shopping less frequently but spending more money amid the current crisis. In fact they may even grow revenues YoY as people are not able to eat at restaurants/bars currently.

Companies like Dollar Tree (DLTR), Home Depot (HD) and Staples are in a similar boat in that they sell many "staple like" products and have not closed their doors. Companies like Marshalls and Kohl's (KSS) have closed their doors but still have an online presence, therefore there is little reason to believe they will run into difficulties in the near term with making payments.

Fitness centers like LA Fitness and Planet Fitness (PLNT) is where issues lie as them shutting their doors to the public essentially cuts off their revenue. However, these companies don't represent more than 5% of the portfolio. Government subsidies in place should allow the franchisees to make their payments in the near term; however, rent deferrals will likely be inevitable for which CDR should still collect the cumulative amount eventually.

Source: 2019 YE Supplemental Information

Financial Condition

On the surface it would appear that the 8.4x Debt/EBITDAre at 2019 YE which rose from 7.7x at 2018 YE looks precarious. Although this is high even for a REIT, given the stable tenant mix, cash flows should not be hugely affected and this level of debt should still be manageable. Not only that but also given the declines in LIBOR, CDR should be able to roll over its debt into lower interest rates as such a low percentage of its assets are encumbered (8% to be exact).

Source: 2019 YE Supplemental Information

Management has also reduced the quarterly dividend from $0.05/share to $0.01/share which will free up ~$14MM in additional annual liquidity that can be put towards servicing the debt if things do go more awry than expected. In addition, management has reduced capital expenditure guidance for 2020 from $20MM-$29MM to $15MM largely as a result of being forced to halt construction in Philadelphia which means three of its major redevelopment projects will be delayed (South Quarter Crossing, Riverview Plaza, and Fishtown Crossing). As there was $17.8MM in common distributions paid in 2019 and with the distribution being cut by 80% that would indicate $3.6MM will be paid over the next year. With FFO at $42MM at 2019 YE, FFO would have to drop by 44% before CDR would have to drawdown on its revolving credit facility to finance CAPEX/common distributions thereby increasing leverage.

As of 2019 YE CDR has $95MM remaining on its revolving LOC that is set to expire in 2021; it also had $3MM in cash for ~$98MM in liquidity which equates to about two-thirds of its 2019 YE revenue. Liquidity on hand would replace revenue for eight months and if tenants default en masse which is unlikely, management and G&A fees would also significantly decline.

In addition CDR has a measly $1.1MM in debt due in 2020 and only $76MM due in 2021 as it has the option to extend the maturity on the revolver out one year. After that the maturities are well-staggered.

Source: 2019 YE Supplemental Information

Therefore CDR does have plenty enough balance sheet flexibility that I don't foresee further reductions to its common dividend.

What provides greater comfort is that as of 2019 YE 91% of CDR's space was occupied and 93% was leased.

Source: 2019 YE Supplemental Information

Only ~5% of base rents are month-to-month and ~8% of base rents are set to expire in 2020. Therefore, only 12% of base rents can be lost completely this year or renegotiated to a lesser amount given the current economic environment.

Source: 2019 YE Supplemental Information

Discount to NAV

A "simple" way to approximate NAV would be to utilize the direct capitalization method which takes the expected annual NOI and divides by a capitalization rate that is best representative of the asset class.

A study by CenterSquare suggests that cap rates have on average expanded 189 bps for shopping centers. Therefore, cap rates for properties that CDR has recently acquired/disposed of may not be relevant.

Source: CenterSquare

Source: May 2019 Corporate Presentation

Although CDR holds properties with cap rates in the 7.5%-9.0% range (not including recent expansions), most of those properties are earmarked for disposal as they are not the core asset class CDR wishes to hold. Therefore, cap rates of 5.5%-7.5% with a 200 bps spread seem like a more appropriate range for our analysis.

We can see from the graph below, even using cap rates on properties at the higher end that CDR owns, the price is trading at at least a 62% discount to NAV.

2019 YE
NOI Run Rate	$93,027
Debt	$633,344
Working Capital	$6,075
Preferred Shares	$159,541
Common Shares	86,341

Click to enlarge

*** Figures in thousands

Source: Author's Tables

Redevelopment Opportunities

The following information is derived from the below slide in the May 2019 Corporate Presentation.

Per the company, "South Quarter Crossing is a proposed 1.2 million square foot mixed-use redevelopment" project that will serve Philadelphia's new South Quarter neighborhood, and has a regular day-time population of ~800,000.

This crossing will feature the following high quality national and regional anchors:

• A new prototypical LA Fitness

• A renovated ShopRite

• Top-performing local merchants

• On-site multifamily residences.

Source: May 2019 Corporate Presentation

The following information is derived from the below slide in the May 2019 Corporate Presentation.

The Riverview Plaza, also in Philadelphia, "sits along three city blocks just south of Washington Avenue on Columbus Boulevard". The development will include some "130,000 square feet of new entertainment, shops, and restaurants, as well as 265 multifamily units". The property is ideal for "prospective merchants on an established retail corridor directly at the I-95 ramp with visibility from the highway roads".

Source: May 2019 Corporate Presentation

The following information is derived from the below slide in the May 2019 Corporate Presentation.

"East River Park is a catalyst for population growth and development," and as this transpires, the portfolio properties should enjoy the ensuing benefits. The property is "strategically situated in northeast Washington D.C." which is home to Ward 7, the emerging "grocery-anchored shopping center in the region". The region was "rezoned for mixed-use in 2016", and "the proposed shopping center will include 225,000 square feet of retail and office space and 365 multifamily residential units".

Source: May 2019 Corporate Presentation

Per the company, "The Port Richmond Village Shopping Center has been a community staple for northeast Philadelphia's thriving Fishtown neighbourhood", which is ideal "for young professionals looking to stay in the city". Fishtown Crossing is another redevelopment that "will transform obsolete small-shops into upgraded pads with better visibility on the highly trafficked Aramingo Avenue". The major grocer IGA "is undergoing a complete rebranding... and features a unique craft beer bottle shop featuring a communal area for consumers to enjoy on site".

Source: May 2019 Corporate Presentation

Conclusion

The preferred share classes offer strong returns that will likely be realized more immediately as CDR would have to suspend the common dividend before there could be any preferred distribution cuts, and as mentioned in the financial condition section, liquidity is plenty enough that the common dividend will not likely get cut further. Investors in these shares should still enjoy a 13% yield that is fairly safe and at the same time reap plenty of upside potential as the shares trade at nearly half their liquidation value. These shares will likely bounce back to pre-crisis levels sooner than their common counterparts as investors just need some more assurances on CDR's debt servicing abilities for which the high leverage position has cast doubt. Either the B or C class is a great option; if liquidity is an issue, I would pick the C class.

Source: 2019 YEFS

On the other hand, I believe the common shares will offer greater long-run returns. I am certain that the common dividend cut is just temporary to ensure cash flow obligations are met if tenant deferrals ensue. There is little doubt that when the crisis is over CDR will go back to its pre-crisis levels of FFO and will be able to make significant returns to shareholders via increasing the dividend to pre-crisis levels which would mean a 20% forward yield or else buying shares back at a significant discount to NAV which the company has been known to do.

Source: May 2019 Corporate Presentation

Investors will see further headwinds as revenues from the redevelopment projects hit their financial statements. Unfortunately, this may not occur until late 2021 as progress on the Philadelphia projects have been delayed. However, CDR anticipates seeing rents of up to $20/sq ft. on the Fishtown Crossing project, which is well above its average rent of $14/sq ft. which will show tremendous incremental revenues.

Analyst’s Disclosure: I am/we are long CDR.PB. 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.