Pennsylvania Real Estate Investment Trust: Nearing the End (NYSE:PEI)

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Amid the pandemic, the Pennsylvania Real Estate Investment Trust (NYSE:PEI) filed for Chapter 11 bankruptcy in 2020. The company faces $1.47 billion in debt payments this year, which is more than four times as much company’s forecast annual sales of $277.6 million.

The stock price continues to fall, down (-71.3)% year-to-date to just $0.31 per share at the time of this writing.

Line chart showing a 71.3% drop in share price since January 1st

I’m looking for Alpha Premium

Is there any hope for this company to survive?

Get to know the company

Founded in 1960, Pennsylvania Real Estate Investment Trust is one of the first REITs ever formed. The Pennsylvania Real Estate Investment Trust is headquartered in Philadelphia. The Company owns 19 regional malls totaling approximately 16 million square feet in dense urban areas and claims an average household income of just $85,000 in surrounding communities. The national average is $104,000. The properties are located in the eastern half of the US, with an outlier in Michigan.

Map of the eastern US showing lands from Pennsylvania and Rhode Island south to South Carolina and one west of Michigan

Geographic distribution of PEI assets (Investor presentation of the company)

According to the company’s website, Joseph F. Coradino was appointed CEO in 2012 with a mandate, ” [improve] Improving portfolio quality and balance sheet while improving operational performance to position the company for growth.” The company says it is committed to “transforming the future of America’s shopping center into mixed-use districts. . . [turning] to make it a multigenerational community center.” The plan doesn’t seem to be working, as we’ll see below.

Quarterly results look bleak

The company’s 10-Qs for Q1 2022 reflect these results:

  • Total revenue of $69.4 million, up 6.2% year-on-year (YoY).
  • Total expense of $105.7 million, resulting in a loss of $39.3 million ($0.49 per share), more than half of the company’s quarterly earnings.
  • Net cash from operations of $8.4 million, down 47.9% year-on-year.
  • $850 million in assets in unconsolidated partnerships, which posted a net operating loss of $394,000 at an 84.5% utilization rate, versus $951 million in liabilities in these partnerships.
  • Quarterly interest expense of $23.1 million, about a third of revenue.
  • Overall occupancy of 92.7%, of which 94.3% in consolidated properties, both up about 500 basis points year-on-year.
  • FFO and AFFO per share of (-$0.01) and (-$0.06) per share, a significant improvement over the corresponding (-$0.14) and (-$0.15) a year ago, however still below value. (The company’s investor presentation touts a 13 cent per share improvement in FFO.)
  • Extension lease spreads of 3.7%.

If we extrapolate the company’s earnings to four times Q1, we arrive at an estimate of $277.6 million.

The chart shows consolidated properties with an occupancy rate of 94.3%, unconsolidated properties at 84.5% for a composite average of 92.7%, all about 500 basis points higher than last year

PEI 10-Q for Q1 2022

Management reports that 95% of revenue comes from tenant rentals and tenant-related activities. PEI’s pipeline of fixed contractual lease payments over the next 5 years totals $663 million, with an additional $248 million thereafter.

shows $138.4 million this year, plus $167.3 million next year, $144.6 million in 2024, $116.0 million in 2025, and 96.9 million US dollars in 2026

PEI 10-Q for Q1 2022

The company announced that it has established a $275 million pipeline for much-needed asset sales.

Recent Developments

The Four Corners Property Trust (FCPT) announced on June 9 that it will purchase 11 outparcel properties from PEI for $32.5 million. FTSE has since removed Russell PEI from the Russell Microcap Index.

growth metrics

Here are the 3-year growth numbers for FFO (funds from operations), TCFO (total cash from operations) and market cap.

Metric 2018 2019 2020 2021 3-year CAGR
FFO (millions) $111.5 $104.6 $(-1.7) $4.4
FFO Growth % (-6.2)% (-100.0)% N / A (-66.0)
FFO per share $1.54 $1.04 (-$0.01) (-$0.04)
FFO growth per share in % (-32.5)% (-100.0)% N / A (-100.0)
TCFO (millions) $134.9 $111.4 $5.9 $69.0
TCFO Growth % (-17.4)% (-94.7)% 1069.5 (-20.0)
Market Cap (Billions) $0.41 $0.41 $0.07 $0.08
Market Cap Growth % 0.0 (-83.0) 14.3% (-42.0)%

Source: Hoya Capital Income Builder, TD Ameritrade, CompaniesMarketCap.com and author calculations

As you can see, PEI was already struggling with declining FFO and cash flow when the pandemic struck, and the company hasn’t recovered, despite seeing a sharp increase in cash from operations in 2021.

Thanks to the 73% sell-off in share prices in 2022, the market cap has fallen to a microscopic $0.02 billion, even the (-42.0)% 3-year average fall in market cap shown in the table above overrated the performance of the company.

Here is how the stock price has performed over the last 3 twelve month periods.

Metric 2019 2020 2021 2022 3-year CAGR
PEI share price June 10th $6.69 $1.86 $2.97 $0.31
PEI share price gain % (-72.2) 113.4 (-89.6) (-64.1)
VNQ share price June 10th $88.73 $83.18 $105.50 $92.62
VNQ Share Price Gain % (-6.3) 26.8 (-12.2) 4.4

Source: MarketWatch.com and own calculations

In price gains alone, the market cap weighted Vanguard Real Estate ETF (VNQ) has gained an average of 4.4% over the past 3 years, while PEI has unfortunately lost (-64.1)%.

balance sheet ratios

This is the worst record I have ever seen from a company I have reviewed on Seeking Alpha. PEI also stands out from the crowd in the mall REIT sector, which is characterized by ailing balance sheets. Its debt is practically equal to its assets, at 14 times EBITDA.

company liquidity ratio debt ratio Debt/EBITDA bond rating
PEI 1.00 81% 14.1

Source: Hoya Capital Income Builder, TD Ameritrade and author’s calculations

The Company held $61.1 million in cash, restricted cash and cash equivalents as of March 31, versus $2.06 billion in debt. Debt maturities in 2022 are a staggering $1.47 billion and interest rates are high. The weighted average floating rate is 7.44% and the fixed rate is still a high 3.96%. As currently structured, maturities will fall sharply in 2023.

The table shows $1.1 billion due in 2022 at an interest rate of 7.44% and $326 million due in 2022 at an interest rate of 3.96% with a portion reduction in the coming years

PEI 10-Q for Q1 2022

The company reports total liquidity of $110.5 million for the first quarter of 2022.

dividend metrics

In a sector known for its hefty dividend yields, PEI pays no dividend at all, hasn’t paid a dividend in two years, and the prospects for resuming a dividend for the foreseeable future look dim.

company Dept. Yield Dept. Growth Dept. Score payout rate Dept. Security
PEI 0.00% -100% 0.00 N / A N / A

Source: Hoya Capital Income Builder, TD Ameritrade, Seeking Alpha Premium

Dividend Score predicts the return three years from now for stocks bought today, assuming the dividend growth rate stays the same.

Valuation metrics

Even at a miserable $0.31 per share, PEI is expensive given its price-to-FFO ratio of 40.0. If you think cheap, high-yield REITs are a bargain, now is the time to invest in mall REITs. But not PE.

company Dept. Score Price/FFO
PEI 0.00 40.0

Source: Hoya Capital Income Builder, TD Ameritrade and author’s calculations

What could go well?

The company could. . .

  • radically refinance its debt, and
  • significantly increase the rate at which it sells its assets.

Both seem necessary if this company is to survive. Given the level of risk for the lender and the rising interest rate environment, it remains to be seen whether they can find a lender willing to take on the risk at a lower rate than they are currently paying. I’m not sure what options they have at this point. Your opinion on this would be appreciated in the comments section.

The investor’s bottom line

According to the company’s website, “Since 2012, the company has driven a transformation guided by an emphasis on balance sheet strength, quality merchandise and disciplined capital spending.” Doesn’t look like it to me.

Factor scores for PEI rating A+ (really?), Growth D-, Profitability F, Momentum F, Revisions C

I’m looking for Alpha Premium

It’s hard to find a good reason to buy stock in this company. The pipeline of $275 million to $300 million in asset sales seems woefully inadequate to handle the massive amount of short-term, high-yield debt payments the company is facing. A radical restructuring of their debts in the near future seems imperative. Hard to see them staying in business otherwise.

Any investment in stocks would be purely speculative. If you’re considering a speculative buy, just note that those who tried it two months ago lost about 50%. Conversely, if you’ve held PEI stock for more than a few months, your position has dropped to the point where it may not be worth selling.

One of my tech stocks is down about 90%, and what little money I could raise by selling it seems irrelevant. It seems like a better idea to just hold it in hopes it can recover. But then again, this company’s assets have more than doubled its liabilities, and it has enough cash to pay off about two-thirds of its debt. The same cannot be said about PEI. It’s probably best to sell your stock, buy yourself a proverbial beer with the proceeds, and chalk it up as a lesson learned.

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