Stifel is out with a pretty snappy dowgrade on
Pennsylvania REIT (NYSE:PEI) lowering their rating to Sell from Hold due to declining real estate fundamentals, an overleveraged balance sheet, and obscured visibility to improvement in either factor.
PEI lacks a clear path to reduce leverage. It has $670 million of 2010 unsecured credit line maturities and only $315 million of current market equity to support a renewal - it may find solutions, but the firm prefers safer business plans in a frozen debt environment.
PEI shares are up 196% since the $2.62 March 2 closing low, compared to a 45% decline in the RMZ index, a rally that they think is overdone.
PEI trades at an implied 9.9% cap rate excluding any new equity dilution that would reduce its 90% debt-to-gross-asset-value ratio (10% cap rate).
They estimate that PEI would have to sell about 100 million new shares to bring debt down to 60%, more than tripling the float.
Portfolio fundamentals are weaker than expected - highlighted by a 6.4% DECLINE in same-store NOI growth - the worst they have ever seen from a public retail REIT in one quarter. They think PEI will survive, but its line lenders could increase control through tough extension terms at the expense of common shareholders.
Notablecalls: This will no doubt hurt the stock.
