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Re: ACTUALLY INVESTMENT RELATED: Anyone Looking at WPG? Batman or UGAdog still here?Good advice & is why I'm hoping some more knowledgeable & familiar in the process might take interest. :D To understand my situation: I acquired a basket of prefs in mall & hotel REITs last year when Covid struck and markets crashed. Picked up a few with the strategy if I picked uo 5-6 at under 20% liquidation preference & 50-60% yield that if at least 2 survived I could/would see at least 100% return. I have a background in accountong and real estate and tracked all forms in the last cycle between residential, commercial, REITs, etc, bankruptcy filings etc. Real estate isn't liquid and prices aren't as volatile; instead sales activity is and pricing increases/decreases can be prolonged. Most have recovered & either resumed or continued divs and I've traded in & out of them since & done quitw well. This is the 2nd I got into during bk, PEI being the 1st and did well in that one but this one is evem more confusing than the first. (Interesting article to follow). So my thoughts on the WPG prefs is from my understanding of reading the reorg plans is downside to the prefs is $2.52 per share if the re-org plans are approved AND at least 25% prefs DON'T select the equity option (I realize that could change & could be as little as $1.51 if plans approved buy 25% don't select cash option or worse, zero on alternate circumstances). In totallity trade is nominal but loss is never good but I'm looking at accumulation of multiple trades in an overall strategy so I'm not looking at a loss. If the prefs realize their full liquidation preference, I would be looking at a potntial 600+% return on the trade not including any accumulated dividends if declared. I'm not naive & have assessed the risk vs. reward and willing to take in consideration of all other trades/returns in my overall strategy. Of course, there is the option to trade in and out as I've done with the others which could get interesting considering the reorg plans discuss locking out equity holders from trading once making an election to choose either cash or equity option. I suppose that was my hope to find someobe else trading in this to provide input on their thoughts on what are the likely scenarios & what are the likely debt holders strategy. Given common shares o/s are approx 24m & prefs are less than 8m at 25 liqu pref and as you pointed out from yoir article, even management believes the asset value is in excess of debt. It would seem more sebsibke for a well ran REIT to acquire the portfolio at a fair price & eliminate nanagement. Here's a commentary article on PEI which was the other I've been in that went through the re-org https://seekingalpha.com/article/4332783-wait-isnt-preferred-stock-supposed-to-be-safer-common-looking-pennsylvania-real-estate Wait, Isn't Preferred Stock Supposed To Be Safer Than Common? Looking At Pennsylvania Real Estate Investment Trust Mar. 18, 2020 1:54 PM ETPEI, PEI.PB...BPYMACTCO58 Comments17 Likes Kevin Mackie profile picture. Kevin Mackie 2.21K Followers Value, Long Only Contributor Since 2016 Value strategies resonate with me, and I don't relegate myself to any sector or industry. You could say I am an equal opportunity investor: if a company meets my investment criteria, I will buy. Big picture, I look for three main things in a stock before I consider it for investment: Does the company have a product or service that will be in demand in the future? Does the company have a demonstrated history of success and are they on solid financial footing today (i.e., a manageable debt load and strong cash flow generation)? Can I purchase their stock for a reasonable price? If I can verify each of these things, I then look at how that company deploys their free cash flow to enrich their shareholders. Capital allocation is key. Money needs to be spent on the right thing at the right time, meaning that debt reduction should be prioritized over a dividend in most instances. Annual reports are also important to find any red flags or factors that strengthen the case for investment. That is the skeleton of my process, and it has served me well thus far. I appreciate engaging in intelligent dialogue with the SA community and look forward to learning with other users. Summary PEI common and preferred stock has been absolutely pummeled in the market sell-off. Interestingly, the preferred has done WORSE. The conversion rights spelled out in the prospectus tell us why that is the case. PEI preferred holders should hope for a chapter 7 bankruptcy over the company being acquired if the acquisition price is anything less than a 250% premium. Let's cut right to the chase: Pennsylvania Real Estate Investment Trust (PEI) common stock has been grossly lagging the market for a while now, long before the meltdown happened, and certainly now in the thick of turmoil: ChartData by YCharts ChartData by YCharts In spite of their preference in the capital chain, the preferred shares haven't fared any better. In fact, counter to conventional wisdom, the preferred shares have done even WORSE: % change as of 16 March Common Preferred B (PEI.PB) Preferred C (PEI.PC) Preferred D (PEI.PD) 1 month change PEI -61.48% -77% -78.5% -65.5% *Data compiled by author How could this be? After all, in the event of a chapter 7 bankruptcy and liquidation, the preferred shareholders would get their money back before the common stockholders would see a dime. As long as the preferred is reasonably covered by assets after debt, shouldn't that insulate the preferred from cataclysmic decline? The problem is that, in my opinion, PEI is far more likely to be acquired than they are to go bankrupt. That is where the rub is. The prospectus for the preferred shares spells out what happens to the preferred shareholders in the event of a change in control of the company. Those details reveal that in that circumstance, the value of the preferred shares are inextricably tied to the value of the common. This means that, if the market agrees with me that liquidation is unlikely but being acquired is possible, the preferred shares will ALWAYS roughly track the change in value of the common. That has historically been the case: *Charts from tradingview.com Same general trend-lines. This is in contrast to other preferred shares that have no change of control attachment to the common, like that from Gladstone Land (LAND): Preferred: *Images from tradingview.com Very little correlation between when one zigs or the other zags. Notice also that the LAND preferred's have held up well amidst market pressure, declining only 3% vs. the common retreat of almost 22%. That is just one example among many. My point is that the durability of the preferred is sabotaged when the price thereof is attached in any way to the common. Details In the prospectus for each class of PEI preferred's we find the details for conversion rights in instance of a change in control. In essence, for each class and assuming a cash buyout, conversion to common shares will be the lesser of: - Par value plus accrued dividends divided by the price of the acquired common or, - The number of preferred units owned multiplied by: --> B shares = 3.1348 --> C shares = 2.72 --> D shares = 4.9068 So when the value of the common goes down, the value of the preferred's must necessarily retreat since the reasonable price at which the company would be acquired goes down, dragging with it the conversion. Hypothetical Buyout Price We can use recent events to put together a hypothetical situation for PEI being bought out. Simon Property Group (SPG) recently acquired Taubman (TCO) at a 51% premium. If we generously apply the same premium to PEI, that would result in an acquisition price of $2.10. In this scenario, preferred shareholders would receive the following in common stock value: B Shares = $6.58 C Shares = $5.71 D Shares = $10.30 Now look at where each preferred closed at the end of trading on March 16: B Shares = $4.11 C Shares = $4.03 D Shares = $6.37 In light of the fact that the preferred shares are trading UNDER the values I hypothesized, market participants apparently don't think that PEI common would fetch a premium of 51%. Given all that information, preferred shareholders would MUCH RATHER the company go bankrupt and liquidated than be acquired. After all, the preferred's liquidation preference is covered by assets over four times if we value PEI assets at acquisition price. This seems silly, but the numbers bear out the simple point: if they get liquidated preferred shareholders get $25 plus accrued dividends. If they get acquired, they get WAY less. In order to break even, or get $25 back, the common stock would have to go for the following in a take-over: B Shares = $7.98, a 465% premium C Shares = $9.19, a 551% premium D Shares = $5.10, 261% premium I can't imagine any company on earth willing to pay those premiums to current trading levels. However, all that should be considered in context of PEI's book value per share, which comes in above $5. I could certainly see D shares being made whole. But I am not confident in anything much higher. Potential Suitors PEI being acquired is a VERY real possibility. Probably not by SPG since they just scooped up Taubman and may want to wait to integrate those assets before biting into anything else. But considering their very low leverage and available liquidity, taking on PEI isn't impossible. SPG reported $7.1 billion in liquidity at year end 2019, and will pay $3.6 for Taubman. That leaves a cool $3.5 billion for anything else. Considering that PEI has an enterprise value of around $2 billion, they could do it if they had the appetite for it. If we use book value instead of market cap for PEI, the enterprise value would be close to $2.5 billion, still well within SPGs reach. Macerich (MAC) likely doesn't have the stomach for it given their elevated debt levels. Brookfield Property (BPY) could also jump in, with $6.8 in liquidity, though they too are already pretty leveraged. It is impossible to know if or who would take on PEI. My opinion is that it is a very real possibility and therefore a very real risk to preferred shareholders. Which is likely a reason why the preferred has fared so poorly. Corona Virus The other thing punishing PEI, along with most every other asset class, is the corona virus. Their exposure is out-sized, given the proximity of their properties to areas of serious outbreak. Here is a map of all PEIs properties, followed by a map of all confirmed corona virus cases in the US: *Image from preit.com *Image from The New York Times Not that this is anyone's fault at PEI. But nonetheless, the economic effects of their properties being right in the middle of one of the major epicenters of the outbreak will be out-sized. This exacerbates operating issues PEI was already struggling with prior to the corona virus mess. Conclusion In context of all these nuances, extreme caution would be advised when considering an investment in PEI preferred's, particularly the B and C shares. Others here on SeekingAlpha have parsed out the current financial condition and prospects of PEI. In a word, they are distressed, and it will almost certainly get worse given the fear surrounding Corona virus. A suitor could potentially come along and offer a buyout price below book value given the distressed financial condition PEI is in and the fact that the common is therefore trading at only 25% of book value. In that instance, the buyout price would likely not come close to the preferred liquidation value of $25. Just a few weeks ago the preferred shares were trading in the high teens. Now they are in the mid single-digits. If PEI were to be acquired today at a 51% premium, the preferred shares wouldn't even be worth what they are currently trading for. Never assumed that preferred shares are safer than the common. Preferred shares require due diligence as deep as anything else. Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks. This article was written by Kevin Mackie profile picture. Kevin Mackie 2.21K Followers Value strategies resonate with me, and I don't relegate myself to any sector or industry. You could say I a... Value, Long Only Contributor Since 2016 Value strategies resonate with me, and I don't relegate myself to any sector or industry. You could say I am an equal opportunity investor: if a company meets my investment criteria, I will buy. Big picture, I look for three main things in a stock before I consider it for investment: Does the company have a product or service that will be in demand in the future? Does the company have a demonstrated history of success and are they on solid financial footing today (i.e., a manageable debt load and strong cash flow generation)? Can I purchase their stock for a reasonable price? If I can verify each of these things, I then look at how that company deploys their free cash flow to enrich their shareholders. Capital allocation is key. Money needs to be spent on the right thing at the right time, meaning that debt reduction should be prioritized over a dividend in most instances. Annual reports are also important to find any red flags or factors that strengthen the case for investment. That is the skeleton of my process, and it has served me well thus far. I appreciate engaging in intelligent dialogue with the SA community and look forward to learning with other users. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. 17 Likes 58 Comments Comment Comments (58) jroberts1187 16 Apr. 2020 Premium Marketplace Comments (49) Really like this article. I'd love to see what you think about CBL preferreds in the event of a bankruptcy/liquidation event. If they can even liquidate give the preferreds $5 a piece, that's nearly a 400% return Matthew Zeets 31 Mar. 2020 Contributor Premium Comments (1.54K) Thanks for doing the leg work of looking into this. It was on my list to get around to, as I heard the conversion rights were different amongst the preferred shares. The main point I disagree with is that the book value of PEI assets would matter at all in Chapter 7 bankruptcy. Those are just the depreciated carrying value of their assets. The market is very different than the prices those were bought at. Sure a few of the best assets could feasibly be sold for more than their depreciated value and other encumbered assets returned to the lenders for more than their carrying value, but the vast majority would go way lower in an auction sort of format. In a liquidation, the portfolio as a whole would likely get sold at much worse cap rates than the ~6.8% implied by liquidation to get full value back to preferred shares. I'm interested on your thoughts to all that, since I recently bought preferred shares, so I'm treating the liquidation possibility as a real one. fasthandssam 18 Mar. 2020 Comments (629) is it possible that the share price would increase if PEI were to be bought out? Kevin Mackie 19 Mar. 2020 Contributor Comments (973) It is common for buyouts to occur at a premium to the stock price. Given how low PEI is trading at $1.00, and that they have a book value of $5, if a buyout were to occur it would almost certainly happen at a premium to where the common is currently trading. SteveL, cpa 18 Mar. 2020 Comments (218) I haven't seen my common dividend in TD Ameritrade for PEI that was due 3/16 (for cash) and 3/17 for DRIP. I've read a lot of stuff yesterday and today and I keep seeing mention that the dividend occurred? Any thoughts? (PS, I wrote an e-mail a week or two ago begging them to decrease the common div from $0.84 to $0.30-$0.40 as part of their agreement with the banks. No response.) dondiego77 19 Mar. 2020 Comments (41) My friend and I received ours. sabaidii2 19 Mar. 2020 Marketplace Comments (248) I also received mine. My account is with ETrade User 41387426 19 Mar. 2020 Comments (3) Haven't received mine either. thecud 18 Mar. 2020 Comments (3) What are the C shares worth right now? cat2005 18 Mar. 2020 Comments (3.52K) No. Preferred stocks were never supposed to be safer than common stock; however, preferred stock dividends are safer than common stock dividends. ghss44 18 Mar. 2020 Comments (16) Preferred stocks may be safer than common shares but the devil is in the details of the prospectus. I own no common shares, only preferred. I never repeat never buy preferred that are mandatory convertable to common shares. If they give a conversion ratio then it is not for me even if it can only be converted by my choice. tta2 18 Mar. 2020 Comments (1) Interesting write-up. At $.86 for the common, and $1.92 for the Class C preferred, it's hard to pass up. The long slow death of brick-and-mortar retail makes their demise pretty much inevitable, but I'm just hoping for a snap-back from this carnage. kenodick 18 Mar. 2020 Comments (152) Maybe the potential takeover buyer is already buying the preferreds at these bargain prices. ghss44 18 Mar. 2020 Comments (16) You think? Bet your sweet a-- there is a lot of that going on today and tosmorrow. Geomann1 18 Mar. 2020 Comments (100) This whole argument is based on the assumption that in response to this once in a lifetime nationwide crisis, the government will not take effective steps to help airline, hospitality, and retail industries etc. bridge the chasm and prevent the vast majority of these companies to avoid BK including PEI. It also assumes that the corona virus epicenters today will be the same a couple of weeks down the road; instead the first hit areas will likely be the first the recover as most of the "herd" gets it and become immune (see Wuhan). Clearly the vast majority of longs in the market as a whole are unhappy about events, but a couple of years down the road this will be a blip. With respect to the PEI preferreds, I suspect that a lot of older income investors who are attracted to preferreds panic sold. dondiego77 18 Mar. 2020 Comments (41) Article is incorrect re PEI preferreds. Holder has right to convert not the company. They cannot force holder to convert at 2.72 to 1 shares. Read the damn prospectus please. Kevin Mackie 18 Mar. 2020 Contributor Comments (973) "When a company is bought or merges with another company, all types of stock, including preferred stock, must be satisfied as a debt during the transaction process. Sometimes, holders of preferred stock from the original company are offered preferred stock of equal value from the new corporation. Other times, preferred stockholders are bought out and paid an amount that generally reflects the fair market value of the stock." from pocketsense.com. Any company interested in a buyout would go for that final option, where the preferred shareholders are offered an amount generally reflecting fair market value. Because it would likely be less expensive. So if you had the choice between converting to common shares at a multiple (which would give you $3.97 as of right now), or getting fair market value for the D shares (which would give you $3.66), which would you choose? Furthermore, the buyout price would likely happen at some premium. So the conversion amount would increase, getting you more money. Taking the common, bought at a premium, applied with a multiple would likely net you more than taking fair market value for the preferred. Or you can sit, hope to collect a dividend from the acquirer, and then hope that the preferred price improves from there. It all depends on who their buyer is. Kevin Mackie 18 Mar. 2020 Contributor Comments (973) "When a company is bought or merges with another company, all types of stock, including preferred stock, must be satisfied as a debt during the transaction process. Sometimes, holders of preferred stock from the original company are offered preferred stock of equal value from the new corporation. Other times, preferred stockholders are bought out and paid an amount that generally reflects the fair market value of the stock." from pocketsense.com. Any company interested in a buyout would go for that final option, where the preferred shareholders are offered an amount generally reflecting fair market value. Because it would likely be less expensive. So if you had the choice between converting to common shares at a multiple (which would give you $3.97 as of right now), or getting fair market value for the D shares (which would give you $3.66), which would you choose? Furthermore, the buyout price would likely happen at some premium. So the conversion amount would increase, getting you more money. Taking the common, bought at a premium, applied with a multiple would likely net you more than taking fair market value for the preferred. Or you can sit, hope to collect a dividend from the acquirer, and then hope that the preferred price improves from there. It all depends on who their buyer is. dondiego77 18 Mar. 2020 Comments (41) Nobody will take $3.66 for the preferred with a $1.80 dividend. Since the holder gets to choose they cannot be forced to take the $3.66. And in most cases they are bought out at par and the buyer then refinances at a lower rate if they can. From "common sense" not pocket sense. garbanzo99 18 Mar. 2020 Comments (15) You do realize that, according to the original offering document for the preferreds, Upon the occurrence of a Change of Control, each holder of Series C Preferred Shares will have the right (unless, prior to the Change of Control Conversion Date, we have provided or provide notice of our election to redeem some or all of the Series C Preferred Shares held by such holder as described above under “— Optional Redemption” or “— Special Optional Redemption,” in which case such holder will have the right only with respect to Series C Preferred Shares that are not called for redemption) to convert some or all of the Series C Preferred Shares held by such holder (referred to as the “Change of Control Conversion Right”) on the Change of Control Conversion Date into a number of our common shares per Series C Preferred Share (referred to as the “Common Shares Conversion Consideration”) equal to the lesser of: • the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference per Series C Preferred Share plus the amount of any accrued and unpaid dividends thereon to but excluding the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a record date for a Series C Preferred Shares dividend payment and prior to the corresponding dividend payment date for the Series C Preferred Shares, in which case no additional amount for such accrued and unpaid dividends will be included in this sum) by (ii) the Common Share Price, as defined above (such quotient is referred to as the “Conversion Rate”); and • 2.72035 (referred to as the “Share Cap”). In case you don't understand, holders have THE RIGHT, NOT THE OBLIGATION to get the conversion value for their preferred shares. If you believe PEI will be acquired by anyone with a higher credit rating then YOU WOULDN'T CONVERT! You'd just hold on to the preferred and continue to receive the dividends until the preferred is redeemed. Rodentsoft 18 Mar. 2020 Comments (20) That's exactly how I read the prospectus too. It seems to me that the author has confused "may" with "must". This article is sadly based on a false premise and should be withdrawn. bobholt 18 Mar. 2020 Marketplace Comments (668) @garbanzo99 I hope you are right and that they get acquired. Are you sure? garbanzo99 18 Mar. 2020 Comments (15) Yes, I am absolutely certain that the conversion provision is only a put option the holders of the preferred have and was designed to limit the maximum the prefs would be worth to $25 regardless of what the common was bought out for. If an acquirer wants to retire the prefs they have 2 choices: they can buy it in the open market or do a mandatory call at $25. Otherwise, the preferreds will remain outstanding with their current dividends. And even if PEI decides to suspend the dividends on the prefs, they're cumulative and would have to be made up before they could ever pay another common dividend. SOS TUPPER 18 Mar. 2020 Comments (4.83K) Kevin, if any of the public companies bought Pei, the pref would go up significantly, forget the change in control, a buyer would come in and take the equity and than couldn't dividend anything to themselves unless they paid the pref. Soif SPG took them the pref would trade along side spg pref which amazingly is now 8%, or 22.50 for the C and you can extrapolate from there. PEI did a very very very very bad thing when they tried to negotiate a waiver while paying out a common dividend, the banks are apoplectic. Notice no waiver came with the K. Why cause of what Joe did, he said he was hig fiving it with the banks during their waiver talks, yeah right. So now they are screwed. The common dividend is Never coming back as in Never, the pref who knows, depends if we ever open malls again. Odds of a chapter 11 here is super high now. Expect a deferral of the pref div coming. Now I will give you the odd trading pattern of the D, which is why I started shorting it up around $7 versus a share for share buy of the cheapest pref at the time. Spread is collapsing and its working, but likely Pei is a doughnut from the common to the pref. Thank you Joe davidbdc 18 Mar. 2020 Comments (3.72K) At this point, PEI along with many other companies are dependent on what the government response is to this whole mess. My own opinion is that PEI and others likely survive through some sort of national loan program. Retail as a whole can't be allowed to collapse as its the local tax base. Banks can't be given zero percent free money yet again and not to help spread the benefits through communities. They got away with that in 2008 - the political situation isn't the same - people aren't going to listen to their "leaders" explain why the big time CEO's get bailouts while the local mom and pops have to adjust to market forces. markmendlovitz 22 Mar. 2020 Comments (1.03K) @davidbdc you are right. The force of government shut the economy down. This is entirely different from 2008, which was a case of gross negligence. Corona was almost like a natural disaster- no fault of the victims. I think PEI makes it out of their predicament because Coronavirus gives them an excuse to get a no-cost or low-cost bridge loan that will be enough to carry them through until their new projects start paying off. Ian Bezek 18 Mar. 2020 Marketplace Contributor Premium Comments (13.96K) CBL preferreds? 0. WPG preferreds? 0. PEI preferreds? 0. If you must speculate in these, bonds are the only thing worth buying. hc351 18 Mar. 2020 Comments (325) Agreed. No equity left in these businesses. But if there is cash flow, they do need to maintain the REIT status. Not sure how it would actually play out. My guess is they just file for bankruptcy and there is nothing for equity. hc351 18 Mar. 2020 Comments (325) I mean, taxable income of course. Unlikely to see too much, if at all. SOS TUPPER 18 Mar. 2020 Comments (4.83K) @hc351 Pei has no requirement for either a common or pref div. Has been all return of capital, why Joe needed to be fired. Why the CFO left etc etc NV_GARY 18 Mar. 2020 Comments (14.92K) Why wouldn't PREIT elect protective BK? A chance to save the company, and avoid a give-away. Kevin Mackie 18 Mar. 2020 Contributor Comments (973) Probably because management wouldn't get a dime in BK proceedings. And they would still have to work. Even a low-ball buyout would give them an immediate paycheck and poof, they don't have to work anymore. Ronster WA 18 Mar. 2020 Premium Marketplace Comments (5) In the event of the sale of PEI will preferred shareholders have the option to not convert their preferred shares to common shares? SOS TUPPER 18 Mar. 2020 Comments (4.83K) @Ronster WA Its an option the writer has no idea what he's talking about. The reason its there is to protect the pref holder in a go dark situation. Throw this article away. |
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