Cedar Realty Trust Inc. (“CDR” or the “Company”) is a REIT that owns primarily grocery anchored shopping centers in Pennsylvania, Virginia, Massachusetts, Connecticut, Maryland, New Jersey, and New York.  Like most retail REITs, it’s down significantly this year – 68% and cut its dividend by 80% in April.  Additionally, CDR was dropped by the S&P SmallCap 600 on August 3^rd driving further technical pressure.   

The Company now trades at a 9.9% cap rate compared to a peer average of 7.7%, despite having the best in class boasting best-in-class grocery anchored rent collection rates in Q2 and July.  The Company has averaged a cap rate of 8.4% and 7.5% over the past 5 and 10 years, respectively, or a spread over treasuries of 630 bps and 520 bps compared to 910 bps today, despite the fact that grocery-anchored retail has significant COVID related tailwinds relative to other retail real estate.  

That said, the Company is highly levered and has a $75mm debt payment due in February.  However, the Company’s primary lender (Keybank) has shown flexibility with a Q2 2020 covenant amendment and the Company has $75mm of RLOC capacity and $20mm of pad sites available for sale.  Further, the Company has the capacity under the credit agreement to incur secured debt on existing properties to help refinance the upcoming maturity and the ability to extend its RLOC through September 2022.  Further, the Company appears well equipped to continue making interest payments at current collection rates.  See downside scenarios below for further detail.  Note that the Company generated $13.9mm of EBITDA in Q2 compared to $5.7mm of interest. 

Given the leverage, below market cap rate, and high collection rate, I believe there is significant upside to the equity.  Assuming July is the new run rate collections for rental revenue and assuming the Company is able to scale down property operating cost on a 75 / 25 variable / fixed basis (peers and the company have scaled down cost to a greater extent historically), and that property taxes and G&A are fixed results in over a 3x return on your investment at average peer cap rates and a 2x return based on a five year average cap rate for CDR, despite treasuries being much lower today than over the past five years and grocery anchored real estate being better positioned to weather the downturn than most.   Note I use 3/31 LTM rental revenues because it ignores double counting the collection rate and reserves against revenues due to lack of collectability. 

Note that only 3.6% of rents are rolling off in 2020 and 11.7% in 2021.  The rents rolling off in 2021 average $10.89 per square foot for leases greater than 10,000 sq. ft. compared to a portfolio average of $11.24.  These are more likely to be grocers, and thus have a higher chance of stability especially given the lower than average lease rates.  Smaller leases rolling off average $22.26 compared to an average of $21.37.  Admittedly, these may exhibit more downward pressure but I believe being in grocer anchored centers has become increasingly attractive post-COVID and thus there could continue to be healthy demand for the space.  If the smaller leases coming have -10% re-lease rates, it would result in ~$650k of reduced profitability.

Admittedly, I think this one does have some material potential downside, if collection rates decline further or the Company can’t come to agreement with its lenders.  I think the position should be sized as such.  That said, I think the upside / downside is very compelling.