Retail REITs to Buy: Pennsylvania REIT (PEI)
Dividend Yield: 7.6%
Pennsylvania REIT (NYSE:PEI) could be a prime example of how the future of mall REITs will look.
This owner of regional malls has been hit hard during the latest decline, but much of that drop may be unjustified. Unlike some mall operators, Pennsylvania REIT has realized that the regional mall’s days could be over, and has begun adjusting itself accordingly.
PEI has dumped “junk” malls and taken a “consumer-driven approach” to creating its tenant mix. That means replacing dying anchor stores with restaurants, entertainment complexes and high-end salons. A prime example of this shift was the addition of a Legoland Discovery Center to the Plymouth Meeting Mall.
The idea is that malls have to become a destination for a full day’s worth of entertainment rather than somewhere to just pick up a shirt.
The changes are working. PEI’s sales per square foot increased to $465 in the most recent quarter, up about 2% year-over-year, while leasing spreads for non-anchor space reached 92.1%. That’s a vast improvement from the past few years, and shows that Pennsylvania REIT has its head in the right place.
PEI is a turnaround play for sure — the stock is off roughly 55% in the past nine months alone. But the turnaround appears to be legit, and a nearly 8% yield will provide a thick padding of protection while you wait for the transition to fully take hold. FFO grew 16% during the most recent quarter, so the dividend looks pretty safe, too.
Pennsylvania REIT is showing that retail won’t die if it evolves. Investors should buy this evolution.
As of this writing, Aaron Levitt was long PRE and SKT, and was considering adding NNN on dips.