SKT Valens Credit Analysis – No Traded CDS, Base Case iCDS 443bps, Negative Case iCDS 571bps, 2024 3.750% Bond YTW of 2.981%, iYTW of 5.841%, Baa3 Rating from Moody’s, HY2 (equivalent to B2) Rating from Valens, High Refinancing Need

• Credit markets are grossly understating credit risk, with a cash bond YTW of 2.981%, relative to an Intrinsic YTW of 5.841% and an Intrinsic CDS of 443bps. Furthermore, Moody’s is materially understating the firm’s fundamental credit risk, with their Baa3 credit rating five notches higher than Valens’ HY2 (B2) credit rating.
• Earnings Call Forensics™ of the firm’s Q4 2019 earnings call (1/27) highlights management may lack confidence in their ability to improve sales per square foot and FFO per share, sustain dividend increases, and continue to generate significant free cash flow. Moreover, they may be exaggerating the value of their low-cost of occupancy to tenants and their ability to attract and provide services for tenants. Finally, management may be concerned about the impact of the Forever 21 bankruptcy and their Jeffersonville impairment, and they may be downplaying concerns about the possibility of portfolio downsizing.
• SKT currently trades below recent averages with a 20.8x Uniform P/E (V/E’). Even at these levels, the market is pricing in expectations for Uniform ROA to expand from 7% in 2018 to 9% through 2023, accompanied by 1% Uniform Asset shrinkage going forward.