Barclays’ $6.4 million buffered notes on REIT basket to gain from reopening despite risks

By Emma Trincal

New York, March 30 – Barclays Bank plc’s $6.4 million of 0% buffered SuperTrack notes due March 22, 2022 linked to an equally weighted basket containing the common stocks of EPR Properties, Vornado Realty Trust and Macerich Co. offer an attractive risk-adjusted return for investors seeking exposure to real estate investment trusts poised for a rebound as the economy reopens, analysts said.

The payout at maturity will be par plus 2 times any basket gain, up to a 30% maximum gain, according to a 424B2 filing with the Securities and Exchange Commission.

If the basket falls by up to 20%, the payout will be par.

Otherwise, investors will lose 1.25% for every 1% decline beyond 20%.

Vornado

Yousuf Hafuda, equity analyst at Morningstar who covers Vornado Realty, is relatively bullish on the name.

Vornado Realty is a New York-focused REIT with interests in high-quality office and retail properties. The company now generates nearly 90% of its net operating income from New York City, he noted.

“I’m relatively optimistic about Vornado. There’s a pretty decent spread between the fair value I assigned to the stock, which is 59, and its current price,” he said.

The share price closed at $46.57 as of Tuesday.

“Given that gap, we see the stock as undervalued even though I can understand the market is viewing it differently,” he said.

Since its 52-week low in October, the stock price surged by more than 56%.

There are specific risks associated with the sector, and Vornado in particular, this analyst said.

“The coronavirus situation obviously [is a concern], but there are other concerns specific to New York. Vornado has a higher retail presence, which is riskier in this sector even though they tend to invest in high-quality retail. This strong presence in retail means the business can be challenged in a recession,” he said.

Terms

The Covid-19 pandemic has hurt the share prices of REITs overall with retail stores closing and workers working remotely from home.

But Hafuda downplayed the risk posed by telecommuting on commercial REITs, saying that New York will remain a “hub for global talent in the long run.”

If the basket components have a moderate growth, the leveraged note will allow investors to outperform.

“The terms of the notes are pretty good,” he said.

“Part of it may be due to Macerich. I don’t cover the stock, but it’s a more volatile name as they operate malls, which is a segment of the real estate market that’s a little bit more challenged.”

The implied volatility of Macerich is 70.61% versus 53.39% for EPR Properties and 44.69% for Vornado.

Kevin Brown, the Morningstar equity analyst who covers Macerich, has a fair value target of $29.50, according to the company’s website. The stock, which closed at $11.80 on Tuesday, is therefore strongly undervalued.

Yield

The non-payment of rich dividends to the noteholders contributed to the pricing of a high cap, deep buffer and double upside exposure over a one-year tenor.

“Those REITs pay a lot of dividends. Macerich has a dividend yield of more than 5% and Vornado pays 4.6%,” he said.

“Perhaps that’s the way they can do this.”

Equity investors directly buying REITs receive high dividends since the trusts have to return at least 90% of their taxable income to shareholders. Buyers of the notes give up the high yields, which provides the issuer with more pricing power.

“It seems pretty compelling to me. I am an equity analyst. I’m not an expert on the debt market. But this payout seems attractive even without the dividends,” he said.

Limited risks

Lance Roberts, chief investment strategist at Clarity Financial, also had a favorable opinion on the notes.

“I don’t see much of a problem here. The real estate sector is pretty secure,” he said.

“One risk perhaps is the moratorium on evictions extended until June.

On Monday, the Centers for Disease Control and Prevention extended the federal ban on evictions through June 30, which will put some pressure on REITs’ bottom line.

“That’s the only thing I can see playing against the REITs other than another surge of Covid,” he said.

“I really don’t expect much downside risk. It’s unlikely that you would have a 20% decline.

“The only thing is you may not have a lot of upside.

“REITs will face a headwind if interest rates and inflation continue to rise.”

As bond alternatives for some investors, REITs are subject to interest risk. Their value depreciates in a higher interest rate environment.

“It’s hard though to find anything wrong with this trade,” he said.

“The worst I can do is underperforming the yield I would get in just owning the three securities.”

Barclays is the agent.

The notes settled on March 16.

The Cusip number is 06748EEV1.

The fee is 0.25%.

© 2015 Prospect News.
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