WPG - WP Glimcher

[Picasso]

Pretty simple thesis here.

 

Spinoff from Simon Property Group in 2014, trading at $14.30.  They (Washington Prime Group) acquired Glimcher and so the consolidated numbers look a little messy for now.  They recently guided from $1.77 to $1.85 of AFFO which at a 15x multiple is a fair value in the $20's.

 

Dividend is a dollar a share which gets you paid 7% while you wait for the selling pressure to end.  Not a lot of concentration risk, bonds are still investment grade and preferred are trading in line.

[Spekulatius]

It looks like WPG overpaid for Glimcher, they paid an ~6% Cap rate for their B-Malls, which is too high imo. The bad capital allocation may scare away buyers of this stock. The combined company will be more or less run by the former Glimcher management, which I don't consider to be top notch either.

While I agree that this is cheap, they have a lot of low performing Malls that need to be fixed, or otherwise may become worthless in the changing retail environment.

[Picasso]

They did pay a high price for Glimcher but it wasn't just all B-malls.  Around 40% of current real estate are A-malls and a lot of that came from Glimcher.  Average sales per sq foot were in the mid 400's versus low and mid 300's for Washington Prime.

 

At this point WPG is pretty much at their max leverage and facing a downgrade to non-investment grade if they make another big purchase or bad capital allocation decision.  Therefore I think there is some decent protection against a dumb, capital destroying decision.  Also the notes and preferred that are backed by WPG are trading at spreads in line with other similar comps, so the credit market isn't that concerned.

 

They seem to be focusing on milking out the properties that have little potential longer term and spending a fair amount on underloved properties to bring up the return on those assets.  It doesn't seem to me that they are blindly investing or neglecting assets, which may have been the case under Simon.

 

I just wish they hadn't setup the transaction to sell the best properties to Simon after the merger of Glimcher.  I would like more color on that.

 

Fair value when you look at lesser quality comps are in the 11-12x area.  That still gets you to about $20/share while you get paid over 7% to sit and monitor the situation.

[valuedontlie]

How does a company like this de-lever when 100% of cash flow gets directed towards capex and dividends?

[Picasso]

They typically sell assets to pay down debt.

[mateo999]

grow noi via reinvestment projects, maybe some slight rent increases.  Also, not all FCF beyond growth capex is being used.

[Picasso]

Large insider buy from Director Jackie Soffer at $13.10 for 100,000 shares.  Jackie is the co-owner of some major real estate including the Aventura Mall in Florida.  Interesting to see her purchase when they typically focus on class A properties.

 

Fidelity sold their position down from 14% to 6.5% of outstanding shares.  Looks like they have been one of the larger sellers of stock considering average trading volume isn't that high.  Typical spinoff selling pressure.

[mateo999]

We bought the day after presenting at nareit.  got lucky (so far) on timing.

[Picasso]

mateo, anything catch your interest from the presentation?  It sounded like they were going to provide more information on the supplementals to give a better idea of NOI improvements in the next couple years.  CEO was also busy flying around to each property.  At a minimum it didn't sound like a real estate portfolio that is going to implode anytime soon.

[mateo999]

yeah we should expect transparency to improve.  look to what GRT used to provide in supplementals as a guide.  in my talks with Michael, I went over some of my math with him, and I ultimately surmise that ~$350psf is a safe assumption for the mall portfolio.  He's been very busy visiting properties.  They see a lot of $2.5-3mm projects to freshen up a mall, maybe subdivide some space, hopefully to bring in some food.  The team is all very enthusiastic (i hope that's not a sign that they see everything through rose color glasses).  They think the multiple formats (mall, open air) and their newfound size will be helpful in having more holistic conversations with tenants.  Food is also a big focus, whether grocery or eatery.  Nothing's off limits- they have no problem bringing grocery to enclosed malls.  Michael made a comment like "i look forward to proving everyone wrong."

 

sorry for discombobulated stream of consciousness. 

[mateo999]

FWIW, I believe WPG offers a compelling opportunity at today's prices.  I know it's not as sexy as OUTR, BH, ZINC, or DNOW which the board is so fond of discussing.  But i like it better than each.

[Picasso]

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NTk1MTE3fENoaWxkSUQ9MzA0Nzc0fFR5cGU9MQ==&t=1

 

At $12 a share, the cap rate is still close to 9%.  At a share price of $20, you have a cap rate closer to 7% which seems much more appropriate in my view.  I just don't see how the cap rate on WPG justifies previously distressed recession cap rates, especially when you get to have around 22% in high quality community centers.  This isn't 2008 by a long shot.

 

We'll see if management can get 3% NOI growth in 2017, but that would put in on par with other REIT's the market has no problem paying twice the valuation for.

 

In this situation you get to clip a well covered 8.3% dividend yield while waiting for the stock to reflect a normalized cap rate.  I'm down around 16% on the position but thesis hasn't hit the skids quite yet.  NOI is still flat, you'd think it was falling off a cliff by the way the stock trades.  Maybe they can't get the NOI growth up to 3% (which the stock is probably reflecting), but I still don't see how the current valuation is appropriate.

 

There is about $1.30 of adjusted FFO which is a 9.2x multiple.  Really cheap almost every way you look at it...Except...

 

CBL also trades at low valuations.  For whatever reason I gravitated towards WPG because of the spinoff effect.  Hard to see how you lose at this price.

[mateo999]

We are down mid single digits when including dividends.  We think the cap rate is at, or slightly above, 9% when accounting for some of the not-yet-NOI-enhancing redevelopment dollars already spent which we capitalize.  Yes WPG trades in line with CBL.  But why I choose WPG isn't because of the interesting backstory as much as the 40% of NOI coming from higher quality strip and lifestyle centers.  Just my two cents.  Management just needs to execute, which is what they tell investors as well.

[Picasso]

Actually, adjusting for recent purchases in the $11.75 area and the last dividend on previous shares I am down mid-singles as well.  I was looking at the price that I found it attractive and it's down about 16% from that point excluding dividends.  So I think the 16% loss is more indicative of how much it's fallen against what I thought was an attractive valuation.  We'll see how it eventually turns out.

 

I would like to see more holes poked in the thesis as to why a 9% cap rate is properly valuing the stock.  Doesn't seem like anyone is interested though.

 

When is AZ going to release the next parts of the VRX saga so that thread can light up again? 

 

I agree on the difference between CBL and WPG.  But it seemed like Goldman adjusted for the better legacy Glimcher assets and still thought fair value was in the $14 area because of the CBL valuation.  It would be helpful if the whole sector got a lift (RSE, PEI) even if WPG seems better geared for returns. 

[BG2008]

I think I can actually speak about B Malls and the perils of owning them.  My first deep dive out of college was when we took a portfolio of over 3mm sqft of B Malls to the market in early 2008.  I spent 2 weeks reading leases and extracting the key terms to build an Argus model.  My key takeways from those days are the following:

 

1) There's a saying in the mall space, "don't buy assets from David Simon".  In short, if David Simon doesn't want it, it's because he can't fix it.  If David Simon can't fix it, no one can.  Many people have gotten burned buying non-core dispositions from David Simon thinking they can add some sort of local or personal touch to the assets and got burnt. 

 

2) Don't own the 2nd or 3rd best mall in a town.  They're kind of like newspaper.  Eventually, the 2nd or 3rd best die. 

 

3) Malls are synergistic creatures.  You have an office building be empty from floors 10-20 and 1-9 be occupied.  People won't give a damn.  But, it kills the mood to walk through a mall that is 50% vacant.  When a mall reaches 30% vacancy, it kind of collapses.  Most mall agreements has clauses where if a certain anchor pulls out, the tenants can vacate their leases.  If you hit 25% vacancy and then JCP, Macy's or whoever decides to pull out, you're gonna be in a lot of trouble

 

4) Malls require a lot of cap ex, TI, and LC.  If you don't know what they are.  Learn them.  Problematic malls go into a death spiral where they don't have the capital to finance the cap ex, TI and LC and they wind up bringing in crappy tenants, i.e. Chinese buffets or fly by night operations.  Bringing in restaurants, food tenants into inland space is typically a bad sign.  Food should be relegated to the food court. 

 

5) Do your yelp review.  I don't have a dog in this.  But those that own the name should just create a spread sheet and summarize yelp reviews.  There are usually extensive comments.  For example, there's no saving this mall. 

 

"How this mall is still standing after all these years is beyond me! Over the years one store after the other fell through and was replaced either by a newsstand, Native American store or a poorly managed empty brand name establishment. The only store that this place had going for them was fye which recently went under. The food court has very little selections and poor quality food. Worst malls around."

 

http://www.yelp.com/biz/jefferson-valley-mall-yorktown-heights

 

6) Look and see if the debt is cross collateralized.  Better hope it's not.  If the assets have individual mortgages, you're likely in decent shape as they can just give the keys back.  But if the debt is at the corporate level or cross collateralized in a pool, go back to reading the yelp reviews and make sense that the malls quality is there. 

 

7) For certain down and out malls, there likely isn't a price for me to own it

 

 

[Picasso]

I think I can actually speak about B Malls and the perils of owning them.  My first deep dive out of college was when we took a portfolio of over 3mm sqft of B Malls to the market in early 2008.  I spent 2 weeks reading leases and extracting the key terms to build an Argus model.  My key takeways from those days are the following:

 

1) There's a saying in the mall space, "don't buy assets from David Simon".  In short, if David Simon doesn't want it, it's because he can't fix it.  If David Simon can't fix it, no one can.  Many people have gotten burned buying non-core dispositions from David Simon thinking they can add some sort of local or personal touch to the assets and got burnt. 

 

2) Don't own the 2nd or 3rd best mall in a town.  They're kind of like newspaper.  Eventually, the 2nd or 3rd best die. 

 

3) Malls are synergistic creatures.  You have an office building be empty from floors 10-20 and 1-9 be occupied.  People won't give a damn.  But, it kills the mood to walk through a mall that is 50% vacant.  When a mall reaches 30% vacancy, it kind of collapses.  Most mall agreements has clauses where if a certain anchor pulls out, the tenants can vacate their leases.  If you hit 25% vacancy and then JCP, Macy's or whoever decides to pull out, you're gonna be in a lot of trouble

 

4) Malls require a lot of cap ex, TI, and LC.  If you don't know what they are.  Learn them.  Problematic malls go into a death spiral where they don't have the capital to finance the cap ex, TI and LC and they wind up bringing in crappy tenants, i.e. Chinese buffets or fly by night operations.  Bringing in restaurants, food tenants into inland space is typically a bad sign.  Food should be relegated to the food court. 

 

5) Do your yelp review.  I don't have a dog in this.  But those that own the name should just create a spread sheet and summarize yelp reviews.  There are usually extensive comments.  For example, there's no saving this mall. 

 

"How this mall is still standing after all these years is beyond me! Over the years one store after the other fell through and was replaced either by a newsstand, Native American store or a poorly managed empty brand name establishment. The only store that this place had going for them was fye which recently went under. The food court has very little selections and poor quality food. Worst malls around."

 

http://www.yelp.com/biz/jefferson-valley-mall-yorktown-heights

 

6) Look and see if the debt is cross collateralized.  Better hope it's not.  If the assets have individual mortgages, you're likely in decent shape as they can just give the keys back.  But if the debt is at the corporate level or cross collateralized in a pool, go back to reading the yelp reviews and make sense that the malls quality is there. 

 

7) For certain down and out malls, there likely isn't a price for me to own it

 

 

 

Thanks for the thoughts BG.  I think that most of the non-mortgaged properties are non-core for this reason.  Banks aren't willing to lend against those properties. 

 

Your idea to do Yelp reviews is a good idea I didn't think of.  I'll be doing that and posting it later.

 

In this case, Simon didn't sell the assets to someone else but instead gave it to their shareholders.  I'm not sure that is the same thing as betting against David Simon although they have distanced themselves from this spin off.

 

We're also a very, very long way off from 30% vacancies on the B-mall portfolio.  The productive assets (excluding that Yelp review you posted since they exclude it from vacancy/sales disclosures) are still at around 90% occupied.  It's a risk but I think quite a ways off and they're spending quite a bit on capex.  I know that management is flying to every property to identify each opportunity.

[Picasso]

http://www.barrons.com/articles/3-stocks-1-reit-to-buy-an-oil-behemoth-to-avoid-1442310545

 

Q: What’s a company you like in the U.S.?

 

A: We own WP Glimcher ( WPG ), a REIT with a $2.3 billion market value. Simon Property Group ( SPG ) spun off a company called Washington Prime, which was sort of their small malls, and their outdoor malls. And then [Washington Prime] made an acquisition of a company called Glimcher. The stock was at about $20 or $21 when they closed the merger. Today it is trading at $12. I think they overpaid for Glimcher and the market didn’t like it.

 

It is a great management team with good and less good assets, but they are aggressively working to refocus these assets. The market just has not understood the quality here because it is a new company in a sense.

 

You are buying a company with an 8.6% yield that we think it is worth just north of $20; it’s trading at $11.60 right now.

 

Seems like he has the market cap off so maybe his analysis is sloppy.  220 million shares is around a $2.6 billion market cap (@$11.60) plus net debt of $4.1 billion.  So EV of $6.7 billion and $600 million of NOI. 

[BG2008]

I think I can actually speak about B Malls and the perils of owning them.  My first deep dive out of college was when we took a portfolio of over 3mm sqft of B Malls to the market in early 2008.  I spent 2 weeks reading leases and extracting the key terms to build an Argus model.  My key takeways from those days are the following:

 

1) There's a saying in the mall space, "don't buy assets from David Simon".  In short, if David Simon doesn't want it, it's because he can't fix it.  If David Simon can't fix it, no one can.  Many people have gotten burned buying non-core dispositions from David Simon thinking they can add some sort of local or personal touch to the assets and got burnt. 

 

2) Don't own the 2nd or 3rd best mall in a town.  They're kind of like newspaper.  Eventually, the 2nd or 3rd best die. 

 

3) Malls are synergistic creatures.  You have an office building be empty from floors 10-20 and 1-9 be occupied.  People won't give a damn.  But, it kills the mood to walk through a mall that is 50% vacant.  When a mall reaches 30% vacancy, it kind of collapses.  Most mall agreements has clauses where if a certain anchor pulls out, the tenants can vacate their leases.  If you hit 25% vacancy and then JCP, Macy's or whoever decides to pull out, you're gonna be in a lot of trouble

 

4) Malls require a lot of cap ex, TI, and LC.  If you don't know what they are.  Learn them.  Problematic malls go into a death spiral where they don't have the capital to finance the cap ex, TI and LC and they wind up bringing in crappy tenants, i.e. Chinese buffets or fly by night operations.  Bringing in restaurants, food tenants into inland space is typically a bad sign.  Food should be relegated to the food court. 

 

5) Do your yelp review.  I don't have a dog in this.  But those that own the name should just create a spread sheet and summarize yelp reviews.  There are usually extensive comments.  For example, there's no saving this mall. 

 

"How this mall is still standing after all these years is beyond me! Over the years one store after the other fell through and was replaced either by a newsstand, Native American store or a poorly managed empty brand name establishment. The only store that this place had going for them was fye which recently went under. The food court has very little selections and poor quality food. Worst malls around."

 

http://www.yelp.com/biz/jefferson-valley-mall-yorktown-heights

 

6) Look and see if the debt is cross collateralized.  Better hope it's not.  If the assets have individual mortgages, you're likely in decent shape as they can just give the keys back.  But if the debt is at the corporate level or cross collateralized in a pool, go back to reading the yelp reviews and make sense that the malls quality is there. 

 

7) For certain down and out malls, there likely isn't a price for me to own it

 

 

 

Thanks for the thoughts BG.  I think that most of the non-mortgaged properties are non-core for this reason.  Banks aren't willing to lend against those properties. 

 

Your idea to do Yelp reviews is a good idea I didn't think of.  I'll be doing that and posting it later.

 

In this case, Simon didn't sell the assets to someone else but instead gave it to their shareholders.  I'm not sure that is the same thing as betting against David Simon although they have distanced themselves from this spin off.

 

We're also a very, very long way off from 30% vacancies on the B-mall portfolio.  The productive assets (excluding that Yelp review you posted since they exclude it from vacancy/sales disclosures) are still at around 90% occupied.  It's a risk but I think quite a ways off and they're spending quite a bit on capex.  I know that management is flying to every property to identify each opportunity.

 

I'll share a story, I knew of a mall that had 88% occupancy and looked great on paper.  Tenants were paying their rent etc.  As a young analyst, I was thinking along very similar ways as some of the commentary here.  It's 88% occupied, a long way from 50-70% occupancy.  It looked healthy.  My boss later explained to me that Simon forced the buyer to buy this "shit" mall in a 3 mall portfolio or they won't sell these malls to the buyer.  When he visited the mall, he knew right away that it was in trouble.  There was a Chinese buffet at the entrance.  It is the 3rd or 4th best mall in a town that can only handle 2 malls.  A lot of the tenants are local and names that you've never heard of before.  It didn't take a genius to figure out that this mall won't be around for long.  Bear Sterns was the mezz lender for the deal.  The best thing to do is to visit all the malls and see if you want to shop there.  If the answer is "this is depressing" then I suggest you not own that asset, even if it's at 95% occupancy.   

 

Your job should be to figure out how many "dead malls walking" there are.  Then see what happens to the portfolio if these malls go to 0.  You need to look into cross collateralization vs individual mortgage.  It's very possible that the lenders forced them to populate each pool with 7 good malls and 3 shit malls.  The lenders are probably think I'll make a buck lending and the 7 good malls will allow me to recover.  As an equity investor, there's potentially real risk from $12 or 9% yield if you have 3 shit malls go under.  By the way, 9% cap rate is very different from 9% dividend.  One is safer than the other due to the impact of leverage. 

 

 

 

 

[mateo999]

I'm not sure if you realize this, or it makes a difference to you, but David Simon owns $50mm+ worth of units and common.  Insiders have been very big buyers of stock.  Take Jackie Soffer for instance.  She knows high quality malls.  Yet she bought 100K shares on the open market at $13.10 in June.  Your anecdote is just that, an anecdote, and I sincerely don't think those with inside knowledge AND INSIGHT into the mall space would put their own money to work like this is they thought WPG was one big dead mall walking.

 

I think your comment about "there's not a price that i would buy..." is largely why this opportunity exists.

 

It's a Rorschach test I suppose.  It's what makes markets.

 

Also, are you Scott Fearon by any chance?

[Picasso]

I take your point that we should be looking at giving no value to the zombie malls.  But I don't see why they can't milk those properties for free cash flow while they are still 75-90% leased out and reinvest in the better opportunities?  Am I wrong for thinking this is an okay outcome even with what will be a dead asset?  WPG has basically told investors that these assets are dead to them and they are just looking at reinvesting the cash flows while they exist.  The question is whether it is a higher percentage of the assets than they have excluded.  This can be somewhat checked through those Yelp reviews (at least give on okay idea when paired with a tenant roster).

 

Last I looked there were only 10 properties cross collateralized out of 121 total properties.  I'll have to recheck those figures but based on their recent update it can't be more than 18 properties today.

 

I also accounted for the difference in cap rate and dividend yield.  There is $600 million of NOI on an unlevered $6.7 billion which is a 9% cap.  On a stock price of $12 they do $1.30 of distributable cash flow which is a 10.8% "levered yield."  They only payout $1 which gives the current 8.3% dividend yield.

[BG2008]

No dog in this.  Just trying to be helpful and offer some suggestion on how to do DD on the quality of the mall and how to assess the risk.  The anecdote isn't as "one off" as you may think.  Hopefully, it can offer a different framework for you to think about the company.  I can be totally wrong and they can have 95% really good assets that just doesn't fit in well with the rest of the portfolio.  That's why the yelp review is suggested.       

 

I do not want to get into a heated back and forth debate.  No I'm not Scott.  I'll wait till someone does the yelp review analysis before I comment again.

 

My opinion on Simon doing the spinoff is that he doesn't want the lesser malls to hurt the overall valuation metrics of his more pristine assets.  It's a bit of a goodco/badco separation so that the Simon owners will know that they only own really dominant malls and give it the proper valuation.   

[mateo999]

BG, I'm not getting defensive and meant nothing overly negative by the anecdote comments.  Not sure why the assumption is that no one else has checked yelp reviews.  For those interested in a good starting place, see Suntrust's excel model (if you can get it).  Ki Bin Kim has an $18 PT on it and has done a boatload of yelp review analysis baked into his cap rate NAV analysis.

[BG2008]

I take your point that we should be looking at giving no value to the zombie malls.  But I don't see why they can't milk those properties for free cash flow while they are still 75-90% leased out and reinvest in the better opportunities?  Am I wrong for thinking this is an okay outcome even with what will be a dead asset?  WPG has basically told investor that these assets are dead to them and they are just looking at reinvesting the cash flows while they exist.  The question is whether it is a higher percentage of the assets than they have excluded.  This can be somewhat checked through those Yelp reviews (at least give on okay idea when paired with a tenant roster).

 

Last I looked there were only 10 properties cross collateralized out of 121 total properties.  I'll have to recheck those figures but based on their recent update it can't be more than 18 properties today.

 

I also accounted for the difference in cap rate and dividend yield.  There is $600 million of NOI on an unlevered $6.7 billion which is a 9% cap.  On a stock price of $12 they do $1.30 of distributable cash flow which is a 10.8% "levered yield."  They only payout $1 which gives the current 8.3% dividend yield.

 

Picasso,

 

Great question.  I think the danger in assuming that cashflow can be milked is that malls can fail spectacularly very quickly, quicker than you think.  Economic downturns can magnify this effect.  They can go from 90% to 50% and then you have to give the keys back to the lender because you don't have the ability to service the debt.  You can google some wsj articles about mall failures that were common during 08 and 09.  Like with all melting ice cube, you need to figure out the rate of decline.  If the decline is cigarette like, then you are likely fine.  If the decline is more video rental like, you maybe in trouble.  Most tenants have clauses that says if occupancy goes to 70%, they can break their leases or if 1 or 2 anchors leave, then they can break their lease.  There's a crumbling dynamic.  Office buildings on the other hand can operate with 50% vacancy and no one will notice.  How do you handicap this?  It's very hard, the first step is the yelp reviews.  If you see a lot of 2 stars on yelp, it's likely a dead mall. 

 

What is the company's capital structure? 

Mortgages

Holdco Debt

Revolver     

Credit line 

 

Equity investors is better protected if each assets has a mortgage on it.  This is likely not the case.  If there are holdco debt then each mall that fails increases the LTV of the entire company.  So, don't think like you own 121 individual houses.  You own 121 RE assets that are collectively collateralize against some of the debt and you need to know how much there are. 

 

Rouse properties is a spinoff of GGP in 2012.  It's got very similar dynamics as WPG. 

 

 

[BG2008]

Picasso,

 

Sometimes, the malls will have 40-50% legitimate national type retailers and have 40% local merchants who will never be able to afford inline mall rent.  You hit a hiccup in the market and the merchants fail very quickly and you can go from 80-90% to 50%.  So, if you look at the directory of the malls and see pre-dominantly strong national type retailers, you're likely in decent shape.  If you see a bunch of names that you've never heard off, watch out.  It's helpful to look at the mall directories, they are typically available on the mall site.  All of this is time consuming and I have some personal views on the long term standing of malls vs Amazon.com that holds me back from doing deep dives on this.  But, I'll be happy to share what I think are the right approach to conduct DD. 

 

Also, one should notice the bifurcation of retail post 2008. It seems the strategies that works falls into 2 groups, outlets such as Tanger or high end.  You're either luxury or you're outlet and discount pricing.  Note how tough it is for the Abercrobmies, American Eagles, etc of the world to work these days.

 

Best of luck to you guys. 

[mateo999]

Thanks, BG.  I appreciate your comments/warnings.  For anyone interested in doing the work that BG has mentioned, leasing plans for all malls are freely available, as are (obviously) yelp reviews.

 

Part of what this comes down to is management's ability to refresh malls that will respond well to a refresh, starve malls of capital that won't respond to capital, and plough money into major redev projects in better assets, including lifestyle centers.  I would listen to the company's NAREIT presentation, and a video interview that Michael Glimcher gave around that time.

 

Thanks again for the well wishes and words of caution!