WPG - WP Glimcher

[Spekulatius]

A mall with a 6% Cap rate and NOI growing 3% annually (the latter is rare, but growth is still possible for good mall assets) is equivalent to 9% Cap rate asset and stable NOI. I also think that the former is easier to manage than the latter.

I have looked at CBL for quite some time and WPG recently as well, but I feel like those are melting ice cubes. B-malls are not only endangered by A-Malls, but also very vulnerable to Amazonification, since visiting them has no entertainment value and they lack the showcase potential. Considering the downwards potential and the leverage, I consider the risk reward ratio not that attractive.

[Picasso]

Spekulatius, can you explain over what time frame a 6% cap rate and 3% NOI growth is equivalent to a stable 9% cap rate?  Goldman made this comment as well saying that you should pay up for growth, but they ignored that the four best performing REIT's of the past decade all started at high cap rates and no growth.  WPG has indicated 3% NOI growth starting in 2017 and a currently stable NOI seems indicative that it is a good possibility with capital allocated to the better assets.  And remember, we have 22% of the portfolio in higher quality assets outside of the B-malls. 

 

If WPG turns out to be unable to get any NOI growth then perhaps you are right that this is a melting ice cube. 

 

Do you have any better quality REIT's you look at that trade at a 6% cap rate and 3% NOI growth so I could compare?  Seems like all the 3% NOI growth REIT's today trade at much lower cap rates.

[mateo999]

40% of NOI comes from non b malls. Management doesn't have their heads in the sand. They know they need to freshen up some of their b malls so that the ice cube stays frozen. Believe it or not, even in this age of Amazon, there are some retailers and restaurants increasing store counts. Fast fashion, sporting goods, etc.

[Spekulatius]

Spekulatius, can you explain over what time frame a 6% cap rate and 3% NOI growth is equivalent to a stable 9% cap rate?  Goldman made this comment as well saying that you should pay up for growth, but they ignored that the four best performing REIT's of the past decade all started at high cap rates and no growth.  WPG has indicated 3% NOI growth starting in 2017 and a currently stable NOI seems indicative that it is a good possibility with capital allocated to the better assets.  And remember, we have 22% of the portfolio in higher quality assets outside of the B-malls. 

 

If WPG turns out to be unable to get any NOI growth then perhaps you are right that this is a melting ice cube. 

 

Do you have any better quality REIT's you look at that trade at a 6% cap rate and 3% NOI growth so I could compare?  Seems like all the 3% NOI growth REIT's today trade at much lower cap rates.

I am looking at UE (also a spinoff). What I like about them is that all their assets are in demographically favorable areas and RE space tend to be constrain (Urban/high density). I think they have a decent growth path just refreshing their properties.I think the implied cap rate is about 7% or close to that value. UE also has a lower leverage, which gives them more headroom to invest organically or by acquisition.

[Picasso]

Where do you get a 7% cap rate on UE?

 

I show an enterprise value of $3.4 billion and $200 million of NOI which is a 5.9% cap rate.  Also FFO of $1.20 on a $21 share price with 4% of recent NOI growth.

 

WPG: $6.7 billion of EV and $600 million of NOI for a 9% cap rate.  FFO of $1.80 on a $12 share price with no NOI growth (yet, or possible declines in bear scenario).

 

Unless I calculated FFO wrong (which is pre-capex and such) then it's a difference of 17.5x and 6.6x on the equity component.  I would love to see some NOI growth at WPG and I plan to give some site-by-site information to see how bad/good the situation looks.  But I still don't see how the gap should be that wide (aside from more leverage at WPG which is boosting FFO).  Maybe my math is off or you can show me how you're getting a 7% cap rate today?

 

Any other comparisons would be useful as well.  Thanks.

[Spekulatius]

I had the 7% Cap rate from and CS report that is available in Etrade. Looking at this closer, it is an implied cap rate after stripping out some assets (Bergen Center) at a low cap rate of 4.5%, so not quite fair in that sense. FWIW, the CS report in Etrade is worth reading. I still don't think that UE is low enough, but I like their assets and keep it in my watch list.

I don't like WPG assets as much and neither do I like the Glimcher management.

[Picasso]

Got it.  I had looked at UE while doing my initial look into the closest comps to WPG and had liked what I saw.  It should be noted that WPG is having the same NOI growth on their portfolio which bears the closest similarities to UE.  It's the other 60% of NOI which the market seems to dislike about WPG.

 

As far as the low cap rate Washington Prime paid for Glimcher, I'm sure if you strip out the higher quality assets that were sold to Simon and JV'd, you'd get a higher cap rate than 6% on the resulting net capital deployed similar to how CS would highlight that value in UE. 

 

I would like to point out that I don't think the assets are that great but the price looks compelling.  It seems like I'm just hearing a lot of "bad asset, I wouldn't buy at any price."  When I finish up this Yelp spreadsheet maybe we can address this a little better.

[Picasso]

One more thing I wanted to mention.  If we use the 5.9% cap rate that UE has on the $240 million of NOI that bears very similar qualities, that gives a capitalization of $4,067 million.  The other $2,633 million of b-mall capitalization is doing $360 million of NOI which is already a 13.6% cap rate. 

 

Just seems way too cheap.  If WPG had the same cap rate as UE it would be trading at about $27.  I'd rather buy something with a little hair trading at a 55% discount and then monitor the situation for potential deterioration while giving a margin of safety.

 

If they can get 3% NOI growth like they are targeting then the stock is clearly a home run.  I'm basing my position size on something in the middle.

[Picasso]

Okay one more thing.  Goldman in their last report gave a blended cap rate on the portfolio (based on similar comps) of 7.8%.  So I'm not that far off here.

 

It would also take an overall 12% hit in NOI to get down to $1 in distributable fund flow.  You would need to see more than a 20% decline in overall "B-mall" NOI given the growth in the other 40% of NOI.  I could see several assets deteriorate rather quickly but the entire portfolio at once?  Especially given the redevelopment efforts currently underway from existing assets.

 

Even in a worst case scenario down to $520 million of NOI at an overall 8% cap rate, you get a share price less than $0.50 away from the current market value.

[mateo999]

Just circling back on the cross-collateralization / cross-default front:

 

There are 2 pools totaling 6 properties that have cross-collateralized and cross-default mortgages encumbering them.  They are all Community Centers (read: no enclosed malls/B malls).  Yelp reviews are a bit difficult because these are strip malls. 

 

Pool 1: White Oaks Plaza, Muncie Towne Plaza, Lakeline Plaza, and Forest Plaza

Pool 2: Palms Crossing and The Shops at Arbor Walk

 

Technically I believe there are cross-collateralization provisions covering Town Center Plaza and Town Center Crossing, 2 sister properties in Leawood, KS that were old GRT enclosed malls.  In 2013 they did $539 sales psf (reported as one mall, since they're related properties).  I'm not worried about that property.

 

[Picasso]

So I went through all the enclosed "B-mall" yelp reviews and tried to match up to some other information we have from the company.  I attached the spreadsheet.  (Ignore my scribble at the bottom of the spreadsheet.)

 

Red is coded for reviews putting the asset in clear lower tier B-mall category.  Yellow means no review (might be a b-mall, might not but I'll assume they are to be conservative).  Green are all better quality assets that shoppers seem to like going to for various reasons.  Some of those green ones are high quality or have some unique aspect that leave them open to redevelopment or improvements.  A lot of those look like low hanging fruit.  Blue is coded for put in development.  I also included which ones are mortgaged properties so we know whether they are just having a hard time mortgaging bad assets.  From the looks of it they have a lot of good assets unencumbered and around half of the crappy malls sitting with a mortgage.

 

You'll note that something I considered a dead asset, Jefferson Valley Mall, is being redeveloped for $34 million with a new anchor (Dick's I think) replacing the dead anchor space.  You also recently have H&M and Forever 21 in there.  I think that is a good example of something being dead that could very well provide $2.5-3 million of new NOI to the portfolio. 

 

WPG has given us 7 "non-core" properties, AKA terrible B-malls, whereas I find potentially 15 via Yelp reviews and maybe a total of 18 when include non-reviewed properties. 

 

There is a total of 62.3 million square feet of "core" properties.  Total square feet of the 18 estimated not-so-good B-malls would get me to 14.5 million square footage of crap versus the 6 million square footage which management has told us they view as "non-core"  I could probably guess the ones they fit in that category.  Anderson Mall, Forest Mall, Knoxville, Rushmore, Valle Vista, and Virginia Center for sure. 

 

I show around 70% of B-mall NOI coming from good quality malls and 30% basically being put in runoff.  After going through the list I feel fairly confident about a few things:

 

1) There is a lot of low hanging fruit on several properties to grow NOI

2) Bad mall NOI is around $110 million a year.  If that is worthless over several years maybe the present value of this is $500 million.  No cap rate is needed here, we'll just give it some value for the cash we'll get.

3) There is around $250 million of higher quality B-mall and growing NOI.  I think a 7% cap rate is conservative for these assets which gives me $3.6 billion.

4) There is another $240 million of really high quality NOI from the strip/lifestyle centers.  This is trading in the market at around a 6% cap rate or $4 billion.

 

In sum total we get an EV of $8.1 billion versus a current EV of $6.7 billion.  NAV on the stock then becomes $18+ [($8.1-4.1b)/220m shares].

 

I see plenty of evidence for the $490 million of quality NOI to grow at an attractive rate.  That is also around the NOI where WPG can cover its dividend and service debt.  So wiping out the $110 million of NOI which is more than twice what the company has told us is "non-core" still gives me a margin of safety. 

 

And if WPG does a better job allocating capital then we get upside beyond $18 if they can grow NOI on an overall basis at 3%+.  Management has already identified 15+ projects that would fit within this B-mall yield enhancing category. 

 

By the way, if we use the 7 non-core without second guessing things with Yelp, NAV on the stock goes up to $21 under similar assumptions.  It's not a big difference like I thought it might be. 

 

WPG_Mall_Portfolio_-_Copy.xlsx

[Picasso]

By the way, you'll notice that there are several instances where 95%+ leased out properties are dying or dead in my eyes.  So BG has a good point when he/she says how quickly the situation can deteriorate. 

 

However because this is a large pool of assets, the overall impact from those situations doesn't detract very much from the overall productivity figures.  Versus previously not looking at them one-by-one, I get a fairly close valuation versus using the broad productivity figures.  I think you'll continue to see very slow movement in overall leased space, sales per sq ft, as those assets wind down.  There might be a quarter or two of 1% movement but I just can't see how NOI drops 15% in a year or two.

 

The one issue I saw with the dead/dying malls was that they were typically the 3rd mall in town.  I think if I have time I'd like to do a radius search of similarly sized shopping centers to get an idea of competition.  But that obviously has a big impact on whether something is dying.  I don't think this is the case 100% of the time so you have to use some judgement there. 

[thepupil]

appreciate the work...if it helps, you passed my test by rating boynton beach mall a dead mall...that thing is ghetto!!!

 

-pretentious boca douche

 

From one review on Boynton

 

This mall is great for one reason, it makes people like me truly appreciate the Town Center Mall.  Boca maybe full of pretentious douches and has become a phoney plastic world, but when you're in the mall you know you got some great options. You know it's thoroughly clean and now thoroughly protected.

[Picasso]

Ah yes, some of the reviews and pictures were quite funny.

 

I was thinking of putting a column to provide extra B-mall "insight."  Items would include pictures of massage chairs, Sbarro's, Santa Claus photo lines, and carousels. 

 

One other possibility was how many times someone mentioned being robbed in the store or out in the parking lot.  Or lets not forget the people saying how wonderful the mall is because they hate crowds and no one is ever there.  Those are dead malls for sure.

[mateo999]

Picasso, thank you for your work and for sharing it.  How are you arriving at your % leased figures?  Going through the lease plans and counting empty storefronts?  It based on estimated GLA?  Or just X open slots out of Y total slots?

[Picasso]

I used figures from the annual report. There have been some changes with a few anchors leaving but I put those in the bad mall category. I'm still updating the spreadsheet with other important figures like # of empty anchors, empty spaces, etc. The annual report gives us the % on a GLA of course.  I looked at that to see what kind of correlation there was between leased out space and quality of the mall. 

[BG2008]

So I went through all the enclosed "B-mall" yelp reviews and tried to match up to some other information we have from the company.  I attached the spreadsheet.  (Ignore my scribble at the bottom of the spreadsheet.)

 

Red is coded for reviews putting the asset in clear lower tier B-mall category.  Yellow means no review (might be a b-mall, might not but I'll assume they are to be conservative).  Green are all better quality assets that shoppers seem to like going to for various reasons.  Some of those green ones are high quality or have some unique aspect that leave them open to redevelopment or improvements.  A lot of those look like low hanging fruit.  Blue is coded for put in development.  I also included which ones are mortgaged properties so we know whether they are just having a hard time mortgaging bad assets.  From the looks of it they have a lot of good assets unencumbered and around half of the crappy malls sitting with a mortgage.

 

You'll note that something I considered a dead asset, Jefferson Valley Mall, is being redeveloped for $34 million with a new anchor (Dick's I think) replacing the dead anchor space.  You also recently have H&M and Forever 21 in there.  I think that is a good example of something being dead that could very well provide $2.5-3 million of new NOI to the portfolio. 

 

WPG has given us 7 "non-core" properties, AKA terrible B-malls, whereas I find potentially 15 via Yelp reviews and maybe a total of 18 when include non-reviewed properties. 

 

There is a total of 62.3 million square feet of "core" properties.  Total square feet of the 18 estimated not-so-good B-malls would get me to 14.5 million square footage of crap versus the 6 million square footage which management has told us they view as "non-core"  I could probably guess the ones they fit in that category.  Anderson Mall, Forest Mall, Knoxville, Rushmore, Valle Vista, and Virginia Center for sure. 

 

I show around 70% of B-mall NOI coming from good quality malls and 30% basically being put in runoff.  After going through the list I feel fairly confident about a few things:

 

1) There is a lot of low hanging fruit on several properties to grow NOI

2) Bad mall NOI is around $110 million a year.  If that is worthless over several years maybe the present value of this is $500 million.  No cap rate is needed here, we'll just give it some value for the cash we'll get.

3) There is around $250 million of higher quality B-mall and growing NOI.  I think a 7% cap rate is conservative for these assets which gives me $3.6 billion.

4) There is another $240 million of really high quality NOI from the strip/lifestyle centers.  This is trading in the market at around a 6% cap rate or $4 billion.

 

In sum total we get an EV of $8.1 billion versus a current EV of $6.7 billion.  NAV on the stock then becomes $18+ [($8.1-4.1b)/220m shares].

 

I see plenty of evidence for the $490 million of quality NOI to grow at an attractive rate.  That is also around the NOI where WPG can cover its dividend and service debt.  So wiping out the $110 million of NOI which is more than twice what the company has told us is "non-core" still gives me a margin of safety. 

 

And if WPG does a better job allocating capital then we get upside beyond $18 if they can grow NOI on an overall basis at 3%+.  Management has already identified 15+ projects that would fit within this B-mall yield enhancing category. 

 

By the way, if we use the 7 non-core without second guessing things with Yelp, NAV on the stock goes up to $21 under similar assumptions.  It's not a big difference like I thought it might be.

 

Picasso,

 

Thank you for 1) Doing the work 2) posting and sharing this.  Now the dialogue going forward will be more geared toward bottom up analysis.  I've got a few things on my plate and will look at this in the next few days

[Picasso]

WPG reported earnings which look pretty good for a supposed melting ice cube.

 

Sales PSF on the B-malls are now $361 which is looking a lot better.  NOI is up about 0.7% on the core portfolio (excluding 7 crap malls) and flat overall including the community centers.

 

About $1.36 of adjusted FFO including capex which is about 8.6x.  Pretty damn cheap if they can grow NOI between 1-3%.  If core NOI stays flat while they spend $150mm on redevelopment then we should be looking at about 2.5%+ NOI growth.

[mateo999]

WPG reported earnings which look pretty good for a supposed melting ice cube.

 

You don't have to convince me, good sir.

[Picasso]

mateo, do you think the increase in sales PSF is being driven by the loss of weaker tenants?  I was thinking it's possible to see a jump in sales PSF before it starts falling again.  They seem to calculate it based on leased space and we're seeing a drop in occupancy which would explain that.

 

Any thoughts or things you didn't like?

[mateo999]

i didn't love the new lease spreads at core malls.  They only provide rolling 12 month data which makes it a bit harder to know what what happened in the Q.  as to your point on the sales psf boosted by lower occupancy, i hear you.  but note that occupancy increased sequentially to 90.6% from 89.9% at 6/30/15 while sales psf increased to 361, from 358.

[Picasso]

Ah, I was looking at YoY changes in sales PSF versus occupancy rates.  I also like the fact that numbers are coming in line with guidance.  I was a bit worried that their 0-1% improvement in NOI guidance for the second half of 2015 was optimistic.  So far so good.

[Picasso]

mateo, did you talk to the company after their earnings call?

[mateo999]

i haven't.  i was pretty pleased with the report so i figured i wouldn't bug them.  strange it's underperforming its peers today.

[Picasso]

I spoke with the company and had a few key takeaways.  They weren't thinking about issuing stock at these valuations (fairly adamant about it), they don't think my number of 17 non-core is representative of dead/dying malls, and 3% NOI growth in 2017 is realistic if they can continue to stabilize the B-malls. 

 

I still think the reality of non-core is still somewhere between the 7 they disclosed and maybe 16. But I started calculating the fair value on the equity if they can hit guidance of 3% NOI growth starting in 2017 and it's really compelling.  Annual returns can easily get into the 20%+ area for several years.

 

Buffett once mentioned how he doesn't understand REIT's.  They say "our stock is undervalued, blah blah blah" but then they go out and issue more stock all the time.  Since WPG is trading for 7x FFO and they aren't willing to tap the capital markets for a while, they're limited from doing a dumb deal or buying assets that destroy value.  In the meantime NOI is building up and hopefully the business gets some credibility and the current cash flows are supportive of very high returns.  At some point when the valuation is in-line then I would start to worry a bit more about market sentiment, capital allocation, economic cycle, etc.  After all they did pay a fairly high price for GRT when the stock was trading at a full valuation.  The low valuation helps cure that urge to do something silly.

 

I sort of laugh at some of these market moves lately.  Rates went up today because the economy is improving and then credit spreads blow out because people rush out of interest rate type products.  If the market isn't worried about credit risk it's worried about interest rate risk.