WPG - WP Glimcher

[Spekulatius]

I was tempted to buy some, but then I really don't like to invest in lesser quality Real estate at almost any price and decided to abstain from the stock. instead, I purchased some VTR instead, which is not as cheap, but has a much better growth record. I do agree that the market moves, as they relate to interest rates, don't make any sense.

 

I will keep WPG on my watch list for now.

[Spekulatius]

I compared this to CBL and it's almost a mirror image in terms of valuation and asset metrics.

 

sales/sqft: CBL:  $371;  WPG: $361

Unlevered cap rate: CBL: ~9% ; WPG: ~9%

Occupancy:  CBL: ~92%;  WPG:  91%

 

Above are approx. numbers but close enough. Both stocks have been hammered this year, so it's not just a matter of Mr Market hating WPG. I think the difference boils down to which management one likes better. So far, I think I like CBL better. FWIW, CBL has just authorized share buybacks for $200M, which is almost 10% of the market cap. It's clear that they would need to sell properties to finance this, but if indeed their stock is far below NAV as they claim, then this is a good way to increase NAV/share.

[mateo999]

I compared this to CBL and it's almost a mirror image in terms of valuation and asset metrics.

 

sales/soft: CBL:  $371;  WPG: $361

Unlevered cap rate: CBL: ~9% ; WPG: ~9%

Occupancy:  CBL: ~92%;  WPG:  91%

 

Above are approx. numbers but close enough. Both stocks have been hammered this year, so it's not just a matter of Mr Market hating WPG. I think the difference boils down to which management one likes better. So far, I think I like CBL better. FWIW, CBL has just authorized share buybacks for $200M, which is almost 10% of the market cap. It's clear that they would need to sell properties to finance this, but if indeed their stock is far below NAV as they claim, then this is a good way to increase NAV/share.

 

CBL is more reliant on malls than is WPG.  WPG states that 60% of NOI comes from "Malls" and 40% "Community Centers".  Peeling back the onion a bit, included in the 40% is 18% of "Top Tier Malls & Lifestyle Centers".  So at most, 78% from malls (but some of that is outdoor centers).  Call it 70% mall exposure.  22% from strip.

 

Conversely 91% of CBL's NOI comes from malls.  With 31.4% coming from what it dubs Tier 1 malls (sales psf > $375).

[Picasso]

mateo, what do you think of a pair trade with a short on RSE?

[mateo999]

mateo, what do you think of a pair trade with a short on RSE?

 

I don't know if I'm qualified to answer the question directly because I don't know RSE's operations as intimately as I do WPG's, but I certainly think WPG is cheaper.  Pls let me know if you put it on.

[Picasso]

A similar cap rate on RSE would leave the equity worth half of where it trades today.  Similar occupancy rates and around $345 sales PSF.  I wanted to pair trade it before but never thought much about it and the shares fell along with WPG.

 

However now shares of RSE are trading back at $17.52 and with half the dividend yield.  They have shown some good progress since the spin, but it seems like the equity could show some derisking based on where WPG is trading.  Either way probably a trade that should work.

 

I was thinking who the marginal buyer of WPG might be since everyone hates B-malls.  Maybe hedged buyers of WPG/RSE.

[Picasso]

mateo,

 

Been reading through the RSE filings going back to the spin.  The market just seems so mispriced or lost on this whole B-mall sector.

 

RSE was a spinoff at roughly $11/share with an enterprise value of $1.64 billion and $155 million of NOI.  NOI was declining 3% as well and average sales per sq ft were at $284 with occupancy at 88% excluding anchors.  That sounds like the worst metrics on the planet and it traded at a 9.5% cap rate.

 

They have the following top tenants in order of lease revenue:

 

L Brands

Signet

Foot Locker

JC Penney

Cinemark

Sears

American Eagle

Macy's

Luxottica

 

Now look at WPG's top tenants:

 

Signet

L Brands

Foot Locker

Ascena

Luxottica

Genesco

American Eagle

JC Penney

Sears

 

Not a heck of a lot of difference if we just take the mile high view.

 

Anyway, RSE was showing 3% declining NOI at spin of $155 million and today is doing around $192 million.  Shares and debt went up a bit for a total enterprise value of $2.8 billion.  That's a 6.7% cap rate.  But the returns for the equity were incredible.  $11 to $21 or so plus another $2 of dividends.

 

So does it make sense for RSE to trade at a 6.7% cap rate when WPG trades at over a 9% cap rate?  Let's just say RSE trades at a 9% cap rate like WPG.  That's a $8.90 price on RSE.  Big difference from the $17 it trades at today. 

 

So then I look at the short interest for RSE.  It's got a ridiculous amount of the float short.  I have a rule not to short stocks with 20% short interest, but I have to wonder why the valuation gap is so big on WPG versus RSE.  WPG isn't showing negative NOI or sub-300 sales PSF like when RSE was spun, but yet it trades at an almost identical cap rate.  What's the market missing?  Some dumb acquisition of RSE right around the corner?  Hopefully not by WPG....

 

Kind of nutty.  Also can't say the recent numbers out of Macy's, Nordstroms, etc are going to help sentiment on these REIT's.  Maybe WPG keeps trading like death until we see 2016/2017 NOI, but I can't see how RSE is completely immune to this. 

[mateo999]

The obvious difference is that was late 2011 vs today.  Gps, m, jwn, fosl all getting killed.  Maybe we're buying peak Wpg whereas back then, you were buying RSE with improvement ahead of it.

 

There is no doubt in my mind that Wpg is cheaper than its peers. but the way it's trading, the market says that doesn't matter.  We're adding, not selling. but part of me wonders if we're just buying the best house on a crappy block.

[Picasso]

But why is there such a gap in the valuation today? It might be peak but then it doesn't explain the price on RSE.

 

Also, I think we might be getting the best price on the hybrid mall/strip center "neighborhood."  PEI has some good quality only-mall-in-town B-ish malls.  WPG is where RSE was at a few years ago, only from a higher base.  My thesis has partly been that Simon just neglected these assets so the core property results today aren't entirely indicative of their productive potential, similar to what happened with RSE.

[mateo999]

http://i651.photobucket.com/albums/uu231/fiskesh/aFu_BangingYourHead1-1.gif

[Picasso]

hey mateo do you happen to know the cap rate on the recent B-mall acquisition by Rouse?  They bought a really scappy Carlsbad mall and I wasn't able to find out more than what was in the press release.

[mateo999]

Nope can't find anything.  Even did factiva searches and went through transcripts.  Maybe there will be an adjustment called out in Westfield's next earning release, but i'm guessing it wouldn't be clean.  Just some articles I found:

 

http://www.sandiegoreader.com/news/2015/oct/16/stringers-absolutely-malled-carlsbad-westfield/# (according to this, sounds like there is huge vacancy there)

 

http://www.sandiegouniontribune.com/news/2015/nov/04/westfield-rouse-plaza-camino-real/

[Picasso]

Reading between the lines, seems like it will be a difficult second tier mall in the city.  Caruso is also doing some big redevelopments in the Palisades and the city is bending over backwards to make it happen.  I can imagine why Westfield wanted out.

 

Some back of the envelope figures make it look like an expensive purchase for Rouse.  If you apply the same purchase price for Carlsbad across the B-mall footage at WPG, you get around $7.5 billion of value.  Add another $2.3 billion for the strip malls and that's close to a $10 billion EV.  That would imply a $26 share price for WPG, which is really optimistic.  At a minimum I would say Rouse overpaid.  Some of these other cities in the WPG/RSE portfolio aren't Carlsbad, but they also don't have freaking Caruso making sure no one is going to shop at your mall again.

 

I've been shorting shares of RSE against WPG.  I think there's money to be made on both sides of that trade.

[Spekulatius]

The Carlsbad mall ought to be worth much more so than the average WPG mall, due to it's location in CA. RSE seems to have done quite well with their recent Mall acquisitions in CA, so I think they see potential there. I believe that based on their recent track record, RSE's management is quite capable. I have concerns that WPG's management, which came from Glimcher is not up to the task - this is just based on Glimchers fairly awful LT track record and an apparent lack of skill in capital allocation, even prior to the financial crisis. I am not they have learned much either. So with a long WPG/short RSE you are betting better management against lower valuation and it is not clear to me who wins in his case.

 

WPG's assets are not easy assets to own, their B-Malls need management with good skill to keep them productive, otherwise, they could easily wither and become worthless over time. With the high leverage, that WPG operates with, this quickly can become deadly.

 

At less than $10/share, this is yielding 10% now, but high yields typically scare the yield hogs more than their attract them. Maybe, they should consider the KMI solution and axe the dividend to get more funds available for a redevelopment program.

[Picasso]

Spekulatius, have you compared the metrics on the WPG portfolio versus RSE portfolio?  I don't know how one could argue that RSE deserves to trade at 2x the valuation.  The first year of the spin RSE showed terrible NOI declines whereas WPG is showing flat NOI.  I could understand your point if WPG saw worse post-spin metrics than RSE.  And again we're not talking 100% B-malls here.

 

WPG preferred is still trading at par.  KMI preferred went down to 80 cents on the dollar.  Big difference there....

 

Maybe WPG should cut the dividend to fuel growth, I don't know.  I'm not buying this for the dividend so that's not a big positive for me either way.  I just want the cash going to the right places, whether that is a dividend or buybacks or renovations.  I don't want them blindly throwing money at B-malls, which so far they have not done.

[mateo999]

I agree with picasso on valuation vs RSE.  I also think management isn't so bad here.  I know mark ordan stepped aside, but I only think he'd do so if he thought the company was in very capable hands. He told me that he and Michael shared the same vision for the company and felt completely comfortable with MG running the show.  Take a look at mark ordan's record of significant value creation on essentially everything he's ever touched. Maybe this will end the streak, I don't know.  Also of note, the head of leasing is from spg.

[Picasso]

Hey Buffett.  If you like SRG, you'll really like WPG.

 

With love,

 

Picasso.

[mateo999]

any wpg news today?

[Picasso]

Heard some turkeys from Nevada put out a hit piece. Naked short sellers started their syndicated raid.

 

I'm putting on my 45% ROE goggles that I borrowed from Donville. Still looking good to me.

[mateo999]

Philidor houses all its pharmacies within wpg malls??  I'm sure you are, but do let me know if you're not kidding.  I actually checked citron and was pretty nervous.

[Picasso]

Hahahahaha.  Can you imagine though?  I'd probably quit investing in a concentrated manner and join the index fund brigade.  I wouldn't even buy stocks.  Just 10 year muni bonds, AAA rated. 

 

Asset managers are dumping their orphaned yield co's like it doesn't matter.  What fund is trying to defend their position in WPG or "pick your yieldy asset here?"  It's about meeting liquidity with non-core holdings and focus on your winners. 

 

http://whalewisdom.com/filer/kayne-anderson-capital-advisors-lp

 

Arrange it by ownership size.  Kayne used to manage like $15 billion in a bunch of energy assets.  Those guys are blowing up right now and they're dumping what they can.  The MLP or REIT asset class isn't liquid when you exclude the marquee names.  Look at their holding MEP.  Down 18% today on no news and it's 97% take-or-pay midstream with a bunch of investment grade counter parties.  Just gaps down middle of the day, whomp!

 

Is WPG liquid?  It only trades like $10 million a day for a $2 billion REIT.  Take a look at who owns the stock and I think you'll see a lot of motivated sellers.

 

It looks similar to the Buffett REIT play from 1998/1999.  A no growth industrial REIT (First Industrial) was trading for 6-7x FFO and yielded 10%.  Buffett gave it as one of his stock tips that were auctioned off and the stock doubled over the next few years plus provided the dividends.  He bought some others that were impossible to peg as "best" in class.  Just a bunch of REIT cigar butts no one wanted.

 

The REIT industry has been battered in the stock market for the past two years. REIT share prices are down about 19% so far this year amid tepid demand. Including hefty average dividend yields of 8.5%, the REITs' total returns are down 11.9% for the year. First Industrial, whose dividend yield is about 10%, has seen its share price fall 7.5% this year. That compares with a 15.42% gain for the Standard & Poor's 500-stock index.

 

First Industrial traded for 6-7x FFO.  We're getting WPG at the same dividend yield and also 6-7x FFO/AFFO.  Well a lower multiple than First Industrial but no need to nit pick this.

 

Anyway I'm a buyer of these orphaned yield plays as long as there aren't any debt issues.  They're just coming at me so fast that it's hard to keep up with the pace.  I was halfway through TERP when Tepper came in and made the stock double.  Buffett comes in and buys SRG when almost everyone dismissed the quality of the real estate for a long time.  Go read the comments on the SRG article prior to the Buffett stake.  Here's some good ones:

 

"A fool and his money are soon parted" applies equally to Sears Holdings and to Seritage. Eddie Lampert knows ZERO about retail. Consequently Sears and KMart are dying slow financial deaths. Chances are identical that startup Seritage knows zero about property managing. I can think of dozens of foundering companies currently on life support that are better investments than anything remotely related to Sears Holdings.

 

While I wish them luck, putting money in this 'investment' is far more like gambling. Way too much risk for possibly an adequate return. The assets are generally good ones with shaky tenants. Even downsizing the major tenant has risk beyond measure, though the concept is good.

 

Anyway probably preaching to the choir here but this isn't the kind of melting ice cube to warrant this valuation.  I'm capped out at my 15% allocation limit but I'll just keep reinvesting the dividends at prices under $15. 

 

Are you going to their investor day in January? 

[mateo999]

I'll be there. I'll wear a flower on my lapel so you'll know it's me. as for srg I just never got comfortable with potential unfair preference claims from creditors should shld file.

 

Thanks for the commentary. It's helping to keep me sane.

[Picasso]

Goldman noted on their WPG upgrade the quality of the strip malls versus CBL.  Also saying they have a better balance sheet and very solid dividend coverage.  Not a lot of sell side research on this stock so thought I would mention it.  I know someone said they preferred CBL but Goldman had some comments saying the opposite.

 

Investor day with guidance is this Friday.  I guess I'll see you there mateo.

[Spekulatius]

The presentation on 1/8 was very unimpressive and they seem to have guided down their FFO. Also the returns on their mall upgrades seem low - around 8-9% (unlevered, I assume).

 

CBL stock is doing even worse, so I assume it is a sector problem. I think CBL and WPG are very much alike, maybe WPG's assets are a bit better in quality,due to ~21% of NOI coming from Community centers. CBL seems to have a plan of assets monetization and using the proceeds to reduce debt and buy back stocks. This makes a lot of sense, when your stock is far below NAV.

 

I have this on my watch list,but I think that lower quality mall assets are going to be a terrible place to be going forward. I'd rather own something like UE (which has high quality assets) at a fair price (<$18) than a pot. "Cigar But" like WPG or CBL.

[Picasso]

I agree that their presentation was very unimpressive.  That said I don't see how you lose at this price; there is around a 15% implied cap rate on their non-strips which even CBL doesn't trade for.  I think it makes shorting something like RSE that much more compelling.

 

Overall I'm less bullish on their prospects but we're still probably looking at a minimum of 1% NOI growth for 2016 when including non-core.  My worries include the ways they are getting better sales psf and NOI growth.  I'm beginning to think they might be padding the NOI a bit as they deal with these retailer issues.

 

It's not a stretch to say this is worth $15 in a worst case situation.  Over a year that would be a 60% return including dividends.  But it seems like it's become a show me story and we don't have any marginal buyers until leasing spreads improve on the B-malls, NOI grows 3%, and sales psf head toward $400.  If you wait until that happens, this won't still be a $10 stock by the time we get those trends staring us in the face.