WPG - WP Glimcher

[mateo999]

Don't forget that on Friday you had Gap down 14% (ON w/ weak comps), American Eagle down 16%, Abercrombie down 7%, signet down 5%, Ascena down 5% etc etc etc.

[Picasso]

If you think this is a value trap, I think shorting the preferred stock of WPG is potentially a very good trade. You have to pay out 7% of dividends but I don't see how it trades at these spreads in the future if you think their portfolio is that bad. I don't think it's as terrible as people make it (they're dead, they're dead!!) but just thought I would mention it for the bears. A little something for everyone.

 

I don't think it is unreasonable to think WPG can still pay $1 of dividends in 5 years. I would expect it to be higher, but at current prices you would be looking at a $5 adjusted basis. I'd be interested in hearing from someone what kind of numbers we could get in a bear case and what that does to the stock at $10.

 

Also $150mm of redevelopment per annum is going to drive $10 million of NOI at a 7% yield. Not sure anyone noticed, but occupancy rates on B-malls have been ticking higher and so thay additional return can at a minimum plug a lot of holes. They also don't need to increase leverage to get those returns.

 

Yeah it's not sexy like UE or MAC or SPG but it looks like it can still get better returns than all of those guys. Doesn't matter how good the assets are when they trade at low cap rates in a low rate environment.

[thepupil]

Picasso & others. Have you all considered Dillard's? It owns 90% of its real estate, has little debt and is retiring shares at a nice pace. I'm just starting to look at it on account of its recent decline and Greenlight's position in it. It's like a low quality low leverage macy's thesis. But similar real estate to WPG, but with single tenant and the actual business.

[Picasso]

I think DDS is really interesting as well.  I was looking up Yelp reviews fore various locations near me and they were all very positive even at deep B-malls.  Problem is the very swift downturn in SSS and these retail stocks live and die by that number.  Also a couple activists have been burned in the past (unless Marcato sold after all the REIT talk) but maybe it's so bombed out that valuation supports you here. 

 

If you get a more optimized balance sheet at DDS it's probably worth over double the current share price.  Question is whether they do it and what gets SSS to improve so you're not looking at WPG 2.0 where it just bleeds every time it starts trading. 

[Guest roark33]

Hmm, my Brad Thomas spidey sense warnings are going off....

 

http://seekingalpha.com/article/3826606-mr-buffett-picked-wrong-blue-light-special

 

 

 

 

 

[Picasso]

Yeah that's the bear case here.  I hate being on the same side of anything Mr click bait Brad Thomas is touting. 

 

Suntrust also threw in the towel today. 

 

On the positive side almost everyone on the SA comments hates the idea. 

[CorpRaider]

What does the BAM bid for rouse do for your valuations?  Nothing?  Strip shopping centers versus B and C indoor tomb malls?

[Picasso]

What does the BAM bid for rouse do for your valuations?  Nothing?  Strip shopping centers versus B and C indoor tomb malls?

 

RSE with $195 million of NOI and an EV of $2.6 billion (@ $17/share) is a 7.5% cap rate for 100% B-malls that have been shown lots of tender love and care post GGP spin.  I would take a look at the metrics when it was first spun off (declining NOI, under $300/foot, low occupancy rates) as a roadmap for what can be accomplished on what most consider dead assets.  WPG isn't seeing those kind of initial metrics on their B-malls so they're starting from a better point except we're further down the cycle.

 

If you give WPG a 6% cap rate for their strips and 7.5% for the B-malls, there's around $2.2 + $6.24 billion of capitalization against $4.1 billion of debt.  On the current share count that's a $20 stock plus dividends.  If you start throwing out C-malls (I think WPG owns around ten of them) then you get a share price closer to $17 using the same calculation.  You could easily argue it's still worth $20 when throwing out the C-malls because these aren't cross collateralized, so handing back the keys reduces leverage kills off some NOI but the yield on redevelopment across the rest of the portfolio makes up for it.  I really don't think the zombie malls are that big of a deal here but that's the market perception.

 

Questions is whether you think WPG can do the same thing with Simon B-malls that BAM is doing with GGP B-malls.  Management should be aggressively buying up stock here considering how little stock the CEO owns after seeing Glimcher acquired.  His lack of buying might indicate he's not that confident it can be done easily.

 

Ultimately I think the RSE bid shows these aren't completely dead, 20% cap rate type assets when we're talking about B-malls.  But they owned 30% of RSE already and it's being put inside BPY.  I'd have to assume they see some favorable trends from being an RSE insider when other investors are simply watching the retail headlines and thinking it's going to get the Amazon schlong.  Another key difference is that RSE is more west coast focused than WPG which can skew the comparison; I just don't see how it's *that* wide of a comparison.

[Picasso]

To expand on it a little bit further, I think a lot of investors in the REIT space value these on FFO which is your levered return.  I'm not a big fan of using FFO but at a certain point it cushions your downside absent other risks like refinancing big chunks of debt.  But if we take a look at free cash flow it gives you an idea of where WPG stands versus the RSE bid.

 

At $17, RSE is being purchased at 17x free cash flow.  They already had a fairly low cost of capital but there are probably some overhead cuts at Brookfield which can increase free cash flow, so maybe the value to BPY is a bit better.  My personal opinion:  I think Brookfield has become a bit promotional and their various yieldco's trade at above average market multiples.  RSE will get the benefit of using BPY as a currency for acquisitions so that's a positive as well.

 

At $9, WPG is trading at 7x free cash flow.  Question becomes what future free cash flow and capex will look like.  If operating results improve then I think that free cash flow is indicative of the real economics and you'll see it improve nicely over time.  If it doesn't improve as they spend then you probably need to normalize those numbers for what the real free cash flow is.  The first year of these REIT spin-offs have messy integrations with messy financials and the need to plan capital spending the parent neglected to do.  Whether it's Seritage or Rouse or Urban Edge, they take a little time to get the ball rolling.

 

So when you consider everything I mentioned, I think it probably makes sense to give the WPG B-malls an 8.5% cap rate (Brookfield can overpay a bit for various reasons) which gives value of $5.5 billion leaving $650 million of value for all the strip malls at WPG doing $132+ million of NOI.  Obviously it doesn't make a lot of sense for the strips to trade at that valuation.  And giving those assets a 6% cap rate would leave you with a share price on WPG of $16.

 

The numbers by the end of 2016 should be very telling for WPG.  As long as they get half the results that RSE experienced after the spin, it should be worth and hopefully trading closer to $16 plus dividends.  If that happens by the end of 2017 then you're looking at 70% of upside plus another 20% of dividends.  A 90%+ return over a couple years seems fairly compelling for a boring stock.  Even at that price it would be trading under 13x free cash flow.  That's part of the reason why I'm scratching my head on the lack of insider buys and the big red flag for me.

 

Anyway hope that's helpful.  In full disclosure, I had shorted RSE at $17+ and that's where Brookfield put out their bid so they are paying what I consider a full price.  BAM has an aggressive target of growing EPS (even though it looks cheap here, that's part of the reason I've avoided BAM) so it makes sense why they would pay such a low cap rate compared to other peers for their yieldco vehicle.  So it's not perfectly apples-to-apples and giving WPG an extra spread on those B-malls ahead of their redevelopment will give you a better idea of private market values.

[Spekulatius]

Hmm, my Brad Thomas spidey sense warnings are going off....

 

http://seekingalpha.com/article/3826606-mr-buffett-picked-wrong-blue-light-special

 

Brad Thomas likes them all. He has been spectacularly wrong with some of his pics.

 

While I agree that WPG is cheap, it is most likely cheap for a reason. The assets and management are mediocre. And those that shorted RSE and went long  WPG didn't do too well either.

 

It should also be noted that b-class mall REITs overall don't do to well, it's not just WPG. CBL is in the same boat and trades at an even lower valuation. What I see however, is that CBL seems to recognize this and starts to sell assets and buy back stock, WPG so far does neither.

[Picasso]

How does CBL trade at a lower valuation?

[BG2008]

Take a look at pg 9 of the Starboard's presentation

 

They are using 7.2 to 9.2% cap rate for B Malls.  If you are Starboard, you're likely giving it a bit more credit.  The problem is that C Malls are valued at 15.6 to 17.6% cap rate.  Where you can lose your shirt in WPG is that if the malls are Cs instead of Bs.  From my experience Bs can turn into Cs following a bad recession, demographic trends, or general bad leasing activities.  Frankly, this is what makes me a queasy about owning any Non-A malls. 

 

http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf

[Picasso]

Take a look at pg 9 of the Starboard's presentation

 

They are using 7.2 to 9.2% cap rate for B Malls.  If you are Starboard, you're likely giving it a bit more credit.  The problem is that C Malls are valued at 15.6 to 17.6% cap rate.  Where you can lose your shirt in WPG is that if the malls are Cs instead of Bs.  From my experience Bs can turn into Cs following a bad recession, demographic trends, or general bad leasing activities.  Frankly, this is what makes me a queasy about owning any Non-A malls. 

 

http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf

 

I don't disagree with that sentiment.  The questions is whether these are B's that will turn into C's and how quickly.  Other factors include how many other malls are in the city, etc.  Based on all the reviews I went through (including additional reviews for various anchors on each B-mall) and seeing who the key anchors (not some wacky bookstore, etc.) I really don't think we're dealing with an upcoming armageddon.  There's some C's in the portfolio that are essentially in runoff but these aren't going to sink the rest of the ship by any means.  You're going to need to see the rest deteriorate very quickly, which like you said is a possibility in a recession.

 

Another example might be PREIT (ticker PEI) which in 2011 was trading for $8 and was also sitting on mostly B-malls with 90% occupancy rates and sub $350 sales psf.  Over the next several years the stock traded up into the mid $20's as they were able to drive sales psf over $400.  Is PREIT suddenly an A mall operator?  I don't think so.  Technically it is but you'll notice they have malls being affected by Macy's closures, etc.

 

In terms of what Spekulatius said about buybacks, I came to the conclusion that REIT's don't and shouldn't drive returns from buybacks.  They need to spend excess free cash flow on getting customers into their malls and driving NOI.  No matter how I tried to make the math work, buybacks even at large discounts to intrinsic value don't change intrinsic value very much.  Unless they are going into runoff then maybe it can makes sense then.  PEI didn't go from $8 to $25 because of buybacks, SPG hasn't done extraordinarily well for shareholders because of buybacks, etc.  If I wanted to see reinvestment of cash flow into an undervalued REIT I would just reinvest the dividends myself. 

 

I found around 10 assets at WPG that I decided should be put into runoff and it didn't kill the company or affect the valuation by more than a couple bucks a share.  I'd be curious if someone bearish could identify more and kill my thesis but it sounds like everyone is too skeptical to spend the time.  It seems like a classic "that can't be $100 sitting on the ground, someone would have already picked it up" stock.

[Spekulatius]

Picasso,

CBL's valuation seems to be more or less on par with WPG's. Maybe WPG's assets are of better quality, but it does not show much in terms of sales/sqft. CBL and WPG pretty much trade in lockstep, so it does not seem to me like WPG is singled out, it is the category of owning lower quality malls that is currently not being liked by Mr Market ( and has not been liked for years).

 

I agree on improving the asset quality and driving customers to their malls being the first priority. I am not all that impressed by the return that WPG is getting (and those are assumptions to begin with), but maybe it is still the right thing to do because doing nothing would cause those malls to slide into the dreaded C category otherwise. However, this also means that some of the capital spent is maintenance spending. I do think that if a REIT trades far below NAV, they should prune their portfolio and use the proceeds to reduce leverage and buy back stock.  Doing it this way does not really impact the ability to use FCF to improve the quality of their portfolio. CBL seems to go down that route but WPG so far not.

 

Also, the sales/sqft number of a mall should increase with the rate of inflation over time, which means that the threshold between C and B mall should go higher as well. Years ago, this was around $300/sqft but my guess is that this should be higher now.

[Picasso]

I guess I'd like to know how you quantify CBL being on par with WPG when there's a different mix of asset quality.  Aside from FFO metrics or dividends.

 

Also CBL has owned these B-malls forever and they have had plenty of time to improve the quality if it was possible to do so.  WPG is a new entity that is just starting that improvement.  There has been very little reason for SGP to invest in the bulk of WPG B-malls so we should see similar improvement that Rouse experienced after being split from GGP.  Would those malls have seen similar investment/value creation under GGP?  I highly, highly doubt it.  We're further in the cycle so it doesn't have to be on par with RSE but it could be half as good and still result in a very good outcome.

 

In addition CBL has over $2 billion of debt to rollover in the next couple years, whereas WPG does not have that much short-term debt.  I would expect CBL has no choice but to reduce the size of the balance sheet which has taken the form of selling the roses to invest in the weeds.  I'd probably be worried more about WPG if they sold off the better assets to get an uncertain return on a full B-mall strategy.  That's exactly what CBL is doing; they benefit from holdings of "only mall in town" but so far it isn't really showing in their metrics and it's been a really long time coming.

 

But if CBL keeps down this sliding path then more investors will slap that multiple or cap rate on WPG thinking they are also 100% B-malls.

[Picasso]

I'm probably not going to be spending too much more time on this position (lots of other mispriced assets elsewhere in the market versus when I started investing in this REIT) but thought I would mention something that I think the small sell-side coverage is missing.

 

I attached the historical cap rate and spread to 10Y treasury on CBL.  I'd attach WPG but obviously it hasn't been public that long.

 

You'll notice that the absolute cap rate is basically at 2008 levels but the spread to the 10Y is at all time highs.  What sort of interests me is that CBL (despite not being that great) is not in nearly as bad of shape as 2009.  As what happens with a lot of these REIT's, large 75% dividend cuts usually creates a really high cap rate as people blow out of the stock.  CBL is still in dividend hiking mode and I'd argue this is nothing like 2008 (yet). 

 

It sort of interests me that the sell-side says peers trade at these multiples so let's value the rest of the peers that way.  I'm starting to be of the opinion that since all peers are trading at 2008 valuations, it doesn't make a lot of sense to value them that way.  You'll just seem cap rates subside across the board and there will never be an "ah-ha!" moment where people warm up to the idea.  Or NOI just starts plummeting off a cliff.

 

Also should note that if you bought CBL the last time it traded at these spreads, you made around 85% in 2009 and a similar 80% in 2012 into mid-2013.  We're further in the cycle and Amazon is really kicking ass and taking numbers but I'm not seeing 2008-like deterioration.  Yet. 

 

Then there's REIT's like PSA trading at 3.5% cap rates.  Brookfield is rumored to purchase the rest of GGP so there's a real push for yield still.  Backing out the strips into WPG gets you a 14-15% NOI on the B-malls so we're talking super crazy spreads here.  My biggest question is still the following: why the heck isn't management buying stock here?  Either they don't care, they're stupid with capital allocation decisions, they're broke (maybe they put all their cash in VRX and ZINC), or they think they're being dealt a crappy hand.  Normally I don't care too much about insider purchases, but they know their properties and know where the stock is trading.  It should be a slam dunk return for them unless the reality is something different.

[peridotcapital]

So what do we think is behind today's news? Was the CEO negotiating behind the board's back? Did he disagree with the board's desired strategy (merge with someone and reduce his role)? Given all of the shuffling around at one time, it seems pretty clear there was a disagreement. Maybe the board has had enough of this thing trading at 6x FFO.

[Picasso]

Hard to say.  Michael Glimcher said back in January that he'd buy shares for himself in the open market and here were are in June with no insider purchases.  Spekulatius was right in that management wasn't that great here. 

 

I think if you take a mile high view of the situation, Washington Prime paid a high price for Glimcher.  After getting a big payday, he doesn't bother buying any shares of WPG.  Watches it fall under $8.  Then he probably went behind the boards back to sell the company well under what WPG paid to acquire GRT.  But selling the company is a bit difficult because it's a mix of strips and B-malls.  You sell the strips and you're left with a pure B-mall player and you can see where CBL trades today (4x FFO).  Kite got hit on the news so clearly the market doesn't like the idea of someone buying B-malls.  That probably exposed WPG to some risk when you have buyers walking away from an acquisition.  It becomes hard to argue that WPG should be worth more in the public markets than what someone is willing to pay for them privately.  So maybe the whole Kite thing was just handled badly and it was a complete 180 of their intentions when they brought on Michael Glimcher. 

 

I sold a big chunk of my shares today (thank you heavier volume than normal) and will likely be out of the position now that it's pretty clear the initial thesis isn't going to play out.  CBL is down 20% this year and WPG is up 10%.  The value of the strips seem to be priced relative to CBL at this point so why bother staying long WPG. 

[peridotcapital]

Hard to say.  Michael Glimcher said back in January that he'd buy shares for himself in the open market and here were are in June with no insider purchases.  Spekulatius was right in that management wasn't that great here. 

 

I think if you take a mile high view of the situation, Washington Prime paid a high price for Glimcher.  After getting a big payday, he doesn't bother buying any shares of WPG.  Watches it fall under $8.  Then he probably went behind the boards back to sell the company well under what WPG paid to acquire GRT.  But selling the company is a bit difficult because it's a mix of strips and B-malls.  You sell the strips and you're left with a pure B-mall player and you can see where CBL trades today (4x FFO).  Kite got hit on the news so clearly the market doesn't like the idea of someone buying B-malls.  That probably exposed WPG to some risk when you have buyers walking away from an acquisition.  It becomes hard to argue that WPG should be worth more in the public markets than what someone is willing to pay for them privately.  So maybe the whole Kite thing was just handled badly and it was a complete 180 of their intentions when they brought on Michael Glimcher. 

 

I sold a big chunk of my shares today (thank you heavier volume than normal) and will likely be out of the position now that it's pretty clear the initial thesis isn't going to play out.  CBL is down 20% this year and WPG is up 10%.  The value of the strips seem to be priced relative to CBL at this point so why bother staying long WPG.

 

Sounds like you don't think a private buyer would pay more than 4-5x FFO for B malls. If that is true then I guess there isn't much here to like. It will be interesting to see that the board does now. I'd be curious to see them try and pare back the mall portfolio and see what prices they could get from a private equity type buyer. 

[Picasso]

CBL trades for around an 11% cap rate.  Just some back of the envelope:

 

WPG strip NOI: $132m @ 6% cap = $2.2 billion

WPG b-mall NOI: $468m @ 11% CBL cap = $4.2 billion

 

$6.4 billion NAV - $4.2 billion debt = $2.2 billion into 220 million shares = $10 share price

 

If you use CBL as a proxy (now there's obviously some difference in mall quality between the two), it's hard to argue that WPG is cheap here.  Unless you think cap rates on B-malls will compress over time.  That's a tough bet to met.  So to be long WPG, you should really like the valuation on CBL.  Plus we saw what happened to KRG when the WPG leak came out.  The market didn't like it one bit. 

[glorysk87]

Why on earth would the strip malls deserve a 6% cap??

[Picasso]

What cap rate do you think the strips deserve?  I'm just taking an average of public comps like KIM or KRG.

[glorysk87]

I don't know, I don't have a good handle on it but 6% just kind of jumped out at me as too low.  I mean Class B malls aren't really that different from strip malls in my opinion, so a 5% spread seems unbelievably wide...

[Picasso]

Take a look at the WPG supplementals.  There's a lot of NOI growth from strips.  6-7% cap rates on those assets seem close to market.  You'll shave about $1.25 off NAV if you go up to 7%. 

 

I was telling someone that 10 year Greek bonds yield 7%.  Everyone is yield starved.  6-7% on decent growing NOI is not that unreasonable?  Anyway, your take can be different.

[glorysk87]

Am I right in assuming the "community centers" in the supplemental are the strip malls?

 

If so, the NOI growth rate doesn't appear to be significantly higher than the Class B malls, and going through the actual properties they have and looking at them, they certainly physically appear to be lower quality properties.

 

I'll be the first to say I haven't spent a ton of time analyzing these types of properties, but a 5% spread between Class B and Strips seems way out of whack. Either the class B cap needs to come down or the strips need to go up. But I can't imagine that private sellers are valuing the two types of properties that differently. 5% is a HUGE valuation disconnect.