WPG - WP Glimcher

[Saluki]

Is anyone looking at this company?

 

https://finance.yahoo.com/news/washington-prime-group-1q-earnings-231826060.html

 

I'm trying to resist my urge to dumpster dive in favor of buying better companies, but I think I'm missing something here.

 

At FFO of $0.31 per share that's $1.24 per year. I know some people look at these B and C malls as melting ice cubes, but even if that $1.24 is cut in half, and you get a FFO of $0.62 and even if you apply a ridiculously low multiple of 10 to FFO, you still get $6.20 a share which is a gives you almost a 50% upside from here.  (and a 17% dividend while you hold it).

 

It seems like it's being priced like Winterfell mall after the White Walkers started marching south past the wall.

 

I resisted pulling the trigger at 7 and 6 and at 5, but daddy likes a bargain.  Can someone talk some sense into me?

[cameronfen]

I just took a quick look at the company and I think the question is, will you get your money back in dividends before this goes belly up?  Liquidating would be the safe option but management is investing to cover properties from mall space to lifestyle and office space, or perhaps even worse maybe management has contemplated liquidation and the returns would likely be even worse.  I dont know how that will turn out but obviously management is incentivized to keep this company afloat as long as possible which comes at the expense of shareholders.  5 years and change is a long time for this company to stay alive, that's also assuming they dont cut the dividend which is heroic.  I think the success rate of melting ice cubes is low as there will always be a fraction of investors than invest because of the low p/e (usually semi-subconciously). 

[peridotcapital]

Is anyone looking at this company?

 

https://finance.yahoo.com/news/washington-prime-group-1q-earnings-231826060.html

 

I'm trying to resist my urge to dumpster dive in favor of buying better companies, but I think I'm missing something here.

 

At FFO of $0.31 per share that's $1.24 per year. I know some people look at these B and C malls as melting ice cubes, but even if that $1.24 is cut in half, and you get a FFO of $0.62 and even if you apply a ridiculously low multiple of 10 to FFO, you still get $6.20 a share which is a gives you almost a 50% upside from here.  (and a 17% dividend while you hold it).

 

It seems like it's being priced like Winterfell mall after the White Walkers started marching south past the wall.

 

I resisted pulling the trigger at 7 and 6 and at 5, but daddy likes a bargain.  Can someone talk some sense into me?

 

The assets are better than the market believes, and their balance sheet is cleaner than many B mall companies. I think there is value here, but I like the preferreds and the bonds better than the equity. The common dividend will be based on taxable income and could very well be cut. The income from the prefs and corporates is more predictable. The 2024 bonds yields about 8%, with the prefs at nearly 10%. The issue with the common is simply that the market is likely always going to give them too low of a multiple on FFO, so even if FFO stabilizes and the bond/pref holders get paid out, the common div could go to 50 cents and the stock price could be $3 very easily in that scenario, so you might not make any money.  If 8% is not enough on the bonds, the prefs could narrow the gap to par and earn low to mid teens. Until they can prove they can grow FFO and cover the common dividend, I don't see the stock working.

[Saluki]

Is anyone looking at this company?

 

https://finance.yahoo.com/news/washington-prime-group-1q-earnings-231826060.html

 

I'm trying to resist my urge to dumpster dive in favor of buying better companies, but I think I'm missing something here.

 

At FFO of $0.31 per share that's $1.24 per year. I know some people look at these B and C malls as melting ice cubes, but even if that $1.24 is cut in half, and you get a FFO of $0.62 and even if you apply a ridiculously low multiple of 10 to FFO, you still get $6.20 a share which is a gives you almost a 50% upside from here.  (and a 17% dividend while you hold it).

 

It seems like it's being priced like Winterfell mall after the White Walkers started marching south past the wall.

 

I resisted pulling the trigger at 7 and 6 and at 5, but daddy likes a bargain.  Can someone talk some sense into me?

 

The assets are better than the market believes, and their balance sheet is cleaner than many B mall companies. I think there is value here, but I like the preferreds and the bonds better than the equity. The common dividend will be based on taxable income and could very well be cut. The income from the prefs and corporates is more predictable. The 2024 bonds yields about 8%, with the prefs at nearly 10%. The issue with the common is simply that the market is likely always going to give them too low of a multiple on FFO, so even if FFO stabilizes and the bond/pref holders get paid out, the common div could go to 50 cents and the stock price could be $3 very easily in that scenario, so you might not make any money.  If 8% is not enough on the bonds, the prefs could narrow the gap to par and earn low to mid teens. Until they can prove they can grow FFO and cover the common dividend, I don't see the stock working.

 

That's a good point, I'll take a look at the bonds.  I regret not buying the SRG cumulative preferreds when they were beaten down and yielding over 10%.  The only reason I didn't buy was that I had so much of the common (my 2d biggest position at the time), but if I believe the common would pay off, then the preferreds have to pay off. 

 

Thanks guys.

[cameronfen]

also another thing to add, and is what I get from only doing a cursory look the first time,  the companies revenue is only declining slightly, is it's a mistake to extrapolate that trend forward.  People assumed in 2002 that newspapers would have a slow decline and you can make money on the melting ice cubes but once word got out that news online was better and they lost operating leverage, they fell off a cliff.  They will lose tenants which will cause their malls to suck, fewer people go so fewer tenants want to rent space, which causes mall to suck more (or rents to go down).  In my experience melting ice cubes almost always melt more and more quickly over time. 

[Saluki]

also another thing to add, and is what I get from only doing a cursory look the first time,  the companies revenue is only declining slightly, is it's a mistake to extrapolate that trend forward.  People assumed in 2002 that newspapers would have a slow decline and you can make money on the melting ice cubes but once word got out that news online was better and they lost operating leverage, they fell off a cliff.  They will lose tenants which will cause their malls to suck, fewer people go so fewer tenants want to rent space, which causes mall to suck more (or rents to go down).  In my experience melting ice cubes almost always melt more and more quickly over time.

 

Yes.  I saw in the investor presentation that they believe retail in these secondary and tertiary markets is underdeveloped (in terms of square feet of retail vs population) in comparison to places like NYC and Chicago.  But I think that's not quite right, NYC has 8 million residents, but they have way more tourists who visit and buy a lot while they are there.  No one goes sightseeing in Peoria and decides to go shopping for souvenirs while they are there. And unlike malls in top cities there is a not a line of people waiting to buy property in downtown El Paso. To their credit Conforti seems like a straight shooter and pretty sharp and they are doing a good job of replacing tenants as they leave with new retail that involves going to the mall (restaurants, gyms etc) and won't be as easilly disrupted by Amazon.

[brycepeterson]

Saluki - great line.  I might need to use a by-product of it sometime.

 

"It seems like it's being priced like Winterfell mall after the White Walkers started marching south past the wall."

[cameronfen]

also another thing to add, and is what I get from only doing a cursory look the first time,  the companies revenue is only declining slightly, is it's a mistake to extrapolate that trend forward.  People assumed in 2002 that newspapers would have a slow decline and you can make money on the melting ice cubes but once word got out that news online was better and they lost operating leverage, they fell off a cliff.  They will lose tenants which will cause their malls to suck, fewer people go so fewer tenants want to rent space, which causes mall to suck more (or rents to go down).  In my experience melting ice cubes almost always melt more and more quickly over time.

 

Yes.  I saw in the investor presentation that they believe retail in these secondary and tertiary markets is underdeveloped (in terms of square feet of retail vs population) in comparison to places like NYC and Chicago.  But I think that's not quite right, NYC has 8 million residents, but they have way more tourists who visit and buy a lot while they are there.  No one goes sightseeing in Peoria and decides to go shopping for souvenirs while they are there. And unlike malls in top cities there is a not a line of people waiting to buy property in downtown El Paso. To their credit Conforti seems like a straight shooter and pretty sharp and they are doing a good job of replacing tenants as they leave with new retail that involves going to the mall (restaurants, gyms etc) and won't be as easilly disrupted by Amazon.

 

Caveat Emptor for taking me seriously.  I looked at it for 5 minutes and decided I had enough knowledge to comment on this thread.  Stuff just comes from (perhaps faulty) pattern recognition. 

 

That being said one more comment, there doesnt seem to be a dearth of restaurants or gyms or even office space in the US and nearly every single failing mall REIT and quite a few PE firms are embarking in this strategy.  Might work short term, but the truth is no one needs that property. 

 

I dont know much about the management team.  I'll just trust you when you say they seem honest and competent. 

[Spekulatius]

The stock is not worth bothering with, imo. Their malls have average sales of ~$400/sqft, which is barely viable. NOI growth is negative and getting worse ~-2% this year. So you need to buy this at double digit cap rates. Why bother when you can buy A malls with a cap rate of close to 8% (MAC, TCO) which are still growing NOI by roughly 2% in this challenging environment.

 

I don’t think that WPG earns its dividend when you look at AFFO vs FFO/share.

[Deepdive]

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

 

There were some good debates in this stock back in 2015.  WP now trades at $4.10 and CBL trades at $0.81 from mid teens.  The mall business is tough. 

[Saluki]

Glad I never pulled the trigger on this when it fell from $8 to $4.  It seemed dirt cheap at the time, but it's currently at $0.70

 

They might be able to survive this storm. Lou Conforti is in rare form in this earnings call:

 

https://www.fool.com/earnings/call-transcripts/2020/08/11/washington-prime-group-inc-wpg-q2-2020-earnings-ca.aspx

 

I'm still not interested in the common, and I haven't pulled the trigger on the preferreds, but if anyone is interested and is braver than me,  the H and I preferreds are trading at $8 ($25 liquidation/call value) and at the current price are yielding almost 20%.