Why This Mall REIT Is Not on Our Radar

chart01WP Glimcher (WPG), a $2 billion market cap mall REIT, has been the center of attention due to its activities over the last few weeks. First, there was some speculation that the firm was interested in merging with the shopping center REIT Kite Realty Group Trust. WPG denied that it had any interest in doing business with any third party. Another strange event took place when Michael Glimcher surprisingly stepped down from being the CEO of the company. His position has been temporarily filled by a board member.

To be frank, we’ve watched WPG’s activities with a jaundiced eye. Let’s look at why we are skeptical of WPG.

WPG has average sales per square foot of $374. This unimpressive figure puts WPG in the low productivity small group. It is also important to note that this group is often seen as more vulnerable to online retail activity.

WPG hasn’t been successful with its effort in managing its tier 2 malls (about a quarter of their portfolio). In Q1, tier 2 malls’ NOI growth headed to negative rates. This prompted us to place it in the same group as the Regional Malls REITs CBL & Associates Properties (which apparently just turned over a mall to the lenders) and Pennsylvania Real Estate Investment Trust.

Our due diligence uncovered that the stock is undervalued, and has yet to show its potential. Formerly known as Washington Prime Group, the stock has not performed well since its spin-off of Simon Property Group back in 2014 and merger with Glimcher Realty Trust in 2015. Underperforming by almost 50%, we haven’t had full confidence in the stock. As a consequence, it is one of the mall REITs that has high dividend yields. This separates it from its peers. Even with a dividend payout of 70%, the dividend yield has been a little more than 9%.

At this point, it is very difficult to pinpoint where the stock is going. To our surprise, the company has not provided full details about the abrupt change of leadership. The company proposed to change its name back to Washington Prime Group after the sudden departure of Michael Glimcher. This only added more drama to the confusion.

In short, we may miss a golden buying opportunity for a REIT, but recent events and weaker fundamentals are forcing us to keep our distance.

Source: WP Glimcher Inc. (NYSE: WPG), CBL & Associates Properties Inc. (NYSE:CBL), Pennsylvania Real Estate Investment Trust (NYSE:PEI), Simon Property Group Inc. (NYSE:SPG).

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

 

Should You Be Investing in Mall REITs?

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Click here to check dividend yields and stock performance.

Macy’s, J.C. Penney, and Wal-Mart are some of the retailers that are closing stores, prompting fears that now is not the time to invest in mall REITs. For example, Chris Versace, a writer for the Eagle Daily Investor, has stated that anchor store closings and the rising number of online sales are changing how retailers operate, meaning that people should not invest in mall REITs until the resulting wave of store closures have come to a conclusion.

Are These Concerns Warranted?

There are reasons to believe that fears about mall REITs are overblown. For starters, some stocks have been performing better than others, meaning that there is still hope in the form of REITs with high sales per square foot such as General Growth Properties, Macerich, and Simon Property Group. Also, REITs are still planning new malls, which they probably wouldn’t be if the prospects were really so bad. Mall vacancy rate has been trending downwards since the great recession.

In fact, these companies have been performing better than the average equity REIT. Their dividend yields have been lower, usually an indication that things are going in their favor. As another point of view, WP GLIMCHER and CBL & Associates Properties are offering higher-than-average dividend yields because they have suffered from tenant bankruptcies and store closures with corresponding consequences for their own financial states and share prices.

Also, Brookfield Asset Management bought mall REIT Rouse Properties last month, elevating Rouse’s share price by 25% in 2016. This transaction elevated mall profile, as well.

It is worth mentioning that the concerns over store closures have been exaggerated. For example, Macy’s opened 26 stores even as it closed 40 stores in 2015, suggesting that the problem wasn’t across the board but concentrated in particular locations. Similarly, both Macy’s and J.C. Penney have pointed out the positive correlation between brick-and-mortar stores and their online counterparts that exist because people are able to browse and return products that they buy online. In other words, the conclusion that the rising number of online sales is causing an industry-wide problem for mall REITs is suspect because the evidence shows that having both an online and offline store actually drives up sales rather than drive them down.

Further Considerations

Summed up, it is debatable that mall REITs should be avoided because of the rising number of online sales and stores closures. However, interested individuals should remember that successful investing is based on a lot of hard work, meaning that they should not take this as an endorsement to invest in mall REITs at random without putting in the necessary time and effort.

Source: CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), WP GLIMCHER Inc.(NYSE:WPG), Simon Property Group Inc.(NYSE:SPG), The Macerich Company(NYSE:MAC), General Growth Properties, Inc(NYSE:GGP)

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

Simon Spoiled Taubman’s Mall Project

Last Friday, some investors in the financial markets were disappointed at the Q4-2015 results of Simon Property Group, a huge regional mall REIT ($58 billion market cap), but in the world of brick and mortar, that may not be the case. Simon looks to have beaten Taubman Centers’ ($4 billion market cap regional mall REIT) plan to open an enclosed shopping mall in downtown Miami. Taubman is instead settling for a high end retail street.

chart03.pngAlong with Miami Worldcenter Associates and Forbes Company, Taubman intended to construct a 765,000 square foot mall which was fully enclosed. While retail, dining and entertainment were to be key, over 40% of the mall was set to be dedicated to Bloomingdale’s and Macy’s. Included in the plan was a pedestrian-only street which featured multiple restaurants and shops on 7th street, which led directly to the American Airlines Arena. A press release on Jan 11 stated that the mall project had been discarded, and in its place would be a high end retail street, positioned south to north between 7th and 10th streets.

chart04.pngSimon planned to construct an open-air shopping center simultaneously in downtown Miami. The luxury mall is to be 500,000 square feet, and complete with high-end retailers along with plenty of dining and entertainment facilities in the Brickell neighborhood. Part of the project has already been finished and is to open this year. Local developers have been developing the project with Simon. Both projects are mixed-use and also include offices, hotels and residences.

chart05.pngTaubman’s decision strikes many as yet another signal that the idea of a mall no longer works in America. Cities have become increasingly urbanized and, along with the growth of online shopping and the boost to high street shopping, malls have become marginalized. But while Taubman is looking to expand overseas, and in particular to Asia, it’s unlikely that they will scrap future mall projects in the U.S. This scenario appears to be just a downtown Miami battle between two competitors.

chart02Due to recent selloffs, some regional malls REIT stocks have returned poorly, whereas others have been holding better. Simon has been the latter. Following the release of its results on Friday, Simon stocks dropped, but they quickly rebounded. Simon’s Q4-15 funds from operations have fallen in comparison with Q4-14. Also, occupancy dropped by 100 basis points. Despite this result, vacancy levels for malls in general have trended downwards.

The regional malls REITS that have higher sales per square foot have been doing better. Macerich, Taubman, Simon and General Growth average an AFFO multiple of 24x. In contrast, Rouse Properties, Pennsylvania Real Estate, WP Glimcher and CBL & Associates are languishing badly with an AFFO multiple of just 11x.

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As a result of the project change, Taubman’s share price fell for days after the announcement was made. Taubman trades at 27x yield at 3.2%, which is the highest AFFO multiple among its peers.

chart06Source: Taubman Centers, Inc.(NYSE:TCO), Simon Property Group Inc.(NYSE:SPG), General Growth Properties, Inc(NYSE:GGP), WP GLIMCHER Inc.(NYSE:WPG), Pennsylvania Real Estate Inves(NYSE:PEI),The Macerich Company(NYSE:MAC), CBL & Associates Properties In(NYSE:CBL), Rouse Properties, Inc.(NYSE:RSE), Yahoo!Finance, Fast Graphs, Brickell City Centre, Miami Worldcenter, Reis

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

WP Glimcher: Biting Off More than It Can Chew

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The ambitious WP Glimcher (NYSE: WPG) is currently in the midst of a race to pay back a bridge loan amounting to a significant portion of its market capitalization and to cut down its debt level even as its operational metrics flatten and its dividend yield soars. WP Glimcher was formed last January by a merger of Glimcher Realty Trust (former NYSE:GRT) and Washington Prime Group, which was created in 2014 to hold the strip center business and smaller enclosed malls of Simon Property Group (NYSE: SPG). The new business entity now owns and manages 121 shopping centers, including outlet centers and mixed-use, open-air and enclosed regional malls that it inherited from Glimcher.

To finance this transaction, WP Glimcher had to borrow $1.19 billion under a bridge loan to be paid in January 2016. In March, the company issued bonds payable and used $248.4 million of the funds thus earned to pay back part of the debt. This week, the company announced a joint venture with O’Connor Mall Partners, which will reduce its debt by another $800 million. Proceeds from the aforementioned joint venture, plus the replacement of the bridge loan with a term loan, should help improve Glimcher’s debt profile. The remaining balance will be repaid, according to Glimcher’s plans, with the proceeds from a new five-year $500 million loan.

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Among its regional mall peers, WP Glimcher was the worst performer of 2015. Its share price tanked eighteen percent, the sector’s median return being minus four. The company’s market capitalization went down to $2.5 billion, its outstanding debt being estimated at $4.4 billion — far too much for a retail REIT focused on class B malls. Both S&P and Moody’s have placed a negative outlook and Fitch has downgraded the Company to a BBB- rating.

Operationally, as a result of the merger, revenues have gone up by fifty percent in the first quarter of 2015, compared with last year. Comparable store net operating income has increased slightly, while funds from operations (FFO) per share have decreased, though they have been essentially the same except for expenses incurred by the merger. Average rent per square foot has also got up slightly.

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Because of its high level of debt, it is not surprising that WP Glincher’s valuation metrics have been undervalued. With a price-to-FFO ratio of about eight — one of the lowest among its peers — the business has been on the risky side of the spectrum, yielding 7.4 percent. Only for investors who are willing to go for the ride.

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Source: WP Glimcher


Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.​