Washington Prime (WPG) Presents At The 2018 Citi Global Property CEO Conference - Slideshow

The following slide deck was published by Washington Prime Group, Inc. in conjunction with this event.

Comments

[Rick39]

Mall REITS are being slammed today apparently on the news of Toys R Us going into liquidation.

WPG is down and I am not aware that they have much, if any, exposure to Toys.

CBL is getting slammed again. I don't like the stock long term, but it seems like a trading opportunity for the short term. How bad can Toys hurt CBL????

[William Packer]

Cbl will go bankrupt and WPG will tank with it but still survive. Although, WPG dividend could be cut in half by then.

[Rick39]

quoting from above

"There is NO competition in their isolated geographies. If you want to put up a store, you have to deal with a WPG mall."

response:

I agree. This seems to be a somewhat unique characteristic of investing in WPG. No competition in a number of malls for many miles.

This, of course, creates other type of risks for WPG as well. Some of these isolated malls are in less densely populated areas very dependent on the agriculture economy.

And farm prices are down, exports damaged by Trump, and plenty of debt that burdens purchasing power.

A lot of "one way" economic risk surrounding some WPG malls.

[Trending Value]

Well, this presentation is the same as all the old. But their competitive advantage is real and it's something I've noticed since I started analyzing both WPG and CBL.

Some analysts argue the class B operators have no advantage because their gross metrics are inferior (Sales per Square Foot). Keener insights look at profitability ratios.

For instance, compare $75M expected maintainence CAPEX divivded by $329M FFO (minimum guidance). Only 23% of their earnings are eaten up by CAPEX, meaning they're charging rents significantly above costs. This puts WPG in the same league as many famous "moat" companies that Warren Buffett owns or owned, such as KO, PG, etc.

How do they do this? There is NO competition in their isolated geographies. If you want to put up a store, you have to deal with a WPG mall.

Now, look at FFO divided by total property at cost. You've got 5-6% return on assets. This might seem inferior, but remember we're talking about real estate and levered returns. It takes A LOT of capital to open shopping malls. So most people don't do it, and especially not in isolated areas that already have a mall.

The moat is real. And it appears that the recent NOI declines are more a function of one time, solvable issues, such as department stores closing down. WPG will emerge from it both stronger and more profitable. This is a great opportunity at today's share prices.

CBL is cool, too.

[Rick39]

Office space may generate some lunch hour traffic, but most stores need traffic 12 hours a day and much heavier flow on weekends. Offices that are open 5 days a week, do not help. Most malls rely on heavy weekend traffic.

I agree that SRG is going to make best use of properties for its shareholders. That might not be the best use for WPG shareholders.

[tradingbot2004]

Depends on big the mall is. If mall is too big, it’s great to have some traffic on weekdays as well. Plus if it’s office, business probably open at least 6 days a week bringing more traffic. Offices could be corporate or small businesses.

[Byron Clarke]

I’ve visited a few Sears stores in the last few months. The ones I have been to are deader than dead. Pretty much anything is better than a Sears... and those Sears stores generate very little rent. To me, this is a huge opportunity for owners of these spaces and adjacent spaces.

[tyler.freeborn]

Yeah, I imagine no retailer wants to be associated with a graveyard. Sears is a pariah, there's no hope. I have no idea why that guy hangs on, pride I guess, lots of money has been lost by big boys refusing to admit they were wrong.

[tradingbot2004]

SRG owns all the best properties from Sears, so WPG’s properties are much better than CBL. Also, SRG is a public REIT where Warren Buffet owns. SRG goal should be to max shareholders value and make the best out of the properties. I highly doubt they are going to not develop all their properties to play gambling games and hopefully buy the mall at discount? Doesn’t make sense, they need capital to redevelop if Sears close. Also, it’s about supply and demand, they can’t just put any tenants they want, has to make sense for both parties.

[tradingbot2004]

Office buildings or residential buildings are good for malls too as they create traffic in malls during lunch/dinner or just to take a walk and buy something since it’s right there. It’s more comforting that most are owned by SRG than Sears.

[GrumpyOldMan2]

Why would they not look at converting some open retail space for offices (businesses, dentists, doctors and etc). I would love to be able to visit my doctor/dentist where I could also do some shopping, stop by a restaurant/food court, see a movie or other entertainment.

[Rick39]

good luck with combining your dentist visit with a dining experience in a shopping mall. There are some businesses which will generate more foot traffic for a mall, and dentists or doctors are pretty low on the list.

It is interesting to note that WPG has redeveloped some of its malls to now be focused on lifestyle tenants rather than traditional uses as pure retail in apparel, shoes, etc. They seem to be happy with the bigger restaurant operations which generate a lot of traffic that will combine dining and drinking with shopping. Some businesses are more compatible with malls than others.

[Neptune81]

"Good luck with combining your dentist visit with a dining experience in a shopping mall"...
Why rule it out of the question so quickly? I just got back from a trip to the Philippines. My friend set up a dentist appointment for me, and it was on the third floor of a very large shopping mall. I'm telling you right now, the mall was packed. And people were not just window shopping. They were carrying around shopping bags and making purchases. And we are talking about a third world country here. As far as I see it, in the future WPG and other mall operators will have no choice but to take a page from the playbooks of malls in other countries like this.

[gimmeecoffee]

Actually, that is NOT a crazy idea at all. The local mall near me (Not a major mall operator) is converting the old Macy's to be a medical diagnostic place, where you will get X-Rays, MRIs, lab work, etc.... It is not an anchor in any way, but it will be a rent payer and solve the ugly empty store syndrome.

[Rick39]

The basic problem is that if these Sears stores go vacant for a number of months or years without any tenant and it is out of the control of the shopping center owner, this could be a eyesore regardless of how it is developed. In the end, SRG is going to try to get maximum value for these spaces and the use might not be retail friendly and the mall owner can't do diddly about it. Will the maximum value to SRG equate to the most favorable tenant for WPG or CBL? We hope so, but it might not always work out that way.

[Frontrange]

How do you know SRG could redevelop those spaces any way they want?

There could certainly be clauses that require certain types of development (similar to home owners association for the mall space) and zoning lmits to what they can put in a mall development.

In fact, I'd be shocked if there wasn't limitations.

[user 44890606]

I would think there are deed restrictions in place which would limit the type of redevelopment these properties could be used for

[Rick39]

frontrange

You are right that we really don't know if there are use restrictions. This is going to depend on the location. I have seen such store spaces redeveloped as offices, which really would not be a plus for a mall. They might be better off with a dud Sears store which attracts some traffic rather than an office or a medical building which houses doctors, dentists and labs and probably would be allowed. In that case, all SRG wants is the maximum amount of rent and could not have any motivation to help WPG's mall. The best tenants should generate more traffic for WPG but it is unlikely there are zoning rules that the Sears space must be retail forever.

[tyler.freeborn]

Not bad. I thought the best part was where they guided to what their exposure would be if all the troubled big box anchors were to fold and vacate their spaces, $300M, which is quite manageable considering WPG's debt position. They also revealed (maybe not for the first time) that SRG owns a number of the Sears stores, which is better than dealing with a bankrupt Sears when it comes to getting the spaces redeveloped.

[MarionPolk2017]

Not sure I would like to trust another owner to redevelop vacated boxes. It is nice not to have to spend any capital, but not so nice to have no control over redevelopment. A third party might choose to wait a few years, while the WPG center experiences the collateral damage from the vacant box.

[tyler.freeborn]

SRG still has access to the capital markets, probably because of the Buffet effect. It only yields 2.8%, they don't have to wait.

[Rick39]

There could be a hidden exposure in a abandoned Sears location for WPG ---if SRG being in charge of redevelopment efforts.

That is a valid point.

I could see a case where SRG redevelops these stores as thay close into a different tenant use that might not be positive for WPG......lets say, for the moment, if SRG put in some type of light manufacturing operation or a wholesale bakery or large dry cleaning operation. None of that stuff would help a retail mall.

Its not out of the question that the Sears space could be developed in a way that just consumes parking space ---like a company office--and does not add any revenue for the WPG mall.

If this is the case, it probably will be a lot worse for CBL which seems to have much more exposure to Sears, from what I can tell. Perhaps another reason to avoid CBL.