Washington Prime Group: Limited Downside Vs. Big Upside Potential

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About: Washington Prime Group Inc. (WPG)
by: Bill Zettler
Summary

WPG is down 50% over the last year.

WPG has a huge $1.00 per year dividend.

WPG is making much progress on its turnaround plan.

Note: This article was published on May 22 exclusively for subscribers to the "Turnaround Stock Advisory".

Overview

Washington Prime Group (WPG) is a REIT that specializes in malls. At this point in time, anything to do with retail e.g. malls is subject to Amazon (NASDAQ:AMZN) phobia. And, WPG is very popular with SA authors too, with 50 articles being written about WPG just since the first of the year.

Basically, WPG has been burned by the bankruptcy of some of its major tenants especially anchor tenants like Sears, Bon-Ton, and Toys R Us. With 27 big empty stores, WPG is considered by many to be extremely weak or even on its last legs. And, its current 20% plus dividend rate makes it seem all the more like just another overextended mall owner.

If you want to talk about a beating here's what WPG's price has looked like over the last year. That's about a 50% drop, and it's pretty much straight down.

And, it's not much better if you compare WPG to its competitor REITs as owned by iShares U.S. Real Estate ETF (IYR).

That is a big "jaws" chart for sure (these charts are named after my favorite movie).

I have been following WPG on and off for the last 3 years waiting to see if it would bottom out. I think the odds are the time is now. And even if it's not, WPG's huge 20% dividend minimizes the downside risk. Management has said this year's big $1.00 dividend is safe so I see little downside for the balance of this year.

Lou Conforti CEO during 2018 Q4 earnings call:

"certainly our plan is to maintain the dividend for 2019."

And Mark Yale CFO:

"Finally, in terms of our dividend, we are anticipating that it will be essentially covered in 2019."

They also seem cautiously confident about continuing the $1.00 dividend in 2020 based upon their assumption of an increase in Net Operating Income (NOI) in 2020 of 2-3%.

Yale again:

"Accordingly, when considering our available liquidity and manageable debt maturity profile over the next four years, we feel confident in our ability to fully commit to our current redevelopment pipeline. We also believe this puts us in a strong position to be able to maintain a dividend payout, in line with historical levels."

and

"And by virtue of us comfortable enough and with enough increased visibility to speak to 2020 same-store NOI growth of 2% to 3%, obviously, that surplus cash flow generated makes our dividend policy kind of as is."

And, Conforti:

"We've laid out a growth profile for 2020. We think it's even greater for 2021. And certainly our confidence in the cash flows and where cash flows are going will be part of the dividend, but right now we see a path and certainly our plan is to maintain the dividend for 2019."

Those are certainly not table-pounding comments for continuing the $1.00 dividend in 2020, but they are not wishy-washy either.

The negative here is the fact that management has been wrong about forecasting NOI for the last 3 fiscal years, which is another reason investors have been negative on the stock.

On the other hand, Conforti recently bought $1 million in stock, so that shows a certain confidence about the future.

Lou Conforti:

"We trade at a silly multiple which we continue to prove the pundits wrong."

I say that is putting your money where your mouth is. Go for it Lou, prove the pundits wrong.

Here is why I think the risk can be minimized between now and the end of next year.

The current dividend is .25 per quarter with 3 more payments this year. If we add those 3 payments (.75) to our downside limit of 10%, we get this:

So, with our 10% down limit, we are protected to $3.30, or 27%, over the next 6 months. That's a pretty steep drop for any stock.

Of course, the stock could fall more than 10% plus the divvys, but that seems like pretty good downside protection.

On the upside, if they manage to keep their dividend at $1.00 per year in 2020, a price of $8-10 would be reasonable because that would give them a 10-12% dividend rate still high but not in nose-bleed territory.

By the time the 3rd dividend is paid, we should know whether the 2020 and 2021 dividend will likely be paid or not.

Risks

Any stock that has fallen by 50% is risky.

1. Management could be wrong again on their forecast for NOI.

2. A recession could kick in before the end of next year slowing down mall traffic.

3. Management's plan for rehabbing anchor stores could be strung out and/or over budget affecting NOI.

4. Another anchor could bailout: think J.C. Penney - that would subtract from NOI, require even more rehab investment, and add to delays of the new plan i.e. reformat and re-lease anchor stores for higher rents. This, in my opinion, is the biggest risk. As a matter of fact, J.C. Penney is closing 27 stores in 2019, but none of them in WPG malls.

On May 20, Ascena (ASNA) announced they were closing 765 Dress Barn stores. ASNA has a total of 116 stores with WPG, but that includes all their other brands like Ann Taylor, Lane Bryant, Catherines, etc. Since ASNA is not in bankruptcy and does not look like they will be anytime soon, this has no effect on WPG leases since they are legal obligations of ASNA so they will be paid at least until the end of the lease term. What will probably happen is ASNA will repopulate the empty Dress Barn stores with other brands since this is the least expensive way for ASNA to run out the leases. If the redos are successful, then the leases will be renewed.

The net effect over our investment time period: probably little or nothing.

Also, note that the GLA (Gross leased Area) for all ASNA brands is only 1%.

Conclusion

WPG has taken a real beating, price-wise, over the last few years and rightfully so. But they have dropped so far that they are selling for roughly 1/2 book value. Of course, more bad news could affect mall values and WPG's book value, but as of now, it looks like a turnaround is possible over the next 18 months or so.

And SA Contributor Rida Morwa, an expert on REITs, says this about WPG management:

"The type of long-term planning that has been exhibited by WPG's management is exactly the kind of leadership investors should be looking for"

and

"A management team that has exhibited solid judgment in managing their balance sheet and portfolio."

And

"The bottom line, WPG has one of the best management that any company can hope for, and this really matters in situations like this."

That last comment is exactly what I want to see when I invest in a "Turnaround" stock.

WPG is a buy for income and appreciation.

NOTE: WPG goes ex-dividend on May 30, so if you are going to buy WPG, you should do it within the next few days.

Disclosure: I am/we are long WPG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.