Thinking About Washington Prime Group

Summary

• Washington Prime Group is now the mall REIT on the edge.
• In a macro sense, they are viable and likely to have substantial share value in the future.
• But their survival, and the value of the common shares, is threatened by a debt covenant.
• I offer my perspective on their future and on the meaning of purchasing shares now.
• Looking for a helping hand in the market? Members of High Yield Landlord get exclusive ideas and guidance to navigate any climate. Get started today »

In a recent article, I shared some Thinking About Malls. That article discussed the elements involved in the success of malls going forward.

A main focus there was the tenants who run mall stores (as opposed to anchors). Going forward past this recession, they will be less indebted and fully omnichannel. But restoring the financial performance of even good malls may take some period of years.

Figure 1. Nearly all the profit of a mall landlord comes from the many small mall stores. Source.

From that article and the fruitful discussion it stimulated, some context emerged. Challenges arise for mall stores as sales/square ft ("sf") drops. The number of employees that can be afforded can become impractically small at some point. Inventory turnover does too.

The bottom lines seem to be these. A well-managed mall whose small stores average no more than $300/sf is likely to fail going forward. In contrast, a well-managed mall whose mall stores do more than $400/sf may succeed, if superior nearby competition does not interfere.

The break point on average is somewhere in between. Any given case will depend on many factors, including how much-needed redevelopment has already been done and what local costs are.

For their part, mall owners will continue to broaden the uses of their space, seeking to sustain and increase foot traffic. How they handle the replacement of departed anchors (mostly department stores) will be crucial to long-term success. Many malls will flourish, and many will fail.

In addition to the issues of store profitability and foot traffic, mall landlords must manage their debt effectively. Mall REITs, in particular, carry enough debt that some kind of debt-related default is the most likely source of failure.

We saw this issue cause the only bankruptcy to date in equity REITs, when General Growth Properties

Analyst’s Disclosure:I am/we are long CBL. 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.