Mall talent

With the close of the quarter we spent a lot of time talking about 2CHYP at a portfolio level, so I want to spend this commentary on a single stock, Washington Prime Group (WPG).

We bought more of it this week, taking the position to almost a 9% weight.  Here is why we are excited about the name.

Lou Conforti became the full-time CEO of WPG on 10/6/2016 and has since initiated a slew of value creating maneuvers.

  • 10/4/17 WPG COO steps down and is not replaced. This saves about $1.8mm a year in G&A
  • The Southern Hills Mall was allowed to go back to the lender, eliminating a $99.7mm mortgage loan. The property was repurchased for $55mm. This is an immediate gain of $44.7mm.
  • Valle Vista Mall was given back to the lender providing WPG with a $27mm gain on debt extinguishment
  • 9/20/17 Sale of 41 restaurants to FCPT for $67.2mm at a mid-sixes cap rate. WPG trades above a 10% cap rate, so the sale simultaneously improved WPG’s NAV and signaled that their properties are worth far more than the EV.
  • 5/5/27 WPG sold a 49% stake of $600mm worth of properties to an O’Connor Capital Partners joint venture at a 5.25% cap rate
  • 4/25/17 WPG paid off the Mesa Mall loan at a discounted cost of $63mm. The outstanding balance was $87.3mm, but since the bank did not want to own the asset upon WPG’s intentional default, they agreed to the partial payoff.  WPG recorded a gain of $21.2mm after adjusting for closing costs.
  • As of 9/25/17 WPG had 54 approved or active projects ranging between $1M-$60M with an average estimated project yield of 9.5%.

Dispositions at 5% and 6% cap rates pair quite nicely with redevelopment projects with a 9.5% estimated cap rate.  Not only will WPG get a higher quality portfolio, but there should be near-term FFO accretion.

WPG is among the best run mall REITs yet it trades at a FFO multiple less than 5X.  While retail is undoubtedly risky given the headwinds, the best operators can still thrive.  I think WPG has the grit to come out ahead and given its low price, there is sizable upside.

Commentary may contain forward looking statements which are by definition uncertain.  We retain no obligation to update or correct forward looking statements should the available information change.  Actual results may differ materially from our forecasts or estimations.

2CHYP Portfolio Snap Shot

10/5/17 2CHYP Performance since inception

2CHYP Weekly Trade Confirmation Report