Earnings season continues

While there is plenty of excitement with the broader markets crashing, I try to remain focused on fundamentals, and on that front, some more news rolled in this week.

CBL Properties (CBL) technically hit its numbers for the quarter, but it was not pretty.  Guidance for 2018 calls for significant declines in FFO/share and a roughly 6% decrease in same store NOI.  CBL is not in 2CHYP so this does not directly affect us, but it does have implications for Washington Prime (WPG) which dropped around 5% today.

The market clearly considers WPG to be cut from the same cloth as CBL, so do the weak numbers from CBL portend an equally bad quarter for WPG?

I’ll be honest with you in that I do not know.  WPG’s shopping center portfolio should fare significantly better, but that is only about a fourth of WPG’s portfolio.  The malls look fairly similar to those of CBL on key operating metrics like sales per square foot.  I believe WPG’s management is better, both in terms of alignment with shareholders and its strategy for dealing with the headwinds.  Thus, my base case projection for WPG’s 4Q17 is mild weakness.  I believe the combination of superior asset management and the shopping center portfolio will make WPG’s numbers significantly better than those of CBL.

Owning the stock is based on a scenario weighted analysis of what is already priced in.  At $5.56 per share and a $1.00 dividend, the market is pricing in a sizable dividend cut.  The market is pricing in a sharp decline in FFO/share.

While it is possible severe troubles will manifest, we think the most likely scenario is mild weakness which makes WPG well worth its price.  When devastation is priced in, a mere scratch is likely to be received as good news.

Medical Properties Trust (MPW) also reported this week and it revealed record setting normalized FFO/share along with guidance for 6.6% year over year growth in 2018.  It appears to be firing on all cylinders fundamentally and we were quite pleased with its performance.

Market volatility

The whipsawing continues with REITs thrashing up and down multiple percentage points each day.  Today was a favorable day with most REITs closing up materially.  Was yesterday the bottom or is this a brief respite in a further decline?  I consider short term predictions to be futile and am focusing all efforts on capturing the stocks that offer the most value at the best price.

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.

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