Washington Prime: High Yield Turnaround?

12/30/2016 8:00 am EST

Focus: REITS

George Putnam

Editor, The Turnaround Letter

This recommended REIT carries some execution risk, but we like its very attractive valuation and aggressive new management, asserts George Putnam, editor of The Turnaround Letter.

Washington Prime Group (WPG) is REIT with 116 regional and community retail malls across the country totaling over 65 million square feet. 

Despite the roster of highly-regarded tenants, WPG has struggled as the internet has reduced customer traffic at its retail properties. 

The merger with Glimcher Realty Trust in January 2015 has not gone as expected, and the company is facing store closings by anchor tenants like Macy’s, JCPenney and Sears. 

Its balance sheet remains investment grade, but Washington Prime has a high level of debt, some at expensive interest rates, that it needs to pare down. 

The weak fundamental outlook plus the prospect of rising interest rates have pushed WPG shares toward their all-time lows. Investors are treating WPG shares as abandoned property.

In June, the company’s board lost its patience, removing Mike Glimcher as CEO and changing the name back to Washington Prime.  The new CEO, Lou Conforti, has a strong background in the REIT industry, and he is already taking a number of steps to get the company back on track. 

Conforti is streamlining the unwieldy organization, accelerating non-core asset sales, redeveloping newly-available space and taking numerous other actions to improve the overall value of WPG’s properties. 

Washington Prime’s revenue and earnings appear to be stable, operating results are well above debt covenant limits, cash flows look reasonably healthy and overall liquidity is substantial.

WPG’s very high 10% dividend appears well-covered. Valuation at 5.8x next year’s FFO, or Funds From Operations (a measure of operating cash flow), is nearly half that of its peers, leaving strong upside potential. 

While this REIT carries some execution risk, the very attractive valuation and aggressive new management make it an appealing addition to our Recommended List.

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