Turnaround Letter Buy-rated Washington Prime Group (WPG) reported a 24% decline in adjusted Funds From Operations per share compared to a year ago. Adjusted FFO is a common performance metric for real estate investment trusts that is similar to earnings per share. Revenues declined 10% from a year ago.
Comparable net operating income for their combined Tier One and Open Air malls fell 5.5% compared to a year ago. These malls represent 93% of total net operating income and are Washington Prime’s highest potential segments. The profit decline was attributed to the bankruptcies of several retailers.
This is WPG’s predicament: most of the mall business is doing well enough, but is still being crippled by a steady flow of bankruptcies from uncompetitive retailers. Stability ex-bankrupt retailers is critical, but the company needs to continue to transition its renter base to a better mix of relevant businesses. Its heavy capital spending on re-fitting its malls to accommodate these new businesses is the foundation of its strategy.
Management reaffirmed their guidance for full-year adjusted FFO per share of between $1.16 and $1.24 and committed to the $.25 per share quarterly dividend for the rest of the year. The company reiterated its forecast for comparable net operating income growth of at least 2% for their Tier One and Open Air malls in 2020.
The company continues to redevelop spaces vacated by weak retailers. It has re-leased 3.2 million square feet of space so far this year, up 13% from last year’s pace. Occupancy, sales per square foot, leasing spreads and other metrics appear reasonably stable or positive.
Washington Prime’s multi-year turnaround continues to make progress. The company will likely need to reduce its dividend, perhaps by 25-50%, to help fund its heavy capital spending over the next few years. Once these newly rebuilt properties start providing rental income, the company’s cash flows should recover.
We continue to rate shares of Washington Prime Group a Buy with a $17 price target.
Disclosure Note: One or more employees of the Publisher own WPG shares.