In our report today, we recommend buying privileged promotions Washington Premier Group (WPG), Mall REIT. The two preferred shares are:
- Washington Group Premier, 7.50% H Series, Total Redemption Privileged Shares (WPG.PH), or WPG-H – Profitability 10.2%
- Washington Group Premier & # 39; 6 6/8% Cum Red Pfd Series I (WPG.PI) or WPG-I – Profitability 10.4%
These two issues are some of our HIGHLY acclaimed privileged stocks among highly productive privileged stocks. Currently, they are traded for very attractive estimates due to the positioning of one of the largest ETF privileged funds, iShares US Preferred Stock ETF (PFF). PFF switches the tracking index and, as a result, dumps the prevailing shares of WPG-H. As a result, stock prices for WPG-H and WPH-I remained artificially low. They offer investors the opportunity to consolidate profitability by + 1
We will explain in this report why these two advantages are among the most reliable stocks there. It is important to note that, despite all the negative news about the Mall REIT shopping centers, WPG shares enjoy a high level of security and are suitable for conservative income investors.
More about WPG
The issuing company WPG saw its stock price under siege as shopping centers faced an increased level of bankruptcy of tenants. The last one is Sears Holding Company (OTCPK: SHLDQ), even though Eddie Lampert has made his attempt to maintain the company's operation, there will still be many closed locations.
The closure of Sears stores represents an opportunity for WPG to recycle them, but it also has a high risk and a lot of costs. Ordinary shares have fallen sharply in price, as many are afraid that dividends will be reduced in order to pay for the reconstruction.
For WPG, the closing of Sears stores makes it possible since Sears usually pays well below market rental rates. through contracts that were signed when the owners of the shopping centers really wanted the location of Sears. The anchor concept was based on the idea that a large names store would drive traffic to the mall, and that traffic would benefit the embedded stores. Today Sears can not attract significant traffic, and the owners of shopping centers believe that the space can be better used by new tenants. Bulls argue that new tenants will be more attractive to modern buyers, winning all the stores in the mall, and that new tenants will pay a higher rent, directly using WPG.
The risk is that the redevelopment of the Sears space is going to require large capital.
WPG designs $ 300-350 million of capital expenditures for the reconstruction of 28 objects. It is clear that only cash flows will not be enough to finance this level of spending, so WPG will turn to other options such as debt, real estate sales, or joint ventures.
In addition, the total dividend is approximately 224 million dollars. / year Although the management argued that they did not intend to reduce or suspend common dividends, that is, a large source of cash flows that could be addressed.
In 2017 and 2018, the general dividend of WPG was protected by a 90% payout rule. In order to qualify as REIT, the WPG must distribute at least 90% of its taxable income in the form of annual dividends. Due to high returns on property and loan repayments, WPG was close to this line. In 2019, it is not clear whether the taxable profits of WPG will be so high that they will not be able to reduce the overall dividend.
Although we believe the WPG is likely to be able to maintain its common dividends, we also recognize that it does not have the same protection as it had in recent years. We also recognize that a reduction in the overall dividend may be a seductive source of capital, especially if more significant retailers file a bankruptcy claim.
For investors who want to avoid the volatility inherent in ordinary shares, the major issues, WPG.PH and WPG.PI, is the possibility of obtaining a more stable dividend. Privileged shares of the H series and the I series also saw price pressure with both operations with a discount of 25% + to face value and both give more than 10%. This sale is exaggerated and gives investors the opportunity to achieve double-digit profits for many years.
Preference shares allow investors to obtain a more specific income stream
Preference shares are relatively minor obligations of WPG . With a total volume of 7.8 million units, the prevailing dividends are only $ 14.27 million in the year . General dividends can not be paid at all until the payment of privileged dividends.
In order for the privileged dividends to be discontinued, the WPG will have to suspend the first dividend, collecting approximately $ 224 million. In a free cash flow then they will have to have less than $ 16 million in annual taxable income.
In other words:
- Dividends with preferred shares are covered 25 times before the general dividends.
- Even after payment of general dividends
It's kind of crazy to prefer to bargain with such a discount to couples. The prevailing dividend is a rounding error for WPG. From the point of view of the company this is a rather inappropriate part of their capital structure.
Coverage of assets
In addition to the fact that dividends are very well protected by cash flows, there is a significant amount of property value that will help preferred shareholders return their capital even in an extreme case of bankruptcy or liquidation.
Considering the additions for the third quarter of 2018, we can see how WPG counts against its most restrictive deals. The strength of the WPG balance is that they have a significant amount of unused properties, and properties that are not burdened are usually more qualitative, more valuable properties.
As of the third quarter of 2018 and their unavailable assets more than doubled. All secured debts that WPG has "non-recursive" means that the WPG has the ability to transfer keys to the creditor, and if the sale can not cover the mortgage, the creditor is not entitled to apply to
Even assuming that each mortgage has small Null value greater than its mortgage Non-current assets of WPG more than double their unsecured debt . Elimination costs. The current nominal value of issued privileged shares is only $ 195 million
In other words, the coverage of assets of preferred shares is 10 times enormous. With such a significant difference between the amount of unsecured real estate and unsecured debt, there is a high probability that privileged shareholders will be able to charge their nominal value even in the event of unlikely liquidation.
Both shares of WPG, WPG-H and WPG – I am one of the safest privileged shares of real estate REITs if we consider dividend coverage and asset coverage. We believe that any event of bankruptcy or liquidation is extremely unlikely. And even if there is an event with a black swan, the preferred shares are well covered by the value of WPG assets.
The iShares US Preferred Stock ETF is one of the largest preferred ETF shares. large holdings WPG-H. Not so long ago PFF decided to reorient its portfolio by switching to a new tracking index. Why does PFF change the index? This new index seems to give greater weight to "convertible preferred shares" and "baby bonds," and therefore PFF has to sell some of its unconverted preferred shares to make the switch
Here it is important to note that the new index seems to be , has a shortened distribution on WPG-H. So PFF was forced to sell its WPG preference and was dumping a huge number of stocks. Please note that this is by no means a negative view of WPG because it is solely based on the index tracking solution. Let's look at the PFF sales details:
As we can see from the table above, PFF has sold a huge number of shares (over 400,000 shares) between November 9, 2018 and February 12, 2019 or 93% of its stocks . This would lead to enormous pressure on the WPG privileged stock. The latest data we have on PFF is available on February 12, 2019. We control PFF stocks daily and they stopped selling any WPG-H shares from February 6, 2019
Although most of the preferred stock fully returned to (or close to) their old trading levels, since market sales that we seen in the last quarter of 2018, WPG-H and WPG-I remain very cheap compared to where they traded in September 2018, just before the market correction.
- WPG-H was then traded at a price of $ 23.30 / share, compared with $ 18.90 today ( or traded higher by 23% above ).
- WPG-I was traded at a price of $ 21.20 compared to $ 17.40 () or traded above 22% here )
Six months WPG-H Price Chart  Source: Yahoo Finance
Six Months WPG-I Chart
Source: Yahoo Finance
As we see from the chart above, preferred shares are nowhere near what they were trading to market correction, and we We do this by selling PFF shares
. ] We have a further analysis that the non-fulfillment of WPG preferred shares concerns the sale of PFF. Let's compare relative index of the year to the present WPG compared to other Mall REITs, CBL & Associates Properties (CBL), preferred shares, and Pennsylvania Estate (PEI) privileged shares:
- CBL-D reached YTD by 30% .
- CBL-E to YTD by 31 %
- PEI-D has increased from the beginning of the year to 32% .
- PEI-B has increased from the beginning of the year by 29% .
- WPG-I increased by only 12% from the beginning of the year
- WPG-H has increased by only 12% since the beginning of the year.
With this significant inefficiency compared to other REIT shopping centers, we conclude that this is a huge sale of PFF that retains the benefits of WPG from the association
Given the latest positive news on the situation in Sears, and that PFF is selling its stocks to WPG, we believe that the preferred WPG shares are going to be united.
When a privileged promotion can be raised to + 25% to the level below it is unlikely that this is a terrible phenomenon for the redemption of shares. Both issues go beyond the date of their consideration and can theoretically be redeemed on any day. However, it is very unlikely that any problem will be redeemed in the near future.
WPG expects capital expenditures to increase by 2023, and we believe that it is unlikely that the management will allocate any funds for the redemption of preferred shares until the completion of the Sears restructuring. . Based on current price, the market agrees
Out of 2023, whether repayment will take place, will depend on a variety of variables such as market interest rates, the effect of redeployment on cash flow and the strength of joint capital
. ] If and when redeemed, then it is likely that WPG.PH will be redeemed first, since the coupon rate will be 62.5 bits higher.
Given the expected capital requirements of WPG, it is unlikely that both benefits will be redeemed by 2023 .
One of the factors that investors need to know is the case of a change of control on a legal entity which is not publicly traded as a direct investment fund. Both preferred shares have a reserve for the redemption of preferred shares at nominal rates plus accrued dividends if there is a change of control. If WPG redeem preferred stock in this situation, the price will be at $ 25 / share and shareholders will be rewarded with a huge increase in capital based on today's prices.
However, if WPG can not buy shares, preferred shareholders will then be able to convert into ordinary shares . For both series, the number of ordinary shares, each preferred share can be converted, calculated on the basis of the separation of liquidation preferences of $ 25 plus any dividends calculated on the total share price. However, there is a particle limitation that limits the maximum number of ordinary shares that can be obtained for a redesigned preferred share. For WPG-H, the share limit is 4.99 ordinary shares. The WPG-I series has a share of 4.3745.
The difference in the limitation of shares between two issues may be relevant if WPG is acquired by a private company. Consider the scenario where a private company has bet on WPG for $ 5 for a total share, and they can not redeem preference shares.
- Shareholders of WPG-H will be able to convert each share to 4.99 common shares, at a cost of $ 24.95 ($ 4.99 * $ 5).
- Shareholders of WPG-I received only 4.3745 simple shares for each, valued at $ 21.8725 ($ 4.3745 * $ 5).
In addition to the coupon rate, the difference in the greatest difference between these two problems is the restriction of the rights to a conversion. This restriction will only affect if WPG is acquired by an untrained company at a price lower than that where it is traded now. Although this is unlikely scenario, under such specific circumstances, the WPG-H shares are somewhat higher than WPG-I.
Our short-term price target price for these two preferred stocks is the prices they traded at just before the correction of the market and the sale of PFF .
- For our WPG-H our target is $ 23.30 per share ( or 23% higher .
- For WPG-I our target target of $ 21.20 per share ( or 22% more than current price .)
Given the level of security that these two preferred stocks use, we believe that they should trade very close to the corresponding nominal values or 30% to 40% of the current price . 19659072] Conclusion
After the correction of the market that we saw at the end of 2018 and the sale of tax losses, the vast majority of the prevailing white The sixth ks retreated back Although the most up-to-date since there are certain opportunities for investors, we have published a number of articles on undervalued high-yield privileged shares.
In our report above we highlighted the prevailing WPG stocks that were kept artificially low because one of the preferred stock shares of ETF (& PFF & # 39;) switched the index it tracks and the new index does not seem to include the desired WPG stocks. As a result, PFF dumps large volumes of WPG preferred shares.
Now that the sale is over, the WPG preferred shares must quickly recover and achieve short-term target prices, which will increase profits by 22%. More importantly, as income investors, we record safe earnings + 10% in the long run.
In addition, as noted above, these preferred WPG shares are very strong in terms of dividend coverage and asset coverage because they are insignificant in relation to the company's balance sheet. Supported preferred shares are the value of assets. WPG has a significant portfolio of non-hedged assets, and their bond agreements help to secure a large landing cost over unsecured debt.
- Dividends are covered 25 times in cash flows. assets of the company.
- Additional security functions include aggregate dividends and the obligation of WPG to pay 90% of the taxable income to support the REIT status.
All this adds to these privileged shares, which is one of the safest privileged shares investors can find on the basis of dividend coverage and asset coverage
WPG privileged shares offer a great opportunity for income-oriented investors to record 10 or more profits during for many years, enjoying enormous cover both at the expense of money and assets. Since the reconstruction is complete, and the current climate of fear is decreasing, we expect that the bid prices will go to the level which will lead to a growth potential of 30% to 40% . These privileged shares represent an incredible opportunity, and today they are our election.
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Розкриття інформації: Я / ми довго WPG.PH, WPG.PI, WPG, PEI.PD. Я написав цю статтю сам, і він висловлює мої власні думки. Я не отримую компенсацію за це (крім від Seeking Alpha). У мене немає ділових відносин з будь-якою компанією, акції якої згадуються у цій статті.