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Berko: Washington Prime is risky bet that could pay off

By Malcolm Berko

Published: May 25, 2019, 6:02am

Dear Mr. Berko: I had bad luck last year buying various high-yielding issues you and my two top brokers recommended. The brokers lost over 70 percent and did embarrassingly worse than you. According to my wife, who’s my business partner and bookkeeper, I had a net return of minus 3.6 percent in 2018, including interest and dividends.

A friend of mine found a stock called Washington Prime that’s $5.50 a share and yields nearly 18 percent. I’d like to buy 5,000 shares and would appreciate your opinion.

— E.Y., Erie, Pa.

Dear E.Y.: You must be a masochist, coming back to me for more punishment. Your folks must have dropped you on your head shortly after you were born, or they fed you too many Dum-Dums during your formative years.

Washington Prime Group (WPG-$4.50) is a wild-hair speculation that could singe your intestines and fry your occipital lobes. Initially, I thought you needed a psychiatrist, but after reviewing WPG, I think you need a discount broker. Your two top brokers will charge you some important body parts to purchase 5,000 WPG shares, while discount brokers like Vanguard or Schwab will charge $4.95 for the whole kit and kaboodle.

WPG is a mephitic, abominable and daft speculation, but considering its 17.7 percent dividend, it could be an incredibly shrewd, crafty and ingenious speculation. While WPG has my imprimatur (if you can afford the risk), let it be known this is not a stock for widows and orphans or sons and daughters of widows and orphans. And — surprise, surprise — CFRA, the world’s largest institutional research firm, which acquired Standard & Poor’s Equity and Fund Research in 2016, agrees and has a buy rating on WPG. On the flip side, Charlie Schwab suggests WPG should be sold, believing it will strongly underperform the market in the coming 12 months.

This self-managed REIT operates and develops retail properties — 108 shopping centers consisting of 58 million square feet — primarily community shopping centers along the highways, byways and heavily trafficked thoroughfares in many major cities across our nation. Most of WPG’s community centers and malls are in Texas, Florida, Ohio, Illinois and Indiana.

WPG generates its revenue from leasing space to shoe stores, clothiers, restaurants, entertainment venues, department stores and the like. Investor sentiment for most things retail-related has been mind-numbingly negative. Nevertheless, I think WPG has made impressive progress in repositioning its portfolio, suggesting to me there’s a 60 percent to 70 percent degree of probability WPG can maintain its $1.00 dividend. However, the bears that are short, 22 percent of the stock, are betting on a dividend cut. I think the market has created a unique opportunity at a discount.

Most WPG malls have excellent locations and their real estate values remain strong. Be mindful that the malls we knew 20 or 30 years ago are not dying, rather they’re changing. WPG’s management has advanced a series of plans (tailored to specific communities in which it has malls and shopping centers) to redevelop vacant and soon-to-be-vacant big-box stores. And the new tenants will pay higher rents. It’s also important to know that WPG is capable of funding its plans at very favorable interest rates.

I’m told by two analysts whose knowledge of WPG is impressive that management is committed to maintaining the $1 annual dividend. And the strong balance sheet tells me WPG can afford it. Meanwhile, CEO Lou Conforti and two directors purchased over 200,000 shares last year at an average price of about $6.11. Last year WPG had revenues of $780 million and earned 42 cents, but revenues will be about 7 percent lower this year, and share earnings may fall 5 percent.

If you can afford the risks, then do it! And $27,000 is a lot of risk.

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