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Watch List: WP Glimcher Separates Malls into Two Distinct Piles: Strong Performers and 'Others'

Welcome to the Relaunch of CoStar Group's Watch List Report, Focusing on Value Add and Opportunistic Investing -- Today’s Most Active Area of CRE Interest
March 9, 2016
In reporting results for its first full year as a combined firm, retail REIT WP Glimcher disclosed it has divided its portfolio of 62 malls into Tier 1 and Tier 2 assets. Going forward, it plans to concentrate future capital expenditures on the larger Tier 1 group assets, while minimizing any financial investment for properties in the Tier 2 group.

According to WP Glimcher’s annual 10-K filing, its Tier 1 mall properties generally have higher occupancy, sales productivity and growth profiles, while Tier 2 malls have lower productivity and modest growth profiles.

Its Tier 1 mall portfolio, which represents 51% of the company's NOI, includes 36 malls with sales in excess of $400 per square foot, occupancy cost average of just over 12% and average occupancy of nearly 94% at year end, according to the REIT.

Its 26 Tier 2 malls account for just 24% of its annual NOI.

“Very clearly the majority of our capital, almost all the capital we invested in the prior year, went into Tier 1 malls, Michael Glimcher, CEO of WP Glimcher, explained to analysts.

Cash Flow from Lower Tier Assets to Fund Value Enhancement of Higher Tier Assets

However, the REIT said the lower-tier assets are expected to play an important role in its capex plans. Much of the money it plans to invest in the Tier 1 malls will come from the free cash flow of its Tier 2 properties, Glimcher said.

“It is really a pretty amazing cash-flow machine that spits off free cash flow that we can then reinvest and make the Tier 1 malls more valuable,” he said.

WP Glimcher already sold-off some of its non-core properties. In January of this year, the REIT sold Forest Mall in Fond Du Lac, Wisconsin, and Northlake Mall in Atlanta, Georgia, for a combined price of $30 million to private real estate investors.

In addition, during its fourth quarter earnings conference call, the REIT disclosed plans to turn over some of its Tier 2 properties facing higher risks back to their lenders.

Four of the five malls WP Glimcher plans to transition to a servicer secure CMBS loans, according to Nomura Securities. WP Glimcher is also planning to enter into discussions with the special servicer for the Southern Hills Mall in Sioux City, IA, over the next several months.

“We therefore believe that all 15 of the CMBS loans secured with WPG’s Tier 2 assets now face a higher risk of default,” Nomura analysts wrote. “However, as many continue to report a high DSCR [debt service coverage ratio], this story will likely take some time to play out.”

WP Glimcher was formed in January 2015 when Washington Prime Group completed its purchase of Glimcher Realty Trust. The predecessor company, Washington Prime, was created in May 2014 when Simon Property Group spun off a portfolio of 98 malls and community centers. As part of the acquisition of Glimcher, WPG gained 23 assets consisting primarily of Class A regional malls.

The company reported FFO for the 12 months ended Dec. 31, 2015 was $375.3 million compared to $295.1 million a year earlier. It reported a net loss of $101. 3 million compared to net income of $170 million a year earlier. The loss was attributed to merger and spinoff transaction expenses and non-cash impairment charges associated primarily with the acquired properties from Glimcher.

WP Glimcher currently owns interests in and manages 119 shopping centers totaling more than 67 million square feet diversified by size, geography and tenancy.

But Wait, There's More Value-Add, Opportunistic CRE News

With this relaunch of the Watch List Report, CoStar intends to turn a brighter spotlight on the most active segment in today’s investment market.

Value-add and opportunistic (VA&O) investing cuts across the entire spectrum of property types. This week we cover hotels, offices, retail, industrial, multifamily and even mortgage news.

VA&O investing also cuts across all reader types: institutional and private investors; international, national, regional, and local buyers. And because of the nature of the work involved in repositioning these properties, there is a high degree of interest in these deals from brokers and all other property services providers.

As demonstrated by strong fundraising for opportunistic and value added funds in 2015, there is considerable investor appetite for exposure to opportunities further up the risk/return spectrum.

Value added and opportunistic funds represent about two-thirds of funds in the market today and total capital targeted. And according to CBRE's Americas Investor Intentions Survey released this week, value-add remains the preferred investment strategy (40%) among the five major real estate investment types: core, secondary, value-add, opportunistic and distressed.

What qualifies as a Value Add investment? According to the California Public Employees Retirement System, the country’s largest public pension fund, the Value Add risk classification includes properties that are expected to produce a predictable current net income yield after debt service within a reasonable time frame, typically one to three years. These properties may require capital investment to develop, lease, redevelop or renovate. Value-add assets may have moderate leverage and moderate risk/return profiles. The value-add risk classification includes investments primarily in developed markets. But stabilized (core-like) private assets in emerging markets are also considered value add.

In contrast, CalPERS defines its Opportunistic risk classification as assets that have low or non-existent income at the time of acquisition but with the opportunity to produce substantial capital appreciation and higher yields during the holding period. Opportunistic investments often exist because of inefficiencies in real estate or capital markets. The opportunistic risk classification includes investments with assets in developed, emerging, and frontier markets. Investments in land are also categorized as opportunistic.

This recurring Watch List news column will cover deals, strategies, players, fundraising, market conditions and provide hidden opportunities within markets. Here are more VA&O stories published this week on

In what is a particularly jaw-dropping deal, a 1.2 million-square-foot St. Louis mall just sold for a measly $3.75/square foot.

Although this price would appear to make it the poster property for a troubled mall sector, it was actually the victim of unique circumstances in which not one but two new outlets malls opened within a 10-mile radius.

Here is a new chance to enter the Washington, DC, office market. After getting only a few, unacceptable offers for an exchange, the federal government has decided to put two of its older, empty office buildings totaling more than 1 million square feet into its disposal program.

The ongoing energy price bust is battering Houston, but here is one office building that could outlast the cycle even as its second largest tenant misses a debt payment and faces a possible bankruptcy reorganization lease cancellation.

Tribune Media Co. has initiated a process to explore the full range of strategic and financial alternatives to enhance shareholder value. That has the storied media company considering selling more of its 7 million square feet of owned real estate.

Two new value add funds just completed huge fundraisings and are looking for deals: Westbrook Partners; and Kennedy Wilson.

Speaking of active buyers, here are the latest deals from three buyers, one each in the Northwest, Atlanta and Chicago.
Swift Real Estate Partners Completes $30 Million in Pacific NW Investments;

Admiral Capital, McCann Form JV To Acquire Atlanta Apartment Complex; and

Hilco Global and Senior Executives of MB Real Estate Acquire One North Lasalle.

And lastly deal financing fundamentals appear to be holding up well as CRE and multifamily mortgage delinquencies continue to decline.

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