A Dividend Cut Is (Likely) Coming…
- This idea was viewed in advance by my private investing community, The Intelligent REIT Investor.
- An investor group, that includes Washington Prime, signed letter of intent to acquire The Bon-Ton Stores Inc. and keep the business operating.
- As a REIT investor in WPG, you are essentially providing the capital for WPG’s tenant to continue operating, such that the REIT can continue to pay out the $1.00 annual dividend.
- WPG’s management team is becoming increasingly distracted, trying to stave off a dividend cut by propping up yet another retailer.
To arms, to arms! The British are coming, the British are coming.” Paul Revere
An investor group that includes Washington Prime (WPG) signed a letter of intent to acquire The Bon-Ton Stores Inc. (OTCPK:BONTQ) and keep the business operating. One such requirement: “Bon-Ton had to seek U.S. Bankruptcy Court approval to pay the group a $500,000 fee, which the consortium would use to cover due diligence as it worked to finalize an asset purchase agreement in advance of an auction Monday.” source
Yesterday at a hearing in Delaware, Bankruptcy Court Judge Mary F. Walrath rejected the request, ruling a “work fee” is not pursuant to the approved bid procedures and calling into question the fairness of such a move when there are other qualified bidders that paid their own costs to evaluate a potential deal for Bon-Ton’s assets. She added,
I’m also concerned that the integrity of the process is being offended here. We have a potential — not an actual — bidder who appears to be being preferred by the debtor by agreeing to give them reimbursement of fees simply to get them to make a bid.”
Jon Harris with The Morning Call explained,
Her decision further swirls doubt that an 11th-hour bid to save the struggling department store will actually come together. The investor group’s letter of intent — which doesn’t amount to a finished bid — is “the last and only opportunity for the debtors to continue operating in business.”
Bon-Ton has received call for the liquidation of the 120-year-old business that operates around 250 stores and employs more than 20,000 people across 23 states. The bid deadline was originally April 2, though later extended to April 4. During Q1-18 Bon-Ton announced they would be closing 42 stores in 14 states, in addition to five stores previously announced and in February 2018, the company filed Chapter 11 bankruptcy.
WPG has 15 Bon-Tons in its portfolio, 13 of which are owned by the REIT:
On Monday, the Bankruptcy court will rule as to whether Bon-Ton will survive, depending in large part on whether WPG and its partners will become the winning bid. In other words, WPG is betting on whether one of its primary tenants will continue to pay rent for the 13 owned locations.
However, keep in mind, this is much more than 13 rent checks we are talking about. If Bon-Ton ceases to operate, WPG will be forced to cover the on-going operating costs (taxes, insurance, and maintenance). In addition, I suspect that many of the leases with Bon-Ton include co-tenancy clauses that could put further pressure on WPG’s already high-risk dividend.
WPG’s dividend payout is already at a critical juncture, in which the company pays out $1.00 per share in dividends (annually), compared with $1.03 on AFFO (adjusted funds from operations). See my latest article here.
Furthermore, consensus estimates forecast WPG to decrease AFFO/share by 7% in 2019, making the dividend extremely unsafe.
In other words, if WPG is not successful with its Bon-Ton bid, WPG will likely be forced to cut the dividend (like CBL last year). Put another way, as an investor in WPG, you are essentially providing the capital for WPG’s tenant to continue operating, such that the REIT can continue to pay out the $1.00 annual dividend.