Whenever you see a dividend-paying stock fall enough to push the yield above 10%, it’s understandable to grow concerned about a dividend cut. If that yield hits 15%, then it’s usually safe to assume it’s right around the corner.

But what if it doesn’t happen? What if the share price keeps falling, and the yield rises to 20%? And it keeps climbing as the stock falls?.

That’s the case with retail property owner Washington Prime (NYSE: WPG).

Not long ago, WPG reaffirmed its intent to maintain quarterly dividends at $0.25 per share, or $1.00 annually.

With the stock languishing at about $2.58 as I write this, that equates to an unbelievable yield of 38%.

Would You Buy A Stock With A Yield This High?

I’ve written about this stock a couple times before, in May 2019, and then again in August. (And remember, I pointed out that WPG was only suitable for risk-tolerant investors.)

But honestly, at this point, the company doesn’t need to deliver any real operating improvements or earnings growth to satisfy the market and reward investors. If it can just maintain the status quo, then the income stream alone will likely outpace the S&P. In fact, today’s investors would recoup their sub-$3 per share outlay (and double their money) in less than three years.

Forget about jumping over the bar. It’s set so low that Washington Prime could practically step over it.

Typically, when yields get in this extreme range, the company isn’t producing nearly enough cash flow to meet its obligations and a cut is imminent. But Washington Prime is on track to generate funds from Operations (FFO) of $1.20 per share for the year – good enough to cover the $1.00 distribution 1.2 times over.

There’s a margin of safety there, which is why the company can confidently say that dividends aren’t changing in fiscal 2019. But it made no mention of 2020.

We’ll get more clarity there in a couple of days. Washington Prime is scheduled to report its fourth-quarter and full-year 2019 results on February 27. Presumably, we’ll also see get some fresh guidance on how 2020 is shaping up.

What Drove The Stock So Low (And The Yield So High)?

Like all retail property owners, WPG is coping with the wave of bankruptcies and store closures in the e-commerce age. Just a few weeks ago, iconic department store chain Macy’s (NYSE: M) announced plans to shutter 125 locations nationwide. They join other anchors such as Sears, Bon-Ton, and Toys ‘R’ Us.

Not only is that space tough to fill, but smaller stores up and down the mall often have co-tenancy clauses in their leases. These allow for rent reductions if larger stores (which draw the most property traffic) shut down.

Washington Prime’s Net Operating Income (NOI) slipped 5.5% last quarter, a decline of $6.4 million. Every penny of that came from recent bankruptcies and co-tenancy adjustments.

That’s the bad news.

What’s Working At WPG

Fortunately, its remaining tenants are among the industry’s most profitable and have increased their average sales by 5% over the past year to $413 per square foot. That bodes well for lease renewals. Despite the loss of tenants such as Payless Shoes, occupancy rates at the firm’s Tier One malls and open-air centers has stabilized near 93%.

More importantly, leasing activity is strong. The company has filled those empty spots by signing new and renewal leases for 3.2 million square feet of space over the past three quarters — an increase of 13%. And leasing spreads are positive, not negative, meaning the company is getting more rent from new renters than old ones. It has addressed 17 of its 23 big department store vacancies, where new tenants such as PetsMart and Fieldhouse USA will soon move in.

Unless NOI deteriorates further, Washington Prime is hauling in sufficient cash to meet its dividend. And management doesn’t see that happening. In fact, occupancy rates are expected to improve by 200 basis points to the 95% range (we’ll know for sure in a couple days).

More importantly, NOI is forecast to grow by 2% this year.

That outlook reflects positive developments in recent months. To quote colorful CEO Lou Conforti, “if we didn’t have visibility, we sure as heck wouldn’t forecast positive 2020 comparable NOI growth”.

Action to Take

You’d think by the collapsing share price that Washington Prime’s malls and shopping centers are empty shells. But they are 95% full and attracted more than 300 million visitors last year.

While the 38% yield suggests that the dividend is doomed, the company is currently generating enough cash to meet its payments with a little room to spare (120% coverage rate). And NOI is expected to tick even higher in 2020.

Now, that doesn’t mean management won’t voluntarily re-set its dividend at a lower level in this tough climate. As I’ve argued before, it probably should. Cutting the distribution in half would still leave a hefty yield of 19%. And it would also preserve more cash to accelerate the redevelopment of its properties. Those costs aren’t cheap, eating up around $100 million annually. But they are vital to transforming tired malls into vibrant new town centers.

Taubman Centers (NYSE: TCO), one of WPG’s mall peers, was just acquired at a generous 50% premium. That’s a positive appraisal of retail property in general. With all of this in mind, if you decided to take a flier on WPG, then consider holding tight to see what happens. And remember that this is a speculative stock, meaning you should be willing to withstand volatility during this turnaround phase. If you bear those things in mind, the payoff at the end could be worth it.

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