Reaffirms dividend guidance for remainder of 2019Year-to-date leasing activity remains strong exhibited by a 13% increase to 3.2M SFTier One sales PSF increased 4.6% to $413Tier One occupancy cost decreased 90 basis points to 11.2%Addressed 17 of 23 department store boxes to be repositioned at Tier One and Open Air assetsProactively retired at a discount $29.1M of outstanding principal on the Senior Notes due 2024$68.1M of net loan proceeds raised from the refinancing of four Open Air assets$42.4M of net proceeds from the sale leaseback of fee interest in land at four Tier One assetsCOLUMBUS, Ohio, Oct. 23, 2019 (GLOBE NEWSWIRE) — Washington Prime Group Inc. (NYSE: WPG) today reported financial and operating results for the third quarter ended September 30, 2019 that reflect continued progress of the execution of the Company’s financial, operating and strategic objectives.A description of each non-GAAP financial measure and the related reconciliation to the comparable GAAP financial measure are provided in this press release.Business HighlightsRobust and Diversified Leasing Progress2019 leasing continues to be strong exhibited by a 13% year-over-year (YOY) increase totaling 3.2M SF, and the number of lease transactions increased 9% YOY;Of the aforementioned 3.2M SF, 56% of new leasing volume was attributable to lifestyle tenancy which includes food, beverage, entertainment, home furnishings, fitness and professional services; andThe Company continues to incent its leasing and property management professionals in order to further diversify tenancy as illustrated by 143 leases qualifying under various incentive programs during the first nine months of 2019.Stable Operating MetricsCombined Tier One and Open Air occupancy decreased 110 basis points to 92.9% during the third quarter 2019 compared to a year ago, all of which was attributable to the bankruptcies of Charlotte Russe, Gymboree, and Payless ShoeSource;Tier One sales PSF increased 4.6% to $413 during the trailing 12 months ended September 30, 2019;Tier One occupancy cost decreased 90 basis points to 11.2% as of September 30, 2019; andLeasing spreads for new transactions increased 1.6% during the trailing 12 months ended September 30, 2019 for Tier One and Open Air assets.Net Operating Income PerformanceThird quarter 2019 Tier One comparable net operating income (NOI) decreased 8.8% YOY while Open Air comparable NOI increased 2.6%, resulting in a combined decrease of 5.5% or $6.4M; andThe aforementioned decrease is primarily due to a $4.3M negative impact of cotenancy and rental income from 2018 anchor bankruptcies (Bon-Ton Stores, Sears, Toys R Us), and $2.1M was attributable to 2019 bankruptcies (Charlotte Russe, Gymboree, and Payless ShoeSource).Redevelopment and Department Store ProgressThe Company has now addressed 17, or 74%, of the 23 department store boxes to be repositioned within Tier One and Open Air assets;As exhibited within the most recent third quarter 2019 supplemental, the Company continues to provide real time updates relating to the 29 department stores within its Tier One and Open Air properties identified for repositioning (excluding space owned by third parties such as Seritage Growth Properties);The efforts of leasing and development include the following projects, all of which are situated within Tier One assets:FieldhouseUSA will anchor the planned mixed use redevelopment of the former Sears location at Polaris Fashion Place®, in Columbus, Ohio;At Town Center at Aurora, located in Aurora, Colorado, FieldhouseUSA will anchor the planned mixed use redevelopment of the Sears location. Sears announced in August 2019 its plans to close its Aurora location by the end of the year, and the Company proactively gained control of the space for redevelopment efforts;A national retailer has provided a letter of intent to replace the former Carson Pirie Scott (Bon-Ton Stores) at Markland Mall, in Kokomo, Indiana;The demolition of the former Sears department store is underway at Southern Park Mall, in Boardman, Ohio, and is to be replaced by DeBartolo Commons which includes an athletic and entertainment green space and event venue. Adjacent to DeBartolo Commons, Southern Park Mall will feature a new entertainment hub with plans to include an indoor golf entertainment center, additional entertainment uses, and new food and beverage offerings. The renovation plans include a permanent DeBartolo-York family installation in the common area;A national entertainment concept has executed a letter of intent to replace the former Sears at Port Charlotte Town Center, located in Port Charlotte, Florida;National retailers have finalized letters of intent to replace the Sears at Longview Mall, in Longview, Texas;A national sporting goods retailer has provided a letter of intent to replace a former Herberger’s (Bon-Ton Stores) at Mesa Mall, located in Grand Junction, Colorado. In addition, a to-be-constructed Dillard’s will replace the Sears space based on terms of a letter of intent;At Southern Hills Mall, in Sioux City, Iowa, the Company has executed a letter of intent with a national off price retailer and has received a letter of intent from a national home furnishings retailer to replace the former Sears location;Dillard’s opened a second location in June 2019 replacing the former Herberger’s (Bon-Ton Stores) within Southgate Mall, in Missoula, Montana;The Company announced HomeGoods, PetSmart, Ross Dress for Less and T.J. Maxx will collectively replace the former Sears at Grand Central Mall located in Parkersburg, West Virginia;The Company has executed a lease with Dunham’s Sports at Morgantown Mall, in Morgantown, West Virginia, replacing space previously occupied by Elder Beerman (Bon-Ton Stores). A national discount retailer and an entertainment concept have provided letters of intent to replace the former Belk department store. The AMC Theatre located at Morgantown Mall will undergo a renovation in late 2019, adding dine in food and beverage, and the Company is actively planning to transform the former Sears location into an outdoor greenspace;The Company is in the process of obtaining necessary entitlements for WestShore Plaza, in Tampa, Florida, and discussions are underway regarding a joint venture of this mixed use redevelopment replacing the Sears space. In conjunction, the Company also purchased an outparcel located in a high visibility corner of the asset, currently occupied by office tenancy to be included as part of the entitlement process;The RoomPlace opened in August 2019 and replaced a former Carson Pirie Scott (Bon-Ton Stores) at Lincolnwood Town Center, in Lincolnwood, Illinois. The beautifully-designed 84,000 SF space, which is highlighted by a large atrium, occupies two floors and combines three brands – The RoomPlace, The MattressPlace and RP Outlet, marking The RoomPlace’s largest store to date; andThe RoomPlace and Round1 Entertainment will replace the former Sears at The Mall at Fairfield Commons, in Dayton, Ohio.Financial TransactionsDuring the third quarter, the Company proactively retired $29.1M of outstanding principal on the Senior Notes due 2024 and recorded a $1.2M gain on the debt extinguishment.In addition, the Company has demonstrated continued ability to access new strategic capital in 2019 including:The Company repaid the $47.6M mortgage loan previously secured by four Open Air assets, which was scheduled to mature on October 16, 2019 at a fixed rate of 7.5%. Simultaneously, the Company closed on a new $117.0M loan secured by the same four assets. The interest-only loan bears interest at a fixed rate of 3.67%. The loan will mature on October 1, 2029;Approximately $68.1M of net loan proceeds from the aforementioned transaction, as well as proceeds from the previously executed $180M nonrecourse mortgage loan secured by Waterford Lakes Town Center, will provide the necessary liquidity to address the upcoming $250M senior unsecured note maturing April 2020;The Company completed the sale and leaseback of four enclosed assets (collectively, the “Properties”). Under the master ground lease agreement, an affiliate of Kawa Capital Partners (the “Lessor”), in conjunction with Perennial Fee Investors, has acquired a fee interest in the land at the Properties for a price of $98.9M. The Company received approximately $42.4M in proceeds upon closing, net of $55.0M in bridge financing provided by the Company and closing costs. The bridge financing has a maximum five-year term, which can be pre-paid without penalty, at an interest rate of 4.00%. The Company’s property-level affiliates (the “Lessees”) entered into a new 99-year master ground lease for a leasehold interest in the land at the Properties. The respective Lessees retained the fee interest in the improvements and development rights. The master ground lease includes fixed annual payments to Lessor at an initial annualized rate of 7.4% and contains annual rent escalators over the term. The agreement includes an option for the Lessees to repurchase the fee interest in the land at a fixed price in year 30 of the master ground lease. If the Lessees do not exercise this option, then Lessor will retain the fee interest in the land, and the fee interest in the improvements and development rights will transfer to Lessor at the end of the 99-year ground lease term. As previously announced, in addition to Lessees continuing to own a fee interest in the improvements and development rights through the term of the aforementioned master ground lease, Lessees will continue to manage, lease and develop the Properties, offering the same exceptional guest experience. It will be business as usual to guests and Property employees; andThe Company signed during the third quarter of 2019 a definitive agreement for the sale of 20 additional outparcels to FCPT Acquisitions, LLC (“Four Corners”) for approximately $38M.Louis Conforti, CEO and Director, Commentary
“Here’s the bullet point summary for the third quarter:Reaffirming both 2019 FFO, as adjusted, and dividend guidance of $1.20 at the midpoint and $1.00 per diluted share, respectively;Maintaining 2020 comparable NOI growth forecast of at least 2.0% for Tier One and Open Air;Leased 3.2M SF of space YTD;Lifestyle tenancy accounted for 56% of the 3.2M SF;Combined Enclosed and Open Air occupancy was 92.9%;Tier One occupancy cost decreased 90 basis points to 11.2%;Tier One Sales PSF increased 4.6% to $413;Leasing spreads for new Tier One and Open Air transactions increased 1.6%;The Company hosted 776 events, activities and installations during the quarter totaling 2,163 YTD;Comparable NOI growth for Tier One and Open Air was (5.5%);Excluding cotenancy and lost rental income impact from bankruptcies, comparable NOI was flat;Of the 23 vacant department store spaces, 17 or 74% has been addressed;Proactively retired $29.1M of outstanding principal of Senior Unsecured Notes due 2024;Raised $68.1M of net proceeds from refinancing of four Open Air assets; andSale leaseback of fee interest in land at four Tier One assets resulted in $42.4M of net proceeds.“The Merriam Webster Dictionary defines alternative music as ‘produced by performers who are outside the musical mainstream…typically regarded as more eclectic or original than popular music…often distributed by independent record labels’. There exists a distinct analogy between this musical genre and Washington Prime Group. In fact, we have strived to transform our assets from their previous 19791 aesthetic via creativity and originality. Instead of walking around Numb2 akin to a Zombie3, my colleagues have laced up their Pumped Up Kicks4, deciding to Tighten Up5 and deal with the challenges facing our sector. It hasn’t been easy and we have the Scar Tissue6 to prove it.“Starting with a department store update, we have now resolved 17, or 74%, of the 23 vacant department stores within the Company’s portfolio and expect to announce several others within short order. While pundits were expecting a [more] Bitter [than] Sweet Symphony7, we were able to provide solutions ahead of schedule and attract a wide array of tenants which markedly diversify current rosters. I’ll let you decide what’s better for our assets…FieldhouseUSA, HomeGoods, PetSmart, Round1, ALDI, The RoomPlace, T.J. Maxx…just to name a few…or a lackluster Sears or Bon-Ton store. Unless you’re the Mayor of Simpletown8, it’s a pretty easy decision. Combine those names with some local and regional flavor as well as common area activations and you have a party!“Let’s now turn to leasing, which As You Oughta Know9 is our most important and Epic10 task. Our leasing professionals continue to perform with the fortitude of a Seven Nation Army11 and as a result exhibited a robust 13% YOY increase totaling 3.2M SF…the number of lease transactions for the same period increased 9%. Of the aforementioned 3.2M SF, 56% of new leasing volume was attributable to lifestyle tenancy which includes food, beverage, entertainment, home furnishings, fitness and professional services. I can’t resist…we continue to give our guests plenty of reasons to Come Out and Play12 as well as eat, drink and buy a loveseat or two. In addition, the Company continues to incent its leasing and property management professionals in order to further diversify tenancy as illustrated by 143 leases qualifying under various incentive programs during the first nine months of 2019.“While Washington Prime Group will always love our tenants with stores that Smell like Teen Spirit13 and we certainly don’t want to start a Teenage Riot14, isn’t it about time we catered to a more diverse demographic constituency? Listen, Mark and I like to rock the latest crop top as much as anybody’s teenage Daughter15 ; however, when we’re meeting with an institutional investor, an exposed midriff is just plain disrespectful. All of this talk about baring one’s midsection makes me think about Forever 21. We currently have 16 locations within our portfolio. As of now, it looks like we’ll only lose between two to three, of which one was slated to be relocated, if even feasible, as the result of redevelopment. Turning to Motherhood Maternity…just thought I’d mention they account for only 20 basis points of annualized rents, of which ~50% of our exposure is situated within Polaris Fashion Place, Town Center Crossing and Scottsdale Quarter. “Continuing with a few other operating metrics, Tier One sales PSF increased 4.6% to $413 during the trailing 12 months ended September 30, 2019 and occupancy cost decreased 90 basis points to 11.2%. Remember, occupancy cost is the litmus test of tenant profitability and we rank among the best within our sector. Also, leasing spreads for new Tier One and Open Air transactions increased 1.6% during the trailing 12 months ended September 30, 2019. While combined Tier One and Open Air occupancy decreased 110 basis points to 92.9%, every single square foot of it was attributable to the bankruptcies of Charlotte Russe, Gymboree, and Payless ShoeSource. Now, I’d be uncomfortable as a Blister in the Sun16 save for the fact we’re filling the space with, plain and simple, better tenants with more interesting goods and services. In fact, we estimate Tier One occupancy will sequentially improve approximately 150 to 200 basis points by the end of the fourth quarter 2019.“It’s now time to discuss comparable net operating income. Tier One decreased 8.8% and Open Air increased 2.6% which resulted in a combined decrease of 5.5% equating to $6.4M during the third quarter 2019. Before you reach for your Lithium17, it’s important to deconstruct this data point in order to better understand its various components. Take it from The Strokes, one of my favorite bands of all times, It’s [not] Hard to Explain18. The entire decrease can best be described as follows: a $4.3M negative impact as a result of cotenancy and rental income loss from 2018 anchor bankruptcies (Bon-Ton Stores, Sears and Toys ‘R’ Us), and the remaining $2.1M was attributable to 2019 bankruptcies (Charlotte Russe, Gymboree and Payless ShoeSource).“So, backing out the aforementioned cotenancy and rental income impact would result in flat comparable net operating income growth. Think about it, if we didn’t have visibility as it relates to resolving cotenancy and rental income loss e.g. leasing space, we sure as heck wouldn’t forecast positive 2020 comparable net operating growth of at least 2.0% for Tier One and Open Air. The bottom line is we are working our behinds off to lease both inline and department store space and have satisfied the vast majority of this detrimental impact. In other words, our leasing volume proves Michael Stipes is sadly mistaken if he believes It’s the End of the World19. Just remember, You Get What You Give20 and my colleagues have given their all.“Crappy companies are ubiquitous in every sector and one of Beck’s most popular songs sums them up in a word. According to Credit Risk Monitor, the ten largest corporate bankruptcies in 2018 exhibited total liabilities of $54.5B. Three of the ten were classified as retail (Sears, Claire’s Stores and Bon-Ton Stores) and their total liabilities amounted to 28.4% of the aggregate $54.5B. While I am absolutely not defending these ne’er do wells or any of their crappy counterparts, there exists a disproportionate amount of negativity with respect to our sector as compared to other industries.“I think I know the reason…my mother. When Carson, Pirie & Scott (Bon-Ton Stores) shuttered their stores last year, my mother was an absolute Basket Case20 lamenting their demise as if a beloved relative had kicked the bucket (don’t even think about asking her opinion about the post merger name change of Marshall Field’s). In an admittedly feeble attempt to comfort her, I said it’s not really a big deal because she was one of only twelve remaining customers anyway, at which point she directed her vitriol toward me as if I was responsible for their demise. Here’s the moral of the story: Ask your mother if she has ever heard of First Energy Solutions, Westmoreland Coal Company, Rex Energy Corporation or any of the other names which accounted for the remaining 71.6%. As physical retail is the quintessential consumer facing industry, I guess I’ll just have to assume the role of martyr and bear the wrath of shopping mothers everywhere.“I’m going to end my commentary with an interesting scenario analysis which provides yet another illustration of the silliness of our current share price. Remember last quarter when we provided a financial analysis which in effect solved for the applicable capitalization rate of Tier One assets by setting all other factors (remaining asset valuation) constant given current share price? The result was at the then current share price, Tier One assets, which comprise ~49% of 2019 budgeted NOI, trade at a ~29.0% capitalization rate.“This time we’re going to take a look at retail or mixed use redevelopment potential and its incremental impact upon net asset valuation. I’ll provide a summary as illustrated below:Three representative assets were selected, WestShore Plaza, Westminster Mall and Clay Terrace, all of which are scheduled to undergo redevelopment in short order;Drawing from the aforementioned financial analysis of the previous quarter, current valuation was ascribed to each asset by applying actual net operating income and an implied capitalization rate of 25.0% derived from a current share price of ~$4.00;Note these redevelopment projects include retail, office, residential and lodging components; in every instance, obligation is to deliver fully entitled land parcels to developers of these products while retail remains the responsibility of WPG;Capital spend for aforementioned delivery of fully entitled land parcels was included as a deduct; andA fair market valuation upon stabilization was calculated via third party research.“The result of what we considered to be highly conservative assumption set resulted in $2.00 or more of value creation per share…just for these three assets. Now extrapolate with varying degrees and apply this methodology to Pearlridge Center, Southern Park Mall, Grand Central Mall, Polaris Fashion Place, Southgate Mall, The Mall at Johnson City…just to name a few.“In closing, I’d like to thank my colleagues who have all become My Hero[s]22. Their collective efforts make me feel like I’m Mr. Brightside22.”Footnotes 1-23: Check out the playlist at https://open.spotify.com/playlist/4n4uo6AYQRMskNRvrJUaBv.
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