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Edited Transcript of WPG earnings conference call or presentation 27-Apr-17 5:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Washington Prime Group Inc Earnings Call

Bethesda May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of Washington Prime Group Inc earnings conference call or presentation Thursday, April 27, 2017 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Keric M. Knerr

Washington Prime Group Inc. - COO and EVP

* Louis G. Conforti

Washington Prime Group Inc. - CEO and Director

* Mark E. Yale

Washington Prime Group Inc. - CFO and EVP

* Melissa A. Indest

Washington Prime Group Inc. - CAO and SVP of Finance

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Conference Call Participants

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* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Daniel Joseph Busch

Green Street Advisors, LLC, Research Division - Senior Analyst

* Floris Gerbrand Hendrik van Dijkum

Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Washington Prime Group First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to your host for today's conference, Ms. Lisa Indest, Senior Vice President and Chief Accounting Officer. Ma'am, you may begin.

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Melissa A. Indest, Washington Prime Group Inc. - CAO and SVP of Finance [2]

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Good afternoon, and welcome to our first quarter earnings call.

During today's call, we will make certain forward-looking statements as defined by the federal securities laws. These statements relate to expectations, beliefs, projections, plans and other matters that are not historical and are subject to the risks and uncertainties that might affect future events or results. For a detailed description of these risks, please refer to our earnings release and various SEC filings.

Management may also discuss certain non-GAAP financial measures. Reconciliations of each GAAP financial measure to the comparable GAAP measure are included in our press release, supplemental information packet and SEC filings, which are available on the Investor Relations section of our website.

Members of management with us today are Lou Conforti, CEO; Butch Knerr, COO; and Mark Yale, CFO.

Now I'd like to turn the call over to Lou.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [3]

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Thanks, Lisa. All right, let's get down to business. I'll provide operational, financial, strategic and innovation highlights, and Butch and Mark will fill in the details.

First, I'd like to address the current binary path which exists today, where retail assets below an arbitrary breakpoint are relegated to DeadMalls.com. This heavy-handed demarcation, based upon pretty blunt-edged metrics such as MSA size or solely upon sales per square foot, is just overly simplistic. Of course, sales per square foot is an important variable, however, other factors need to be weighted accordingly, including occupancy cost, catchment, competitor proximity, travel distance and cost-of-living adjustment.

Take for instance the infatuation with the country's largest MSAs. One of the most cited statistics out there, and now you hear it from just about everybody, is 25 square feet of retail per capita. Make no mistake, this isn't about refuting the fact we're over-retailed. The real question is exactly where this over-concentration exists, and the answer might surprise you. We recently completed a study which showed that the 12 largest MSAs exhibit 2.6x more retail per capita when compared to the rest of the U.S. at 17.2 square feet. So we anticipated a relative wealth argument and so we employed cost-of-living adjustment in order to normalize median household income. Guess what? Constituents residing within our catchments materially benefit from less expensive housing as well as other living expenses. In fact, they exhibit a higher adjusted median household income than the national average.

It's time for a more rational assessment of our cash flow characteristics. And for that matter, ours is, for that matter, our entire peer group. Listen, I'm not here to defend landlords who haven't changed the look and feel of their assets since Alice, the housekeeper, took Marcia Brady shopping for her first pair of wide-wale corduroys, nor am I an apologist for assets nearing functional obsolescence. The answer is to raise those.

As for those insipid retailers that are still out there, they, quite frankly, should gracefully take the escalator up to that big checkout line in the sky, where they can sit on a Bombay Company rocking chair in front of a Woolworths, playing checkers from KB Toys and listening to a CD shoplifted from Sam Goody, reminiscing about the good old days with County Seat, Chest King, Fashion Bug, Merry-Go-Round, you guys -- you get the point. There's a lot of dynamism in this business, and I think that we're going to continue to see change, and it's up to us to continue to help our tenants in a very different landlord-tenant relationship.

Operational. So stabilization continues and we are improving visibility with respect to our -- those activities, and it's best illustrated by the following. Our portfolio-wide occupancy was flat at 92.7%, while Tier 1 and Tier 2 Enclosed increased about 50 basis points to 90.7%. Tier 1 Enclosed, which is comprised of 37 assets, delivered comp NOI growth of 1.5%, which excluded a one-time property tax saving from the first quarter of last year.

Open Air delivered comp NOI growth of 2.9%. Portfolio-wide grew by 20 basis points. Leasing volume totaled 1.5 million square feet, which was a year-over-year increase of 13%. And as it relates to new leases signed, we signed 148 of them, which is a 53% year-over-year increase. I'm pretty pleased about that. I like to also point out that of the 1.5 million square feet for the quarter, 35% was food and beverage as well as entertainment-related.

We are, first and foremost, a leasing company. We initiated an incentive program in January intended to diversify tenant mix and address low-productivity space. Since implementing, more than 125 leases satisfying these requirements have been approved.

Redevelopment is crucial -- is also crucial, as you guys are all aware, as we promote our hybrid asset model of combining Enclosed and Open Air formats into vibrant town centers. We currently have 45 projects ranging between $1 million and $60 million, which substantiates our $125 million to about $150 million of annual capital spend. And again, we've projected average ROIs, and this is from a historical precedent standpoint of 9.5%, and we hope to continue as such.

Butch will provide a detailed discussion of the various projects when he's up next as well as our success in filling up vacated department store boxes and in-line space and just, in general, how we continue to reduce exposure to troubled retailers.

Quickly, financial and strategic, which Mark, of course, will provide in great detail. From a -- from those standpoints, our JV with O'Connor is expected to close by the end of second quarter. As we discussed previously, it will result in reducing our net debt-to-EBITDA to 6.3x, which will position us, quite frankly, as one of the best regional mall REITs from a financial metric standpoint.

This week, we completed a discounted payoff of the $87.3 million loan secured by Mesa Mall for $63 million. Think about it like this, Mesa Mall is the quintessential dominant secondary asset. It was just too darn levered. Whereas the yield on the previous loan was 9%, the yield today after the $24.3 million lender write-down is 13%. So Mark will detail the financial happenings during the quarter, and I just want everyone to rest assured that every action we undertake, whether for capital spend for redevelopment, or in effect, buying back Mesa Mall. All of those are subject to risk-adjusted scrutiny.

So innovation. Innovation from common area utilization as well as dining and entertainment is a priority. Our newly formed joint venture with Cleveland Avenue, a food and beverage venture capital accelerator, provides us with the opportunity to beta test new restaurant concepts. We're also moving the food court to center court as we work with the local operators to provide interesting offerings, including craft brewers, artisanal sandwich makers and the like. Muncie and Orange Park malls are the first 2 locations and should be up and running in a quarter or so.

In addition, our e-commerce platform, Tangible, which is -- has patent pending, and our candy store, Shelby's Sugar Shop, are in their final planning stages. Tangible, just as a reminder, is our concept which curates Internet purveyors on a rotational basis, allowing for a treasure hunt experience. And with respect to Shelby's, we teamed up with a national operator to roll it out, which combines both candy with regional favorites in the creative common area space. We're also going to kind of make it a little bit mobile to the extent that depending upon shopper traffic and kind of thinking about it as heat mapping, we'll take an old-fashioned 3-wheel bike and just pedal around over there and sell candy. But I'm saying this for a couple of reasons. One, we need to focus on the kinetic versus static. We need to be proactive versus reactive, and we just need to create more dynamism within our assets.

Last thing I'll talk about, which I actually love, and I'm going to give a shout out, as we say in the west side of Chicago, for one of our -- one of -- my colleagues. So as you know, we installed 50 Amazon Lockers at 50 of our assets. We think it's the largest installation within our peer group. We took it one step further by installing digital screens with electronic couponing and promotional capabilities, they're actually pretty cool. And what I consider to be the ultimate arbitrage, Kurt Palmer, our Head of our Specialty Leasing and Sponsorship, realized we could actually sell advertising space on the lockers themselves and cut a deal with Coca-Cola. So it's on our website. I had everyone -- I had our folks put it on our website today because I think it's just evidence there's lots of different things, whether it be the symbiotic relationship between e-commerce and physical space, whether it be that there is not one dead -- there should not be any unproductive, dead areas within our assets. And we will think about, I don't know if we're going to look like NASCAR, but to the extent that we have sponsorship and promotional capabilities, we're going to exploit them all for you guys. We're in the business of providing experiences that can't be replicated online, and you'll see a heck of a lot more of this going forward.

Rest assured, we aren't sitting still. We expect a couple of busy days that I see us in next month. And in the meantime, we'll be continuing to grind it out. Butch, you're up.

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [4]

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Thanks, Lou. Listen, business is tough right now, but we are making great progress because we have the entire organization working together to accomplish our goals. We are managing the risk, aggressively leasing space and reinvesting in our portfolio to provide a differentiated experience at our centers. Let me share with you some of our accomplishments.

First, our leasing volume, which includes executed deals and store openings, totaled over 1.5 million square feet for the quarter. Our new deal activity increased 53% from the same period a year ago, with 148 new deals totaling approximately 450,000 square feet. At the end of the first quarter, we had 700,000 square feet of leases executed and not yet open, with a total future income of approximately $21 million coming online in the next 12 months.

In addition, our new deal pipeline, which includes deals currently out for signature but not yet executed, is up 62% versus this time last year. Re-leasing spreads for all new deals were up 15.6%, driven by an 18.2% increase in our Enclosed portfolio and 8.5% in our Open Air centers. Our overall spreads for the entire portfolio grew by 2.1% in the first quarter.

As of March 31, occupancy for the total portfolio was 92.7%, flat when compared to the same period a year ago. In the Enclosed portfolio, we've increased occupancy in the first quarter by 50 basis points to 90.7%. This is extremely noteworthy given the closure of almost 200,000 square feet due to bankruptcies. These results demonstrate our ability to replace underperforming tenants and illustrate the demand for space within our portfolio. For example, over the last 8 months, we have successfully addressed approximately 70% of the limited Aeropostale, PacSun, Wet Seal store closures. As it relates to our traditional department stores, there were approximately 350 closures announced earlier this year, with only 4 those residing in our portfolio. We view these as an opportunity to redefine and re-energize our properties as the town centers within our markets. For example, at 3 of the 4 impacted locations, we already have redevelopment plans in place that will make our centers more relevant, expand our catchment area and keep our shoppers in the centers longer. In fact, over the last 24 months, we have started or completed redevelopment activity at 13 former department stores that include uses such as specialty grocers, entertainment, big box tenants, junior anchors, fitness centers, theaters, casual and sit-down restaurants, off-price retailers, office and medical and residential.

As we previously stated, redevelopment within our portfolio is the best return on investment in order to continue to unlock value. In the first quarter, we approved $50 million for additional investment into our assets as part of our continued plan to spend between $125 million and $150 million a year on redevelopment. Let me provide a few examples of the projects underway.

At Classen Curve in Oklahoma City, we are under construction, with 2 multi-tenant buildings adding 30,000 square feet of new retail to this already vibrant center. The expansion will open in 2 phases starting in the fourth quarter of this year. We are adding first-to-market retailers such as Athleta, Soft Surroundings and Bassett Furniture, along with francesca's, Cos Bar and Boardroom for men.

At Palms Crossing in McAllen, Texas, we have started construction on a 16,000 square-foot expansion, which is scheduled to open early next year. At West Town Corners in Altamonte Springs, Florida, we are under construction with TJ Maxx, Famous Footwear and Five Below to replace the former Sports Authority box that vacated last year. And at The Outlet Collection in Seattle, Washington, we started construction on a 43,000 square-foot Dave & Buster's, which will open in 2018, further demonstrating the diverse offerings we continue to add to our centers.

And finally, before I turn it over to Mark, I want to thank our associates for all their hard work. Thanks. Mark?

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [5]

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Thanks, Butch. Let's now move on to a review of our balance sheet, where we continue to take steps to reduce leverage and enhance our overall liquidity. As previously discussed, we're excited about the upcoming closing of our second O'Connor joint venture, involving 7 of our retail properties. Primarily through this transaction, along with planned property givebacks that I'll discuss in a moment, we will see a solid reduction in overall debt levels, allowing us to drive down our net debt-to-EBITDA to approximately 6.3x on a pro forma basis. We have locked in a blended rate at just about 4% on approximately $225 million of financing on 3 of our unencumbered properties to be contributed to the new O'Connor JV. We're expecting to close on the joint venture next month.

Discussions continue regarding the ownership transition to loan servicer for Southern Hills. During the quarter, we also commenced discussions with the special servicer on Valley Vista Mall. We expect the transition to occur for Southern Hills during the third quarter and close through year-end for Valley Vista.

As Lou mentioned, earlier this week, we were able to execute on a discounted loan payoff for Mesa Mall. The $63 million payoff for the $87 million note was funded with availability on our credit facility. The asset is now unencumbered.

Beyond these loans, we only have one other 2017 mortgage debt maturity remaining, which is Westshore Plaza. Our current plan is to unencumber the asset with proceeds from the new O'Connor JV.

In terms of liquidity, we finished the quarter with over $100 million of cash on hand, and we have approximately $607 million of available capacity on our revolving credit facility, giving us just over $700 million of a cesspool of liquidity at quarter end. Accordingly, and even when considering the recent Mesa investment, we'll have nearly $900 million of total liquidity availability post-closing in the second O'Connor JV.

This is a solid position for the company as it allows us to fully commit to our redevelopment pipeline while being patient on the bond execution front. As we previously discussed, we are interested in issuing longer tenured bonds within the next 9 to 12 months to extend the debt maturity profile of the company. While bond markets continue to be constructive, the negative narrative around retail, especially malls, does not provide a good window for execution. We'll continue to keep a close eye on market conditions.

Now let me turn to our quarterly financial results. Our FFO for the first quarter was $0.42 per diluted share, ahead of our guidance range going into the period. NOI contributions from our portfolio were generally ahead of our expectations for the quarter, with a positive growth rate of 2.9% from our Open Air portfolio. This was offset by a 1.8% decline from our Enclosed portfolio, where growth is muted by a onetime tax appeal savings recognized during the first quarter of 2016, along with the impacts from last year's PacSun, Aero and Sports Authority bankruptcies. When neutralizing for the tax appeal savings, we would have seen total portfolio growth slightly positive for the quarter, including approximately 1.5% growth from our Tier 1 Enclosed portfolio.

In yesterday's earnings release, we did raise our FFO guidance for fiscal year 2017 to a range of $1.64 to $1.70 per diluted share, primarily attributable to the recently executed discounted loan payoff at Mesa Mall. While first quarter comp NOI was ahead of expectations, we are maintaining our full year guidance range of flat to 1.5% growth as recent 2017 bankruptcies, such as Vanity, Payless and hhgregg, will pressure overall growth for the remainder of this year. There were no other major changes to our key guidance assumptions.

Finally, we are introducing FFO guidance for the second quarter 2017 in the range of $0.40 to $0.42 per diluted share. We expect comp NOI in the second quarter to be essentially flat compared to the year prior.

We will now take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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I was just wondering, in terms of the same-store NOI guidance for '17 being flat to up 1.5%, over the past few quarters, the Tier 2s have been negative. So I was wondering, what does it take to get the portfolio above that kind of low single-digit range? And/or kind of what does it take to get the Tier 2s to get to positive territory?

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [3]

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Well, hey, Caitlin, it's Lou. Let me address Tier 2 for a second because we cast an especially wide berth when we characterize assets as Tier 2, and it's manifested itself over the last 2 quarters since I've been here as well as this quarter. And Lisa or -- maybe you can give me the exact number, but our comp NOI growth in Tier 2 ranged from, I believe...

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Melissa A. Indest, Washington Prime Group Inc. - CAO and SVP of Finance [4]

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Negative 22 to positive 18.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [5]

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A negative 22 to positive 18. And I want to provide one snippet to that in a second. But the reality, there was something situational about all of those assets. Now Indian Mound, last quarter, I believe, was at a negative 18. And this quarter, it was, Lisa?

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Melissa A. Indest, Washington Prime Group Inc. - CAO and SVP of Finance [6]

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Well, I think that's a positive 18.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [7]

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And that was a positive 18. So these are assets where, quite frankly, we have the -- if we wanted to be cute, which -- we would have a pretty cogent argument to raise -- to move those into Tier 1. So they're transitional. And they're transitional because they might have been neglected, because Butch was smart enough to move a crummy theater operator out, replacing it with a new one. So it's not kind of a one-stop answer for Tier 2. But let me tell you, Mesa is a great example of an asset, which was Tier 2 fundamentally because it was encumbered, it was just over-levered. And with a little bit of our blood, sweat and tears and a little hugs and kisses, that is -- ostensibly, we do these year-end very rigorous and -- reviews. Ostensibly, that's the type of asset that can go to Tier 1. Did I answer your question?

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [8]

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Yes. So it sounds like these properties, a lot of them can have somewhat large swings. They might have been neglected in the past, but you guys are working on them, and we should be able to see that in the future.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [9]

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Absolutely. And one moment, Butch wants to say something because this is very, very important to us. Well, yes, Butch, go on...

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [10]

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The one thing that I was going to ask -- or answer, Caitlin, or add to the comment is that when you think about first quarter results, we actually grew occupancy in those in our Tier 2 by 70 basis points. So that's really how we're going to fix this is our leasing team, which is very good, has got to fill those spaces. And that's -- I think we're starting to evidence that by the increase in the first quarter.

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Melissa A. Indest, Washington Prime Group Inc. - CAO and SVP of Finance [11]

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And some of these are smaller assets, which would lend themselves to more of a percentage change when you look at the variability in that range.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [12]

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Got it. Okay. And then, I guess, next for Mark. You did mention on the plans for a bond offering that it sounds like now the time range you're thinking of is in the next maybe 9 to 12 months. So that sounds like it's no longer a 2017 event. Maybe you think 2018, is that right?

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [13]

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No. I think we've been consistent that sometime this year or in the beginning of next year, we'd like to execute. It's still in our guidance. So that's factored in midway through the year. And we're optimistic that once some rationality comes back to the market as it relates to retail and the fact that our business is going to continue, that there's going to be a window. And once again, let's not forget, we are investment-grade. We've got a stable outlook. We've got significant liquidity. We've got a great unencumbered pool. Over $300 million of our EBITDA comes from unencumbered properties. So we're very comfortable and certainly optimistic that there will be a window for us. And notwithstanding that though, when we close on the O'Connor JV, we're going to have ample liquidity that gives us the ability to be patient to find the right window for us.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [14]

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Driving down net debt-to-EBITDA over the last year by over a turn. So at some point, we have to realize that there are things that are idiosyncratic, specific to us. And we worked our behinds off to -- listen, with continued evidence that then befuddles me that we trade at this multiple and -- but I hate to throw that in, but there are some things that are beyond our control. And so as soon as we see a little bit of light at the end of the tunnel, we will indeed -- we'll act accordingly. But we are in great financial shape as evidenced by Mark's comments.

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Operator [15]

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And our next question comes from the line of the DJ Busch with Green Street Advisors.

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Daniel Joseph Busch, Green Street Advisors, LLC, Research Division - Senior Analyst [16]

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Lou, just so on the follow-up on Mesa Mall, was that an idea that you approached the lender with? How did that come about?

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [17]

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Yes, and not to -- and well, you as a collective, you -- and we are always looking. As we have said previously, those encumbered assets have a de facto put option to them. But upon, let's just call it, a right size of leverage, we can act quicker than anybody else from the special servicer's perspective, and this is an asset we want to own. In my bed, it was way too levered, and I -- but it's now at a position where we'll be able to do pretty -- this is a Cabela’s-anchored center. It has a couple of other anchors, but we can talk more about metrics in a second, if you want to.

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Daniel Joseph Busch, Green Street Advisors, LLC, Research Division - Senior Analyst [18]

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Yes. That was -- my follow-up would be, just if the sales productivity of that center is similar to Southern Hills and Valley Vista and then to your point, if that -- if it is, what are the characteristics that make you want to invest further in Mesa Mall down the road versus -- the plan versus Southern Hills and Valley Vista?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [19]

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Yes. I think the first thing that you got to realize, DJ, this is Butch, by the way, on the -- on Mesa, first, it does over $200 million in total sales coming out of the center. It's the only game in town. In fact, the next closest mall is almost 250 miles away, either going towards Denver or going to Salt Lake City. And so from our standpoint, buying it at a 13 and no income on the Sports Authority space, there's huge upside in this asset for us. Very different...

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [20]

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For the lease, Butch, at what roughly?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [21]

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94% right now. And -- but different than the other assets that we've -- some of the other assets that we've given back to the lender. But now there's great upside here. Big volume coming out of the center, strong department stores. But most importantly, we think that there's a lot of upside here.

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [22]

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And just to emphasize, the reason why it was Tier 2 was because of the leverage. We reevaluate those classifications once a year. We'll do that in concert with year-end. And we fully expect that Mesa will move up to Tier 1. And it's a great asset that fits our narrative and an asset that we wanted to own under the right circumstances. And we were able to achieve that.

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Daniel Joseph Busch, Green Street Advisors, LLC, Research Division - Senior Analyst [23]

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And Mark, to that point, can you remind us, is the tiers just purely subjective? Or is there some quantitative metrics that are built in there?

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [24]

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There, it's not subjective at all. It's multi-varied. It's based upon catchment tails per square foot. It's multi-varied, so it's -- and...

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [25]

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Tenant leverage is one of the factors that gets quantified in the analysis.

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Daniel Joseph Busch, Green Street Advisors, LLC, Research Division - Senior Analyst [26]

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Okay. And then my last question is just going back to what Caitlin was touching on, the Tier 2. Butch, you mentioned that it was up 70 basis points as far as leased occupancy. Just based on what the cost ratio did, it doesn't look like rents fell all that much. What was the driver of the negative 6%? I know there's -- it's unique to the assets, but in aggregate, was there anything -- if occupancy was up and rents weren't down that much, what was the driver of the decline?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [27]

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It's really the bankruptcies, DJ. But our guys are out there filling these spaces as quick as possible, but it's going to take some time for it to get those tenants open and paying rent. But really, it's the impact of the bankruptcies.

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Daniel Joseph Busch, Green Street Advisors, LLC, Research Division - Senior Analyst [28]

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So the economic occupancy fell, but the leased occupancy held or actually increased?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [29]

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Yes. That's correct.

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Operator [30]

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And our next question is from Floris van Dijkum with Boenning.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [31]

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A question for you guys, in terms of capital allocation, with these Tier 2 malls, and I think most investors would probably place a very high cap rate on them, which also means that theoretically, your required return on capital at those centers also must go up. If, for example, if these are 15 caps...

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [32]

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That's absolutely correct. The risk -- a marginal unit of capital is higher into -- capital is higher in Tier 2 than it is Tier 1. Absolutely right.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [33]

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And so that does that mean that some of the leasing that you might do rather than put in capital or put in TIs, you might give additional free rent? Or how are you thinking about your leasing program for these assets, if you think they might be keepers down the road?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [34]

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Floris, this is Butch. Listen, I think we look at these assets in regards to the day-to-day leasing with the majority of the small shop tenants. We're going to make the same deals that we make with them across the portfolio. I think what we're talking about is when we're going to do a major redevelopment and spend significant capital at the asset, that that's where it has to -- that that's where we take into account the risk-adjusted return.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [35]

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Okay. So you separate out the leasing economics potentially from the redevelopment economics?

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [36]

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Correct.

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Floris Gerbrand Hendrik van Dijkum, Boenning and Scattergood, Inc., Research Division - Senior Analyst of REIT [37]

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Got it. Got it. And let me just -- a follow-up question on the question that was asked previously by DJ, which is, I thought there was also some rent modifications that you did with Aero and with some of the other bankrupt tenants that led for a -- for the drop, where it doesn't show up in leasing spreads because you took those last quarter. Am I...

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [38]

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Yes, that's correct, and that's why you saw negative re-leasing spreads in the mall portfolio or Enclosed portfolio in the last couple of quarters of last year. And now those are coming through. So that is certainly an impact when we talk about bankruptcies, it's not only lost space, but you're right, on PacSun and Aero, there was a significant amount of rent relief. We felt like we made the right decision keeping those tenants, but we are feeling the impact here in the first quarter.

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Operator [39]

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(Operator Instructions) Our next question is from Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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So can you talk about the pace of -- you said you released about 70% of some of the troubled tenants that you mentioned earlier in the call. Is that in the numbers now? Or is that to be -- on the come in 3Q, 4Q?

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [41]

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Yes, I think you're going to see the bulk of that come in, in subsequent quarters. So that talks about -- when we talk about an address, those are leased, not necessarily open.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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Okay. And how's the rent profile versus what it was before?

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [43]

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It's a mix. I will tell you that some of the deals that we're replacing -- we replaced a number of the Aeros. We're bringing in better tenants like Lizard Thicket and some other tenants. But it's a mix. I would tell you that we're not getting the exact rent that we had before. But we're, in most cases, we're bringing in better tenants that are going to be more successful.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Okay. And has your tenant watch list changed in size at all in the past like quarter or so?

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [45]

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No. I mean, it's actually decreased from a quarter or 2, probably more relevant as where we were last year at this point. And we are slightly improved in terms of just the total dollars. I think there might be actual more tenants on there, but a smaller percentage. But it's certainly something we're keeping an eye on. There's a handful of tenants that certainly would be impactful, and we'll have to wait and see how that plays out. But it actually is less as a percentage of our total min rents than where we were last year at this time on the watch list.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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Okay. And on the Mesa Mall, can you help me -- walk me through some of the negotiations? Like why -- and I'm sure you've done this, but to push for a bigger, more loan relief, why not -- what stops the banks from taking 50% haircuts? Is it because there's a buyer behind them or behind you guys...

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [47]

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Yes. Just think about it as an RFP process. This is an auction process. And when they figure out who the best buyer is, it's certainly a combination of price. But we can practically have a no-contingency -- no-contingent close because we certainly know that asset. So is your question, why couldn't we have gotten a better deal? Well, because, Ki Bin, it's a -- we're getting a 13 cap, a 13% yield on an asset that is a dominant secondary asset.

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [48]

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Yes, I mean, just so you know, I mean, the asset was actually marketed. There were other offers. I think that allowed us to understand where the market was. It allowed the special servicer, and that's how we arrived at that valuation. If there had been better bids and the price was higher, maybe we would have passed. But we felt under these circumstances, that type of pricing, it was a very easy decision for us in terms of allocating that capital.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [49]

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Yes. I mean, that's what I was alluding to. It seems like there were other bidders at a worse price, right?

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [50]

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No. I mean, it was all -- it was right around that pricing.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [51]

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Literally within. Yes.

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Operator [52]

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And we do have a follow-up with Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [53]

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I was wondering if you guys could talk about the Pearlridge Uptown II acquisition. I think the release mentioned that, that property or portion of the property is 92% occupied, and the anchors are already Ross and TJ Maxx. So I was just wondering kind of what the future plans are there, or is it just to kind of own more in the same area. And if there's anything you could say about the cap rate?

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [54]

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Well, I think the -- so this is, Caitlin, this is one of the assets that's owned in tandem with...

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [55]

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In the JV, yes.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [56]

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Right, our joint venture partner. And to the extent that, one, we think that Pearlridge, in general, just has a lot of very interesting kind of upside characteristics, it inure to our benefit to own more. And quite frankly, we -- it was -- I don't know what's the right term. Us -- or a third party, not owning something that was holistic just didn't make sense. So now we own everything, and we can think about this tremendous asset from a redevelopment standpoint and a holistic -- from a holistic standpoint.

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Mark E. Yale, Washington Prime Group Inc. - CFO and EVP [57]

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Yes. And I don't think we want to get into cap rate, but what I will tell you is that this has been an opportunity that's been in front of us, not just something that happened a couple of months ago. So we certainly arrived at a price that we were very comfortable with and made sense, and it's certainly strategic. And as we think about future redevelopment and a broader redevelopment, having control of the whole site makes absolute sense and will be very helpful for us. We had the window to get it done, and we got it done on terms that we felt made real sense for us and our partners.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [58]

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Got it. Okay. And then I know you guys talked about a few of your in-process redevelopments before. I don't think you mentioned the Pearlridge -- sorry, not Pearlridge, Fairfield Town Center. So I was just wondering if you could give an update there in terms of what's open already and the timing of what's to come still.

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Keric M. Knerr, Washington Prime Group Inc. - COO and EVP [59]

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So I think we mentioned in the last quarter that Fairfield Town Center is 95% leased. We're very excited. The response from the retailers has been that their sales are far exceeding what their plans were. We're already in process to look at Phase II in the next phase, and we'll probably, in our investment committee, approve something in the next, probably, 30 to 60 days to go to the expansion, the next phase of the expansion, at the center. It's been very well-received, and our team has done a fantastic job on the leasing, development and construction side, and results are very good.

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Operator [60]

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(Operator Instructions) All right. I'm not showing any further questions. So this does conclude the program. Ladies and gentlemen, you may disconnect. Everyone else, have a great day.

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Louis G. Conforti, Washington Prime Group Inc. - CEO and Director [61]

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Thank you, everybody.