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Washington Prime Group Inc (WPG) Q2 2019 Earnings Call Transcript

Logo of jester cap with thought bubble.
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Washington Prime Group Inc (NYSE: WPG)
Q2 2019 Earnings Call
Jul. 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks

  • Questions and Answers

  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Washington Prime Group Earnings Conference Call. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Lisa Indest, Executive Vice President and Chief Accounting Officer. Please go ahead.

Melissa A. Indest -- Executive Vice President of Finance & Chief Accounting Officer

Good morning, and welcome to WPG second quarter 2019 earnings call. During today's call, we will make certain forward-looking statements as defined by the federal security 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 non-GAAP financial measure to the comparable GAAP measure are included in our press release, supplemental information packets and SEC filings which are available on the Investor Relations section of our website.

Members of management with us today are Lou Conforti, CEO; Mark Yale, CFO; Josh Lindimore, Head of Leasing; and Dan Scott, Senior VP of Development.

Now, I'll turn the call over to Lou.

Louis G. Conforti -- Chief Executive Officer and Director

Thanks, Lisa, and hi everybody. Let's recap what turned out to be a very busy second quarter. We are reaffirming both 2019 FFO and divi guidance of above $1.20 [Phonetic] per diluted share respectively. We're maintaining 2020 comp NOI growth forecast of at least 2%. We've leased 2.1 million square feet year-to-date, which is a 14% year-over-year increase with lifestyle tenancy accounting for 55%.

Our Enclosed and Open Air occupancy was 92.5% combined. Tier One sales per square foot increased 330 basis points to $410. Tier One occupancy cost decreased 40 bps to 11.7%. New leasing spreads for Tier One and Open Air increased 2.9% for the quarter. Comp NOI growth for Tier One and Open Air was negative 6.8% albeit when excluding cotenancy and rental income loss resulting from bankruptcies, comp NOI was basically flat. We addressed four more vacant department stores, bringing our running tally to 15 out of 22 or 68%, which is ahead of schedule and kudos to Dan and his team.

We held 713 events in installations during the quarter, totaling 1,387 year-to-date. We closed a $180 million mortgage loan for Waterford Lakes. We executed a term sheet for $117 million mortgage loan collateralized by four Open Air asset with an interest rate of under 4%. We announced a $37 million definitive agreement for the sale of 20 additional out-parcels to our buddies at Four Corners Property Trust. And we announced a $99 million for at the ground sale leaseback whereby we'll pay initial rent equating to 7.4%.

WPG valuation is a stranger thing. All right, I become captivated by the Netflix sensation Stranger Things as have 40 million US households. Well, I certainly enjoy science fiction replete with covert Russian operatives and exploding vermin. Admittedly the personal attraction is that the storyline pretty much revolves around the regional mall. Taking place during 1985 and set within the fictional town of Hawkins, Indiana, it also appeals to a Midwesterner of a certain age. Fact in there was a newness about regional malls which delighted guests of all ages.

Well, words such as experiential, lifestyle on the channel, they wouldn't enter into the industry vernacular for another 20 years or so. There was some really cool stuff going on in these gathering places. This cool stuff was evident whether you lived in Johnson City, Missoula or Tampa. Growing up on the left side of Chicago, I recall heading out many a nights sporting relays from [Chef King], feeling as if I could step into a Duran Duran video. Instead I would hop on the Austin Avenue bus, ride a few miles north of Fullerton Avenue, walk four blocks west and find my way to the Brickyard mall.

I pick up my date after her shift at Merry Go Round or Hickory Farms or County Seat, so unless other blank, and while we sat say in the parking lot I proceed to stare into her Bette Davis eyes. Unfortunately, the evening would usually end on the early side as my date would make it perfectly clear she was definitely not addicted to love. In fact I was usually told to walk like an Egyptian at which point I more often than not wind up dancing with myself in my basement.

Fast forward and it's plain to see both landlords and tenants became passive during these -- during the intervening years. Here lies the opportunity. We still experience 350 million or so annual visitors and we're generally recognized as a town center within our attachment. And every time we entered in something fresh, it has cool on the [Indecipherable] fresh, it resonates with our guests. While the newness of 1985 centered around the physical asset itself serving as the attraction, today's draw has to be the curation of tenancy, events and installations and the adaptive reuse of department stores.

The quantification of a more dynamic experience can best be illustrated by improving operating metrics such as sales per square foot and occupancy cost, both of which continue to head in the right direction. It's not rocket science. More customer sales mean increased tenant profitability, and believe me, we have the eye of the tiger when it comes to focusing upon these objectives and it's working. Turning to our company's valuation, we recently prepared a financial analysis which in effect sell for the cap rate of our tier 1 portfolio at current share price.

We did this by setting the value of other assets, Open Air, joint ventures and tier 2 constant. Okay, methodology was assigned those other assets evaluation based upon widely accepted third-party research and sell for the remaining factor, i.e., tier 1 valuation. Just for the heck of it, we placed 20% cap rate upon tier 2 assets. The result would surprise even the residents of Hawkins, Indiana. At the current share price, tier 1 assets trade at a goofy 29% cap rate. It's just plain ridiculous and my colleagues and I were going to relish the moment and when we proved the pundits wrong who stupidly placed our company and the assets into the have-not category.

So naysayers have questioned our ability to access capital, lease space, diversify tenancy and energize the heck out of our assets. So guess what we've done, we've accessed capital for redevelopment, address the department store vacancy ahead of schedule and we've leased in line space, all while providing best-in-class transparency as it relates to supplemental and other disclosure information.

So in closing, I can assure you there has been no attempt to gain dimensional access to the upside down at any of our assets as well as no evidence whatsoever of Demogorgon presence. Last, we've never owned Starcourt Mall, albeit Josh I think has a few scoops of why lease is out for signature. I strongly suggest binge watching the third season of the Stranger Things that for no other reason other than to remind us how a mullet can serve a dual-purpose business up front and party in the back. Mark, you're up.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Thanks, Lou, and good morning to everyone. We finished the quarter with approximately $475 million of available liquidity when considering cash on hand and capacity on our credit facility. We're also still expecting another $20 million of proceeds in 2019 from the remaining Four Corners outparcel transaction; nearly $40 million over the next year from the recently announced second transaction with Four Corners; over $20 million from the release of lender reserves during the third quarter associated with the Waterford Lakes [salon]; and approximately $100 million of potential proceeds from the recently announced sale leaseback transaction.

This is even before considering the $70 million of excess loan proceeds associated with the executed term sheet for the CMBS refinancing of our four Open Air centers secured by mortgage debt that matures this October. Also this puts our anticipated available liquidity at well over $700 million, leaving us in a strong position to address both the upcoming April 2020 maturity of our $250 million bonds which is our only unsecured debt maturity through the end of 2022 when our credit facility and related term loans come due and secondly to continue to fully commit to our redevelopment pipeline.

In terms of the sale leaseback transaction, we really treat this more like long-term debt. We believe the initial yield in the mid-7% range equates to an implied cost of capital during the term in the mid-8% range when factoring in the exercise of the redemption rate in year '30 and is attractive as long-tenure debt capital. Thus, we're able to raise important capital today, extend out the debt maturity profile of the company all while retaining the ability to finance the improvements associated with the four properties involved in the future. Bottom line when our access to capital continues to be questioned in the marketplace, we are pleased to have circled nearly $400 million of additional equity raised so far this year.

It's also important to point out that we still have a robust unencumbered pool of assets representing over 56% of our total NOI, providing us with the additional future financial flexibility. Finally, we will continue to explore further opportunities to enhance our liquidity position. As we continue to improve the quality of our portfolio, we did transition back to the servicer on July 1st of this year, our Towne West Square Mall, along with the $45 million of related mortgage debt.

We also expect by the end of the year to transition back our West Ridge Mall and Plaza properties together with $50 million of secured mortgage debt. Each of these encumbered noncore assets have single-digit debt yields, thereby providing us with a very efficient way for us to delever. As Lou mentioned, we are making solid progress with respect to addressing the 29 department store boxes in our Tier One and Open Air portfolios, which we believe will need to be repositioned over time. Of those 29 boxes, seven are currently occupied by open and operating Sears stores, so when considering the 15 boxes address the assigned leases or negotiated LOIs, this represents nearly 70% of the currently vacant department store space within the portfolio.

This is great progress and we truly appreciate the team approach that buyer development construction legal groups to make this happen. We also remain confident in our originally projected estimate of around $350 million of additional capital spend necessary to transition all 29 locations over the next three to five years. If you just focus on the 22 boxes currently vacant, projected spend drops to under $300. Remember, the full pipeline excludes the 13 boxes owned by non-retailers including Seritage.

Now let me turn to our quarterly financial results. Our FFO for the second quarter was $0.27 per diluted share, landing toward the upper end of the guidance range going into the period, primarily driven by larger than expected outparcel gains. In terms of comp NOI, it was generally in line with forecast and expectedly challenged, primarily by last year's anchor bankruptcies and this year's in line tenant liquidations. In fact, when neutralizing for the impact of Sears, Bon-Ton, and Toys R Us, and the first quarter in line bankruptcies, we would have seen closer to flat NOI performance for the quarter from our core portfolio versus the negative 6.8% that we reported.

As discussed during our last earnings call, we were expecting the second quarter to be the most difficult in terms of growth performance, but we should start seeing improvement as we begin to comp against the second half of last year that was already burdened by lost anchor rents and cotenancy. Accordingly we expect to deliver improved trends in comp NOI for the third and fourth quarters of 2019, with negative growth of only 1% to 2% on average for the second half of this year. This should result in overall negative comp NOI performance of around 3% from our Tier One and Open Air portfolios for the full year 2019.

In terms of our outlook, we did reaffirm our 2019 FFO guidance within the range of $1.16 to $1.24 per diluted share. This is supported by no major changes to the significant assumptions driving our previous guidance. While operating result have been pressured over the last several years, we do continue to see a tangible roadmap for meaningful growth next year especially when factoring in state of progress being made on the department store repositioning front. As we look to 2020 and beyond, we remain confident in our ability to not only replace the lost rents and address related cotenancy from these closings, but to make our properties better.

Assuming we experience some stabilization in tenant bankruptcies and when factoring in over $10 million of estimated additional NOI next year from our redevelopment of vacant department store space along with other major leasing activity, we continue to anticipate generating meaningful comp NOI growth in 2020 of at least 2% from our combined Tier One and Open Air portfolios.

With that we will now open the call to any of your questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Ki Bin Kim from SunTrust. Your question please.

Ki Bin Kim -- SunTrust -- Analyst

Hi, good morning guys. Can we talk about the economics for the ground lease deals, things like cap rates, base rent coverage ratio and if there are any other contractual requirements on your end for things like capital reserve ratios or anything like that?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes. Ki Bin, I mean, it really starts at as Lou mentioned, the pricing on the ground lease will be at around the mid-7%, 7.4%, 7.5%. It will escalate the modest 1.5% per year. The coverage is probably four times just in terms of the NOI that's in place. But remember, I mean, it's just collateralized by the fee interest to ground, not necessarily the improvements. So we continue to own the improvements. Those would be financeable in the future if we choose to do that. And we thought it was just a very creative way for us to raise capital, probably on assets that would have been more challenging to raise it in a traditional manner.

So from our perspective, we really evaluated as 30-year debt, that's when the redemption rates in place. And if you look at the implied cost of capital, it's going to be in the mid 8%s. And we think for where we are right now, the importance of that capital today to extend out the debt maturity of the profile. We think that's attractively priced capital for us.

Ki Bin Kim -- SunTrust -- Analyst

And are you looking to do any other opportunities in terms of ground leases?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I think we'll always continue to evaluate opportunities. We probably could have done a larger transaction, we chose not to. We thought this was good size in terms of our various levers that we have to raise liquidity. So I'm not sure right now we have any plans to look at this type of transaction going forward.

Ki Bin Kim -- SunTrust -- Analyst

And will this transaction be treated as secured debt? I'm talking about your total debt to asset covenant ratio, which is 60%. You're inching up toward 55%. That's curious how much room you have left. And if that's would be part of that equation?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Well, we have ample capacity as relates to our secured debt. I think you're talking about our overall leverage and this will be neutral to that because it's just swapping out debt for debt. If you remember though, the improvements where the bulk of the value has remained unencumbered. I think the other thing to keep in mind as it relates to our covenants and where we stand specifically as of June 30th, that does not reflect the transition of Towne West that happened on July 1st and the expected transfer back to the servicer of our West Ridge properties. So collectively that's $95 million of debt that will come off the books and that certainly helps our covenants along with continued proceeds from the outparcel sales. So from that perspective we feel comfortable with where we are with our covenants.

Ki Bin Kim -- SunTrust -- Analyst

Okay. And I know we've talked about this a lot, but the ground lease for $99 million, your -- you have cash flow of $223 million that you're paying out in dividends. I think the last time we spoke, the IRS rules still allow you to pay out your dividends in the form of stock, that would allow you to retain that cash flow. When does that decision start to become more appealing?

Louis G. Conforti -- Chief Executive Officer and Director

Cash versus stock -- stock versus cash?

Ki Bin Kim -- SunTrust -- Analyst

Or just cutting dividend?

Louis G. Conforti -- Chief Executive Officer and Director

Well, our dividend policy unequivocally remains the same. And giving away -- if we didn't have the conviction that this -- we are a sorely undervalued company, giving away an incremental share would be a permanent impairment to our other shareholders. So that answers the first part. And the second question is the Board and Mark and myself and Lisa and all, we are always evaluating and we haven't done anything imprudent and nor will we ever do anything and we will in conjunction with our Board figure out what is best. 2019, we are maintaining the dividend. We have growth in the portfolio as Mark and I have discussed. I thought this would be a congratulatory commentary from you, Ki Bin. Smart capital raise and if you deconstruct what our property is, it's land and building, land unproductive. Mark, long-term debt or long-term capital in effect. All right, so I answered the dividend question.

Ki Bin Kim -- SunTrust -- Analyst

Yes. I mean you know why we ask that, right? I mean it seems like a easy source of capital, maybe tough on your stock price in the short term, but I mean it's $220 million of cash flow that you could retain, right?

Louis G. Conforti -- Chief Executive Officer and Director

I'm not going to conjecture, and for a second and I am -- I love you, we appreciate your thoughtfulness, but I'm not going to conjecture with respect to impact upon share price. I -- I'm going to conjecture, can I do this? I think our share price would go up with a dividend cut. We are not here to play around with share price. We are here to build a world-class company that is operationally and financially has a operational infrastructure and financial wherewithal and our dividend are obviously always under review and our dividend policy is always under review, we'll kind of go from there.

Ki Bin Kim -- SunTrust -- Analyst

All right. Just last question. Year-to-date your sales NOI is down about 5.5%, your guidance for the year is negative 3%, around there. It does basically imply a pretty significant ramp up in the second half. So I guess what are you seeing in your leasing pipeline or items or events that you're expecting that gives you confidence that you can hit that guidance number for the full year?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes, Ki Bin, as I talked about in the prepared remarks, I think the biggest factor is we're going to start comping up in the third and fourth quarters of this year against periods where we had already lost anchor rents where we started -- experienced cotenancy. So just in that self, that factor is the biggest driver when you really get down to it and you think about what really drove the negative performance in the second quarter. On top of that, we're going to start seeing the impact of us replacing those department stores and Toys R Us boxes and we probably can go through a long list of what's going to start coming online. But it's really the combination of those two factors that really will lead to a better second half, still down because we're -- still got cotenancy we're working through, but much closer to flat than where we were in the first half of the year and really lays the foundation for the growth that we're confident and as it relates to 2020.

Louis G. Conforti -- Chief Executive Officer and Director

Think about it sequentially. We continue to lease in line space. Dan and the entire team have dealt with 15 out of 22 of our vacant spaces. They come on line and some are sales, some are rentals that are rented, come on line at various times. It addresses cotenancy and obviously replaces rental income. This is an iterative process and it seems like there's always a goddamn disconnect with respect to the leasing that Josh and Dan are doing. I mean, it quite frankly is beating our expectation. And we provided absolute visibility and transparency with respect to cotenancy. And so with that being said, you lease space, you resolve boxes, you get to forecast 2% same-store NOI growth.

Ki Bin Kim -- SunTrust -- Analyst

And the 15 boxes that you've addressed, once those cash flow, how much of the cotenancy losses cure itself?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Well, I mean, we talked about the incremental growth in 2020 of $10 million-plus, certainly a chunk of that is cotenancy. But you're also going to get the benefits. It's not all going to happen, I mean, we talked about roughly $6 million impact of cotenancy in our Tier One and Open Air in 2019. Even with that $10 million of incremental, it does not cure all the cotenancy. So that's something that we'll continue to see the benefits as we move forward off in 2021. But if I had to put a number on it, maybe 1/3.

Ki Bin Kim -- SunTrust -- Analyst

Okay. Thank you.

Louis G. Conforti -- Chief Executive Officer and Director

Thanks, buddy.

Operator

Thank you. Our next question comes from the line of Caitlin Burrows, Goldman Sachs.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi, good morning guys. Maybe back to the total debt to total assets topic and that it is getting closer to 60%, I guess would you say that the covenant requirement is why you chose to do the sale leaseback, which was nontraditional and unique, but more expensive financing than some of the other things you've done in the past?

Louis G. Conforti -- Chief Executive Officer and Director

We both want to answer. Mark, you first.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

No, I mean, it's not covenant-driven because it's really -- from a covenant perspective it's going to be treated as debt versus debt. As I mentioned, I just want to make sure when you look at our covenants and you're evaluating them, we had $95 million of debt that's going to come off from where we were at the end of the second quarter, plus we have proceeds that I went through of another $80 million between the Four Corners and some loan reserves that we're going to get back. So we're comfortable with where we're on the covenants. It's something we're keeping an eye on and we've also talked about the fact that we're going to continue to look for ways to raise capital and we want to bring our leverage back in line with where we want to be longer term and we're working on that every day.

Caitlin Burrows -- Goldman Sachs -- Analyst

I guess just on that leverage target, have you stated what that is long term recently?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

We have and it's not changed over the years. It's in the 6 to 6.5 times.

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it. And then...

Louis G. Conforti -- Chief Executive Officer and Director

Right now are we second or third best, third best in the sector? Third best in our sector. The great SPG, number one. Who's number two, Tanger I think and then us.

Caitlin Burrows -- Goldman Sachs -- Analyst

I guess when you guys look at that metric, are you looking at trailing 12 months EBITDA or next 12 months EBITDA or something else?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I mean, we're looking at the kind of in place where we are.

Louis G. Conforti -- Chief Executive Officer and Director

Yes, point in time, yes.

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it. Okay. And then just in terms of -- so guidance this year includes the transition of one to three properties to the lenders in 2019 and we know this can create taxable income. So I was just wondering if you could tell us or give any color on how much net taxable income you're expecting in 2019?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Right. I think we have been on the record and nothing has changed when we look at the various transactions that we've talked about here that we're going to need a good portion of our dollar for share dividend to cover our estimated taxable income for this.

Caitlin Burrows -- Goldman Sachs -- Analyst

I guess any further way to quantify it or just a good portion of the dollar?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I just -- I would look at last year where we had no return of capital and I think we're within that framework and range. So good chunk means the bulk of the dollar per share.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then I know keep asking this, but I guess perhaps phrase a different way. Thinking about it that the dividend is currently $220 million cash used per year, can you kind of go through how you guys think it is in the best interest of remaining kind of going concern company to fund annual redevelopment needs with the mix of debt like at Waterford Lakes, outparcel dispositions or the sale leaseback when adjusting the dividend it's also an option, maybe not in 2019 because of those lender transitions, but perhaps in 2021 that may not be happening?

Louis G. Conforti -- Chief Executive Officer and Director

Again, dividend policy is always under review by our Board and if we were an outlier and I evoke [Miller-Modigliani] in terms of the prudent use of debt in the capital structure. We want to get our debt down, but again we would -- less leverage is better. We've seen those companies that didn't have that option. Mark and Lisa at all, we've maintained tremendous optionality, whether it be the unencumbered pool, whether it just be just great financial prudency in general. But our 2019 dividend policy is the same. I discussed why share versus cash doesn't -- something to be always -- we'll consider everything, but really doesn't make much sense. And we will continue to balance while we grow and energize our portfolio.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then maybe on 2020, I guess what factors would you consider in determining the right dividend for then in order to sustain your redevelopment CapEx needs?

Louis G. Conforti -- Chief Executive Officer and Director

Again, it's a function of our Board. It's a function of return on versus return of capital.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I mean, our cut -- dividend cover --

Louis G. Conforti -- Chief Executive Officer and Director

Yes, dividend coverage, our taxable income.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

-- for our taxable income.

Louis G. Conforti -- Chief Executive Officer and Director

Then at a common -- the kind of things that we think about every single waking moment. While we're doing things such as increasing sales per square foot, making our tenants profitable as occupancy costs, all into the framework of a absolute bullshit kind of valuation on our company.

Caitlin Burrows -- Goldman Sachs -- Analyst

I guess when you think though about that dividend coverage and what I guess if the numerator is dividend what the denominator is, do you think of that as like FFO and then take out maintenance CapEx and the development -- redevelopment CapEx? Or is that not part of the...

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Absolutely. We look at what our funds are available for distribution. We think we're pretty close to covering the dividend in '19 and that will be part of the comprehensive review in terms of setting the dividend policy that the Board goes through on a quarter-to-quarter basis. But it starts with FFO, you back out what your routine maintenance CapEx and leasing. We look at whatever kind of noncash or arrive at what we believe our funds are available for distribution and that's one of the factors that goes into the decision-making.

Caitlin Burrows -- Goldman Sachs -- Analyst

But then what about the redevelopment needs like the anchor boxes and any other kind of redevelopment that is a cash need in addition to that?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I mean, it's a function of surplus cash flow as well as liquidity and raising $400 million in a very short period of time. Quite frankly all things being equal satisfies that our -- our $300 million to $350 million that we've talked about.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. I have a couple more, but I'll go back in the queue.

Louis G. Conforti -- Chief Executive Officer and Director

You can go on.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Okay. Then the other one was in terms of the Sears boxes. So I know you guys have been making good progress on refilling those. If we look though at what portion of your enclosed properties have -- Sears, whether they're open today or ones that you're still working through and J.C. Penney there's definitely concern out there on J.C. Penney, I hear it from people, I'm guessing you guys hear it too, so I was wondering if you could give any sort of sensitivity or detail on the impact to your NOI if 10%, 20%, 30% of those currently open Sears or J.C. Penney locations did go dark?

Louis G. Conforti -- Chief Executive Officer and Director

Well, we have seven -- I'll turn it over to Mark in a second. So how many remaining Sears, 7? Seven Sears and again just like Ki Bin, I thought that people would be saying, holy cow, you guys really have hit 15 out of 22 vacant? But let's take the other side. So of those 7, I don't think there is one instance where we would not want that box back yesterday.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes, I...

Louis G. Conforti -- Chief Executive Officer and Director

I'm sorry Mark.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I was just going to say as it relates to Sears, and we talked about this in connection with the first quarter impact of the Sears locations staying in our portfolio. I think it's a little over $1 million and half of it relates to one location that we would be very excited to get back ultimately down the road. So that's not a significant impact and as it relates to J.C. Penney, I mean maybe Dan, just share your thoughts in terms of what we think of Penney's -- the fact that they are relevant in our portfolio and like the direction they're heading in right now.

Louis G. Conforti -- Chief Executive Officer and Director

Yes, I don't think any of us can predict the future, but I think five years from now J.C. Penney will still be around. That said, I do think that they will be closing some stores in the future. Obviously I don't know that for a fact, but we think we have opportunities to retenants the J.C. Penney -- some of the J.C. Penney boxes in the future as well. As far as our portfolio goes we have -- on the lease end we have all the renewals complete for the next two years except for one and that one does probably 50% more than what a typical J.C. Penney does and they pay very low rent. So we don't think we're much risk in the near term with J.C. Penney.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

All right. Caitlin?

Caitlin Burrows -- Goldman Sachs -- Analyst

Yes.

Louis G. Conforti -- Chief Executive Officer and Director

As it relates to J.C. Penney and generally us providing lots and lots of visibility, in the most -- I think actually a [Indecipherable] that from a merchandising standpoint this new -- the CEO and the team has done a pretty darn good job, actually better than darn good job. J.C. Penney -- our J.C. Penneys are always well-merchandised. They look good, but let's play the world goes to heck in a handbasket. The most draconian case, which we have calculated, what is the total impact -- income statement impact if including cotenancy, if every single one of our J.C. Penney, which is goofy, goes away, what do you think that number is?

And let me mention one other thing, we have been -- we are always unsolicitdly being approached about interesting -- about interesting larger box space, and you know why? Because we've sold all the crap and we've gotten rid of all the crap. But with that being said, what's the JCP number?

Caitlin Burrows -- Goldman Sachs -- Analyst

I don't know, $10 million?

Louis G. Conforti -- Chief Executive Officer and Director

Little more than $10 million. You're probably right, but with cotenancy we're under $20 million and look at the velocity by which we've leased our departments and look at the velocity which we lease in line. And again, we have a portfolio that is the dominant town center -- generally the dominant town center because we've gotten rid of all the crap. That's the interesting analysis as is the fact that our Tier One, which is now at $410 trades at a 29% cap rate.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

And just to be clear, that number, I mean that assumes no releasing in any of the J.C. Penney space. It also does not assume the fact that the department store repositions that we're working on, the 15 we announced very well could satisfy cotenancy --

Louis G. Conforti -- Chief Executive Officer and Director

That's right.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

-- because there's an overlap there. So we just don't even see as one, we are confident that J.C. Penney is going to navigate through. They're important to this industry, they're important within our portfolio. But even if something would transpire we can navigate through this, work through this. And I don't know what more we can do to prove that there is demand in our town centers.

Caitlin Burrows -- Goldman Sachs -- Analyst

And I guess just thinking about this potential upper max of $20 million impact, is it correct or relevant to think about it like it so that it was like if a 100% of them close, if 50% of them close, would it be like $10 million or it doesn't work that way?

Louis G. Conforti -- Chief Executive Officer and Director

No, that's pretty good. I mean, it's not exactly collinear or linear.

Caitlin Burrows -- Goldman Sachs -- Analyst

But something like that?

Louis G. Conforti -- Chief Executive Officer and Director

Something like that because every cotenancy -- and I really didn't understand this and let's just say that the lease that takes out puts on a green eyeshade and kind of calculates one by one, and there goes Dan because it's completely idiosyncratic to the asset and to the co-part of the tenant.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then maybe just in terms of the 2020 outlook, I know originally you guys were talking about maybe that same-store NOI could be up 2% to 3% next year. Now it's at least 2%, which is pretty similar. I was wondering if anything has changed and with the announcements by -- like Dress Barn?

Louis G. Conforti -- Chief Executive Officer and Director

No, I mean, I just -- you said a minimum threshold and you manage expectations and you over-delever.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay.

Louis G. Conforti -- Chief Executive Officer and Director

I have to say our goal is to not to over-delever or I'm going to get hollered at by attorneys, but yes.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Then last one in terms of Forever 21 was in the news in June as potentially closing or shrinking some stores. I guess in terms of your footprint there, how many do you have? And what is your expectation for their presence going forward in your portfolio?

Louis G. Conforti -- Chief Executive Officer and Director

Hi, Caitlin, it's Josh. So we've got 16 in the portfolio. Their average size is 15,000 square feet inside of our portfolio. So they're right-sized, they're healthy. We don't have any exposure to any of the large 60,000, 70,000, 80,000 square foot boxes that they took several years ago.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

And again -- and given the catchments within which they're located, there is not the -- what I call the -- what we characterize as the bastardization. If there are stores to be closed, yes, we've -- and we've evidenced this historically, we fare quite, quite well. And if there is -- it certainly, but I would assume if anything happened that the reorg versus the liquidation.

Louis G. Conforti -- Chief Executive Officer and Director

Yes, I would agree.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes, let them -- let it make a good content, let it make them stronger. And we continue to solve everything that's set before us. Look at our leasing, look at our sales per square foot, and we do it because we aren't burdened with those assets with crap. We've gotten rid of 14, 15 assets. But we're going to work with Forever 21 and Josh is wearing F21 as we speak. These are -- it's a very cute midriff T-shirt.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Jim Sullivan from BTIG.

Jim Sullivan -- BTIG -- Analyst

Thank you. Good morning guys. First of all, I just have a question on the guide for 2019. You did change your outlook for same property NOI from a range of down 1% down 3% to down 3%, yet you kept the same FFO guide, FFO per share guide. And I'm just curious why you didn't kind of take down the top end of that range and also I guess to find out if there was something that was offsetting the weaker same-store outlook that leaves you to not take down the top end?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes, Jim, it's Mark. Good question. I think if you went back and looked at what we had talked about coming out of the first quarter, we said we were very focused on the bottom end of the range. So as we provided guidance coming after the first quarter we had really been focused on being down 3%, so there was no change there. And when really look at the impact of 100 basis points in terms of our overall comp NOI growth, it doesn't take much to offset that, so we still feel comfortable with our original guidance.

Jim Sullivan -- BTIG -- Analyst

Okay. And then in terms of tenants and tenants that are kind of on your watchlist, obviously there are the tenants that we're all aware of that announced significant closings in Q1 and maybe some immaterial ones as far as you're concerned in the early part of Q2 like Dress Barn. But I just wonder if there's any other tenants that have moved to kind of the -- called critical watchlist during the second quarter that maybe we have not been thinking about, but they do have a heightened focus on?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I mean we don't typically share our watchlist publicly. All I can tell you is somebody just asked a question about one of the tenants that certainly has moved on to the watchlist.

Jim Sullivan -- BTIG -- Analyst

Okay. And then shifting the focus to the ground lease transaction that you announced. You talked about NOI coverage here 4 times, so I'm assuming that's something like a $30 million NOI generated by the four assets that is subject to the ground lease. And just to make sure, I understand this is not a taxable transaction, you're treating it as debt, you're advising us to kind of treat it as debt. So not a taxable transaction. I guess that's because you have the option to buy back, number one.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

From an accounting perspective, that's correct. I think the tax could be treated little bit differently.

Jim Sullivan -- BTIG -- Analyst

Okay. And now we think about the balance of unencumbered NOI, so the NOI associated with these four assets is not treated as unencumbered because of the nature of the transaction, is that right?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I think the -- I'm not quite sure how you asked that, but the way we look at is you can almost look at the ground lease payment, you deduct that, the remaining NOI is unencumbered because it's financeable.

Jim Sullivan -- BTIG -- Analyst

Okay. So the best way to think about it is it's like that $30 million ballpark number for NOI less the $7 million, the balance is unencumbered and therefore when you talked about -- you mentioned in the prepared comments that the non-land asset segment of the asset remains financeable, could you just talk about what kind of financing would be available for the personal property here given that adjusted same property NOI number?

Louis G. Conforti -- Chief Executive Officer and Director

Yes, I mean it's still pretty good and I in previous lives, ground lease real estate is ubiquitous and you'd be surprised in my hometown of Chicago how much of the dirt is owned by the Baptist Theological Union, in all seriousness, because they owned the land since 1902.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Yes. Well, I mean we have Pearlridge that's on a longer ground lease --

Caitlin Burrows -- Goldman Sachs -- Analyst

Yes.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

-- and we have over $200 million of financing, so I think it can be, it gets back to today and today's market with these properties that you get traditional CMBS financing. That's where it could be a challenge and we have found a creative way to tap into some capital.

Caitlin Burrows -- Goldman Sachs -- Analyst

And it's still going to be predicated upon the same that serve as cover divided by -- that serve as covers divided by your -- you take a continent to account, there are going to be a little bit of a premium, tiny, but we don't ask for -- we're not massing proceeds ever, so that's just not an issue for us. I think this is a brilliant financing.

Mark E. Yale -- Executive Vice President and Chief Financial Officer

I also want to be clear we're not necessarily assuming and part of our capital plan that we would look financing, we're just trying to make the point that it is financeable.

Louis G. Conforti -- Chief Executive Officer and Director

Correct, correct.

Jim Sullivan -- BTIG -- Analyst

And so carrying through with that thought and your description that this is a brilliant financing and you get duration and you preserve the majority of the NOI for purposes of future financings, can you just kind of indicate whether you expect to do more of these or not? And -- number one. And kind of number two, I think you just said you're not looking to mass the financing here, but what is the likelihood that you'll look to for example put some financing on the remaining unencumbered NOI from these four assets as opposed to putting financing on other assets that you do not own subject to a ground lease?

Caitlin Burrows -- Goldman Sachs -- Analyst

I mean, what I can tell you right now, Jim, is as we look in our forward capital plan, I mean we do not have any specific assumptions to encumber further unencumbered assets at this point. So I think I mentioned we could have probably done a larger ground lease transaction. We were targeting a certain level of raise, that's how we came up with it. We had no plans to encumber the remainder of these properties today. I think our point is we still have -- over 56% of our NOI is unencumbered at this point and that gives us a lever and gives us flexibility as we continue to navigate through where we are in our business.

Louis G. Conforti -- Chief Executive Officer and Director

We love that unencumbered pool and here naysayers say you don't have access to capital. We have lots of levers we pull. We pulled one of them which I think was a very creative pull and getting long-dated -- 30 year long-dated though. And we've -- we spoke of the $300 million and $350 million of redevelopment capital. Capital is fungible, but think about that 100 going toward that as well as all the other stuff we've done to-date and between redevelopment spend and delivering, we are doing exactly what we've said.

Jim Sullivan -- BTIG -- Analyst

Okay. So just to make sure I have this right, so when you talk about the 56% unencumbered NOI, you are simply taking -- well, with the prior assumptions that haven't changed very much and then deducting from that the financing cost on the ground lease?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

That's the way we would look at it, yes, and it gets you in the mid-50s range.

Jim Sullivan -- BTIG -- Analyst

Okay. Perfect.

Operator

Thank you. Our next question is a follow-up from the line of Caitlin Burrows from Goldman Sachs.

Caitlin Burrows -- Goldman Sachs -- Analyst

Just one follow-up on the ratios again. Just wanted to confirm for the one that's the total debt to the total assets with the sale leaseback transaction, does that total debt number, the numerator get impacted by the sales leaseback [Indecipherable] it a $100 million, I get that the other transitions you're going to do are going to make it go down by $95 million, but does this make it go back up? Or is it not actually debt, so where does that actually come?

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Sale leaseback will have no impact on the numerator or denominator.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay, got it. Okay, that's all.

Operator

[Operator Closing Remarks]

Duration: 50 minutes

Call participants:

Melissa A. Indest -- Executive Vice President of Finance & Chief Accounting Officer

Louis G. Conforti -- Chief Executive Officer and Director

Mark E. Yale -- Executive Vice President and Chief Financial Officer

Ki Bin Kim -- SunTrust -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Jim Sullivan -- BTIG -- Analyst

More WPG analysis

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