Pennsylvania Real Estate Investment Trust
Q2 2019 Earnings Call Transcript

Published: 31 Jul 2019

[Operator:]

Good morning. My name is Amy, and I will be your conference operator today. At this time, I would like to welcome everyone to the PREIT Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]I would now like to turn the conference over to Heather Crowell, EVP Strategy and Communications. Please go ahead.

[Heather Crowell:]

Thank you, Amy. Good morning, and thank you all for joining us for PREIT's second quarter 2019 earnings call. During this call, we will make certain forward-looking statements within the meaning of federal securities laws. These statements relate to expectations, beliefs, projections, trends, and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results.Descriptions of these risks are set forth in the company's SEC filings. Statements that PREIT makes today might be accurate only as of today, July 31, 2019, and PREIT makes no undertaking to update any such statements. Also, certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the comparable GAAP measures in its earnings release and other documents filed with the SEC.Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Bob McCadden, our CFO. Joe?

[Joe Coradino:]

Thanks, Heather, and good morning, everyone. As we sit here today, we're seven weeks away from opening our marquee project Fashion District, which will stabilize at over $18 million of NOI at our share, representing almost 10% of additional same-store NOI.We've taken decisive action to create a quality portfolio that will deliver results over the long-term. We set up on a course, which included disposition of lower quality assets, anchor replacements, redevelopment and in-line remerchandising, all of which have had the result of increasing sales, traffic and portfolio quality.The plan was put in place with the expectation of driving shareholder value through balance sheet improvement, earnings growth and multiple expansion. We're confident in the decisions we've made, as we look to a strong 2020 and monetizing the multifamily opportunities within our portfolio to drive earnings and recapitalize the company.We're leading the way in transforming the national shopping experience and despite challenges among individual retailers, it is working. We reinvented 13 department stores that were paying less than $2 per square foot with tenants paying an average rent of $17, a square foot an increase of nearly 10 times.We've diversified our tenant mix with our top 20 tenants now including TJX, Regal Cinema and Dave & Buster's. 45% of our portfolio, excluding department stores is now comprised of open air and experiential tenants. Tenants in our portfolio are performing with sales continuing to improve, up 5.6% to a new record of $531 per square foot.Notably, this is without any Tesla locations and only four Apple stores. Traffic is up an average of 5%, following our redevelopment efforts. Leasing pace remains brisk. New small format transactions increased 28% over Q1, and renewal spreads improved sequentially by 360 basis points to 6.1%.We continue to have a healthy volume of leases that are signed for future occupancy with 500,000 square feet coming online this year, paying annualized rent of $11.4 million and another 200,000 square feet signed for 2020 paying $3.6 million.Looking in the rear-view mirror for a minute had a difficult Q2 before pivoting updates on our major projects and the leasing environment generally. The bankruptcy and liquidation backdrop has obviously presented challenges, most impactful in the second quarter.Since the end of the first quarter, we've experienced additional bankruptcies impacting our portfolio. Year-to-date 72 stores have been affected, resulting in a $1.7 million impact to the quarter. We have commitments for 84% of the space, vacated by bankrupt tenants approximately half of this is with permanent tenants.The balance is with short-term merchants while we work on longer-term replacement tenants paying higher rents with improved credit. The negative impact from bankruptcies, were slightly offset by incremental revenues from 358,000 square feet of space leased to anchor replacements and big-box tenants that have opened since last June. Bear in mind that as we look forward to 2020, this anchor replacement program will generate an incremental revenue of over $7 million.Regarding changes to our outlook this year, we're a small company and minor changes in assumptions create volatility. If you look at our inventory space, we filled 84% of the space impacted by bankruptcy, some of which is seasonal tenants that pay lower rents. And as we had better visibility into our pipeline today, we concluded that this new supply has impacted our ability to lease marginal space in the near term. But we are confident that we will deliver on our pipeline of permanent tenants over the longer-term and are on track for a strong 2020.While there has been near-term impact from bankruptcies, the long-term picture remains positive. We're confident just as we delivered on our anchor replacement and disposition programs as our leased inventory comes online and our redeveloped portfolio continues to drive traffic and sales we will see growth as anticipated in 2020 and beyond. As this revenue comes online, our dividend payout ratio returns to more normalized levels.I want to take a moment and highlight the changing nature of our business driven by our early mover advantage. We see malls becoming less ubiquitous. The solution is more than just local and regional tenants and dining and entertainment although these have had a positive impact on the new mall paradigm. The challenge is to identify the optimal mix of uses, which is unique to each property. This has led us to special and distinct uses like REC Philly, a co-creating space for independent artists to collaborate; Uniquely Philly where four Philadelphia small businesses will have the opportunity to merchandise their unique offerings at our Fashion District.Digitally native brands getting physical and mature brands are executing pop-up stores. We'll open our first Murphy this year. We've had success with Peloton and we'll open three Hollister pop-up stores this holiday season. We are leaving no stone unturned and are currently negotiating transactions with Canadian, Chinese and Australian retailers.In less than 75 days, we will change the face of our company with Fashion District and Woodman Mall reopening and the new anchor space at Plymouth Meeting opening a milestone order for the company. We're in the final stretch in our transformative project Fashion District set to transform Philadelphia and PREIT. The properties are beehive of tenant construction activity and we are non-stop planning every detail. The first wave of tenants opens on 9/19/19. By holiday, the project will be over 70% occupied with the addition of AMC Theater, Round One and Wonderspaces.Within a year of opening, we'll stabilized at 90% occupancy. When we started this journey 16 years ago, we knew we wanted to do something spectacular for the city and transformative for the company. All of our work culminates now. Fashion District will be a gathering place for Philadelphian and our visitors with over 35 million annual customers within blocks. We expect this property will generate sales in excess of $700 a foot.It's truly a special mix of first-to-market experiences that includes City Winery, a winery restaurant and live entertainment venue only the seventh in the U.S.; AMC movie theatre, the first theater to open in 30 years in Center City; Wonderspaces, an immersive art experience with rotating shows inspired by making art accessible for all.Trendy popular fashion accessories and cosmetics at affordable prices including Nike, Levi's, Ulta, H&M, Columbia, Express, PANDORA, American Eagle, Eddie, Justice and many more. Grab-and-go food accessible on the regional rail platform with liquor available; co-working facilities that span industries putting traditional co-working, artist co-working with over one million in original art spanning nine permanent installations. With opportunities to incubate small business alongside coveted national brands, our project is for Philly, by Philly and Philadelphians are eagerly awaiting its arrival. We cannot be more proud of what we are delivering at this project.At Woodman Mall, a mall addition opens on October 12. This market dominant asset with sales currently over $600 per square foot grows even stronger with the presence of a new Von Maur fashion department store, which is complemented by the areas only REI, Cheesecake Factory, Urban Outfitters and Apple store. The people of Grand Rapids have long awaited the entry of Von Maur experience and we are confident that Von Maur will deliver a high-quality sophisticated experience they're known for.Grand Rapids is the second largest city in Michigan has been named the number one fastest-growing economy in the U.S. by Forbes and in New York Times top 52 places to visit. At Plymouth Meeting, mid-September marks a significant occasion for this perfectly situated real estate. As some of you may recall, we added one of nine LEGOLAND Discovery Centers in the country to do this property just as Macy's closed this redundant location.LEGOLAND has done great things for the property and in just seven weeks, we'll add Dick's Sporting Goods, Burlington, Miller's Ale House, Edge Fitness, Michael's Arts and Crafts. We're confident that this will cement the property as a regional destination and we expect that new tenants will deliver 4 times the sales volume over the former Macy's store. While these are monumental accomplishments, there is more to be done as we move into 2020 including Studio Movie Grill at Willow Grove, Burlington replacing Sears at Dartmouth Mall, Dick's Sporting Goods replacing Sears at Valley Mall and construction is underway on all of these and we expect that the new tenants in place and paying rent in the first half of 2020.The opportunity to add multifamily units throughout our Philly and D.C. portfolios continues to strengthen as we move towards entitlements. We've created a competitive environment for our multifamily land portfolio. We're going after 15 qualified prospective buyers have seven executed CAs with all groups accessing our data room and engage in active discussion. We remain optimistic that we will bring this to closure, recapitalizing the company with $150 million to $300 million in proceeds.Now, before turning it over to Bob, let me remind you that the 2019, Q4 revenue from FDP, Plymouth and Woodland along with additional lease-up of these and other projects annualizes in 2020 at approximately $25 million. So we're on track to deliver a strong growth in 2020.

[Bob McCadden:]

Thanks, Joe. I'm going to start my comments by reviewing sources and use of the capital. Earlier this month, our Fashion District joint venture modified its existing $250 million term loan to increase potential borrowings by up to $100 million. We're pleased that our lenders have recognized the significant value that's been created on this project by agreeing to this expansion.We ended the quarter with $153 million of liquidity, including our cash on hand and borrowing capacity under our credit line. Since the end of the quarter, we raised an additional $14.5 million from draws under the Fashion District term loan, and on our out parcel sale.During the third quarter, we anticipate closing on the remaining land parcel in Gainsville, Florida, which will bring in an additional $10 million. Our credit facility borrowing capacity is governed by the NOI generated by our unencumbered assets. As the incremental NOI from anchor replacements and other tenants opening at Plymouth Meeting, Morristown and then on the former Sears parcel at Viewmont Mall comes online over the next several quarters this is expected to create additional borrowing capacity of approximately $25 million a year from now and $50 million by the end of 2020. This results in approximately $230 million of additional liquidity before any densification proceeds.As Joe mentioned, we continue to make progress on monetizing this land, which will add to our liquidity position. During the second quarter, we spent approximately $45 million on our anchor replacement and redevelopment program bringing our year-to-date spending total to $68 million. As of June 30, we had commitments for construction contracts and tenant allowances at our redevelopment properties including our share at the Fashion District of approximately $76 million. Those expenditures will be made with the balance of this year into early 2020.Last week, we announced that we will pay our 170th consecutive dividend in September. Our FAD payout ratio for the trailing 12 months ending June 30 ticked over 100%. With our pipeline of new leases, the majority of anchor replacements opening later this year and Fashion District opening in September, we anticipate seeing a reduction to a reasonable payout level in 2020 and continued reduction over time as these projects stabilize.In our release last evening, we revised our same-store NOI guidance. We now expect same-store NOI to range from negative 1% to positive 0.5%. Through the end of the second quarter, same-store NOI was minus 0.4%. While we have replacement tenants identified for a significant portion of the closed space many of those tenants won't take occupancy until later this year, and in some cases in 2020.Program store openings for anchor replacements will largely offset the impact of bankruptcy later in the year. We're forecasting total occupancy at our core malls to increase by 75 to 100 basis points by the end of 2019.Regarding other key assumptions. We raised the lower end of our lease termination revenues to $3 million and maintained the upper end at $4 million. Year-to-date, we've recognized about $0.5 million in lease terminations. We're currently working on several transactions that will bring us to the midpoint of our guidance range. The lower same-store NOI outlook also flows through the income statement down the FFO.As we progress through the entitlement process at several of our projects and have greater visibility into land values, we're more comfortable with the expected values for some of the properties that are furthest along. As a result, we have increased our estimate of gains from the sale of multifamily and hotel parcels of both the upper end and lower end of our guidance range.We did not include the potential impact of any conveyance at Wyoming Valley Mall. The carrying value of this property is significantly less in the debt balance with a non-recourse mortgage loan. We will recognize a gain of approximately $36 million or $0.46 a share when this transaction is completed.Just a quick recap on our second quarter financial results. As expected, our second quarter results reflect the impact from bankruptcies. Same-store NOI excluding lease terminations decreased by $1.3 million, or 3%. In our same-store portfolio, bankruptcies reduced same-store NOI by $1.6 million, offsetting $0.7 million of incremental revenues provided by anchor replacements and box openings since June 30, 2018.Lease termination revenues were $6.4 million lower in 2018 second quarter, which had an unusually high concentration of termination fees. We received net insurance recoveries of $1.9 million during the quarter and expect to receive more than $3 million more in August. The income statement benefits from these recoveries are included in our NAREIT-defined FFO guidance that are excluded from our FFO as adjusted guidance.Occupancy at our core malls remained stable at 93.7% when compared to June 2018 despite the impact of store closings. Since June of last year, bankruptcy-related store closings reduced occupancy by 215,000 square feet at our core malls. We've opened replacement tenants in 57,000 square feet for a net impact of 158,000 square feet. These closings impacted total occupancy in our core malls by 147 basis points.Our average renewal spreads showed sequential improvement over the first quarter, and as we had previously communicated a material reduction in a number of tenants converting to leases paying us a percentage of their sales and in lieu of minimum rents. To put this in perspective as of June 30, a total of 89 tenants in our core malls were paying us percentage in lieu of fixed rent.So before we open up for questions, I wanted to remind you of the valuation gap that exist in our stock today. At the NAREIT Conference in June, we shared with you our view of NAV for the top five properties in our portfolio. Using a reasonable range of cap rates from public sources, we estimated our top five assets we were at $10 to $12 a share after debt. We also estimated the land value of our densification opportunities to be between $2 and $4 a share.At the midpoint of that range, our entire portfolio is trading at less than 50% of the value of our top five assets. That analysis didn't even factor in the value of Fashion District, which was still under construction at that time. With a transformed high quality portfolio, no vacant anchors in our core malls, the imminent opening of our major projects this fall and the end of our capital spending cycle in sight, we expect investors to see the compelling value opportunity in our shares.And with that, we'll open up for questions.

[Operator:]

[Operator Instructions] Your first question today comes from the line of Ki Bin Kim of SunTrust. Your line is open.

[Ki Bin Kim:]

Hi, everyone. Can we first start off with just talking about the kind of the large occupancy drops in Lehigh Mall, Viewmont, Patrick Henry and Cumberland? Despite some of the perhaps successes you've had in leasing it does seem like a pretty notable drop.

[Joe Coradino:]

So I'll start with the Cumberland Mall. We had the Toys"R"Us and Bath & Body Works that closed since June of last year. In about 50,000 square feet, we have replacement tenants in the pipeline for Bed Bath & Beyond, I'm sorry. Total of 50,000 feet we have replacement tenants identified. We're negotiating with them. That would cover 40,000 of that 50,000 feet.Some of the impacts also at Lehigh Valley, we also had Babies"R"Us, which was a big tenant. And Viewmont and others were largely impacted by the 2019 bankruptcies.

[Ki Bin Kim:]

Okay. And just I guess overall, I didn't try and reconcile every earnings note, but it does seem like for the past couple maybe few years, you are even missing guidance. Not just on FFO per share, because I really don't care about quarter-to-quarter FFO per share, but the more of the underlying business fundamentals like same-store NOI and maybe leasing spreads things like that. So I'm just curious, is it just because maybe you're not being conservative enough at the onset, or is the underlying business and tenant demand changing at a more rapid pace than you've initially thought and it's just kind of surprising you quarter-to-quarter?

[Bob McCadden:]

So I think when -- certainly, we take the 2019 bankruptcies and I think the retail world has changed more in the last couple of years than we've experienced historically. That previously when tenants filed for bankruptcy, we saw more often than not they were reorganizing and continuing business. The impacts could have been rev reduction maybe a few store closings, but the landscape at least for some tenants has changed more significantly where when they're filing for bankruptcy at least the 2019 and many of the 2018 tenants basically moved right from store closure to liquidation. That's probably been the biggest change that we've seen in our portfolio, but I'll ask Joe...

[Joe Coradino:]

I would add two additional things to that Ki Bin. Number one, the size and scale of the portfolio, so we -- given our size, we're more impacted by relatively smaller changes in revenue. And the second thing is that, I think we've been a bit more aggressive in terms of taking space back because it's our belief that the portfolio we created is one that we can repopulate in relatively short order which was basically our theme today that while this is a blip if you will in terms and not a little blip, but a sizable one, but one that we believe will recover from and fill up the bankruptcy vacated space.

[Ki Bin Kim:]

Okay. But ignoring the fact if a tenant goes in technical bankruptcy or for store closures this quarter or next quarter or next year, I mean you guys have a real-time sense of how profitable, how relevant each of your tenants are doing because you get the financial reporting from sales productivity. So, why not configure some of that kind of insight into a mid or wider guidance range or something a little more conservative at the onset because I think it does really do a disservice to your multiple when you more often than not miss guidance?

[Joe Coradino:]

That's -- it's a good comment Ki Bin. Thank you.

[Ki Bin Kim:]

Okay. And just going back to the dividend, I know you're -- there is going to be some upside from Fashion District next year and maybe the year after, but it does feel like that's a pretty easy -- I know I am seeing it now by looking at but an easy lever to pull to retain capital. There is no guarantee that you will get the proceeds we want from land sales or some of the monetization efforts. And even if those things do work out, you're not creating a reserve for a potential recession at some point, right? So what keeps you guys from proactively rightsizing that dividend?

[Bob McCadden:]

Essentially from proactively lowering the dividend?

[Ki Bin Kim:]

Yes, I mean you're not covering it today. Even if Fashion District comes online and you get the yields that you expect...

[Bob McCadden:]

Not just Fashion District, it's Fashion District, it's Woodman, it's Plymouth Meeting, it's Dartmouth, it's Valley and we've got a lot coming online that will normalize our dividend payout. We just don't think that it's a prudent decision at this point.

[Ki Bin Kim:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Caitlin Burrows of Goldman Sachs. Your line is open.

[Caitlin Burrows:]

Hi, good morning. I guess maybe starting with a question regarding liquidity in Fashion District. So, given that you are getting close to some debt covenant limits and further capacity on the revolver is somewhat limited, how much of the TI for Fashion District will be covered by the extra $100 million of capacity on the Fashion District term loan? It seems from the press release that a decent amount of that has already been drawn given the $13 million of availability that was shown?

[Bob McCadden:]

No just to clarify the term loan -- the additional term loan, we've only drawn a small fraction of what we -- of the $100 million. So the funding for tenant allowances at Fashion District can come from several different sources. The way we have been doing it PREIT-Macerich is contributing the money from general capital source they have available as well as the term loan.So, the term loan is significantly yet to be drawn at the full $100 million. At this point, we don't have commitments for the $100 million, but that is really just an additional source of capital that could be available to us if necessary. But at this point, we're not relying on that additional $100 million to fund. Near the completion of the Fashion District, we can fund that through and our partner through available capital sources that's just diversifying the source of potential funding.

[Caitlin Burrows:]

Okay. And then maybe following up on Ki Bin's question, I know that you've mentioned and we know that as NOI comes online from Fashion District and other redevelopments, the dividend payout should improve. I guess, I'm just wondering though, when you look forward whether it's next quarter or next year, what factors kind of will you consider when establishing the quarterly dividend amount and that the rate you have today is the right one?

[Bob McCadden:]

So there is couple of things. We obviously look at our dividend coverage ratio. That's a key consideration. And as importantly, we also look at the redistribution requirements. We have a significant amount of activity in terms of land sales which will potentially generate significant capital gains for the company. So that's also like a major consideration that we will be evaluating in terms of our taxable income in the future as well as the prospect of having to recognize capital gains.

[Caitlin Burrows:]

Got it. And I guess when you model out multiyear earnings of the company when do you think that current $0.84 per share per year becomes covered by recurring operations rather than things like one time land sales and the like?

[Bob McCadden:]

Yes, we think next year in 2020 we should be covering it from operations.

[Caitlin Burrows:]

Okay. And then maybe just related to the potential proceeds from the land sales to the multifamily developers. I was previously under the impression that a large portion of that could be realized in 2019. So I was just wondering is that still the case? Kind of what is the progress? What's been going on in the past couple of months? And if not 2019 what's impacting the timing?

[Bob McCadden:]

Well, we've expanded the group of perspective buyers in the interest of creating a highly competitive environment. As I mentioned in the script, we have seven qualified institutions in the data room at this point. And with meetings and property tours being scheduled regularly it was our expectation that we would close this year. We're still pushing hard to do that. We think the fallback would be Q1.

[Caitlin Burrows:]

Okay. Thanks. I’ll go in the queue.

[Operator:]

Your next question comes from the line of Christy McElroy of Citi. Your line is open.

[Christy McElroy:]

Thank you. Good morning, everyone. Just wanted to follow-up on Ki Bin's question on guidance with regard to your same-store NOI range. Just trying to understand the biggest changes to expectations or surprises from the Q1 results when you reported Q1 results too today. It seems like a quarter ago you did have certain expectations in there for incremental bankruptcy impact in the numbers. The bulk of the liquidations that have been announced were known at this point and at that point that was running close to the higher end of your initial expectations.So you were sort of implying the lower end of the range at that point even though you didn't change it. But just want to understand between then until now what the biggest changes have been between the different buckets of additional closures that you're now expecting additional rent relief? And you also mentioned the mix of temp versus perm and timing of backfill.

[Bob McCadden:]

This is probably, I don't know if I can draw around one single reason, but we did have additional bankruptcies subsequent to the end of the first quarter Topshop, Charming Charlie, a local jeweler that was not anticipated that they would again file and liquidate. We had a couple of delayed store openings at a couple of -- at several of our properties that were pushed from Q4 to Q1 2020.Originally, I think, we anticipated that Charlotte Russe is going to maintain stores at a number of our properties based on their level of performance and our negotiations with them at the time and that was a little bit of a surprise that they closed all their stores. And then we saw some erosion in our common area revenues. We've grown that program pretty significantly over the last couple of years and had anticipated continued strong growth and we've seen some weakness in that area as well.

[Christy McElroy:]

How much did you loose in rent from the Topshop closure at Springfield?

[Bob McCadden:]

It's about -- yes, well I guess I don't want to give that specific -- it's tenant-specific number.

[Christy McElroy:]

Okay. So maybe related to that there are a couple of your larger ABR exposure tenants with larger stores that have hired restructuring advisors. Maybe you can provide some color on some of the conversations that you're having sort of a bigger picture not necessarily specific tenants but with struggling tenants outside of the bankruptcy process. Is there a risk of rent relief or closures or downsizing? And how is that factored into your second half outlook? I know you did mention you raised your lease termination fee guidance maybe that had something to do with that maybe some more color there.

[Joe Coradino:]

Well, we are in active discussions with one major tenant that has 13 stores in our portfolio. We actually feel pretty good about the outcome because there -- we don't have any oversized stores in our portfolio and so we're working through a restructuring --downsizing the two stores and some rent relief.

[Christy McElroy:]

Okay. That one specific tenant with the 13 stores so that's something where we would see lower rent and that's factored into your guidance?

[Bob McCadden:]

Yes.

[Joe Coradino:]

Yes.

[Christy McElroy:]

Okay. And then just lastly in addition to the base rents being down just that the expense recovery rate was also lower year-over-year. How much of that was related to the bankruptcies in sort of this discussion versus sort of a collection timing issue that we could see made up later in the year?

[Bob McCadden:]

Yes, I think, a lot of that has to do with the -- we talk about the loss of rent from the bankrupt tenants a lot of that was in the extras. We're seeing that effectively drop to the bottom line.

[Christy McElroy:]

Okay. So mostly bankruptcy related?

[Bob McCadden:]

Right.

[Christy McElroy:]

Okay. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Karin Ford of MUFG Securities. Your line is open.

[Karin Ford:]

Hi. Good morning. I was wondering if you could bridge us on the new FFO guidance from the $0.22 result you had in 2Q, up to what looks to be $0.39 quarterly average for the back half of the year at the midpoint?

[Bob McCadden:]

So, if you look at the third quarter, we expect the third quarter results to be kind of roughly in line with where we delivered in Q2. And then, if you -- that kind of implies roughly $0.55 to the midpoint of our range for the fourth quarter. And that compares to $0.52 a year ago.And given the amount of activity that we have in our anchor redevelopments coming online, Fashion District et cetera, we think that incremental $0.03 is very achievable.

[Karin Ford:]

Okay. And that, bridge is mostly store openings and rent commencements offset by some of the additional, rent relief that you just talked about et cetera?

[Bob McCadden:]

Right, so if you think about the second and third quarters, you have basically the lost rent for the bankruptcies. And you don't have any mitigating impact from new store openings.And you also have the normal seasonal tick up in, seasonal revenues that, occurs, in the fourth quarter that generally makes the fourth quarter, stronger than the previous three.

[Karin Ford:]

Okay. Thanks for that. And then, just my second question is, can you just give us any updated thoughts on the JCPenneys in your portfolio? And how they're doing? And any anticipated closures there?

[Joe Coradino:]

Sure. We have 13 JCPenneys in the core portfolio. It's noteworthy they all have Sephoras, which I think is, sort of speaks in terms of the level of quality and sales volume they are producing.And at this point we don't really have any concern that there is any imminent closing at any of the JCPenneys. And we are in not in discussions with respect to rent relief in any of them either.

[Karin Ford:]

Great, thank you.

[Operator:]

Your next question comes from the line of Michael Mueller of JPMorgan. Your line is open.

[Michael Mueller:]

Yeah hi, just a couple of questions. First in your NAV analysis with the top five assets curious, what cap rate you applied to the top five assets? And then, secondly is there any sort of an update with respect to the non-core properties? What the status with those is?

[Bob McCadden:]

So the cap rate was in the roughly 6% to 7% range. I think it averaged about 6.75%.

[Michael Mueller:]

Okay.

[Bob McCadden:]

And on the non-core, right -- and then the non-core status we continue to work with a lender of Wyoming Valley and again towards a transaction that we would hope to be completed in the third quarter of this year.

[Michael Mueller:]

Okay and the others, or is that the only one at this point?

[Bob McCadden:]

Yeah. At this point, Valley View has a 20 -- mid-year 2020 maturity and there's really no progress on that.

[Michael Mueller:]

Got it. Okay thank you.

[Operator:]

Your next question comes from the line of Caitlin Burrows of Goldman Sachs. Your line is open.

[Caitlin Burrows:]

Hi again. I was just wondering, if we could go through some of the Fashion District details. So I know you're planning to open in mid-September. I was wondering what the progress is on tenants preparing their space? I know you're still expecting 70% of the space to open at that time?

[Joe Coradino:]

Well, the way in which it will open is as follows

[Caitlin Burrows:]

Okay. And then, in the earnings release you mentioned, over $18 million of NOI is expected at your share at stabilization. But if I just multiply your expected cost and the mid point of the return I get to like $15 million. So I was just wondering, what the difference is there?

[Bob McCadden:]

So, Caitlin this is Bob. There's two things. One is that that's an incremental return. So when the return is computed, in the supplemental that's incremental NOI over what was in existence, at the time we effectively took a property offline.And the second thing is we're currently working on creating an additional 40,000 square feet of space that was not contemplated in the initial underwriting. So to the extent we bring that transaction to a conclusion, the project cost will go up for that additional amount and the return will stay roughly the same, but that's essentially what's driving the difference. It's the incremental NOI as well as the additional space that we're creating.

[Caitlin Burrows:]

Got it. And just on the incremental NOI today is the assumption that it's zero, but that one day it could be over 18, or today it's actually something?

[Bob McCadden:]

Yeah, I mean, today it's essentially zero, but we wanted to take credit and in fact not take credit for disrupting the NOI in terms of looking at the incremental return from an investment perspective.

[Caitlin Burrows:]

Got it. Okay.

[Bob McCadden:]

So, yeah the 18 is kind of a stabilized 2021 run rate.

[Caitlin Burrows:]

Okay. And then last one. I guess just thinking about -- I know you don't have that much more leasing to do, but how could any NOI returns be impacted by the mix of tenants at least the remaining phase? I guess, I'm just wondering for more experiential tenants such as Wonderspaces and others that you have how do their rents compare to the traditional retailers that you've also announced?

[Joe Coradino:]

I think it's a -- I think they compare favorably. I mean, we're not buying deals there.

[Caitlin Burrows:]

Okay.

[Joe Coradino:]

Was that your point?

[Caitlin Burrows:]

Yeah. Just wondering how they compare, but it sounds like they compare well.

[Joe Coradino:]

Yes. And look it's a very exciting project. I went over a number that's a real number, 35 million potential customers within a couple of blocks of the property that's not a fabricated number. That's a real count looking at the transportation system, looking at the historic district, the convention center, et cetera. We expect that -- we expect the property to stabilize north of $700 a foot in sales, and we are very optimistic that we'll be able to capitalize from the lease-up and have been capitalizing from the lease-up given the potential of the project.

[Caitlin Burrows:]

Actually will you -- that maybe I think just when you talk about the amount of people in the area, will you guys have traffic counters at the property, or is that not really…

[Joe Coradino:]

Yes, we will.

[Caitlin Burrows:]

Okay.

[Joe Coradino:]

Yes, we will.

[Caitlin Burrows:]

Okay. Thank you.

[Joe Coradino:]

Thank you.

[Operator:]

Your next question comes from the line of Karin Ford of MUFG Securities. Your line is open.

[Karin Ford:]

Hi. Just staying on the Fashion District topic, can you just remind us how does the capitalized interest stop as the project is completed? Is it all stop on September 19? And if not how is it staged? And when does the property start becoming breakeven from an FFO standpoint?

[Joe Coradino:]

So we stopped capitalizing interest as the project comes online. So, using a simple example day one, we open it 60% occupancy. We would stop capitalizing interest on 60% of the project cost. A month later if we take another 10% -- we would take 10% out of the capitalized interest calculation.Generally, we and Macerich have same policy so that whatever is left at the end of one year following grand opening, we essentially cease capitalization on a project as a whole. So we would expect given the yield on the project and the incremental cost of -- we're capitalizing interest call it roughly 4% and the yield is north of 7%. So we would expect sometime during 2020 to actually be generating strong FFO contribution to the company's performance.

[Karin Ford:]

Got it. Thank you.

[Operator:]

And ladies and gentlemen, this does conclude our Q&A session for today. I now turn the call back to the presenters.

[Joe Coradino:]

Thank you all for being on the call. Before we hang up though, I want to say that I want to remind you again that 2019 Q4 revenue from FDP Plymouth and Woodland along with the additional lease-up of the other projects annualizes in 2020 at $25 million. So we're on track to deliver strong growth next year and look forward to seeing you in the coming months and actually keep an eye out for a Save the Date for an investor event at Fashion District in early December. Thank you all for being on the call and have a great day.

[Operator:]

And this concludes today's conference call. You may now disconnect.