Washington Prime Group Inc.
Q1 2019 Earnings Call Transcript

Published: 25 Apr 2019

[Operator:]

Good day ladies and gentlemen and welcome to the Q1 2019 Washington Prime Group Earnings Conference Call. [Operator Instructions]. And as a reminder, today's conference call is being recorded. I would now like to turn the conference over to Lisa Indest, Executive Vice President and Chief Accounting Officer. Please go ahead.

[Lisa Indest:]

Good morning everyone and welcome to WPG's first quarter 2019 earnings call. During today's call, we will make certain for 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 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 packet and SEC filings which are available on the investor relations section of our website. Members of management with us today are Louis Conforti, CEO, Mark Yale, CFO, Josh Lindimore, Head of Leasing and Dan Scott, Senior Vice President of Development. Now I'll turn the call over to Lou.

[Louis Conforti:]

Thanks, Lisa. And good afternoon to everybody joining us today. Let me take a couple of seconds to summarize the last quarter via a few bullet points. We leased 1.4 million square feet of space, a 20% year over year increase in leasing volume and a 10% increase in number of transactions. Lifestyle tenancy attributed for 52% of new leasing volume, Tier-1 and Open Air occupancy combined was 93.3%, combined occupancy cost at 11.7%, sales per square foot was 399 bucks. Actually, as Lisa pointed out, it was $399.23 versus last quarter of $399 55. So it was actually a 32 Penny difference, but we tend to round conservatively. Tier-1 and Open Air leasing space combined for new deals or average for new deals 13.2% during the quarter and importantly, we addressed 50% of our department store vacancy and we are working our behinds off to get these tenants up and running. Take a look at our press release and supplemental for details and thank Dan Scott and his team next time you see him. Tier-1 and Open Air comp NOI growth was down 4%. However, when excluding the 4.7 million, negative impact of co-tenancy, comp NOI for Tier-1 and Open Air was essentially flat and I wouldn't have mentioned this, or pointed this out if we hadn't made solid progress addressing co-tendency, which takes effect over the next year or two. We financed Waterford Lakes for $180 million. We maintained our FFO guidance in 2020 comp NOI forecast between 2% - 3% and we left our 2019 dividend policy unchanged. By the way, we have 674 events, activities and installations and I have a broken down and detailed if anyone would like to see, all of which served to strengthen our dominant town center status. The above evidence is just how busy we've been during the quarter and I should probably end my commentary at this point, but I can't. My colleagues have worked too darn hard and I'd be doing them a disservice if I didn't rally in defense of their endeavors, as well as a few of my industry peers who have embraced the change necessary to compete in today's evolving landscape. So to quote a quartet of Liverpudlians, I read the news today oh boy, yellow journalism is best defined as reporting which emphasizes hyperbole over factual data. During the previous couple of weeks a research report, a newspaper article illustrated just how prone our sector is to this sensationalism. Little background, Washington Prime Group has a financial and demographics analytical team headed up by Charlie Adams. Let me tell you, Charlie doesn't suffer fools and he's is smart as a whip. He became, shall we say, skeptical of the conclusions and incomplete nature of the aforementioned so he assembled his team with their green eyeshades and went into sequestration and went about fact check these canards. The research firm in question focused upon visitation growth, which is a more as at [ph] best even for a landlord. They utilized proprietary data, which in the assets of being able to analyze underlying factors, we just had to take it at face value. The conclusion was traffic peaks during fourth quarter last year, implying the free fall had begun. Wait a minute. Upon closer examination, two data points were conveniently omitted. While they stated loud and clear year over year visitation growth exhibited a marginal decrease. They forgot to mention it still exhibited positive year over year growth. The second even more glaring omission is the fact that visitation growth immediately rebounded during the first quarter of this year. When reviewing their very own Bloomberg graph, we saw you know, there was indeed volatility, which could be caused by observational bias or maybe visitation growth did moderately decreased during that specific timeframe. Regardless, over a one and three year timeframe the trend is unmistakably positive. Take a look for yourself on a Bloomberg terminal. The bottom line is visitation growth has been trending upwards and I think it's because most of our sector has learned a valuable lesson of diversifying away from apparel, admittedly both by choice and attrition and we're increasingly offering guests differentiated goods and services. Some of my peers are just doing it faster than others. The next questionable report was a newspaper article entitled what's retail recovery, I'm going to kind of drop an octave malls under pressure as stores close. Let's deconstruct this article as well as there are several headline grabbing statistics which warrant further examination. For instance, the article quoted a study by a sell-side analysts which stated another 75,000 stores around a 10th of existing stack as of the third quarter or half the close by 2026 if online retail penetration continues to rise from the current 16% to 25%. Holy cow, this equates to over 10,000 closures each and every year over the next seven years. Here's the problem with this doom and gloom prophecy, listen up. It assumes all e-commerce growth is direct to consumer and conveniently ignores the fact by online pick up and store and click and collect are the two fastest growing online segments increasing five times faster than e-commerce as a whole. By the way, it also doesn't take into account new store openings and that's a risk of being anecdotal. We signed 1.4 million square feet of new leases you know new tenants last year and 462,000 square feet this quarter. Let me repeat that 1.4 million square feet last year, 462,000 square feet this quarter. The analysts this report further assumes 75% of total retail growth will be driven by e-commerce notwithstanding recent data from the third quarter of last year, which illustrates just 26% of total retail growth is online while 74% is physical, you know in other words, therefore can't assume the exact opposite of what the actual data is exhibiting. It's a pretty striking incongruity and in order to make the math work, they got to assume physical retail shutter stores at a breakneck pace. It's kind of a sell for. The online growth cited within this report is pretty lofty as well. A 100% for auto parts, 200% home improvement, 400% for grocery, the latter implying 13 billion skyrockets to 80 billion. I'll take the under as once again they forgot to take and tie their ecommerce projections with the plain and simple fact that the vast majority of current online sales growth is consummated via consumers picking up merchandise at a physical location. Let's turn to 2019 store closures, nor [ph] argument with a 5994 tally this year stinks. However, a little bit of data parsing provides color to the nature of these closings. Six retail chains accounted for 73% of this year's closures compared to 21 in 2016, and 27 in 2018 respectively, so more concepts aren't going under just the shitty ones. Then there was the mention of landlord loan defaults. What drives me crazy is when an idiosyncratic event is used to extrapolate a general and more often than not obtuse assumption. For instance, one over levered asset was highlighted in the article it exhibited fair to middling occupancy of 86% prior to an 850,000 square foot expansion for a grand total of 2.4 million square feet further exacerbating the situation the asset was located within a catchment unable to absorb existing little own incremental space. Oh, almost forgot the cap rate used for evaluation purposes was sub-5%. So, you know, I'm actually seeing BS and as pursuant provided by [indiscernible] it's performing pretty well from historical standpoint. Overall delinquencies as of March 2019 was 2.8% compared to March - I'm sorry, that was March 2019 and March 2018 delinquencies were 4.55%. So pretty market decrease. In regarding my beloved sector, delinquencies have actually decreased by a 100 basis points to 4.9%, which includes all those questionable CMBS series one side loans with their [indiscernible] asset valuations. Simply put, the marketplace is dealing with their responsible CMBS loans originated from the previous cycle. And remember, a bad loan doesn't always necessarily mean a bad asset, clarification is also necessary regarding overall retail vacancy of 10%. It includes both malls and shopping centers per race [ph] a major reason mall vacancy increased 30 bps was due to Sears. They also go on to mention rentless flat during the same period, despite the occupancy pickup. This somehow going to make it into the article, we will maybe check the footnotes. Washington Prime Group continues to make prudent decisions as it relates to tenancy and if it means forgoing an over levered junior fashion retail with not so good merchandising for a tenant which diversifies product mix, even at a lower rental rate then we're going to do it. We have been able to achieve this delicate balance of what I described as minimal variance, minimal variance of cash flows, operating metrics, so on and so forth over the previous three years, and will continue to do it because it makes our assets more dynamic. It just makes them better. In closing, my passion is shared with every single one of our colleagues and listen that we are not delusional. Our sector needed this cleanup. We think our positioning as the dominant town centers and kudos to Mark for getting rid of the 14 or 15 assets to the whole team that you know, heavens forbid if we still owned them. You know, we've done everything that we're supposed to do and I believe we've managed expectations. Never bet against us because Charlie, Morgan I'm going to read about 1600 names now. So here it goes now Charlie, Morgan, Kasha, Steve, Greg, Brandon, Christy, Tambra, Jimmy Carmen, Rocky, Hillary, Hannah so and so forth were all going to prove you wrong by going in and out. I'm going to turn it over to Mark. Mark you are up.

[Mark Yale:]

Thanks, Lou. Good morning to everyone. We finished the quarter with approximately $350 million of available liquidity by considering cash on hand and capacity on our credit facility. We're also still expecting another $25 million of proceeds from the remaining Four Corners outparcel transactions, with the majority closing by the middle of the year putting us in a solid overall liquidity position. As we continue to improve the quality of our portfolio, we expect transitions back to the servicer of our town, West Square Mall and West Ridge mall and Plaza properties, together with $95 million of related mortgage debt by early in the fourth quarter of this year. Each of these uncovered assets as a single digit debt yield, thereby providing us with a very efficient way for us to delever. In terms of other upcoming debt maturities, our focus remains on the April 2020 maturity of our $250 million inaugural bond issuance. In that regard last week, we closed on a 10 year hundred $80 million CMBS financing on our Waterford Lakes property at a fixed interest rate of 4.86%, proving that there's still solid access to the debt markets for good retail assets. It's also important to point out that even when considering this financing, we still have a robust unencumbered pool of assets representing approximately 57% of our total NOI. In addition, we're now in the market to refinance this year four cross collateralized Open Air properties that secure loan with an outstanding balance of approximately $48 million. The refinancing of this low leverage loan should allow us to generate approximately $70 million of excess mortgage proceeds. Accordingly, we are confident in our plans to address next year's bond maturities. Excluding this bond maturity our remaining debt maturities through the end of 2022, fully manageable secured mortgage debt and our credit facility and term loan that don't mature until the end of that period. Accordingly when considering our available liquidity and manageable debt maturity profile over the next four years, we remain comfortable committing to our current redevelopment pipeline. That being said, we'll continue to explore opportunities to enhance our overall liquidity position. This could include evaluating the secured or unsecured debt markets, as well as further non-core asset or outparcel sales. As Lou mentioned, we're making solid progress with respect to address in the 29 Department Store boxes in our Tier-1 and Open Air portfolios, which we believe will need to be repositioned over time. Of those 29 boxes seven are go forward Sears locations. So when considering the 11 boxes addressed via signed leases, or negotiated LOIs this represents 50% of the currently vacant department store space within the portfolio. This is great progress and we truly appreciate the team approach led by our development construction groups to make this happen. We also remain confident and are originally projected estimate of around $350 million of additional capital spent necessary to transition all 29 locations over the next three to five years. If you just focus on the 22 boxes currently vacant, the projected spend drops to around $250 million. Remember the full pipeline is 13 boxes owned by non-retailers including [indiscernible]. Now let me turn to our quarterly financial results. Our FFO for the first quarter $0.31 per diluted share, landing above the upper end of the guidance going into the period, primarily driven by larger than expected outparcel gains and below market lease amortization. In terms of comp NOI it was generally in line with forecast and unexpectedly challenged primarily by last year's anchor bankruptcies. In fact, when neutralizing for the impact from Sears, Bon-Ton and Toys ""R" Us we would have seen flat NOI performance for the quarter from our core portfolio versus the negative 4% that we reported. 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 original guides. We should note that when considering the $6 million negative impact in 2019 from the full liquidations of Payless, Charlotte Russe and Gymboree we're now projected via the lower end of our comp NOI range about 1% to 3% for the core portfolio. Specifically in terms of co-tenancy guidance, there were no substantial changes to our estimates other than the positive impact of the go forward Sears, staying open throughout 2019. This was offset by unbudgeted co-tenancy relating to the earlier than anticipated Sam's Club closure at Seattle. However the good news is that this impact should be substantially addressed in early 2020 by the significant upgrade of opening Fieldhouse, USA at the property. Well, operating results have been pressured over the last several years we do continue to see a tangible roadmap for meaningful growth next year, especially in factoring in the state of progress being made on the department store repositioning front. As we look to 2020 and 2021 we remain confident in our ability to not only replace the lost rents and address related co-tenancy from [indiscernible] but make our properties better, assuming tenant bankruptcy stabilized and barring any extraordinary circumstances, we would anticipate generating meaningful, comp NOI growth in the next several years of at least 2% annually from our combined Tier-1 and Open Air portfolios. With that we will now open the call for any questions. Thank you.

[Operator:]

[Operator Instructions]. And our first question comes from Ki Bin Kim of SunTrust. Your line is now open.

[Ki Bin Kim:]

Hey, can we go back to your co-tenancy comments, you had a negative $4.7 million hit this quarter? I'm just trying to get a sense of how much of that loss is temporary versus maybe longer term and how that 4.7 million is cured by the 11 million. I mean, by 11 out of the 22 boxes you've addressed.

[Louis Conforti:]

Just to clarify that $4.7 million is co-tenancy but probably bigger piece of it is actually just the lost rents they incurred. So obviously, as we get that released, we will be able to address the rent, and we're chipping away at the co-tenancy and I think our whole point of isolating that amount is we clearly believe it's temporary, we're going to replace it not only replace it, but we have a great opportunity to make our assets better.

[Mark Yale:]

Well, actually, and I'll even you know, you know, we're attempting to provide as, as you know, direct a roadmap and without going into excruciating detail. If you think about satisfying 50%, you're going to have to make some assumptions of our department store vacancy, and coming in at roughly 2%, same store comp NOI growth next year and I think I mentioned I think it was pretty much verbatim said you know what, I sure as heck wouldn't have mentioned this, if we didn't have, you know, as per Dan and his team's stalwart efforts if we hadn't, you know, substantially or made, you know, real good progress on 50% of those boxes. And I hope we've provided better visibility on each and every one of those blocks is, you know, via our supplemental and Lisa's efforts. So that's probably as much information you're going to get, but it's a heck of a lot more than anyone else is going to give you. But again, I respectfully understand your question, but think about us addressing half of that, and then us, you know, with an expectation management mindset, then talking about two plus percent same store comp NOI growth.

[Ki Bin Kim:]

Right. So, but in the short term does that 4.7 million get a little bit worse, before it gets better?

[Mark Yale:]

Well, we talked about in our original guidance that for the full year looking at the co-tenancy and the lost rents, it's about $16 million, is what the impact is $15 million - $16 million for the full year. So that's already in our guidance included, and then I think Lou's point is we will start seeing dramatic improvement in the out years as we replace the rents and address the co-tendency, that will take time, but that we will see the positives, and the tailwinds from that and 2020 and 2021.

[Louis Conforti:]

Yes and then let me again, emphatically stress it is and was in our guidance. Repeat after me it was because I think a lot of people in fairness are missing that it was and is in our guidance.

[Ki Bin Kim:]

Right. And in terms of your CapEx usage, I was actually surprised that the CapEx usage for renewal leases was about $15 a square foot. I'm sure there's probably a story behind that?

[Louis Conforti:]

Yes. And we have our Head of Leasing to discuss this and Head of Leasing. Josh Lindimore will tell you the story.

[Josh Lindimore:]

Yes, it's predominantly driven by a theater [ph] concept that we gave money to for renewal to lock them in long term along with three ultra-deals that we locked in for 10 years. So that's really what's driving a significant piece of that number.

[Louis Conforti:]

Each and every one of them making those respective assets better.

[Operator:]

And our next question comes from Caitlin Burrows of Goldman Sachs Group. Your line is now open.

[Caitlin Burrows:]

Maybe just on the same story outlook. So I think the original guidance target of down one to down three for the Tier-1 and Open Air properties included the possibility of a liquidation of each of Charlotte Russe and Things Remembered and Payless, but now we're expecting the lower end. So I guess I was just wondering what updated pieces contributed to the revision?

[Mark Yale:]

Well, it's full liquidation, Caitlin, I mean, at the time, we have provided that 1% to 3% range, we said we could accommodate all outcomes. I think at that time, Charlotte Russe was going to reorganize but you know, unfortunately, all three went full liquidation. But the point is, we're still within the guidance range, even with that $6 million impact.

[Louis Conforti:]

Again, kudos to Mark, Lisa, capturing it in guidance and you take a continuum 0% to 100%, they took 100% expect as the most conservative, I guess, viewpoint. And, you know, there's always some upside and something else and our conservatism, I hope evidences itself because full liquidation was not the probabilistic assumption that that us and the rest of the street took, albeit within our guidance.

[Caitlin Burrows:]

Got it. And then in terms of that $6 million headwind, could you just tell us how much of that was realized in the first quarter versus what could still be coming?

[Mark Yale:]

I don't know if I have the specific breakout, but certainly the bulk of its going to be in the second and third quarters, so we did lose some stores in the first so probably a piece of it. But then I think, Josh, you have a good update as we're starting to address the releasing of that space as well.

[Josh Lindimore:]

Yes, I mean, hey Caitlin, it's Josh. So we lost roughly 460,000 square feet in the bankruptcies we've addressed, and what I mean by that is either have at field or in process about 65% of that space, as we sit here today,

[Louis Conforti:]

As evidenced by the total 1.4 million square feet of which 462,000 was for new leases.

[Josh Lindimore:]

That's not what we picked in the number, that's just new leases.

[Louis Conforti:]

Yes, but 1.4 million square feet in total.

[Caitlin Burrows:]

And then I guess when you guys talk about that progress that you've made in terms of backfilling. I guess if you're doing that work today, how quickly would you expect whether it's for those spaces or even the inker spaces that are referenced in the earnings release? In terms of letter intense out and working through those how quickly could that NOI start being recognized?

[Mark Yale:]

Well, I think it'll be back loaded. Certainly, we will get a portion that open in 2019. I think in the release, we laid out in terms of the redevelopment those that are expecting to come online in 2019, I think as it relates to the bankruptcy space, we're started seeing some benefit from that as we get into the fourth quarter.

[Louis Conforti:]

Yes, it's a function of, you know, you just turn in line space over, you know, from a work letter or tenant improvement standpoint, just a heck of a lot quicker. And again, you know, I think I said it's coming you know, let's talk about it, you know, with respect to the department stores, the big the anchors, over the net 2020, 2021. I mean, it's, yes, just takes a little bit longer. There's zoning and zoning ordinances and just a little bit more planning, but again, 50% of our department store boxes have been addressed, which it beat our schedule. Dan, what are you doing sitting here? Dan, please.

[Dan Scott:]

Yes, it's time for me to get to work, I guess.

[Louis Conforti:]

Yes get out of here.

[Caitlin Burrows:]

And then maybe just if we think about, so same store, and then how that impacts FFO, you guys kept your FFO target unchanged for the year, is one of the things I guess driving that slightly later than expected dispositions on the Four Corners side. Anything else? Helping to keep that up if same store NOI does come in at the lower end of the original target?

[Mark Yale:]

Yes, I mean, I think Caitlin, it's ins and outs. So you know, a penny or two of comp NOI has a pretty significant impact in terms of the percentage, but when you get down to it in terms of FFO I think it's just some ins and outs. And, you know, we were able to certainly hold our guidance and feel very comfortable with our FFO guidance at this point.

[Operator:]

And our next question comes from James Sullivan of BTIG. Your line is now open. Q - James Sullivan I'd like to start with a couple of questions about cap rates. You did refinance one asset in the quarter and I wonder if you can help us understand how lenders are thinking about the cap rates that they're using for LTV purposes and that particular asset Waterford Lakes? I think it was Tier-1 asset as you indicate but I wonder if you could help us understand whether it's from a performance attributes standpoint? Is it a typical Tier-1? Is it above average, in terms of productivity below average?

[Louis Conforti:]

Yes, there's kind of a derivative what's your NAV question which I kind of dig and I would love to disclose. Can we mention what the LTV is?

[Mark Yale:]

Yes. I mean, it was in the high 60s and I'll just say the cap rate was in the low sixes. I'll leave it at that.

[Louis Conforti:]

Yep. Nice try.

[James Sullivan:]

Can you comment about Waterford Lakes in terms of how it ranks within Tier-1?

[Louis Conforti:]

It's a good Open Air asset in a good market.

[James Sullivan:]

Okay. Secondly, regarding the sales of the outparcel tranches to Four Corners, completed some more coming in 2019. And I wonder if you could help us understand how these buyers and the Four Corners of the world evaluate the outparcels, again, in terms of cap rates and to what extent of any, as they do their due diligence, the sales productivity of the related center impacts the cap rate?

[Louis Conforti:]

That's a great question. I mean, and we're not going to answer it directly. But the Head of Four Corners is one of the most savvy real estate executives that I know. And if you think about their business, their business is in effect, kind of our being the risk, it is an interesting arbitrage business and they're not going to buy we have not disclosed cap rates and we won't, but they're not going to buy in an unproductive locations. They have bought a lot of our stuff. So I guess by the transitive theory, we have productive locations.

[James Sullivan:]

Well, I guess a related question, let me try this is to what extent if any, Lou given the ability to monetize that those leases those parcels? To what extent does Washington Prime have the ability to create more saleable outparcels?

[Mark Yale:]

I mean, we have another 25 million of proceeds, Jim, that we're expecting in 2019 and we are in the process of probably identifying another $40 million - $50 million of opportunity and we think that's a great use of capital, obviously, I think you've already figured out when you look at the arbitrage in terms of how we're trading the cap rate, the implied value on the individual assets versus, the implied cap rate on the mall, just based upon our share price.

[Louis Conforti:]

And there's fair and equitable versus reciprocal easement agreement. So you know, it's just, we're not, in no way shape, or form detrimentally impacting our assets. We're just I don't know, if you take advantage it's not the right term, given our crummy cost of equity capital but we're just taking an arbitrage, making an arbitrage opportunity with somebody and a subset of sector in the region, the space that has a better cost of capital and they have a different, you know, their asset liability matures [ph] and we're creating dynamic assets.

[James Sullivan:]

Okay, then switching over to your prepared comments where you talked about e-commerce, you make the point about click and collect and other e-commerce sales types that are really dependent on brick and mortar locational convenience for completion. And I guess I have two questions. Do your reported tenant sales include those sales and number two is it clear to you how the Census Bureau was allocating such sales between the kind of non-store sale category and the other brick and mortar merchant categories that they provide?

[Louis Conforti:]

Agent Charlie Adams who's sitting next to me, we both vigorously shook our head. No, you know, as it relates to the quality of that data, and from a tenant reporting standpoint, we don't get - I mean, some do, some don't. Our big brother in this space has been a lot more vociferous with respect to what should be done. Listen, we believe there's a symbiotic relationship, we're taking advantage of it, but it's a very prescient point from your you make a prescient point, we don't get great data. But we do know, is that in our catchments, given our dominant Town Center status, and this is where we think where the edge is, we know where the edge is, you know, there is a fundamental desire, I don't know if it's a bit of [indiscernible] or whatever, whereby people want to go to a physical location, and they want to touch things. We have a sociologist that we work with at Columbia University, and he does work and he's doing work for one of the largest social media companies in the world. And what is amorphously [ph] defined as Middle America, we touch things that doesn't sound good, 2.5 times more, than not Middle America and I guess that's the reason why Missouri is known as the show me state. People want to touch and feel.

[Josh Lindimore:]

Hey, Jim, it's Josh, just anecdotally, what I can tell you is is having conversations with retailers there not everybody but a big chunk of the preference is click and collect because anecdotally, what you'll find is you'll find an incremental pickup, from a sales standpoint, where the customer comes in, picks up their merchandise and goes and whether it's 10%, 15%, 20%, you know, that's what our understanding what we're hearing from the retailers.

[Louis Conforti:]

So every time that happens, we can extend duration and stay time and we made reference of the 674 events and activities and activities. This is the town center for our day demographic constituencies. Well let me mention one more thing. We were at the forefront of Amazon lockers when some people said, you know, why are you doing this Feldstein deal? They are a proven shopper and that proven shopper we get them in our asset. They're going to hang out if we have cool stuff, and differentiated product mix for them to them to check out.

[James Sullivan:]

The results have another point too. I think in your prepared comments, you identify those two kind of segments of e-commerce says, accounting for a significant portion of the growth in e-commerce and there is no doubt that retailers who say, Hey, we grew our e-commerce division, sales by such and such a number, typically receive applause in the street for doing that. So they have a vested interest in if you will, using their brick and mortar locations, to promote or boost the e-commerce division sales numbers. But they couldn't be completed as designed in terms of customer convenience, without having brick and mortar be the location. So it's clearly a false dichotomy of course, as we've talked about for a while, between e-commerce and brick and mortar. So it would be great to have better defined e-commerce versus brick and mortar, so that we can understand when the two are not the dichotomy but really work together.

[Louis Conforti:]

You've hit the nail on the head and it's exacerbated again, I mean, it's spot on, and it's exacerbated in our catchments where we are the dominant towns, we are the town center, and we are the more often not a focal point. But between your lips, and God's ears we'd love you know - again, our big brother has said it's on the kind of the onus and the burden is resting upon the back of physical, you're spot on.

[James Sullivan:]

Okay, let me just raise a final question. You've now done over the last couple of years, several box replacements bringing in you know, let's call them non-traditional mall tenants and replaced the department stores, and I wondered if you can provide us scorecard as much as to how those non-traditional tenants are doing in terms of sales. Are they happy tenants? And number two, whether their appetite therefore, for more such deals is growing, declining? And how that might be impacted in the terms you're negotiating with, by box replacements today versus say two years ago?

[Louis Conforti:]

Well, the best litmus test is, and it's been 50 52% and I think it's been 50%, 55%, 48 point, whatever, is, over the last couple of years since we made this an absolute focus, we've been around 50% it has been lifestyle, food, beverage entertainment, home furnishing, so yes. Josh, anything further to add?

[Josh Lindimore:]

I think what you can look at is, is as an example of you know we do use it quite a bit as you look at more fearful [ph] comments, where we tore down a box, we added BJ's, Julie's [indiscernible] restaurant you had, you know, call it $6 million coming out of the box, now you have over $25 million - $30 million, that is being driven from that box. And if you look at Dan and his team and the work that they've done, Grand Central is a great example. You know of what, of what we're adding, Dan I'll let you speak to.

[Dan Scott:]

Yes, and I think if you look at it, I think it's proven to be successful by the fact that we're doing repeat deals. When you look at who we're doing deals with, we're doing multiple deals with Ross, we're doing deals with Home Goods, TJ Maxx, Marshalls, and it's repeat deals. Some of those tenants will be doing three or four deals with over the next year or 18 months, we've done repeat deals with round one repeat deals with our own [ph] place so the retailers are looking at it as it's been successful going to a retail area that has already been solidified. We have the mall, we have people coming to the property, it's good real estate, it at all gets to real estate and we have good real estate

[Louis Conforti:]

And again, and I'm surprised Dan mentioned names he didn't let me mention names, but he's spot on and again, I love it. I'm going to remember that next quarter. And again, Lisa, anyone, what percentage of our traditional malls you guys have pretty much submitted to having to say that word every once in a while. What percentage have a viable amount of bullshit but a viable lifestyle, Open Air component outward facing where one elevation or two elevation?

[Lisa Indest:]

More than 60% or hybrid.

[Louis Conforti:]

So I think it's about 2/3rds of our assets. A - Lisa Indest It's closer to 70, you're right.

[James Sullivan:]

Have a true are hybrid which is what our catchment/demographic constituencies/ guests/tenant/sponsors, what they all want. And this is where we are misunderstood and I get so excited every quarter, we get a little closer to proving everybody or proving the pundits wrong, how is that.

[James Sullivan:]

Okay. Final, final question for me, Lou, if you could take one is just going back to that outparcel issue for a moment. In your mortgage debt is there typically a carve out for the separate outlets are they or not? In other words, to what extent are they securing the mortgage on the related center?

[Mark Yale:]

I mean, that's one consideration. There are ways to work around it. In some cases, those [indiscernible] even part of the collateral even though we could add on the property. In a lot of times there's substitute provisions we can work around and we can get a release, but that is one of the factors certainly if you have an unencumbered property in the past a little bit more straightforward, but just because you have debt in place doesn't mean you can't work it just takes time.

[Louis Conforti:]

And Mark related topic, which we always like to mention, what percentage of our assets are unencumbered?

[Mark Yale:]

57% were NOIs driven from properties unencumbered.

[Louis Conforti:]

Which I think that's the second or third best in our sector, now I know it's the second or third best in our sector.

[Operator:]

And our next question comes from Ki Bin Kim of SunTrust. Your line is now open.

[Ki Bin Kim:]

Thanks. So you guys categorize a few more assets into the non-core bucket? Those three assets have more [indiscernible] on it, can you talk a little bit more about the thinking behind it and maybe different color or the debt yields for assets that are in the non-core bucket versus Tier-2?

[Mark Yale:]

Yes, Ki Bin, we classify those as non-core at year end. And I think we talked about the fact that once we identified specifically as non-core, you know, we made a decision most likely to move on from the assets. So two of them were having active discussions on and the others, you know, we would most likely see a path towards an exit and we're talking about the single digit debt yields on those properties. So it ends up being a very efficient way for us to delever.

[Louis Conforti:]

And then and then for us doing anything other than this, this the strategic approach, we'd be silly and so it accounts for 7% and it's just well certainly to you all, at the crummy multiple upon which we trade is a free option.

[Ki Bin Kim:]

Right. And can you remind me about the IRS rules on dividends? Are you allowed to still provide dividends in the form of stock?

[Mark Yale:]

Yes, I mean, I think you can certainly, we're not focused on that, you know, at this point, and we've talked about with where we think our taxable income is going to be, we're going to certainly look to a good chunk of our dollar per share dividend to cover our taxable income. And as Lou mentioned, we reaffirmed our guidance for dividend in 2019.

[Louis Conforti:]

Yes, and without talking about NAV, you can kind of make the kind of the iterative, you know, conclusion that we believe we treat this essentially as NAV discount, that's all I can say.

[Ki Bin Kim:]

Okay, and last question on multi-mall [ph]. You know, when I looked at this mall, several years ago, you know, it kind of stood out as the kind of only mall in town, the town center type of asset that you guys talk about, for many of your assets. On the surface, they had pretty decent Google reviews on it. So just curious like this over time, what happened to that asset and why it didn't end up working out?

[Louis Conforti:]

So Muncie Mall, non-core? Yes?

[Mark Yale:]

Yes.

[Louis Conforti:]

And I actually, obviously, know that, I was just going to say we as you want us every marginal unit of capital that we spend, is subject to not only a direct return on invested capital, but does it make an asset better, and in some instances, combined with the existing leverage we make, which we believe to be the prudent decision, and it doesn't make sense for us to, I don't want to say waste time but I do want to say, we can divert our attention, I think about this as capacity utilization. We are working 24/7, doing what's right and look, and again, 1.4 million square feet, 11 out of the 22 boxes, we control, so on and so forth Muncie didn't make the grade.

[Operator:]

[Operator Instructions]. Our next question comes from Caitlin Burrows of Goldman Sachs. Your line is now open.

[Caitlin Burrows:]

Hi, again, guys. Maybe just on the dividend we just talked about that you left it unchanged and I know part of this is that the lender transitions create a taxable event. So was just wondering, how are you balancing the decision to return these properties to the lenders given the tax event, and then the required cash payment that they cause?

[Louis Conforti:]

I'll let Mark, expand. But first and foremost, this is an economic decision predicated upon the viability of the individual asset, there's no gamesmanship with respect to kind of hold period, these assets don't make sense or I don't want them, I'm being too mean to those assets, these assets. Again, for the reasons that we discussed with Ki Bin they're going to go back to the lenders,

[Mark Yale:]

I think simply put the only other option would be to repay that debt. That's money that's going back to the holders of the securities, dividend, it goes back to our shareholders, it's a much better answer for our shareholders.

[Louis Conforti:]

Absolutely.

[Caitlin Burrows:]

Okay, and then also in terms of, given the kind of cutbacks and redevelopment needs going forward. I know, Mark, in the beginning, you mentioned that future asset sales could be an option for future liquidity. Would you consider selling any of the Open Air properties?

[Mark Yale:]

Of course.

[Caitlin Burrows:]

I guess we haven't seen any of that recently. So what would make that become a kind of route that you guys choose to take?

[Louis Conforti:]

No, I mean, I think it's, it's, it's based - it's kind I will give you a kind of a combination answer. At the well, first and foremost, I'm at the right price and I think I said this my first earnings call, we are a seller of one asset or the entire company, at the right price and that's my fiduciary to shareholders. People know, our number, we think that the assets that we have are important from a holistic standpoint with respect to our portfolio, but they're not crucial no asset is. We are a dynamic operating company that has proven things that quite frankly no one else has in our space. And at the right time we will make the right strategic decision. Do you've a buyer?

[Caitlin Burrows:]

I don't, but I was just interested in the answer to that part. So now we know it. Thank you.

[Louis Conforti:]

Absolutely. Absolutely.

[Operator:]

And our next question comes from DJ Bush of Green Street Advisors. Your line is now open.

[DJ Bush:]

I had a quick follow up on the last couple questions. You know, you talked about Muncie and you talked about some of the other non-core why they may not make sense for Washington Prime, and they'll go back to the lender but you also mentioned in your prepared remarks, there's some good assets with bad loans and I think back to Southern Hills, I think back to Mesa, and you've taken advantage of some of those opportunities and I just think, you know, from your view over the next couple of years, you don't have any immediate maturities but when you look out to 2021, 2022 there's a lot of CMBS coming, you have some of them. How many of your assets do you think when you look out are opportunities where there still good assets with bad loans versus one that may look more like Muncie where they'll go back to the lender?

[Louis Conforti:]

Mark and I'll answer that in tandem. And I can tell you, just anecdotally, the two that you mentioned, we had and I can't disclose because Dan gets to mention the tenant that he wants. Let's just say that both of those - well actually one with details in our release, every single one of the assets right now is an extraordinary opportunity and by the way for the fourth time, maybe we've addressed 50% of those department store boxes, one of which is May of Grand Junction, Mesa. Do we mention names at Mesa? Is it supplemental?

[Mark Yale:]

We have dealers.

[Louis Conforti:]

Yes and then we have several others and you mentioned Southern Park. I'm champing at the bit that Lisa - she gave me the evil eye. She gave me a quarter or two. Okay. So, Mark?

[Mark Yale:]

Yes .It's an evolving process, but if you think through our reclassification, we move forward with the beginning of the year, we did identify additional non-core assets. So that probably tells you the path we're focused on those assets, but at Lincolnwood was a Tier-2 that has moved up to Tier-1, we're investing dollars. I think the reality is when you start getting vacancy and you have these anchors, and you're talking about $5 million - $10 million of reinvestment, you really push on the clock, in terms of figuring out if you want to allocate capital and I think each year as we progress, you know, I think there's less real decisions there less discretion as we move forward and I would really feel good about our Tier-1 portfolio as comprised today.

[Louis Conforti:]

And one more point, if I may. And Mark, I mean, I don't know of a CFO and a partner that, you know, if we hadn't have gotten rid of [indiscernible] fight about what's the number of assets, 14-15 assets, because we needed that little kind of addictive trickle of cash flow that would be a valid question for you Dan and it's certainly a valid question nonetheless. If something doesn't make sense, we have gotten rid of it and we will continue to do so. And I know you're going there. I just you know, I just - you can cite other you know, without, you know, you can cite those that did it.

[DJ Bush:]

Yes, I'm almost asking like, on the flip side, I think like, you know, to the point that you made that there could be because the CMBS market has been shut down more or less for a lot of regional malls space. as a as a sponsor, when you look out to your maturity schedule, and it seems to me there could be more opportunities like Mesa, or Southern Hills where there could be a discounted pay off because the lenders don't want all these assets back at the same time. And it could make sense for you guys to stay into those assets from it because of where the deck could be written down to. I guess that's my point.

[Louis Conforti:]

So you're so spot on and Rob Demchak is licking his lips right now and what champing at the bit and all that other because he's the I think the world's greatest structurer and the DPO work that he's done if we can take advantage of it again. Let me tell you, he'll do it.

[Operator:]

And that concludes our question and answer session for today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone have a great day.