Washington Prime Group Inc.
Q2 2019 Earnings Call Transcript

Published: 25 Jul 2019

[Operator:]

Good day, ladies and gentlemen and welcome to the Second Quarter 2019 Washington Prime Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [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.

[Lisa Indest:]

Good morning, and welcome to WPG’s 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 packet and SEC filings, which are available on the Investor Relations section of our website.Members of management with us today are Lou Conforti, CEO; Mark Yale, CFO; Josh Lindimore, Head of Leasing; and Dan Scott, Senior VP of Development.Now, I’ll turn the call over to Lou.

[Lou Conforti:]

Thanks, Lisa, and hey everybody. Let’s recap what turned out to be a very busy second quarter. All right, we’re reaffirming both 2019 FFO and dividend guidance of $1.20 and $1 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 tendency accounting for 55%; our Enclosed and Open Air occupancy was 92.5% combined; Tier 1 sales per square foot increased 330 basis points to $410; Tier 1 occupancy costs decreased 40 bps to 11.7%; new leasing spreads for Tier 1 and Open Air increased 2.9% for the quarter; comp NOI growth for Tier 1 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 and installations during the quarter totaling 1,387 year to date; we closed $180 million mortgage loan for Waterford Lakes; we executed a term sheet for $117 million mortgage loan, collateralized by four Open Air assets, with an interest rate of under 4%; we announced $37 million definitive agreement for the sale of 20 additional outparcels to our buddies at Four Corners Property Trust; and we announced a $99 million for asset 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 have 40 million U.S. households. Well, I certainly enjoy science-fiction replete with covert Russian operatives and exploding Berman. 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 certain age.Back then there was a newness about regional malls, which delighted guests of all ages. Well, words such as experiential, lifestyle, omni-channel, they wouldn’t entered 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 west side of Chicago, I recall heading out many a night sporting the latest from Chess King, feeling as if I could step into a Duran Duran video. Instead, I would hop on the Austin Avenue bus, right a few miles north of Fullerton Avenue, walk four blocks west and find my way to the Brickyard Mall.I’d pick up my date after her shift at Merry-Go-Round or Hickory Farms or County Seat fill last other blank. And while we sat 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. Instead, I was usually told to Walk Like an Egyptian, at which point I’d 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 the intervening years. Herein lies the opportunity, we still experience 350 million or so annual visitors and were generally recognized as a town center within our catchments. And every time we introduced something Fresh, and it Kool & the Gang 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 tendency, events and installations and the adaptive reuse of department stores.The quantification of a more dynamic experience can best illustrated by improving operating metrics such as sales per square foot and occupancy costs, both of which continued ahead in the right direction. It’s not rocket science. More customers sales mean increase 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 solved 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 to assign those other assets valuation based upon widely accepted third-party research and solve 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, if just plain ridiculous and my colleagues and I are going to relish the moment when we prove the pundits wrong, who’s stupidly placed our company and assets into the have-not category.So you know, naysayers have also 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 have accessed capital for redevelopment, addressed department store vacancy ahead of schedule and we’ve leased inline 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’s 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 have never owned Starcourt Mall albeit Josh, I think has a few Scoops Ahoy leases out for signature.I’d strongly suggest binge watching the third season of Stranger Things that for no other reason other than to remind us how a mullet can serve a dual purpose; business upfront and party in the back.Mark, gear up.

[Mark Yale:]

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 transactions, nearly, $40 million over the next year from the recently announced second transaction of Four Corners. Over $20 million from the release of lender reserves during the third quarter associated with the Waterford Lakes alone, and approximately a $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 stack 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, we 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 as attractive as long-tenured 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 liquidity raise 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 1 of this year, our Town 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 non-core assets have single digit debt yield 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 1 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 store, so when considering the 15 boxes address via signed 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, led by our development and 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 years to five years. If you just focus on the 22 boxes currently vacant, the projected spend drops to around $300 million. 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 towards 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 forecasts 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’ve 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 began to comp against the second half of last year that was already burdened by loss anchor rents and cotenancy.Accordingly, we expect to deliver and improve 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 1 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 guides. While operating results have been pressured over the last several years, we do continue to see a tangible roadmap for meaningful growth next year, especially when factoring and state of progress being made on the department store repositioning front.As we looked at 2020 and beyond, we remain confident in our ability to not only to replace the loss rents and address related cotenancy from these closings, but to make our properties better. Assuming, we experienced 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 1 and Open Air portfolios.With that, we will now open the call to any of your questions. Thank you.

[Operator:]

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

[Ki Bin Kim:]

Hey, 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 Yale:]

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:]

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

[Mark Yale:]

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:]

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 towards 55%. That’s curious how much room you have left. And if that’s would be part of that equation?

[Mark Yale:]

While we have ample capacity as relates to our secure debt. I think you’re talking about our overall leverage. And this’ll 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 30. That does not reflect the transition of Town West. That happened on July 1 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:]

Okay. And I know we’ve talked about this a lot, but the – ground lease for $99 million, you have cash flow of $223 million that you’re paying out in dividends. I think when 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 is start to become more appealing?

[Lou Conforti:]

Cash versus – stock versus cash…

[Ki Bin Kim:]

Or just cutting the dividend?

[Lou Conforti:]

Well, our dividend policy unequivocally remains the same and giving away – if we didn’t have the conviction that this is – we are a surely undervalued company giving away an incremental share would be a permanent impairment to our other shareholders. So there it answers the first part. And the second question is the board and Mark and myself and Lou said 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’re maintaining the dividend. We have growth in the portfolio as Mark and I have discussed, I thought this would be a congratulatory question – commentary from you, Ki Bin. Smart capital raise on – if you deconstruct what our property is, it’s land and building, land on productive, mark – long term debt or long term capital in effect. All right, so I answered the dividend question.

[Ki Bin Kim:]

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

[Lou Conforti:]

I’m not going to conjecture – hang on for a second and I am – love you. We appreciate your thoughtfulness. But I’m not going to conjecture with respect to impact upon share price. I did, but 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 operational infrastructure and financial wherewithal. And our dividends are obviously always under review and our dividend policy is always under review and we’ll kind of go from there.

[Ki Bin Kim:]

All right. Just last question, year-to-date, you’re saying, NOI is down about 5.5%. Your guidance for the year is 3% – 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 and that gives you confidence that you can hit that guidance number for the full year?

[Mark Yale:]

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 in Toys R Us boxes. And we probably could 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 laying the foundation for the growth that we’re confident and as it relates to 2020.

[Lou Conforti:]

Think about it sequentially. We continue to lease in line space Dan and their entire team have dealt with 15 out of 22 of our vacant spaces. They come on line and did extend some of our sales, those that are rented come online at various times. It addresses cotenancy. And obviously, replaces rental income. If 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’s quite frankly beating our estimated – our expectations and we provided absolute visibility and transparency with respect to cotenancy. So with that being said, you lease space, you resolved boxes, you get the forecast 2%, same-store NOI growth.

[Ki Bin Kim:]

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

[Mark Yale:]

Well, I mean, we talked about the incremental growth in 2020 is $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 1 and Open Air in 2019. Even with that $10 million of incremental does not cure all the cotenancy. So that’s something that we’ll continue to see the benefits as we move forward in 2021, but if I had to put a number on and maybe a third.

[Ki Bin Kim:]

Okay. Thank you.

[Lou Conforti:]

Thanks buddy.

[Operator:]

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

[Caitlin Burrows:]

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 non-traditional and unique but more expensive financing than some of the other things you’ve done in the past?

[Lou Conforti:]

We both want to answer. Mark, you first.

[Mark Yale:]

No, I mean it. It’s not covenant driven because it’s really from a covenant perspective, it’s going to be treated as debt versus debt. And as I mentioned, I just want to make sure when you look at our covenants and you’re evaluating, 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. So 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 of back in line with where we want to be longer term. And we’re working on that every day.

[Caitlin Burrows:]

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

[Mark Yale:]

It’s not changed over the years. It’s in the 6 to 6.5 times.

[Caitlin Burrows:]

Got it. And then…

[Lou Conforti:]

Right now, are we second or third best, the 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:]

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 Yale:]

I mean, we’re looking at the kind of in place where are we on time, yes.

[Caitlin Burrows:]

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 just wondering, if you could tell us or give any color on how much a net taxable income you’re expecting in 2019?

[Mark Yale:]

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 proposition of our dollar per share dividend to cover our estimated taxable income for this year.

[Caitlin Burrows:]

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

[Mark Yale:]

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:]

Okay. And then, I know, I’m keeping ask this, but I guess perhaps phrase a different way. I’m thinking about it that the dividends, currently $220 million cash use 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 is also an option, maybe not in 2019, because of those lender transitions, but perhaps in 2021 that may not be happening.

[Lou Conforti:]

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 and the capital structure. We want to get our debt down, but we would – less leverage is better, we’ve seen those companies that didn’t have that option. Mark and Lisa and all, we’ve maintained tremendous optionality, whether it be the unencumbered pool, whether it just be just great financial prudency. And 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 it really doesn’t make much sense and we will continue to balance while we grow and energize our portfolio.

[Caitlin Burrows:]

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?

[Lou Conforti:]

Again, it’s a function of our board. It’s a function of return on versus return of capital.

[Mark Yale:]

I mean, our cut – dividend cover…

[Lou Conforti:]

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 with occupancy cost and all under the framework of absolute bullshit kind of valuation on our company.

[Caitlin Burrows:]

I guess. When you think though about that dividend coverage, what I guess if the numerator is dividend, what the denominator is? Do you think of that as like FFO and then takeout maintenance CapEx and the development – redevelopment CapEx or is that not part of…

[Mark Yale:]

Absolutely, we look at what our funds are available for distribution and we think we’re pretty close to covering the dividend in 2019 and that’ll 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 you’re routine maintenance CapEx and leasing. We look at whatever kind of non-cash 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:]

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

[Mark Yale:]

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 are $300 million to $350 million bucks that we’ve talked about.

[Caitlin Burrows:]

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

[Lou Conforti:]

Hey, keep going.

[Caitlin Burrows:]

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.

[Lou Conforti:]

While we have seven – I’ll turn it over to Mark in a second. So how many remaining Sears, seven?

[Lisa Indest:]

Seven.

[Lou Conforti:]

Seven Sears. And again, I want to – just like Ki Bin, I thought that people would be saying, holy cow, you guys really have hit 15 out of 22 vacant, but instead, let’s take the other side. So of those seven, I don’t think there’s one instance where we would not want that box back yesterday. As it relate – I’m sorry Mark.

[Mark Yale:]

I was just going to say, as it relates Sears, I think we talked about this in connection with the first quarter. The impact of the Sears location, staying in our portfolio, I think 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, maybe Dan you can just share your thoughts in terms of what we think of Penney’s, the fact that they are relevant in our portfolio and I like the direction they’re heading in right now.

[Dan Scott:]

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 retenant 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 have much risk in the near term with J. C. Penney.

[Lou Conforti:]

All right, Caitlin.

[Caitlin Burrows:]

Yes.

[Lou Conforti:]

As it relates to J. C. Penney and generally us providing lots and lots of visibility, in the most – I think actually, I’ll make a preparatory that from a merchandising standpoint, the CEO and the team has done a pretty darn good job, actually better than darn good job. J. C. Penney – our J. C. Penney’s are always well merchandise. 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 – the income statement impact if including cotenancy if every single one of our J. C. Penney’s, 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 unsolicitedly 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:]

I don’t know, $10 million.

[Lou Conforti:]

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 leased our departments. Look at the velocity, which we leased 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 1, which is now at $410 trades at a 29% cap rate.

[Mark Yale:]

And just to be clear, that number, may not 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 because there is overlap there. So, we just don’t even see us. One, we are confident that J. C. Penney’s 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 for this. And I don’t know what more we can do to prove that there’s demand in our town centers.

[Caitlin Burrows:]

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

[Lou Conforti:]

It’s pretty good. It’s not exactly culinary or linear.

[Caitlin Burrows:]

But something like that.

[Lou Conforti:]

Because every cotenancy and I really didn’t understand this and let’s just say that, at least it takes – puts on our green eye shade 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:]

Got it. 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...

[Lou Conforti:]

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

[Caitlin Burrows:]

Okay.

[Lou Conforti:]

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

[Caitlin Burrows:]

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?

[Josh Lindimore:]

Hey, 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 their right sized, they’re healthy. We don’t have any exposure to the large 60,000, 70,000, 80,000 square foot boxes that they took several years ago.

[Lou Conforti:]

And again, given the catchments within which they’re located, there’s not the – what I call the couple of – we can kind of characterize as the bastardization. If there are stores to be closed, we’ve evidenced this historically, we fare quite, quite well and it’s not – certainly, I would assume if anything happened that they reorg versus liquidation.

[Josh Lindimore:]

I would agree.

[Lou Conforti:]

Yes. Let it make a good content. Let us make them stronger and we continue to solve everything that set before us looking 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. Josh is wearing F21 as we speak. He wears very cute Midriff t-shirt.

[Caitlin Burrows:]

Okay. Thanks. Thanks, everyone.

[Operator:]

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

[Jim Sullivan:]

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% to down 3%. Yet you kept the same FFO guide – FFO per share guide. And I 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 leads you to not take down the top end.

[Mark Yale:]

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 we 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:]

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 pill called critical watchlist during the second quarter that maybe, we’ve now been thinking about, but they do have a heightened focus on.

[Mark Yale:]

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

[Jim Sullivan:]

Okay. And then shifting the focus to the ground lease transaction that you announced. You talked about NOI coverage here for a time. So I’m assuming, that’s something like a $30 million NOI generated by the four assets that are subject to the ground lease. And just to make sure, I understand, this is not a taxable transaction. You’re trading it as debt. It’s the advising us to kind of treat it as debt, so not a taxable transaction. I guess that’s because you have the option to buyback. Number one…

[Mark Yale:]

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

[Jim Sullivan:]

Okay. And then 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 transactions. Is that right?

[Mark Yale:]

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

[Jim Sullivan:]

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

[Lou Conforti:]

Yes. It’s still pretty good in previous – 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, that in all seriousness, because they own the land since 1902.

[Josh Lindimore:]

Well, I mean, we have Pearlridge that’s on a long-term ground lease and we have over $200 million of financing. So, I think it can be – it gets back to today in today’s markets, with these properties that you get traditional CMBS financing, that’s where it could be a challenge. And we found a creative way to tap into some capital.

[Lou Conforti:]

And it’s still going to be predicated upon the same debt service cover divided by us or debt service covers divided by – and take a content into account, is there going to be a little bit of a premium, it’s 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 was a brilliant financing.

[Mark Yale:]

And also we want to be clear, we’re not necessarily assuming and part of our capital plan that we would put financing and we’re just trying to make the point that it is financial.

[Lou Conforti:]

Correct, correct.

[Jim Sullivan:]

And so, carrying through with that thought in 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? Number one, that 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 don’t subject to a ground lease?

[Mark Yale:]

I mean, what I can tell you right now, Jim, as we look in our forward capital plan, 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 have 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.

[Lou Conforti:]

We love that unencumbered pool. And may Sears say you don’t have access to capital, we have lots of leavers weak pull. We pulled one of them, which I think was a very creative pull and getting long dated 30 year long dated go. And we’ve spoke of the $300 million to $350 million of redevelopment capital. Capital is fungible. But think about that $100 million going towards that as well as all the other stuff we’ve done to date. And between redevelopment spend and delevering, we are doing exactly what we’ve said.

[Jim Sullivan:]

Okay. So just to make sure I have this right, so when you talk about the 56% unencumbered NOI, you’re simply taking what were the prior assumptions that haven’t changed very much and then deducting from that the financing costs on the ground lease.

[Mark Yale:]

That’s the way we would be looking at it.

[Jim Sullivan:]

Okay. Perfect. Thanks guys.

[Operator:]

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

[Caitlin Burrows:]

Hi Guys. Sorry. 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 sale leaseback by call it $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?

[Mark Yale:]

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

[Caitlin Burrows:]

Okay. Got it. Okay. That’s all.

[Lou Conforti:]

Thanks.

[Operator:]

Thank you. And this does conclude the question. [Operator Instructions] Thank you. And this does conclude the question-and-answer session as well as today’s program. Thank you everyone for your participation. Everyone have a great day.

[Lou Conforti:]

Thank you.