Washington Prime Group Inc.
Q4 2018 Earnings Call Transcript

Published: 21 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Washington Prime Group Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Lisa Indest, Chief Accounting Officer and Executive Vice President. You may begin.

[Lisa Indest:]

Good morning and welcome to WPG's fourth quarter 2018 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 measures 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; Greg Zimmerman, Head of Development; and Josh Lindimore, Head of Leasing. Now I'll turn the call over to Lou.

[Louis Conforti:]

Thanks, Lisa, and congrats regarding your recent promotion to Executive Vice President. Absolutely well deserved.

[Lisa Indest:]

Thanks Louis.

[Louis Conforti:]

As you all know, I'd like to sprinkle my quarterly commentary with popular cultural references that reinforce a relevant theme and today is no exception. Stomp. Stomp. Clap. What happens when an astrophysicist, dental school dropout, electronics wizard, and a Zoroastrian with supernumerary incisors, who also happens to possess a four octave vocal range join forces? Queen is what happened and they serve as the exemplar of interdisciplinary collaboration and unfettered originality. My colleagues, while the vast majority eschew feather boas and gold lame, they're pretty darn creative in their own right. It is this disavowal of the status quo along with the tenant fiscal responsibility and operating efficacy, which continue to differentiate our company and importantly provide today's Queen themed commentary. I find myself in increasingly good company when it comes to my colleagues who embody diversity. And then who are willing to spread their wings and are just plain interesting. Take for instance our recently hired General Manager, whose resume includes the previous stent in a professional roller derby league or how about one of our legal professionals, who is also the publisher of a magazine championing women empowerment. Did I mention an accounts receivable specialist, who is bassist for the jazz ensemble Fo/Mo/Deep. These as well as my other colleagues and this is important, bring a fresh perspective to our sector and their collective and complementary skill sets, they are quite formidable when channeled toward improving our assets. This concept is further emphasized by the fact that nearly 50% of our General Managers have been replaced by what I characterize as Goodwill Ambassadors. Think about them as proactive individuals, who better understand the idiosyncrasies of their demographic, know how to access corporate resources and then they're enfranchised to make real time decisions impacting their assets. “Don't Stop Me Now” best characterizes our fourth quarter as well as 2018 in review. The physical retailing sector continues to find itself under pressure albeit stabilizing and sure there'll be another hammer or two to fall as an overleveraged private equity sponsored junior fashion retailer cried “Save Me” by asking for rental concession, when in fact they should bite the dust. Our guests, tenants and sponsors, they deserve better and we're going to continue to perform some kind of magic by focusing upon those tenants, which provide dynamism to our assets. We consummated one million square feet of leasing during the previous quarter with a year-end tally of 4.2 million square feet. As importantly 60% is attributable or was attributable to lifestyle tenancy including food, beverage, entertainment, home furnishings and fitness because sometimes our guests want to ride their stationery bicycle, play the game and as well as buy some thing that glitter. We continue to motivate our leasing professionals in order to diversify tenancy. In fact the 195 leases qualified for incentives during the previous year. Announcing, We are the Champions may be a tad bit premature when it comes to releasing former department stores. So I'll continue to so I'll keep my Moet et Chandon cavier and cigarettes in a pretty cabinet. Notwithstanding, and I can’t tell you how excited and pleased we are to announce this. We have surpassed our internal projections from a timing standpoint while allocating less dollars than originally anticipated. As of this month, we’ve leased 7 of the 24 vacated or soon to be vacated department stores so think about it in a quarter -- quarter and a half 25% of our previously identified department stores, we've leased -- again 25% serving as a testament to the feasibility of our assets. This flies in the face of punditry which regarded the demise of these fair to middling department stores as detrimental in other words, we can't live without, you just isn't true. As I have mentioned repeatedly the focus is upon cash flow stability as we do our good stuff; diversify tenancy, activate common area, aesthetically improve and when warranted redevelop. This stability is best illustrated by minimal comp NOI variance of just 90 basis points during the previous four years. So think about it both up and down and 90 basis point minimal variance. Rest assured, nobody wants it all more than myself when it comes to same store NOI growth. The key is to focus on the foundational underpinnings which we're doing and that's going to result in staying power. We continue to address co-tenancy, the Beelzebub of landlords by leasing vacated department stores. As a result, we have provided a 2020 comp NOI growth projection of between 2% and 3% and just as a function of increased visibility. Washington Prime Group has done more than merely Keep Yourself Alive during 2018. Plain and simple we continue to reposition our assets as the dominant town centers within their catchments. As it relates to those assets classified as Tier I which comprising about 10% of total NOI they're now going to be excluded from core operating metrics. The reason behind this action is straightforward

[Mark Yale:]

Thanks a lot, Lou, and good morning to everyone. We finished the quarter with approximately $420 million of current available liquidity when considering cash on hand and capacity on our credit facility. We are also still expecting another, roughly, $40 million of proceeds from the remaining Four Corners outparcel transactions, with the majority closing by the middle of the year, giving us close to $0.5 billion of overall liquidity. As we continue to improve the quality of our portfolio, we expect a transition back to the service of our Towne West Square and West Ridge Mall in Plaza properties, along with the $95 million related mortgage debt by early in the fourth quarter of this year. With single digit debt yields in place here, this also represents a very efficient way for us to delever. In terms of another upcoming -- in terms of our other upcoming debt maturities, our focus remains on the April 2020 maturity of our $250 million inaugural bond issuance. We currently have a fully negotiated term sheet for a 10-year CMBS financing on our Waterford Lakes property that should raise approximately $180 million in proceeds. Coupled with the opportunity to generate $70 million of excess proceeds in 2019 through the refinancing of four Open Air center mortgages with extremely low leverage, we feel very confident in our plan to address this upcoming payoff of these bonds. When looking at maturities beyond the 2020 bonds, which is comprised solely of secured debt, we don't see the potential for any elevated refinancing risk until the end of 2022 when our recasted credit facility and term loan matures. Accordingly, when considering our available liquidity and manageable debt maturity profile over the next four years, we feel confident in our ability to fully commit to our current redevelopment pipeline. We also believe this puts us in a strong position to be able to maintain a dividend payout, in line with historical levels. As Lou mentioned, we are making solid progress with respect to addressing the 28 department store boxes in our Tier 1 and Open Air portfolios, which we believe will need to be repositioned over time. With approximately 25% specifically addressed and active planning on another 60% of the pipeline, we are confident in our originally projected $300 million to $350 million estimate of additional capital spend, necessary to transition this real estate over the next three to five years. Remember, this pipeline does exclude the 13 boxes owned by non-retailers including Seritage. Now let me turn to our quarterly financial results. When excluding gains on debt extinguishment, our FFO for the fourth quarter was $0.38 per diluted share, falling within our guidance range going into the period. Lower property operating income was offset by net gains on the Four Corner outparcel sales. As expected, we did see some challenges with respect to our quarterly NOI performance, which was down 5.3% for the core portfolio. Tier 1 saw a decline of 2.8%, due to anchor bankruptcies. In fact, when neutralizing for the impacts from Sears, Bon-Ton and Toys "R" Us, growth would have been positive nearly 1% for the Tier 1 portfolio during the quarter. In terms of the Open Air portfolio, we experienced a decline of 8.7%, primarily as a result of the timing and level of reimbursable CAM Capital, nearly 700 basis point impact. It's important to remember that the Open Air portfolio exhibited 8.9% positive growth during the fourth quarter of 2017, creating a high hurdle for 2018. In terms of our outlook, we did introduced our 2019 FFO guidance within the range of $1.16 to $1.24 per diluted share. Significant assumptions include a comp NOI decline of 1% to 3% from our Tier 1 and Open Air portfolios. As mentioned previously, if you isolate lost rents and applicable cotenancy impact from the Bon-Ton, Sears and Toys "R" Us bankruptcies, we're expecting to see growth of approximately 1.5% at the midpoint of our range, which supports our narrative of stability outside of these anchor disruptions. This range also captures the array of outcomes from the recent Charlotte Russe Things remembered and Palos bankruptcies including full liquidation of all three. Consistent with our stated practice, we did complete our annual reassessment of the property tiering within our portfolio. We saw one property move up the Tier 1 Lincolnwood; and three Tier 2 encumbered assets drop down to non-core. Specifically in terms of cotenancy, the guidance incorporates our estimates to reflect all actual and announced department store closings to date approximately $5.5 million within our Tier 1 and Open Air portfolios and another $3 million in our Tier 2 portfolio. We should also point out that we do not anticipate having any JCPenney store closures within our portfolio. Additionally, while department store closures have been impactful to our near-term growth, it's important to note that 42% of our core NOI is derived from properties that have no exposure to traditional department stores. Due to the contractual spread adjustments as a result of the recent credit agency downgrades by Fitch and Moody's, the guidance also incorporates higher interest expense over the prior year. Although, not insignificant, the annualized amount of $8 million represents only a 22 basis point increase in the company's overall borrowing rate. While operating results have been pressured in 2018 and potentially through 2019, we do see a tangible road map for meaningful growth next year especially when factoring in the state of progress being made on the department store repositioning front. As we looked to 2020, we remain confident in our ability to not only replace the lost rents and address related cotenancy for these closings, but to make our properties better. Assuming tenant bankruptcies stabilize and borrowing any extraordinary circumstances, we would anticipate comp NOI growth in 2020 to be between 2% to 3% within our Tier 1 and Open Air portfolios. Finally, in terms of our dividend, we are anticipating that it will be essentially covered in 2019. And when looking at projected tax flow income for the year driven by continue gains on our Four Corners outparcel sales and the probable lender transition, we believe the plan animal dollar per share is set at an appropriate level. With that, we'll now open the call to any of your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Ki Bin Kim of SunTrust. Your line is now open.

[Ki Bin Kim:]

Thanks, and good morning everyone.

[Louis Conforti:]

Good morning.

[Ki Bin Kim:]

Good morning. So if I look at your development yields, it's in the high single-digit and if I think about the cost of equity and your CapEx things and development needs and there is a few ways to think about cost equity but one simple way is dividend yield and its about 17% today. I appreciate that there are gains from the asset givebacks or sales that you have to think about, but at this point, what keeps the dividend rate at this level? Or are you more willing to revisit that after some of these lender handbags are completed?

[Louis Conforti:]

Well, yes let me kind of deconstruct those two questions. I think you asked two questions. I can answer the first simple -- the first in a straightforward fashion. What keeps the dividend rate at its current level is surplus cash flow and our Board of Directors. As it relates to the in effect the comparison between what our kind of marginal return on invested capital pursuant to development and what our implied equity cost is which is our dividend yield if we did it -- if we were -- if it was univ areas, if the idea of the only return we were ever going to get was 9% or so based upon our development, we would -- we wouldn't develop. But there's a holistic benefit when we do some of our developments and we've evidenced it already in terms of sales volume as well as we have conviction with what this company is doing and that's going to manifest itself via a higher multiple. We trade at a silly multiple which we continue to prove the pundits wrong. So, I guess in summary, comparing our marginal return on invested capital and development -- to development and out equity cost of capital for dividend yield just isn’t the right way to look at it.

[Mark Yale:]

Yes. And I think an important point is that's the direct yield on our investment. So, that is certainly the rents maybe some co-tenancy care. What's not factored in there is -- what's the cost of not moving forward with that redevelopment where do our cash flows go? You start looking at our multiple right now on AFFO and clearly, there is a question regarding stability of the cash flows. So, we certainly believe our portfolio is viable. We think we demonstrate its stability, but obviously, moving forward addressing the loss rent, the co-tenancy, having some organic growth all of a sudden you start looking at our multiples significantly differently. And we think -- and that's why redevelopment is by far our best use of capital. And as we stated in our remarks, we're very comfortable that we have the capital right now to fully commit to that redevelopment pipeline.

[Louis Conforti:]

And we're not the only ones that have faith in our assets. Again I just can't tell you when we put together our 28 of which 24 were active department store boxes that need to be done I would've taken over all day long on about quarter and a half of leasing -- well, if you lease up seven out of 24, that's closer to 30%. Obviously, our tendency as well as our guests believe in our assets as evidenced by this new leasing and what Josh did with 4.2 million square feet this year.

[Ki Bin Kim:]

Okay. And then how about the second part of that question?

[Mark Yale:]

It also Ki Bin doesn't include -- at FieldhouseUSA, for example, The Outlet Collection Seattle we expect to generate almost $2 million -- two million visitors to the mall once they open and that's going to open a lot of opportunities for additional leasing and restaurants, et cetera.

[Ki Bin Kim:]

Right. And how about the second part of that question like so I mean I get it. There is a value element to it not just the yield or are you making the center better? But if that equation works right now if it works a lot better if that cost of funding was lower, so the second part of the question was after some of these assets go back to the lender and the gains are kind of dealt with how is the willingness to revisit that dividend policy?

[Mark Yale:]

The gains, I'm sorry

[Louis Conforti:]

Well, I think what -- I think what Ki Bin is asking is once we get through some of these gains that are driving our taxable income up, how we look at our dividend. And it's a quarter-to-quarter evaluation facts and circumstances. We think we certainly understand where our taxable income is going to be in 2019. We've laid out a growth profile for 2020. We think it's even greater for 2021. And certainly our confidence in the cash flows and where cash flows are going will be part of the dividend, but right now we see a pass and certainly our plan is to maintain the dividend for 2019.

[Mark Yale:]

And one thing that we've – hopefully, we've done and we've managed expectations and everything that we've said we would do we've delivered thus far. And by virtue of us comfortable enough and with enough increased visibility to speak to 2020 same-store NOI growth of 2% to 3%, obviously, that surplus cash flow generated makes our dividend policy kind of as is.

[Ki Bin Kim:]

Okay. And in terms of your same-store NOI guidance for 2019 of minus 2% at the midpoint. Could you just help us understand the different levers? How you got to that negative 2% going through like the contractual rent step up for whatever you can talk about occupancy or lease spreads? And ultimately just trying to see how much cushion there is really built in for the unexpected things that can happen in this business?

[Mark Yale:]

Yes. Ki Bin, I mean, first of all we talked about the bankruptcies that have come to fruition so far this year Payless, Charlotte Russe, Things Remembered, Gymboree, our best understanding of that outcome is factored in midpoint of the guidance, which is the liquidation of Payless. We have some store closings from Charlotte Russe, so that's all factored in. And then we talked about that if there is full liquidation we can certainly handle it within our guidance. And then we probably have somewhere around 50 basis points of just unallocated for the stuff that happens. So that is all factored into that down 1% to 3%, but obviously a big driver, when you talk about levers it's the loss rent and from the bankruptcies from Bon-Ton, Sears, Toys“R”Us. It's about roughly $8 million in the Tier 1 another couple of million dollars in our Open Air. So that's a big driver of it as well as a co-tenancy of roughly about $6 million of impact within the Tier 1 and Open Air. So, once again, I think it's important and if you isolate that and we're not seeing our growth is 1.5% in 2019. But it would be positive outside of that and that's a big part of our thesis is there is stability. Our properties have been performing well in spite of these underperforming anchors. And what we're going to do is just only going to make the properties better.

[Louis Conforti:]

Well, again, then sequentially in 2020 by virtue of us addressing the vast majority of that co-tenancy think about as iterative – iteratively, we are able to forecast with the high degree of confidence, same-store NOI growth of 2% to 3% the following year. We would not have done it if we didn't harkening back if we hadn't leased seven out of 24 or 20 how everyone look at it department store boxes in the quarter and the half.

[Ki Bin Kim:]

Can I squeeze one more in? A quick one.

[Louis Conforti:]

Sure.

[Ki Bin Kim:]

Thanks, Lou. You mentioned that the fourth quarter same-store NOI was impacted by timing of CapEx reimbursements. How much -- can you explain that a little better and is there a reversal of that in 2019 that's benefiting same-store NOI?

[Lisa Indest:]

Hey, Ki Bin, it's Lisa. Really where you see that is the difference, Mark had pointed out the high growth in Q4, 2017, compared to Q4, 2018 so it's really not a big issue between 2018 and 2019 that was more of 2018 to 2017 and this is around our Open Air portfolio where we still have a high number of pro rata deals as opposed to the malls, which are on fixed CAM. So those CAM capital items are reimbursed by our tenants and it was just a timing really in the quarters that are being compared.

[Ki Bin Kim:]

Got it. Thank you.

[Louis Conforti:]

Thank you.

[Operator:]

Thank you. Our next question comes from Spenser Allaway of Green Street Advisors. Your line is now open.

[Spenser Allaway:]

Thank you. All the color around your 2020 guidance is appreciated. Given the difficulty around forecasting in line tenant disruption and then the fact that it looks like Sears is going to be a lingering concern. What makes you guys confident that you have the increased visibility to provide this for next year?

[Louis Conforti:]

Well, I mean as we said, if we haven't have addressed I think of it a 30% about a 25% to 30% of our department stores you're absolutely right which obviously you can calculate the concomitant, co-tenancy and lost rental impact. So the combination of again guys you've asked us to address co-tenancy, you've asked the lease to shift load of in-line space, you've asked us to address our bond maturity, you've asked us -- I mean we've done every single thing that you've asked us to but back on point without that 25% plus addressing of our department store boxes, you're right we wouldn't have had some visibility as well as the historical precedent of Josh and his team leasing up 4.2 million square feet over the last couple of years per annum. But those are good questions.

[Mark Yale:]

And a couple other points on that. One in terms of just the lingering impact of Sears on a go-forward basis we're talking about 10 locations, not a significant amount of rent, not a significant amount of co-tenancy. So hopefully they're going to move forward and we'll see what -- see how that plays out, but we feel comfortable that we can absorb whatever the outcome is there. And then just looking at our watch list today versus where it was even a year ago, I believe the lowest I've seen it in terms of just the concentration of rents as a percentage of our annualized base rents, it's at the lowest level. So we did caveat that the 2% to 3% that we are expecting a stabilization in the level of bankruptcies from where we've been the last couple of years. But based upon what we are seeing in terms of our watch list, were the exposure our conversations with tenants, we feel like we have a level of visibility and a big driver of it is stuff we know I mean it's redevelopment where we already have a shovel in the ground or it's redevelopment more about ready to move forward where we have signed leases. So its return on that it's the co-tenancy curves and a modest amount of organic growth.

[Louis Conforti:]

It does us no good to again not manage expectations. I mean we embrace the creative and the interesting from an operational standpoint. From a financial standpoint, I mean, we've been -- we are nothing but prudent. So, we've thought very carefully about -- what I think about it kind of a sequential path. Leasing space in line addressing department stores hence co-tenancy and tenant lost rental income addressed allows us to feel comfortable about 2020.

[Spenser Allaway:]

Okay. Thank you. And not to bully around the point. Obviously you made a lot of good progress. But I think the investment community would agree that there's still a lot of unknowns whether that's related to the in line tenant health or continuing department store risks. So, are you guys continuing to have conversations with JCPenney and Macy's as it relates to stores within your portfolio? And how comfortable are you again with that 2020 guidance given the fact that there could be potential future closures by these additional anchors.

[Louis Conforti:]

I'm going to answer that in two ways. We speak to every Greg and Scott, Josh. We speak to our tenants big small local regional national every single day. That's why I'm on the road I think three or four days a week on average visiting tenants, visiting assets. And again it doesn't endure anybody's benefit to us not to manage expectations. I can tell you two things from a historical precedent standpoint. We have fared better than our peers both in primary and secondary markets because -- and that's when we're going to continue when our humble estimation is to happen as we transform to dominant town centers. And then I'm going to actually cite an extraordinarily important Greenstreet research article of January 10th which I don't think have gotten enough fan and I'm very serious about this. You in effect talk about the systematic risk being greater in primary versus secondary market. And that's something that we wrote about two and a half years ago. And I think it's still -- often on our website in defensive secondary markets. And there is the idea of non-diversified -- diversifiable risk i.e. beta versus volatility. And I'm doing this for a reason because I mean "gateway markets are among the riskiest in the country. And what we're seeing is -- and that is evidenced by our minimal variance in our cash flows and NOI. We're sticky. We got to provide the right asset -- the right tenant mix, the right amenities with respect to our assets. But this paper that you guys wrote on January 10th as part of your calculated risk -- I don't know who it is.

[Mark Yale:]

Calculated risk I think it's the most important thing that I've seen in the last 15, 20 years because in effect it's a disavowal of primary markets being less risky. And back on point if we didn't have kind of, -- if we weren't comfortable with the stability and visibility we sure wouldn't be forecasting 2020.

[Spenser Allaway:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Caitlin Burrows of Goldman Sachs. Your line is now open.

[Caitlin Burrows:]

Hi, good morning team. I guess referring just on the topic of managing expectations and visibility and providing guidance. I guess given the shortfalls that you guys faced in 2017 and 2018 and now giving 2019 and some look into 2020 guidance, have you guys changed the methodology at all that should make us more confident that that target is attainable?

[Mark Yale:]

Okay Caitlin. I think apart of it just has to do with, if you look at what has transpired in our space since 2017, the level of bankruptcies where our watch list was, where it is today? A lot lower. Where our occupancy is, where our occupancy cost, below 12% in our Tier 1, I think all of that gives us comfort that we have the path forward. I think laid out I know the expectations and the assumptions and we do believe, we're at a point of inflection. We finally can work through this department store disruption. And a lot of disruption from this junior apparel and private equity owned highly levered retailers and we just don't see the same visibility in terms of where we were two or three years ago to that exposure. And the other thing we've done over the last two or three years is just diversify away from that. We've talked about lifestyle type tenancy of that 4.2 million of the new leases, 60% was for lifestyle type tenancy, food beverage health and beauty entertainment and that the home furnishing and that trends only just going to continue.

[Caitlin Burrows:]

Okay. And then maybe just on the co-tenancy point and stop me if I'm wrong on this. But I think for 2019 it looks like you're expecting the impact to be now 16 million in Tier 1 and Open Air from Sears and Bon-Ton, I think actually Toys "R" Us puts another 5 million in Tier 2 and non-core so 21 million total. But I think last quarter you guys had talked about a $7 million to $8 million headwind. So I'm just wondering what the difference is in the $7 million to $8 million that we talked about before versus potentially 21 million now?

[Mark Yale:]

That 16 million in our Tier 1 and Open Air is comprised of two components. One is, the loss rents from those three anchors and then the other piece is the co-tenancy. So if you strip out the co-tenancy, I think, its right about 8.5 million in total for our Tier 1, Open Air and our Tier 2. So not a significant change from what we were estimating at the end of the third.

[Louis Conforti:]

Actually right on target.

[Mark Yale:]

Because we went through this, we were just -- again maybe just providing too much information we will -- we told you what our lost rental income was.

[Caitlin Burrows:]

Got it. So yeah I guess just the idea is that in -- there is a thought out there that the department stores don't pay that much rent, but in this case they were a noticeable headroom that now you guys will get passed.

[Mark Yale:]

Yeah. Well I mean Toys "R" Us in there they clearly were a rent payer. We had some rent being paid from Bon-Ton and even though Sears on a per square foot basis, wasn't paying rent they still had I mean a significant number of stores you just aggregated. I think our point is and we're not minimizing the disruption in 2019 and it's ultimately up to us to prove this out, but we believe this is temporary and it really gives us the platform and the pathway toward real growth not only in 2020, but beyond. And that's why we're focused on highlighting these elements because we're going to ultimately demonstrate, how we're going to address this going forward. We just did with the kind of the seven deals and we're actively working on many more and we certainly are expecting to have incremental progress quarter-to-quarter to share with you.

[Caitlin Burrows:]

I guess just sticking on the Toys boxes, could you give some status there in terms of how many there were and the leasing progress and when we should expect those to come online?

[Louis Conforti:]

How many do -- Josh or Greg, how many do we have in total I mean?

[Greg Zimmerman:]

I think it was 11 altogether. I know Grand Central were moving forward.

[Josh Lindimore:]

Well, we have a Big Lots still that's under construction. Yeah we're working on plans in Honolulu that will probably be mixed use and we're making some progress on the other ones as well.

[Louis Conforti:]

Yeah. I mean we got tangible progress. There was one in our Open Air portfolio that I believe Big Lots is stepping right into and the others we will certainly have an update -- and having good conversations in all the boxes. I think it's -- and we're in various stages of letters of intent or maybe even leases out for signature on the rest of those boxes. So once again when you start talking about growth in 2020, that's part of our confidence. It's the pipeline we're seeing and the opportunity to move forward on those Toys “R” Us boxes.

[Caitlin Burrows:]

Okay. And then just back to the dividend because I know it comes up a lot. I guess just based on the pieces of guidance that you guys gave as it relates to FFO and then CapEx and then redevelopments then it does seem like that the ability to cover the dividend in 2019 is kind of not there. So, I guess, I'm just wondering how do you plan to bridge that gap? And is it -- I know you talked about your liquidity in the line of credit kind of is that the plan and when do you expect it will reverse?

[Mark Yale:]

Well, I mean, Caitlin, I mean, we talked about in the prepared remarks that we believe we're going to cover the dividend in 2019. Remember about $16 million of the decrease in FFO related to the change in accounting for deferred leasing costs, those internally generated deferred leasing costs that was always in our kind of AFFO payout to figure out our coverage. And then I mean certainly not where it was in terms of free cash flow, but it will be covered. You couple that with where our projection is for taxable income in 2019. As we said, we believe we're setting the dividend at the appropriate level for 2019. And we laid out our liquidity, our maturity risk and we're comfortable with where we are on all those fronts. Those all go into our decision making as it relates to the dividend.

[Caitlin Burrows:]

And I guess in the earnings release, I don't know if this was a coincidence or actually a change in thinking that’s why I am asking, but there was a reference now that the Board is going to assess the dividend on a quarterly basis. Has there been a change in the decision making process?

[Louis Conforti:]

None whatsoever.

[Mark Yale:]

It's always been a quarter-to-quarter decision.

[Caitlin Burrows:]

Got it, okay. And then maybe last one just in terms of the cash flow stability. You guys talked about how the Tier One and Open Air properties have had minimal variance over the past five years, but, I guess, given the overall portfolio, which has been shrinking for a few years and that is the overall portfolio supports the dividend in your total company share price, why do you think that subset of comparable NOI is the relevant way to judge cash flow stability?

[Louis Conforti:]

So using -- because like-for-like is generally the most appropriate way that everybody thinks about kind of variance are just about ones portfolio. I don't know what -- we can very easily calculate what the portfolio was four years ago in total but it was, I mean, if you were to sign a discount rate to that portfolio, you would assign a hell of a lot of higher discount rate just because of its concentration, it will be a negative, I guess, it’s not an attribute, but it’s negative -- negative factors. So I think about it kind of in terms of we have made that stream of one through and cash flow the lot more tanker sink for lack of a better term and hence a lower discount rate. I mean, we can kind of get it what it was in total four years ago, but I tend not to think about that term.

[Caitlin Burrows:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] And we do have a follow-up question from Ki Bin Kim of SunTrust. Your line is now open.

[Ki Bin Kim:]

Thanks. So earlier you mentioned that you don't anticipate any closures from JCPenney. I'm just curious is that because the cash flow coverage for those assets or the four-wall coverage that's profitably, so you don't expect to close or is that more based on the conversations you've had with JCPenney and yourself?

[Greg Zimmerman:]

Both. We have a very strong JCPenney portfolio, as Lou mentioned, this is Greg, Ki Bin. We're in constant conversations with JCPenney, Macy's Dillard's all the department stores. So we feel confident about that. In fact, we'll be heading down to playing on a couple of weeks.

[Louis Conforti:]

There in their stores, they're profitable. I mean, I just – again, harken back to the primary versus secondary and the decreased beta. Our stores are profitable. They draw from a wide and an expansive catchment and they serve the demographic constituencies in our markets.

[Ki Bin Kim:]

Okay. And any thoughts you can share on your top tenant jewelers, obviously, a small square footage, but higher AVR and if you think about where typically these jewelers are located in the main area of the mall. If you look at the stock price is down over 50% had a couple of back quarters of earnings, any thoughts on that retailer as of this portfolio?

[Louis Conforti:]

Look, I'm going to turn it over to Josh. Yeah. I think it's a good question. I'm going to turn it over to Josh in a second. But as Mark had mentioned our tenant watch list is -- I don't know at historical low. Josh you can speak to the total AVR per region whatever -- however you want to address that but...

[Josh Lindimore:]

Yes. I mean, look, Ki Bin, it's Josh. I mean, I'm certainly not going to comment on individual tenants, but what I can tell you is throughout our portfolio, we've just completed a package, I’m going to say it off top of my head 60some odd deals with very minimal disruption or issues. I think look I think Signet is going through the same retail malaise that other people are and they're working on their business, and I think they've got a long runway and they’re -- certainly value tenant in the portfolio.

[Ki Bin Kim:]

Okay. Thank you, guys.

[Operator:]

Thank you. And we do have another follow-up question from Caitlin Burrows of Goldman Sachs. Your line is now open.

[Caitlin Burrows:]

I just had another one on, maybe, the leverage side. Given the earnings expectations for 2019, but also the lender transitions, I guess, how do you guys estimate your debt to EBITDA is as so 4Q 2018? And how do you expect that to trend over the course of 2019?

[Mark Yale:]

Yeah. It's in the high 6s, Caitlin, in terms of where we finished 2018. Obviously, when you look at our guidance for 2019 and the decrease in NOI and EBITDA, we will see some pressure back above 7 times, but we do have some give backs. And as we talked about we believe 2019 will be a point of inflection and we'll be back to seeing some positive EBITDA growth, which will help drive that down. When you look at our debt maturity profile and that's why it was very important for us to lay out our plan, really the only meaningful maturity that we have with any significant risk and that was the 2020 bonds April of next year. We've got a fully negotiated term sheet for CMBS financing on our Waterford Lakes and then we also believe we'll generate some excess proceeds from our four Open Air refis that we’re moving forward with this year. We'll be able to take that maturity off the table. So we want to address our leverage and we think there will be a path to bring it back in line. But bottom line is, what we're focused on is making sure that we have the liquidity to address our maturities and be able to fully commit to our redevelopment pipeline and we feel very comfortable where we are on that front.

[Caitlin Burrows:]

Okay. Thanks.

[Operator:]

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