Washington Prime Group Inc.
Q4 2016 Earnings Call Transcript

Published: 24 Feb 2017

[Operator:]

Welcome to the Washington Prime Group Fourth Quarter 2016 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. As a reminder, this conference is being recorded. I would like to hand the floor over to Lisa Indest, Senior Vice President and Chief Accounting Officer. Please go ahead.

[Lisa Indest:]

Good afternoon and welcome to WPG's fourth quarter 2016 earnings call. During today's call we will make certain forward-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 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 these non-GAAP financial measures to the comparable GAAP measures 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; Butch Knerr, COO; and Mark Yale, CFO. Now I'd like to turn the call over to Lou.

[Louis Conforti:]

Good afternoon, thanks for joining us and let's get down to business. Over the previous six months we've worked our tails off to foundationally strengthen the Company and while improvements are always ongoing, we've accomplished this objective. I'll cut to the quick. As a result of such measures, we're forecasting moderate transactional dilution for 2017. It is important to emphasize the transactional versus operational, as these actions were proactively implemented by my team and me. As the son of a former boxer, my father always told me you need to strengthen your core before you work on your biceps. The previous six months has been characterized by lots and lots of sit-ups but pretty much foregoing the curl bar. It is simple. If we get punched in the stomach, we want to be able to shrug off these body blows and continue our grinding it out. If the quid pro quo of this one-time dilution has been to reinforce our investment-grade balance sheet with net debt to EBITDA ratio of 6.3 times and $900 million of cash and credit availability, it's a trade-off I'll make every single time. I'll be providing operational, financial and strategic highlights with Butch and Mark providing the details. We're also going to discuss redevelopment in depth, as we believe it is our most intriguing value proposition. Last, I'll spend a few seconds about innovation and how we're utilizing it to lease space, generate sponsorship revenue and in general, transform our assets into town centers where shoppers are actually excited about spending time and money. First a few highlights. Comparable NOI growth for 2016 was 2.1% across our core assets. It's worth mentioning the performance of our various classifications. Tier 1 enclosed increased a healthy 3.2% and Tier 2, while decreasing a negative 2.6%, there are 21 assets in the Tier 2 basket and it was of disparate range, it ranged between negative 20% to positive 18%. So 3.2% in our Tier 1 enclosed assets. Our open-air assets, it actually -- they handily outperformed their shopping center peer groups, exhibiting comparable NOI growth of 4.4% for the entire year. Leasing volumes 4.9 million square feet, 16% increase over 2015 and occupancy up by 50 bps to over 94%. Operationally we've done the following. We successfully integrated two very different companies into a single platform; that financial impact was $13 million which commenced during the third quarter. In addition and this is in addition to the $13 million, we reduced corporate overhead by $5 million over the last six months and this actually resulted in increased operating efficacy via streamlined decision-making. We consolidated the financial demographic and strategic analysis into a single collaborative effort which has resulted in more robust and timely work product. We reorganized corporate marketing and sponsorship as a profit center and established creative services which draws upon our various skill sets, I think, kind of interdisciplinary, in order to produce collateral materials which quantitatively and qualitatively demonstrates why a tenant or a sponsor should locate within our asset or hopefully assets. I'd like to now turn our attention to redevelopment activity. As mentioned earlier, redev is our best return on invested capital proposition. We will be spending a heck of a lot of time on this effort as we continue to deliver accretive projects for the foreseeable future. We currently have 47 small, midsize and large-scale redevelopments either proposed or underway, ranging between $1 million and $60 million. These projects serve two purposes as they are accretive, they are currently averaging at 9.5% ROI and as importantly, they rejuvenate our assets by diversifying and differentiating our tenant mix. We possess a distinct advantage compared to many of our public and private peers. Mainly our operating and development infrastructure -- and I'm very serious about this. I argue we have one of the most talented teams within the space, led by seasoned veterans such as our COO, Butch Knerr and our Head of Development, Greg Zimmerman. They, as well as others, were trained by some of the best in the business, as they are alumni of Simon Property Group and Macerich. As the aforementioned redevelopment is certain to consist of re-tenanting department stores, let me take a second to address our current exposure. We own or lease 250 department store boxes within our core portfolio which are 98% leased. With respect to last August's announcement of 100 Macy's closings, we fared better than the vast majority of our peer group, with just two. Cottonwood and Sunland Park Mall's and Macy owns both. Macy's owns both, pardon me. For reference, there are 32 Macy's operating in our portfolio, of which 26 are owned by them and 6 by us. As it relates to Sears, 20, 18 and 11 are owned by Sears, WPG and Seritage respectively. We're continually evaluating adaptive reuse at all locations, as well as working with Seritage as they consider redevelopment of several of their locations. I want to highlight something pretty important, so take notes. Year-end 2015, we had 58 Sears stores. By year and 2016 the number was 49. And with our previously announced strategic transactions, e will have whittled our exposure down to 43 stores which equates to a nearly 25% reduction. One more thing, it has become quite apparent that many of our assets are adopting a model best described as hybrid. Which incorporates both enclosed and open-air formats. In fact, of our enclosed venues, 65% have tenants and that excludes department stores, with exterior storefronts and our future projects will certainly capture this hybrid aspect. We're at a distinct advantage in this regard as our sizable open-air and enclosed portfolios allow for such cross-tendency opportunities. As I said before and maybe with not the most amount of gentility, to heck with historical classifications. We're primarily comprised of assets which are dominant within their catchment and consumers who are hankering for interesting shopping, dining and entertainment alternatives. It's imperative we respect those constituencies by providing for the experiential as opposed to the same old you know what. Turning to financial and strategics, Mark will provide the details. If you remember last quarter, we identified several goals and we have accomplished each and every one. I'm going to repeat again one of my favorite operating metrics. Upon completion of non-core asset sales, JV and lender givebacks, all under contract and done, 80% of our NOI, 80%, will be derived from Tier 1 and open-air assets, those are the assets that exhibited 3.2% and 4.4% comp NOI growth respectively. The financial impact of the aforementioned is best illustrated by the improvement to our investment grade balance sheet. The Company ended 2015 with net debt to EBITDA of 7.1, 2016 at 6.9 and by midyear, 2017, we will be at 6.3 times. Grinding it out also takes the form of innovation. Awaiting for the next handout from a national retailer is not a viable leasing model. It's lazy. Let me walk through a specific example, the many things we're doing to serve existing and attract new tenancies. Lindbergh, a dynamic menswear Company, recently executed a lease in Pearl Ridge, they are considering several others. While I'd love for them to take space in all 110-plus of our assets, it ain't going to happen. What we can do is provide space which satisfies the seasonal or situational requirement. In this light, we have introduced what we refer to as the virtual store, whereby a tenant has access to our entire portfolio via pop-up shops, trunk shows and other innovative space solutions as well as through our digital media. This reciprocal benefit is obvious, as these installations serve as de facto tenants -- serving as de facto events that create excitement, they are dynamic. They can also serve as beta tests whereby the experiment just might result in permanent leasing as concepts are validated or an Internet entrepreneur cleans off her Warby Parker eyeglasses and realizes there is a symbiotic relationship between physical space and e-commerce. Thus far the feedback has been outstanding and our creative services team, in conjunction with our financial demographic team has done some amazing collateral material which we can share with you at some point and some of the stuff that we have crafted. Other innovation initiatives, quickly. Third quarter, we had announced our agreement with Amazon to offer self-service lockers at 50 of our assets, thought it was, we believe it to be the highest, largest installation within the peer group. We've taken this one step further. And now installed and are installing adjacent digital screens with electronic couponing and promotional capabilities highlighting our tenants. Our e-commerce showcase Tangible actually received patent pending status. If you recall, Tangible is a concept which curates Internet purveyors on a rotational basis allowing for a unique treasure hunt experience. We expect to roll it out within the next quarter or so. We think in food and beverage is a priority. We're continually reevaluating the food court and in several instances relocating it to center court and providing more interesting offerings such as local craft brewers, artisanal sandwich makers and the like. Orange Park and Muncie malls are the first to offer this more adult alternative, furthering our desire to provide more interesting eating and drinking alternatives. Where we believe we're close to consummating a partnership with a venture-capital private equity firm solely focused upon the food and beverage space and led by the former CEO of one of the world's largest restaurant companies. Reciprocally beneficial we'll beta test their food and beverage concepts within our assets. Last, we're also partnering with a confectionery expert to roll out candy stores in assets which lack such a tenant. These sweet shops combine bulk candy, regional favorites, staff favorites and pretty cool common area space as well as employing a mobile unit which can be relocated to hotspots as shopper traffic warrants. 2017 outlook driven by several factors. As I mentioned above, we'll have that moderate dilution and I would do it again. I think it was the smartest thing we've done for this Company to financially buttress it. Mark will detail. And again, we regard what we've done as prudent, as in the best interest of our shareholders and it's really allowing us to do what we do best; concentrate on leasing space, opportunistically redevelop, you know, grinding it out. Butch, you're up.

[Butch Knerr:]

Thanks. As Lou mentioned, 2016 was a successful year. Our leasing volume which includes executed deals and store openings, totaled 4.9 million square feet across our portfolio. A 16% increase over 2015. This includes total leasing volume of 3.9 million square feet for our enclosed centers and 1 million square feet for our open air portfolio. Representing year-over-year increases of 14% and 28% respectively. More specifically, in our Tier 1 assets we have seen a 36% increase in total new deal activity. Occupancy in our enclosed portfolio improved 80 basis points to 92.7% leased compared to a year ago. Sales for the trailing 12 months ending December 31 were $368 per square foot for our core enclosed properties, an increase compared to a year ago. That increase is among the top of our peer group and is another indicator of the positive impact we're seen as a result of our team's efforts over the last couple of years. Re-leasing spreads for the trailing 12 months were negatively impacted by store closings and rent release associated with Aeropostale and PacSun. As mentioned last quarter, we did not absorb the full impact of vacated space and rental reductions from these tenants during 2016, hence we will realize the remainder related this year. Excluding the impact of these retailers, spreads would have been flat for our core enclosed portfolio. We're proactively managing these at-risk retailers and, for example, we have successfully addressed 75% of the closed Aeropostale locations. As it relates to the 2017 announced store closures, our exposure has been minimal. Limited stores and Wet Seal closed 8 and 7 stores respectively. And these closings represented just two-tenths of an annual base rent. We have accounted for all of the above within our 2017 guidance. Our open-air portfolio continues to be an industry leader. This platform is 95.9% leased. A strong metric that reflects the dominance and high quality of these assets. Re-leasing spreads and rents continue to show steady growth and as Lou mentioned, comp NOI for this portfolio grew by 4.4% in 2016. We continue to execute on our strategy to diversify by the tenant mix by offering more sit-down restaurants and other dining choices for our guests. In fact, in 2016 we added 120 new dining options totaling 325,000 square feet. A large majority of these tenants operate in both our enclosed and open-air centers. Also in 2016, we added 17 new entertainment and fitness tenants representing more than 296,000 square feet across our portfolio. As we said before, one of the benefits that WPG has is the unique opportunity to promote cross-tenancy across our portfolio. This is evidenced by the fact that in 2016, we completed 90 new deals totaling more than 600,000 square feet with tenants that operate in both our enclosed and open-air centers. A few of these tenants include Ulta Beauty, Carter's, Party City, Kirkland's and F21 Red. Now I'd like to switch gears and discuss redevelopment activity. We view this not only as a growth opportunity but as a core part of our business that keeps our centers vibrant. What we have found is that when we invest in our assets, our tenants are willing to partner with us and reinvest capital, bringing the stores to the latest prototype. In 2016, our small and large-scale redevelopments and retailing efforts touched more than 44 properties across our core portfolio. As of today, we have 47 active or approved projects and we continue to see a steady pipeline of opportunity. We will continue to reinvest in our centers making them the best in their respective markets. During the fourth quarter we held the Grand Opening of the new 475,000-square-foot Fairfield Town Center located in Cypress, a suburb of Houston, Texas. The center features retailers such as HEB, Academy Sports, Marshalls, Home Goods, Party City, Old Navy and Ulta Beauty. In addition, we added a number of dining options including sit-down and fast casual restaurants. The project opened three months ahead of schedule and is 95% leased. Development of the next phase of the project will happen quickly due to the strong tenant demand and will include additional big-box, entertainment and small shop retailers. While we're happy about what we've accomplished in 2016, we're even more excited about our future redevelopment. For example, last month we announced a $33 million renovation at Pearl Ridge Center, located in Aiea, Hawaii. The project will include a renovation of Pearl Ridge Downtown, including new interior and exterior finishes, updated entrances and a new contemporary dining space. In addition, a relocated and expanded specialty grocer, Down to Earth, will open, as well as Pieology, Five Guys, plus additional restaurants and retailers. We're also under construction at Northwoods Mall in Peoria, Illinois, with the $16 million redevelopment of the former Macy's box. We have a signed lease with round one, a 56,000 square-foot entertainment concept that has bowling, dining, karaoke, billiards, ping-pong and arcade games. We're in the process of finalizing additional restaurants and retailers and we'll announced those in the near future. Northwoods is an excellent example of how we're repositioning former anchor spaces to be more relevant for their market. At Classen Curve, located in Oklahoma City, we're under construction with an $11 million expansion that will add a 30,000 square foot multi-tenant building which will bring new retailers to this fully leased center that already includes Lululemon, Kendra Scott and Rustic Cuff. Earlier this week we announced a lesson at Scottsdale Quarter which will add an additional 300 luxury apartment homes and more than 32,000 square feet of new retail. The residential component will be led by Lennar multifamily communities and will bring the total to over 575 units with more than 1,000 residents living at the Quarter. This multifamily space, along with more than 2,300 existing office workers, provides a captive audience for our restaurants and retailers. And it serves as another anchor to the project. Finally, we decided not to renew the Sears lease at Markman Mall and are in the process of finalizing the redevelopment of this box. If you recall, we completed a renovation of this asset in 2015. The center is 99% leased and we have strong demand. Once we have signed leases we will share additional details including estimated project cost and returns. While this represents a significant level of activity, we see an equally robust pipeline for the foreseeable future. I will now turn the call over to Mark.

[Mark Yale:]

Thanks, Butch. Let's now turn to the balance sheet, where we continue to take prudent steps to improve our capital structure and liquidity. We're excited about the upcoming closing of the previously announced O'Connor joint venture. As discussed, the positive impact on leverage from this JV along with the recent non-core asset sales are significant as allows us to accelerate the pace of our deleveraging plans. Through these transactions and the planned give-backs I will discuss in a moment, we will see a reduction in overall debt levels of approximately $550 million, allowing us to drive down our net debt to EBITDA to 6.3 times. During the fourth quarter, we did complete the give-back of River Valley Mall to the loan servicer, resulting in debt reduction of approximately $45 million. Discussions continue regarding the transition to the respective loan servicers for Southern Hills and Mesa Mall, but we're not expecting any transfer to occur until the second quarter of this year. We also anticipate commencing discussions with the servicer on Valley Vista Mall towards the middle of 2017. Beyond these planned give-backs, we only have one 2017 mortgage debt maturity remaining which is WestShore Plaza. Our current plan is to unencumber the asset with proceeds from the O'Connor JV. It's important to recognize that the Company has a very strong unencumbered pool, comprising approximately 55% of our total FY 2016 NOI with 84% of this NOI or $260 million, coming from our open-air and Tier 1 centers. With the leverage levels being reduced post-closing of the second O'Connor JV, our balance sheet attention will shift quickly towards addressing the concentration of unsecured debt maturities in fiscal years 2019 and 2020. Accordingly we're focused on pushing out the maturity dates of our credit facility and related term loans as well as raising longer, 10-year debt capital and would like to execute on such plans within the next 12 months. Remember when considering the proceeds from the second O'Connor JV, we will have nearly $900 million of liquidity between credit facility capacity and cash on hand, allowing us to be extremely thoughtful to ensure that we find the right window to approach the unsecured debt markets. Now, let me turn to our quarterly financial results. Our adjusted FFO for the fourth quarter was $0.48 per diluted share, falling within our guidance range going into the period. NOI contributions from our core portfolio were generally in line with our expectations for the quarter of 0.7% over the prior period. This included growth of 4.7% from our community centers, 2.3% from our Tier 1 centers and a drop of 7.4% from our Tier 2 properties. As previously discussed, quarterly growth from the enclosed portfolio was negatively impacted by Sports Authority, Pac Sun and Aeropostale bankruptcies that all occurred during Fiscal Year 2016. Additionally, we have provided our initial outlook for Fiscal Year 2017. Which included an FFO guidance range of $1.62 to $1.68 per diluted share. This guidance excludes the impact of potential net gains on the extinguishment of debt. Along with the sale of the remaining non-core assets this week and the anticipated transfer of Mesa Mall and Southern Hills during the first half of 2017 no other dispositions are factored into our guidance. We're assuming the new O'Connor joint venture will close early in the second quarter of 2017. Remember we're required to place mortgage debt on the 4 unencumbered assets before we close on the joint venture. In terms of comparable NOI growth from our core portfolio, as Lou mentioned earlier, we're expecting an increase in the range of flat to 1.5%. This includes growth of approximately 1% to 2% from our community center and Tier 1 enclosed portfolios offset by a negative growth of over 1% from our Tier 2 properties. Corporate overhead and G&A expenses are expected to be in the range of $52 million to $56 million. This compares to $63 million of actual overhead incurred during Fiscal Year 2016. As Lou mentioned, the net of these assumptions does result in FFO dilution compared to FY '16. Significant components of the decrease include $0.10 of aggregate dilution associated with non-core asset sales, property give-backs and the second O'Connor JV, $0.03 of dilution associated with a planned unsecured debt issuance and an increase in LIBOR rates from the prior year and forced ends of a reduction in purchase accounting related income associated with the Glenshore acquisition. These items were partially offset by positive NOI growth and the year-over-year decrease in corporate overhead. Finally, we're also introducing FFO guidance for the first quarter of 2017 in the range of $0.38 to $0.40 per diluted share. When neutralizing for a large tax appeal savings recognized at one property during the first quarter of 2016, we expect core comp NOI in the first quarter to be down flat to 1% compared to the prior year. Once again it is important to recognize the prudency from a financial and strategic standpoint of the actions driving the majority of the year-over-year dilution. With that, we'll now open the call for your questions.

[Operator:]

[Operator Instructions]. Our first comes from the line of DJ Busch from Green Street Advisors.

[DJ Busch:]

Thank you. Louis, obviously the open air centers delivered pretty strong growth in 2016. I think you guys have said in the past that that part of the portfolio can probably grow at around 3% or so for the next couple years. Just kind of piggybacking off what we've heard of the other open-air REITs, it seems like the growth in 2017 is going to be a little bit more subdued than that, closer to 2%. Can you kind of walk us through how you think about the growth for the two different portfolios in 2017?

[Louis Conforti:]

Sure. So let's, please chime in, my colleagues, but so let's look at our Tier 1 enclosed which evidenced 3.2%, as well as our -- so we have our 4.4%, we still maintain on the open-air that we'll maintain a 3% comp NOI growth. So are you asking the components of this?

[DJ Busch:]

No. That's helpful. Just kind of just thinking about what we've heard from some other companies, it seems like 3% would again lead for that property type would be towards the head of the group. I'm just wondering if you're seeing some headwinds in 2017 in that open-air portfolio, similar to what we've heard from other REITs?

[Louis Conforti:]

We've evidenced a pretty conservative posture in our outlook and our guidance. So the answer is unequivocally yes, we see lots of headwind and some tailwinds and a combination thereof is getting us to maintain that 3% for the open air.

[DJ Busch:]

Butch talked a little bit about Northwoods, but there was a little bit of trend -- I guess some changes in assets moving from Tier 1 and some moving to Tier 2 and vice versa. Only a couple, but can you remind us the criteria that you are looking for when you do make changes or move some of the enclosed properties from one tier to the other?

[Louis Conforti:]

Sure. And I'll let Lisa, Mark, Butch, if they want to elaborate. So one of the things I said that we should do is in effect have a coefficient way to multivariate the model that captures the factors and not only the sales per square foot is there dominance in the marketplace and you know we have about five. Or six?

[Lisa Indest:]

Five.

[Louis Conforti:]

Factors, the sum of one through N coefficient weighted and each factor has a weighting and what is so interesting is that when we put in place this new, in effect, math model, is that we only had 2 or 3 movements. Lisa?

[Lisa Indest:]

Yes we just had, we had, DJ, 3 move up to Tier 1 and 2 move down to Tier 2. It really was -- before it was a more subjective evaluation that I think by using that new fast group to really run a model that demonstrated different factors it was interesting to see how it didn't change that dramatically, but we did have some shift. We factored in things such as leverage, dark boxes, just various factors, but I think it came to the right answer.

[Butch Knerr:]

And DJ our plan is to update on an annual basis in connection with year-end earnings. The other thing that's important is to just put credence in the fact of the quantification. You can see our sales per square foot was right at $399. That we weren't focused on any type of metrics or optics, that we were focused on the process. We think that portfolio is poised for growth, that is the most important factor ultimately. And as Lou said and Lisa talked about, it's trying to identify those factors that will indicate growth and stability.

[Louis Conforti:]

I hoped and wished -- albeit hope is never a strategy and as you guys know me, that I don't regard it as such -- that we can have a 4 handle and we were going to eke up to that $400 a square foot sales PSF. I love the fact of triangulating and quantifying and then using, you know, God forbid, a little bit of common sense to run this, to run our Company and run our portfolio. It was telling that there wasn't any major movement.

[DJ Busch:]

Okay that's helpful. And then one last one if I may.

[Louis Conforti:]

Of course.

[DJ Busch:]

Lou, you said you've completed the non-core dispositions. So when you look at Tier 1 versus Tier 2 versus the community centers how do you think about portfolio management at this time and whether assets should remain in the portfolio longer term? And how are you now looking at potential dispositions going forward?

[Louis Conforti:]

Great question. And it really -- again let me reiterate, reemphasize, 80% Tier 1 open-air. That other 21 assets and help me if I'm off by one or two, assets which comprise the Tier 2 basket, there's going to be more intrinsic kind of fluidity in that portfolio. We rank that portfolio as much as by those factors which we've just discussed, but what's the marginal unit, does it warrant a marginal unit of capital and what is the return threshold for that? They have higher bars. Then there's a lot of variability. So I think I mentioned that we had 18% negative to 21% positive in comp NOI growth in that basket and some are kind of idiosyncratic, a tenant leaves, there's just the reality of timing. Some are going to exit the portfolio and others are going to kind of be the little engines that could and work their way up into Tier 1.

[Operator:]

Our next question comes from the line of Christy McElroy from Citi.

[Christy McElroy:]

Just in regards to the Pearl Ridge renovation, there have been discussions in the past around connecting downtown and uptown. Was that contemplated at all in the context of the current project? Is that still something in the cards for center for the future?

[Butch Knerr:]

Hi Christy, this is Butch. Obviously we look at every aspect when we do a renovation. Honestly, we really didn't think that it made a lot of sense in this scenario. We're very excited about investing the capital into the shopping center. And I will tell you that the response from the retailers and the restaurants has been significant. But to answer your question, no we're not looking at combining. If you recall, we do have the monorail that does go between the two projects. Very significantly. But no, we're not necessarily going to connect.

[Christy McElroy:]

Okay. Among the assets you sold, you sold in the last few months, the non-core stuff, can you give us a sense for the cap rates and what types of investors are buying and what they're doing with assets once they buy them?

[Louis Conforti:]

Let me mention this and you know that I like going on a vacation, but the idea of taking a spot cap rate on an asset which a pretty smart group of people, me excluded, have projected future NOI -- perhaps -- let's talk turkey; future NOI degradation. It really -- cap rate isn't the best way to evidence price discovery. It is what we believe those assets are going to look like in the next couple, few years. I don't know. Well 2015, 2018, 70% -- these are assets that we, pursuant to our very rigorous methodology, they don't warrant in our world a marginal unit of capital investment. The types of folks that are buying, are going to make -- I'm not going to win -- I hope they make a lot of dough doing it, but it's -- they are regarding these assets as more de facto liquidating trusts where the reversionary at the whatever timeframe for which they are accounting is 10%, 15%, negligible.

[Butch Knerr:]

And this was in optics. This really was, as Lou mentioned, looking at what we thought the future value cash flows for the next 3 some odd years for those properties versus getting capital today and reinvesting back into our existing portfolio and the returns and the impact that capital can have. And I think we're very comfortable with how it played out and those were the right decisions for us.

[Christy McElroy:]

I guess I was thinking about it in terms of, because you gave that $0.10 number, in terms of the dilution associated with those sales plus the cleanser transitions and the O'Connor JV. I guess I was just trying to figure out --

[Louis Conforti:]

Break it out?

[Christy McElroy:]

Exactly. And in the context of what we should be expecting if you sell further assets. Like if you're looking at some of the Tier 2 stuff as a potential sale down the road.

[Butch Knerr:]

I would say if you looked at the types of assets we're selling and compare that to others that had disclosed cap rates it is pretty consistent with those cap rates.

[Christy McElroy:]

Okay. Understood. Thank you.

[Butch Knerr:]

And the dilution, when we talk about the $0.10 of dilution it's about $0.06 is associated with the non-core sales. Not just the three, but also the non-core sales we moved forward with in 2016. That's what you wanted, Christy, right?

[Operator:]

[Operator Instructions]. Our next question comes from the line of Floris Van Dijkum from Boenning.

[Floris van Dijkum:]

A question for you, you finished two of your redevelopment projects, I believe Lincoln Crossing and Longview. I think you spent a total of around $22 million on those two projects. Curious to see what is the initial feedback and what have you seen in terms of rents and sales at those centers?

[Butch Knerr:]

Hey, Floris, this is Butch. I would tell you that the response both from the retailers and the local communities have been phenomenal. We had the Re-Grand Opening of Longview, Lou was down there for the Grand Opening and I think they were going to make him the new mayor if he did leave town soon enough. Those are assets that quite frankly didn't get the attention over the years. We reinvested in them, we made significant changes to them, they have been unbelievably well received by the local communities and we're seeing great responses on the sales. I don't have the exact number in front of me, Floris, but just anecdotally we would tell you that the tenants are telling us that sales have been up significantly.

[Louis Conforti:]

Let me mention one other thing with respect to Longview in particular. When we speak of a dominant secondary marketplace, we're really data parsing in respect to the catchment areas. I will tell you, that catchment area and I might be off, but pretty much extends from Lafayette, Louisiana -- Shreveport, Shreveport, I'm sorry -- to Tyler.

[Butch Knerr:]

Tyler.

[Louis Conforti:]

To Tyler. Yes. And God forbid we give these folks something interesting, something differentiated, a little interesting dining, entertainment, some interesting retail. They want to make us the town center and that has been pretty ubiquitous across our portfolio.

[Butch Knerr:]

Yes and I would just finish by saying that at Longview, with the addition of H&M and the addition of the restaurants and some of the new retailers, it truly has expanded our trade area. The next closest mall -- and that's an area -- is 45 miles away. And they don't have some of the tenants that we've added in the last year. So it's really done a nice job of expanding the trade area for us.

[Louis Conforti:]

Butch can get side saddled there in about 45 minutes.

[Floris van Dijkum:]

Again, I think I asked a similar question last quarter for you guys, but you have a lot of liquidity and you obviously keep saying your highest and best use of capital is redevelopments. Where do you see that redevelopment pipeline? Or how comfortable are you seeing that double or see that increase over time? Let me get your comments on that.

[Louis Conforti:]

I'll provide the opening salvo. Redevelopment is going to be predicated upon a risk-adjusted return basis. And quite frankly, lots of small to midsize add up to large. And again we have 47 projects active between $1 million and $60 million. We will never solve for expending capital or solve for anything else. We're going to be deliberate, but it's pretty darn robust. I should kind of keep quiet, because when it comes to development, I think I did a couple of industrial buildings once. I will turn it over to Butch. But. We're being very methodical, but we have a lot. And quite frankly I don't know if I should say this, but we're hiring a couple more redevelopment folks to help us in that regard.

[Butch Knerr:]

And Floris, I would sit there and say when you think that we touched 44 this year in 2016, we have 47 active, when we look at 2018, 2019 and with the uncertainty of some of the department stores and you sit there and think about what we've done once we have gotten these department stores back. We think that there is a huge amount of redevelopment opportunity within our portfolio and as Lou said, on our invested capital we've averaged just around 9.5%. So again, it is a great use of our money.

[Floris van Dijkum:]

Great, thanks. Maybe one follow-up question. If I may?

[Louis Conforti:]

Of course.

[Floris van Dijkum:]

Just if I can get your perspective on percentage rents and how will that evolve over the next 12 to 18 months in your view?

[Mark Yale:]

I mean, all I can say there, Floris, is from a budgeting perspective is as we look at the 2017 plan, we're looking at basically flat year-over-year in overage rent. It is not a huge component of our NOI and that we're not seeing any significant changes, we're not anticipating any significant changes in that level of activity.

[Operator:]

Our next question comes from the line of Ki Bin Kim from SunTrust.

[Ki Bin Kim:]

Have you thought about maybe pushing back harder on property taxes, especially as sales kind of flatline or maybe declined in certain malls? Why not let the townships share some of that burden?

[Louis Conforti:]

Always. Yes. Ki Bin, remember I live in Chicago. If you don't contest property taxes, you know?

[Mark Yale:]

It's an ongoing process, we have resources focused on it and it is a major priority and we have ongoing appeals in play. It kind of ebbs and flows, but it's a major focus for us.

[Ki Bin Kim:]

Any more benefit than previous years to expect or is this just you guys have always been doing it?

[Mark Yale:]

We don't talk about it. It is in our numbers, we did mention we had a significant tax savings first quarter of 2016. Other than that, though, it pretty much -- the positives are offset by increases elsewhere, so they don't necessarily show. So I wouldn't say that there is a significant amount of upside in our 2017 numbers from that. It is just the ongoing process and we get wins and they are offset by increases.

[Ki Bin Kim:]

Okay and I'm not sure if I have this information correctly, but it seems like Town West Square Mall obviously is not one of these -- your term -- unencumbered properties that have a mortgage maturing. But from what I can see, maybe you guys put it into service, serviceship already way ahead of schedule? Is that correct?

[Butch Knerr:]

We did not, but it did go into special servicing and we're in conversations with the special servicer at this point. But it's cash flowing and we continue to move forward. The asset -- we have not made any decisions in terms of what our future plans will be. We've got some term left and we continue to manage the property.

[Louis Conforti:]

We're maintaining it with put options.

[Ki Bin Kim:]

Right. So is one of those put options where you would like to execute or --? Just to get a little sense of that?

[Butch Knerr:]

As I said, we have not made any decisions. We continue to operate the property and that's a bit out ahead of us at this point.

[Ki Bin Kim:]

Okay. And just to be clear on that one though, does it go into serviceship because -- special servicer -- because some kind of financial metric was triggered or is that a different --?

[Mark Yale:]

Our guess is it had to do with some anchor turnover, that's where we did have a Sears --

[Louis Conforti:]

We continue to -- there is two -- there is monetary breaches and there is nonmonetary and this was nonmonetary. Absolute and nonmonetary. Let me repeat that again, nonmonetary. Nonmonetary.

[Ki Bin Kim:]

Okay that's helpful.

[Louis Conforti:]

It's actually -- thank you for bringing that up.

[Ki Bin Kim:]

That's helpful. And just last question. How much store closure is vacancy guidance at this point?

[Louis Conforti:]

How much store closures?

[Ki Bin Kim:]

Yes.

[Mark Yale:]

As Butch mentioned, all the bankruptcies that have recently been announced have been factored in. Certainly we have anticipated in our budget what stores with significant occupancy costs and those rolls, we factor that into our guidance. I would say if there is significant additional bankruptcies that are announced, that will push us within our range. But right now based upon what we know, we're comfortable with the range of flat to 1.5% that's in our guidance.

[Louis Conforti:]

We're not exhibiting any aggressive -- if anything, we're erring on the side of conservative.

[Operator:]

[Operator Instructions]. One moment for any additional questions. We do have a follow-up from Ki Bin Kim.

[Ki Bin Kim:]

That was quick. I thought it would be back in line. Just one last question on your anchors, there's a group of anchors that I'm not too familiar with, just given where I live and where I've lived before. How would you rank the healthiness of anchors like Dillards in your portfolio, BonTon, Belk; are these long term, are they performing well or are they kind of similar, maybe they will look to close some stores in the future type of category?

[Louis Conforti:]

I don't think it's prudent for us to rank score our anchors, but I will tell you we're visiting each and every one. And Butch can add a little bit more. I would say there were some that I have just seen and I wrote a letter to one, a little handwritten note yesterday, because we were just visiting with him and his son out in Little Rock and I am not going to tell you who that is. But those folks are retailers. And that's a big difference. I'm not saying that the others aren't. But curating merchandise, merchandisers, curators, so that is how we're thinking about it. But I think it would be pretty nutty for us to give you an A through Z list of how we rank them.

[Butch Knerr:]

Ki Bin, this is Butch. What I would say is that we have got a great relationship with all of these retailers. We meet with them multiple times throughout the year. We feel very good and on the rare occasion that they are going to close a store, I think we've evidenced by what we've done over the last two and half years is that it's not necessarily a bad thing, we actually turn into a very good thing, making our centers more relevant. So and quite frankly getting the type of returns that are expected in our industry. I would say it is not necessarily a negative.

[Operator:]

Thank you. And I also a follow-up from the line of Floris Van Dijkum from Boenning.

[Floris van Dijkum:]

Quick follow-up. If I were to ask you guys how many Tier 2 malls do you expect to own in three years' time? What would you guess is the number? Would you have 0 Tier 2 malls because they would either have gone up to Tier 1 or have been sold? Or do you think you are still going to own 21 of these properties in three years' time?

[Louis Conforti:]

Let's see if we can do this statistically. So right now we have 21, take the 3 -- no, you know we don't. There's such dynamism. I think that you bring up a point with respect to how fluid we want this bucket to be. We have been, we have erred on the side of visibility and transparency and we will tell you when something becomes non-core and we will tell you when it moves up and why it moves up. I don't know. I would reckon less. No, I would say less. And probably a fair amount less. But you can understand why that is just tough for us to pinpoint that. Because there's so many idiosyncratic factors that might knock someone, knock someone -- knock an asset down or conversely move it up.

[Floris van Dijkum:]

Do you have any of the Tier 2 malls on the market at the moment?

[Louis Conforti:]

No.

[Floris van Dijkum:]

Okay, thanks.

[Louis Conforti:]

You a buyer?

[Floris van Dijkum:]

Depends on price.

[Operator:]

Thank you and that concludes our conference call for today. We thank you for your participation, you may now disconnect. Everyone have a great day.

[Louis Conforti:]

Thanks, everybody.

[Operator:]

Thank you.