Washington Prime Group Inc.
Q4 2017 Earnings Call Transcript

Published: 22 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Washington Prime Group’s Q4 2017 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Lisa Indest, Senior Vice President and Chief Accounting Officer. Ma’am, you may begin.

[Lisa Indest:]

Good morning and welcome to WPG’s fourth quarter and full year 2017 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; Paul Ajdaharian, Head of Open Air Centers; and Josh Lindimore, Head of Leasing. Now, I’ll turn the call over to Lou.

[Lou Conforti:]

Thanks, Lisa, and hey, everybody. Fourth quarter as well as 2017 in its entirety can best be described as an exercise in discipline, determination and what judo players refer to as kuzushi. Loosely translated as employing one’s own balance to exploit the instability of an opponent. This fundamental judo principle has served us well as we adhere to the basic premise of acting in anticipatory fashion, presupposing a variety of outcomes and maintaining equilibrium when faced with a fluid situation. We will never tap out. Don’t get me wrong. We’re going to have our shares of bumps and bruises, albeit these will be cost contained with a focus to further our stated objectives. To paraphrase the judo saying, learning how to fall and get up is more important than learning how to throw. Describing the retail sector as merely fluid is an understatement to say the least. It’s not overall melodramatic to describe our sector as frenetic and volatile, most importantly, it’s evolving. While there is this obvious exogenous and industry risks, these have been amplified by weak actors, both landlord and tenant, who failed to recognize this evolution and as a result, there’s this fallacious notion of a bunch of binary path outcomes such as physical space versus e-commerce, primary versus secondary assets, so on and so forth. These are just oversimplifications. Our balanced approach with respect to financial, operational and strategic actions has allowed us to continue establishing our assets as dominant secondary town centers. Our hybrid format, which captures both enclosed and open air tenancy now totals 75% of those assets historically referred to as regional malls. We’re continually improving these town centers via an expanding selection of local, regional, national goods as well as services and events. Don’t ask me if we’re a regional mall, lifestyle of shopping center company. I just couldn’t care less about this archaic classification. What I do know is our guests demand a convenient manner by which to purchase, both mainstay and specialty good as well as differentiated food, beverage, entertainment and the like. Shame on us if we fail to deliver. In this regard, it’s imperative we remain unrelenting toward diversifying tenancy, expanding our sponsorship, activating common areas, introducing new concepts and just in general, providing a more dynamic experience. Let me offer the following 2017 operating metrics as a testament to this progress. Our leasing volume totaled 4 million square feet. There was an increase in square footage of 2%, 6% in total number of transactions. And of this 4 million square feet, 47% of that total was to lifestyle tenancy, food, beverage, entertainment and kind of cool stuff. Open Air and Tier One assets exhibited 90 basis points of combined comp NOI growth of which Tier One Open Air and Tier Two were negative 60, positive 450 and negative 950 basis points, respectively. Year-end occupancy for the total portfolio was 93.1%. And Tier One and Open Air asset are to account for 89.1% of 2918 NOI of which Open Air comprises 25%. In summary, our Tier One assets exhibited relatively steady operating metrics and our Open Air same store NOI of 4.5% was I think we believe was the best in class when compared to all of the shopping center peer group. We continue to address our Tier Two exposure and we won’t hesitate to dispose of assets; we just won’t talk about it. We’ll dispose off assets when wanted or right size leverage when applicable, redeploying resultant capital into more viable assets or value-add redevelopment. As a reminder and conformation of this strategy, we have sold to third parties or gave back to lenders, 13 assets during the previous 18 months. And let me repeat, Tier Two still accounts for less than 10% of total portfolio NOI in 2018. During periods of abhorrent volatility, financial prudency is of the utmost importance as the execution of capital markets transactions become less certain. While excess leverage and shorter maturities may artificially buffer FFO, the accretive impact on higher debt when compared to equity cost of capital, lower interest expense associated with floating rate financing, this asymmetric downside risk, does not compensate for such financial engineering. As a result, during 2017, we consummated several financing activities which can illustrate our commitment to a highly visible cash flow, and Mark is going to provide the details in a bit. We’re also of the belief, strategic actions, be organic as well as external in nature such as redevelopment, which furthers our hybrid asset model and things that we’ve accomplished during 2017 include again our current redevelopment of 37 projects ranging between 1 million and 60 million bucks with an estimated return on invested capital of 10%. And that is a direct return, not including any derivative positive impact to adjacent unproductive space, the discounted payoff Southern Hills Mall, we signed a $67.5 million purchase and sale agreement last year and which we closed on the first tranche in January of 2018, of 41 restaurant outparcels to Four Corners Property Trust, which equated to a mid-6 cap rate. And pursuant to a 1031 exchange, and again, I want to make let people know that this was purely 1031 tax free exchange, starter. We signed an agreement to purchase Southgate Mall for 58.5 million -- $58 million, which equates to a 10.4% capitalization rate. Southgate Mall is situated in Missoula, Montana, and it really exemplifies our dominant secondary town center focus as the asset captures a catchment of over 130 miles; it’s within close proximity to the University of Montana, has a diverse tenancy mix including a newly built Lucky’s and a nine-screen dine-in AMC Theater, which I think might have just opened the last week, I was out there about three weeks ago. Southgate Mall also offers a long-term growth proposition via future development. As it relates to department stores, we have addressed the adaptive reuse. Every single one of our vacated anchor spaces, save for three, two of which are still occupied. In fact, we’ve completed, commenced and approved 15 department store repositionings ranging between 5 million and 20 million bucks. Most importantly, such projects reflect an average sales volume increase of between two and three times. Furthering a little bit on department stores, we’ve reduced exposure by -- department store exposure by 26% including reducing Sears and Bon-Ton by 33% and 26%, respectively. As we all know, in January this year, Bon-Ton announced the closing of 42 stores, which were going to occur I believe in the first, maybe second quarter of 2018. Not one was situated within WPG asset. Previously and admittedly, they had announced Elder Beerman would close at our Grand Central Mall in March of ‘18. And guess what, we’ve already replaced it with a 20,000 square foot H&M, the first such location in West Virginia. We continue to activate common area via such initiatives as local craft breweries, we have two currently operating, another six under construction, our proprietary e-commerce platform Tangible as well as a host of other dynamics offerings. This dynamism also occurs by delivering installation events and activities, which allow our tenants to showcase highlighted good or service. This is in accordance with our disavowal. A tenant should be confined to four walls, which they demarcate their space. This isn’t true. We need to use every single square foot of common area and create just more kinetic, as I have mentioned, more movement, more ability to highlight things. We’re also redefining the general manager. And a shout out to my -- our GMs, if they’re out there, because they’re the lifeblood of our company. Those possessing the attributes which typify the role of goodwill ambassador will be enfranchised and rewarded accordingly. No other colleague has greater interaction with tenants, guests, and sponsors or better understands the local and regional characteristics of the specific demographic. They also should be front and center to react quickly to our guests’ requests, and this will be implemented by moving them to common area locations from their previous way out of the way back offices. I would like to address the realities inherent when diversifying tenancy. Incumbent with this objective is to decide which tenants we want as our partners. Reducing over-concentrated retail is a priority. And quite frankly, this means we have to exercise judiciousness when a lackluster tenant asks for rental concession. Without a business plan which clearly articulates a commitment to improved merchandising and allocates capital to our stores, we are less inclined to accommodate such a request. And kudos to Mark and Lisa, but the aforementioned can only be accomplished if we’re able to negotiate from a position of strength. Quite simply, this requires financial wherewithal, a rock solid balance sheet. The transactions we’ve consummated over the previous year, while admittedly dilutive, allow us to be deliberate and proactive as opposed to kneejerk and reactive when it comes to decision making. So, break it down, the $0.12 of dilution was attributable to our senior notes offering, the O’Connor JV, and the sale of six non-core assets. As the result was an overall reduction in indebtedness and debt of $400 million, I think a little over $400, it was absolutely unequivocally the right decision. Redefining retail is no small path. While I would like nothing more than to have sequential, robust growth, our steadfast focus is to provide shareholders with cash flow stability, characterized by minimal variance as we optimize our assets. We’re delivering on this promise and admittedly it isn’t easy, in spite of continued volatility and we welcome the much needed purging within the retail space. We’ve introduced 2018 guidance for comparable core NOI ranging between 0% and negative 1%, but this guidance includes continued stable performance from our Open Air and Tier One assets. Final note. We’re increasingly becoming recognized as a logical aggregator as well as the best in class operator, and we’ve got a lot more due to prove ourselves. But, when external opportunities arise, we will act accordingly and rest assured, prudently. Plain and simple, we’re working our behinds off for our shareholders and we refuse to tolerate the status quo. Our emphasis on redefining dominant secondary assets is resolute and as always we’ll continue to grind it out. Mark, you’re up.

[Mark Yale:]

Thanks, Lou. I want to start by highlighting the tremendous progress made by the Company on the balance sheet over the last year. As Lou mentioned, through the closing of the second O’Conner JV, the discounted payoff to Masson southern Hills, the transition of Valle Vista back to the servicer, and the disposition of five other non-core assets, including Colonial Park during the fourth quarter of 2017, we were able to reduce overall debt level by approximately $400 million or 10% from the end of 2016. By adding over $25 million of NOI to the unencumbered pool driven by Mesa, Southern Hills, Square, WestShore Plaza and The Outlet Collection, Seattle, this pool of high-quality properties now represents nearly 60% of our total NOI. And most importantly, through the $750 million unsecured bond issuance in August and the recent credit facility recast, we were able to extend the weighted average maturity of our unsecured debt on nearly two years from the end of 2016. Additionally, in terms of mortgage debt maturities, we only have approximately $150 million of loans maturing through the next two years, about $55 million related to five Open Air centers with the debt yield of over 30%, giving us ample flexibility to pay off or refinance these mortgages. The remaining maturities relate solely to the $94 million loan on a Rushmore property. When considering the 8% debt yield on the asset, it certainly could represent a nice opportunity for us to delever going forward. In terms of the credit facility recast, we closed on restated facility and related term loan last month. We ended up rolling over $1 billion segregated between a $650 million revolver and a $350 million term loan. There was no change in current pricing and we now have term through the end of 2022 on $1 billion facility. Between cash on hand including our pro rata share of JVs and capacity on our recasted credit facility, we’ve nearly $600 million of current available liquidity. In terms of further department store redevelopment capital spend, we have forecasted what the potential needs would be if required to address all the Sears and Bon-Ton spaces in our portfolio. Assuming, Seritage takes care of their 11 locations and we bring in partners to assist named mixed use components, we’re estimating our share of capital investment to be approximately $300 million to transition these locations within our Tier One and Open Air portfolios. With a three to five-year investment time horizon, we’re comfortable that we’ll have a necessary capital to address these opportunities. While we remain realistic with respect to the macro challenges facing our sector, we believe we have a sound balance sheet that will enable us to not only address the inherent risks but opportunities that might come our way in the near future. Now, let me turn to our quarterly financial results. Our FFO for the fourth quarter was $0.44 per diluted share on an adjusted basis, falling within our guidance range going into the period. We did see NOI performance slightly below our expectations for the quarter, driven primarily by continued bankruptcy activity including Charming Charlies and Bon-Ton, and continued downward adjustments to estimated tax recoveries for the year. Additionally, we’ve provided our initial outlook for fiscal year 2018, which included an FFO guidance range of a $1.48 to $1.56 per diluted share. This guidance excludes the impact of any potential net gains on extinguishment of debt, it does assume both the acquisition of Southgate Mall in Missoula and the closing of the second tranche of the Four Corners outparcel disposition during the second quarter of the year. Additionally, corporate overhead and general and administrative expenses are expected to be in the range of $56 million to $60 million. The 2018 guidance does indicate a decrease in FFO over the prior year, which primarily relates to the full year impact of $0.07 associated with the $750 million August 2017 unsecured bond offering as well as the full year dilution of $0.05 from the O’Connor joint venture and the disposition of six non-core assets during fiscal year 2017. As previously discussed, these strategic transactions significantly enhance the Company’s overall balance sheet position. Additionally, there’s an anticipated $0.02 drop from the decrease in year-over-year NOI. We are anticipating these items will be partially offset by an increase in outparcel sales income, net accretion from the Southgate acquisition and the full year positive impact from the Mesa and Southern Hills discounted debt payoffs. In terms of comp NOI growth for our core portfolio, we are expecting a range of flat to down 1%. This includes stable performance from our community center in Tier One enclosed portfolio offset by negative growth of approximately 7.5% from our Tier Two properties. It does include an accommodation for unbudgeted bankruptcy activity and store closings of $5 million to $8 million including the possible ranges of outcomes with respect to the Bon-Ton bankruptcy. Additionally, we’re also introducing FFO guidance for the first quarter 2018 in the range of $0.37 to $0.41 per diluted share. Consistent with our stated practice, we did complete our annual reassessment of the property tiering within our portfolio. We saw four properties move up to Tier One and two dropped down to Tier Two. We also identified three highly leveraged properties as non-core. Accordingly, our Tier One and Open Air portfolio now make up 90% of our 2018 core NOI. With that, we’ll now open the call up for any questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is open.

[Caitlin Burrows:]

Hi. I guess, good afternoon, team. I guess, just as Mark, you were finishing at the end that you were talking about some of the differences and how 4Q ended up versus your prior expectations and how the bankruptcies impacted that. I guess, I’m wondering when you look out to 2018, what are you seeing now that gives you confidence that 2018 will be an improvement versus 4Q itself kind of surprise to the down side?

[Mark Yale:]

Caitlin, and nice to talk to you. First of all, just looking at what had transpired last year at this time versus where we are this year, certainly, just not the same level of bankruptcy, we look at where our watch list is right now. We don’t see the same risk. And probably, Josh and Paul can step in. But, our conversations with retailers after the holiday season by and large are much more constructive than they were last year, the year before in terms of how the holiday season played out.

[Caitlin Burrows:]

Okay, great. And then, I was just wondering on the Southgate Mall acquisition, I know, Lou, you mentioned it was part of a 1031 exchange related to the Four Corners transaction. If there is any other detail you could give on how that came about and maybe some of the reasons for the seller potentially wanting to sell it, or kind of why it works for you and maybe not the previous owner?

[Lou Conforti:]

Well obviously -- well, it’s a private seller, and obviously we’re all very respectful of disclosing anything. But, it’s an asset that to check the boxes pursuant to the dominant position, to potential upside, and because we’re I guess, ubiquitous throughout the U.S. and people -- and there is -- we just came across this transaction, which we really thought is quite extraordinary as well as having a new AMC in a Lucky’s super market, which, I don’t if you guys are familiar with Lucky’s, but they’re just a top notch operator, it just came to pass, and the family was happy to deal with us. And I think it was a quite fair price. And really that’s all we can say.

[Mark Yale:]

Yes. But, I do want to just emphasize, the 1031 nature of this. Four Corners transaction was a great opportunity for us to place some arbitrage with some outparcel restaurants on the ring road at a mid six type pricing. And we will tell you, our basis in those parcels was very small. So, we would have a significant taxable gain we need to address. So, our plan all along was to be opportunistic to reallocate those proceeds through 1031. And we think we did a great job with the arbitrage between the inherent cap rate on those outparcels and moving forward with a dominant asset and a secondary market as 10 plus cap rate. I think what’s exciting is that Lucky’s is in the former Sears box. So, we’re not going in there with the need to develop Sears. I mean, the owner has done a great job of already really starting that process. So, we think it’s certainly a great opportunity and a really nice transaction for us.

[Caitlin Burrows:]

Thanks for that. I actually have been to Lucky’s and it was that one of your properties. So, I will get back in the queue.

[Mark Yale:]

Thanks.

[Operator:]

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

[Ki Bin Kim:]

Thanks. Can you talk about the cap rate again? Is that a NOI in place cap rate, is it cash, how you account for any potential CapEx reserves, things that?

[Mark Yale:]

It’s Mark. I mean, that’s our underwritten NOI, so, in-place. So, for example, Lucky’s that’s just opening, AMC, I mean, we would annualize and include the NOI. But other than that, I mean it’s really in-place NOI and we think we’ve some really nice opportunity to drive that yield ultimately over the next two, three, four years.

[Ki Bin Kim:]

I mean, you have JCPenney there and some assets -- looks nice in H&M and AMC, but you could definitely see some more fall out. I was just curious how that figure into your 10% cap rate?

[Lou Conforti:]

When you underwrite per ARGUS model, you think about renewals, you think about downtime, you think about larger events, and those are all calculated. And when we buy -- if us purchasing Southgate, we didn’t see a prospective -- asymmetric upside in purchasing that asset, if -- and I am not saying this is going to happen, but since you mentioned it, if JCPenney vacates, to me that’s an opportunity. And I am not -- I want to be very careful that indeed we’re not -- there’s no conjecture on our part, but that would be an opportunity. This is the dominant asset within a very robust and superb marketplace from a cash flow standpoint.

[Ki Bin Kim:]

And in your press release, you guys mentioned that you might use some portion of OP units. Can you give a little more color?

[Lou Conforti:]

If we do it’s going to be teeny-tiny. And obviously, we understand deleterious impact of giving our -- giving -- obviously, we have a very different view of share price to net asset value. But, rounding error, if indeed it does come to fruition. But, we want to offer -- and again, I want that in the future. Our OP unit as currency is going to be very important when we equilibrate -- when we kind of get to a more, let’s call it stable share price that recognizes the hard work Mark and Lisa, Paul and Josh and everybody else has done. But it’s a non-starter.

[Ki Bin Kim:]

And in terms of your tenant negotiations, could you just provide some details behind how things are trending? And I think, you confirmed this already last time, but your lease spread disclosures, that fully includes all modifications, correct?

[Lisa Indest:]

Yes, it includes all the modifications if they have any kind of extension at all of the terms. Yes. When you do a package deal that involves rent concessions and modifications, those are included in our numbers, Ki Bin.

[Ki Bin Kim:]

And how are the general tenant discussions going, currently?

[Josh Lindimore:]

It’s Josh. I mean I would say, look, it’s cautiously optimistic. We’ve got - to put it into perspective, we’ve got about 1.7 million square feet worth of renewals; we’ve got a 1 million square feet already done, two months into 2018 with predominately the remaining piece at the back half of 2018. So, I would say cautiously optimistic and much better than -- we’re on a better path than we were in 2017, at this time last year.

[Paul Ajdaharian:]

This is Paul. I was going to just add to what Josh was saying. Retailers are optimistic. They are looking to make deals. We’re not seeing a whole lot of pushback on retailers saying no, I can’t make deals, I can’t do this or whatever. They are hungry for space, and we’re accommodating.

[Ki Bin Kim:]

And Lou, one of more frequent questions I get is -- and there is no gentle way to say this, is that -- why is WPG going to be any different than a CBL in terms of -- you probably know. I mean, the last couple of quarters they put up some pretty poor numbers and kind of guidance. And I know your portfolio is inherently different, right, you have Open Air and some good assets. But, how would you answer that question? Why is WPG inherently different than CBL, and not likely to post, what I call it, a CBL moment?

[Lou Conforti:]

You’ve answered -- you bullet pointed two of the answers already. And listen, I’m as competitive as son of a [obscene expression] as anybody on this planet, albeit, I don’t think it does any good. I quite frankly think that there should be more, kind of the -- there should be a better understanding, and I can’t stand the term landlord, it kind of is the baronial and feudal. But, we need to better corporation between our landlords and our tenants. I hope that we are being the proactive folks that are doing it and I hope everybody else is in our subsector is following too. I’m not going to ever take overt swipes at anybody.

[Operator:]

And our next question comes from the line of Floris van Dijkum from Boenning. Your line is open.

[Floris van Dijkum:]

Thank you. good afternoon, guys. Thank you for the disclosure between the health of your Tier One and Tier Two, your increased disclosure on that, that’s obviously very good for investors to get a sense of. But, I just wanted to -- again, the acquisition raises capital allocation issues. I understand, it’s a 1031 situation. Maybe, could you give us how much of taxes were you trying to shield? And does this sort of take care of that? And also, as there could be further potential handbacks and gains to be harvested from your Tier Two assets and your non-core, could we see something like this again or is it sort of a one-off one and done situation?

[Lou Conforti:]

Thank you. Let me address. And every time we can increase visibility via -- we want to be the most visible and most transparent. So, I appreciate that. I hope that we see another 400 or 500 basis-point opportunity that manifests itself via cash less -- a cash less transaction and upgrades our portfolio. And I’m only being half kidding with respect to that comment. We’ve approached upgrading -- and I actually had a section written, I deleted it, very differently from other folks. Upgrading is organic. And I think I hinted that this is organic. And to the extent that there’s an arbitrage and then arbitrage requires us to further our charter with dominant secondary and we find something interesting, this is what you want us to do. So, I mean -- so, I can deconstruct your question, as to will we do more of it? Perhaps. You guys would be first to know. And will there be an intrinsic delta -- arbitrage between of what we’re disposing? Better be. And I hope that answers the question.

[Floris van Dijkum:]

Let me ask you -- partly, I guess. But let me ask you a related question. We just had -- maybe you haven’t been following this closely, but a hotel company just insinuated that it’s going to be cutting its dividend because more than 50% of its dividend was taxable income. And obviously, as earnings go down, the -- taxable will go down, going forward as well. How do you see that -- what kinds of implications are there for the WPG dividend in regards to taxable income?

[Mark Yale:]

Well, I think the best way to state that and we said it upfront, I mean the whole plan along was we were going to generate a significant gain from this transaction, on a very little basis, and it was important for us to execute a 1031, and that’s why we did it, that probably gives you some indication in terms of kind of where we are with our taxable income overall.

[Floris van Dijkum:]

And again, just reiterating that you feel that your dividend is -- it is plenty coverage, is that correct?

[Lou Conforti:]

We disclaim, and I am getting the stares right now from everybody. Our charter is to provide a sacrosanct stream of cash flows to our investors. And what Mark and Lisa and Charlie Adams and the entire financial team has done, just has buttressed our financial wherewithal. And you can take it from there.

[Operator:]

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

[Caitlin Burrows:]

I just had a more maybe specific modeling question. When you think about the redevelopments you guys are doing, it seems like a number of them are expected to be completed in 2018. And then, Great Lakes Mall is going to be completed in 4Q, Westminster Mall in 1Q, but there’s a few others Markland, Northwoods, Classen Curve, Pearlridge that just showed 2018. So, I was wondering if you could any detail on what is assumed in your guidance in terms of timing and incremental NOI contributions from those other projects.

[Mark Yale:]

I think, as we look at those redevelopments that will come in line, in 2018 as well as the full year impact of those, that came onboard in 2017. We’re expecting about a 120 basis-point lift, incremental lift from our redevelopment contribution. So, that’s factored in the guidance. Obviously, we have the bankruptcies which net against that. But that incremental lift is what we have included in our -- and is inherent in our comp NOI guidance.

[Caitlin Burrows:]

And then, when just you think over the course of the cadence of the quarters, are the ones that are just showing, just you think like Northwoods Mall as an example, when it just shows 2018, are you expecting that to open in different like phases or is it just unclear whether…

[Lou Conforti:]

it is bit more complicated. So, we have probably the key tenant opening within the next couple of months, RoomPlace, but then we have some other tenancy that we’ll probably won’t see a whole lot of impact in ‘18, it will definitely be weighted towards the fourth quarter.

[Operator:]

Our next question comes from line of Ki Bin Kim from SunTrust. Your line is open.

[Ki Bin Kim:]

Can you talk a little about your CapEx spending? I think for 2017, you’re projecting something like $70 million, and you ended up higher, closer to 90. So, can you talk a little bit about where the variance came from? And in 2018, you’re expecting a little bit more, and what gives you confidence that it doesn’t go little bit higher than that?

[Mark Yale:]

Ki Bin, it’s Mark. We’re anticipating midpoint of our guidance about $75 million to spend. That is a bit below where we were in 2017. But I’d also have you look back at where we were in ‘16, where the spend was, even a larger portfolio at that point, we disposed of a lot of assets, since that point. So we feel like we’re going to moderate back closer to where our trends were in ‘16 and obviously just timing of when things happen and lease-up and CapEx. But we think all-in-all, year-after-year that $75 million for this where the size of our portfolio is, is the needed spend to keep things moving along here.

[Ki Bin Kim:]

Okay. And when you guys say, Tier Two is going to be 10% of your NOI, are you guys basically assuming that all of the development projects are cash flowing, and you get back a few more assets, is that how you get your 10% number?

[Lou Conforti:]

I don’t think that is…

[Mark Yale:]

It’s on our budget for 2018.

[Lou Conforti:]

Yes, exactly. So, whatever is budgeted from a net operating income standpoint, which quite frankly, I don’t know what the incremental NOI from development it is…

[Mark Yale:]

We talked about what the increment is. I should point out though that does exclude the three what we’re over calling, overleveraged none core assets that we’ve identified in our supplemental. So, it does exclude the impact. So, when you exclude those three, that’s where you get the 90-10 split.

[Lisa Indest:]

And the other thing, Ki Bin is the fact that we have reclassified, as we discussed in prepared remarks, assets. So, there were more assets that stabilized and moved up to Tier One, which is driving that percentage up. We did move two down to Tier Two, but certainly the larger NOI moved up at the reclassification for 2018.

[Lou Conforti:]

Yes. And that fluidity between tiers and we set up the model, so really we can’t -- God forbid that we would ever, but there is no solving for it. It’s multivariate; it takes into account several factors. And the reality is that would we have -- it sounds silly, but would we have not liked those Tier Two assets, those two assets to fall, yes, of course. But the model stays. And I think that triggered it, quite frankly that you guys should ultimately want.

[Ki Bin Kim:]

And are there any early results from some malls where you’re tried to add to the common space, where you add a tangible or where you try to make it more kinetic, anything tangible so far, I mean on those deals?

[Lou Conforti:]

I mean, it’s all anecdotal. But I will tell you, I guess, photos from my -- from our general managers whether it be a local craft brewer, Shelby’s, the Tangible or just more focused events and activities that are in collaboration with existing tenants and sponsors, we are just creating more traffic which iteratively creates more sales per square foot. And it’s just incumbent upon us to continue to provide what people want. So, have we seen any marked increase? No. But, Rome was -- Jefferson Valley wasn’t built in a day, I think is what.

[Paul Ajdaharian:]

I think it’s also one of those things where activity breeds activity. Right? I mean, you see something happening as a retailer or as a customer where you want to be part of it and it just brings on more action and you build upon it.

[Lou Conforti:]

We’re doing something so exciting with an entertainment company, a music company. And I can tell you what if we don’t, what if we are reactive and we don’t do these things? As I stated, our dominant secondary asset focus -- we’re not doing this because there wasn’t a primary portfolio for us to have, we’re doing this because we believe that the incongruity, it lies within this subsector within this space. And every time we do something incrementally, we have as aspirant demographic constituencies as anybody else, and we need to modulate price points obviously, but we’ve done some cost of living adjustments for you folks if you’ll remember. And it evidences itself. But just ask yourself, what if we don’t do this, what if the industry doesn’t do this, what if Mark and Lisa wouldn’t have done what they’ve done from financial wherewithal standpoint, so that we can make difficult decisions? This is a much operation -- this is not a rent collecting business any longer, and don’t let anybody tell you otherwise.

[Operator:]

And our next question comes from the line of Floris van Dijkum from Boenning. Your line is now open.

[Floris van Dijkum:]

A quick -- two quick follow-ups actually. Could you maybe outline your plans for any capital investments, if so, for your Tier Two assets?

[Lou Conforti:]

Yes. Minimal, and the whole idea is that there’s a very distinct and separate -- separate and distinct threshold with respect to the returns on invested capital. The marginal unit of capital spend, if any, has to warrant a much -- or has to exhibit a much higher return.

[Mark Yale:]

And historically, if you look at over the last three years, I mean, it’s been about a 90 to 10 split in terms of where we’ve allocated that redevelopment spend with 90 going to our Tier One Open Air. And some of that actually is Tier Two investment that now we’re actually moving some of those properties up to Tier One, so.

[Floris van Dijkum:]

But would that also it being how your portfolio would be 90-10 in ‘18, does that mean it’s a one-for-one or is it 90 -- is it also -- I mean, it doesn’t seem like it’s skewed as much as maybe as it should, I am just -- or is that not the right way to think about that?

[Lou Conforti:]

No, I think it’s a right way. I don’t know if it’s 5% or 6%, I mean, we can get it, what is our -- we have to look at our developments plan, it’s small. I don’t even think...

[Lisa Indest:]

If we do the redevelopment in the Tier Two, it has the higher yield but it has to achieve for us, but there have been some [Multiple Speakers]

[Lou Conforti:]

Indian Mound, I don’t think we lost as much as we -- Josh, kind of booted out as an operator and we evidenced a negative 18 -- I’m sorry 28% same store NOI. We immediately replaced it with an ANC, which we had 20 -- and then we then exported that when I was CFO, we delivered a 25% to 26% same store NOI increase in that asset. So there is an instance where it was a glaringly right thing to do. But it is becoming less and less and less. And I promise that we would -- it’s now 10%, we haven’t talked the talk, we walked it with respect to getting to one something doesn’t -- it doesn’t warrant a marginal unit of capital spend, we get rid of it, and we have been more proactive in that regard than anybody else.

[Floris van Dijkum:]

One last question for me. If I look at Southgate, I don’t have the exact specs, but I think I think it does something around $400 a square foot, which is sort of in line with the portfolio average for WPG. Should investors plug that cap rate into value WPG as well?

[Lou Conforti:]

We’re going to do what the simple math, the investors should do whatever they want to do to triangulate our value. But think about what we incrementally have coming on and we have a lot of these, we have an AMC, there is a sprucing, nothing, there is no major redevelopment, there is just us getting our hands on that asset and energizing it. What’s your question? Should someone assign [ph] a cap rate on our asset, let’s do the math divided by what shares outstanding we have…

[Mark Yale:]

All I can say is I mean, our share price is miss-priced, I think assets are miss-priced. And we’ve taken advantage of it.

[Floris van Dijkum:]

Right. I understand. And again, it’s -- what some of the more bearish will say, the number one is why you’re spending money but number two also this sort of presses your portfolio and maybe people’s NAV estimates which are obviously lot higher than where the share price is, maybe they need to come down, if this is the right cap rate for your quality…

[Lou Conforti:]

That’s just kind of an intellectually an appropriate way to think about it. That assumes that there is no relationship between public and private instrument. And I think Mark just said that there is some kind of colinearity between our share price and the price of an asset. We wouldn’t have undertaken if there wasn’t, we think there is interesting upside in addition. And the reality is, about what got us there with the 400, 500 basis points arbitrage by selling credit tenant leased assets, and we deployed in something which we think that provides us some very good risk adjusted return.

[Mark Yale:]

So, we just can’t get caught up in that. We look at the discounted payoffs on Mesa and Southern Hills; and yes, it was a 13 cap. I mean, by that logic we should have moved forward but because somehow that was going to determine what the price of our portfolio is. We don’t look at that way, that was just a tremendous opportunity for us to arbitrage the significant disconnect in long-term values of our properties and we’re going to continue to do that.

[Lou Conforti:]

Yes. I mean, whenever there is a -- we can keep going on -- this is what you want us to do. And maybe we’re just better at it than lots of our peers.

[Operator:]

[Operator Instructions] And that ends our Q&A session. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program and you may all disconnect. Everyone, have a great day.