Washington Prime Group Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to WPG’s 3Q 2015 Earnings 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, today’s conference call is being recorded. I would now like to turn the conference over to Lisa Indest, SVP and Chief Accounting Officer. Please go ahead.

[Melissa Indest:]

Good morning, and welcome to the third quarterly earnings call for WP Glimcher. Yesterday, we issued our third quarter 2015 release and supplemental information packet, which are available in our Investor Relations section of our website at wpglimcher.com. Before we begin, a reminder that certain statements made during this conference call may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. For a more detailed description of the risks and uncertainties that may cause future events to differ from the results discussed in the forward-looking statements, please refer to our 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 release and our SEC filings. Members of management with us today are Michael Glimcher, CEO; Butch Knerr, COO; and Mark Yale, CFO. Now, I’d like to turn the call over to Michael.

[Michael Glimcher:]

Thank you. Thank you everyone for joining us today as well. As Lisa mentioned, this is our third earnings call as WP Glimcher. Even though you are familiar with many of us, we are a new company. In our short history, we have built an experienced team from some of the best in the industry and we are well on our way to implementing innovative systems to support a best-in-class management platform. In the midst of building our team and platform, we also delivered improved operating results while maintaining a stated focus within our four walls. This strong foundation positions us well to drive sustainable and meaningful growth. Coming from a position of experience, the team is energized and steadfast as we work together to build upon this foundation and deliver future results. Our goal from a leasing approach is to provide the best experience at our centers. The key is having the right mix of things to buy along with things to do. When providing the right mix of retail, food, entertainment and services, we know we can significantly improve the guest experience resulting in longer and importantly more frequent visits. In addition, we must provide the right environment for our guests and we are doing this through our redevelopment and re-tenanting efforts. We will execute across our portfolio using the same approach. It’s simply the uses and level of finish that changes from asset-to-asset as you move through our portfolio. Our focus continues to primarily reside inside our four walls and our goals are clear

[Butch Knerr:]

Thank you, and good morning. As Michael mentioned, one of our goals is to create a better experience for our guests. We accomplish this by bringing preferred retail, restaurants, entertainment uses to our centers and by providing the right environment to further enhance those experiences. I’ll share a few of our early successes. At the mall at Fairfield Commons in Dayton, Ohio, we’re excited to announce the Chuy’s Tex-Mex restaurant will open this month. And construction is underway for two additional restaurants BJ’s, Brewhouse and Bravo Italiana, both which are expected to open in the first quarter of next year. In October, the executive team was at Rockaway Commons in Rockaway, New Jersey, for the opening of a 38,000 square foot Nordstrom Rack and an 18,000 square foot DSW. These are additions to an already strong mix of retailers at community center, including new stores with Buffalo Wild Wings, Kirkland’s and Torrid, bringing the center’s occupancy to over 97%. We completed the renovation on schedule and with the higher than expected yield of 15%. A 40,000 square foot Restoration Hardware’s under construction at Town Center Plaza in Leawood, Kansas. This store is expected to open in the second half of 2016, bringing another destination retailer to an already powerful home furnishing lineup, which includes Mitchell Gold and Bob Williams, Pottery Barn, Arhaus and Crate & Barrel. At Fairfield Town Center located in the fast growing Northwest suburbs of Houston and adjacent to the premium outlets, a 71,000 square foot Academy Sports will open tomorrow joining the existing H-E-B grocery store. In addition, two phase expansion is expected to start before the end of the year, which will add approximately 54,000 square foot and it’s expected to be completed in 2016. Leasing has been strong with over 90% of the expansion already committed. Subsequent phases are expected to open in 2017. In respect to some of our smaller scale projects underway, we continue to make solid progress. At Lakeland Plaza in Austin, Texas, Total Wine & More and Dress Barn open in September, adding 37,000 square feet. These additions bring the community center’s occupancy to over 97%. Looking beyond the quarter at Bloomingdale Court in Chicago, a 10,000 square foot expansion of the center is underway. Pier 1 Imports has started construction and is on schedule to open early next year. I’m excited to announce additional small scale projects in our community center portfolio, all of which are expected to be completed next year. This includes a multitenant building expansion at Wolf Ranch located in Austin, Texas, A multitenant building at the Plaza at Buckland Hills located in Manchester, Connecticut, and the renovation at St. Charles Town Plaza in the Washington DC area. These three projects have expected yields of 10% or higher. Other previously announced projects remain on track. Year-to-data we have spent $71 million on redevelopment projects and we continue to expect an annual spend of between $150 million and $200 million over the next few years. We are focused on projects that enhance the quality of our assets, increased traffic in sales productivity and drive NOI growth in cash flow across our portfolio. As Michael said, in addition to creating the right environment to re-tenanting redevelopment, we know that providing the right mix of retail, food, entertainment and services will further enhance our guest experience, and we’re making good progress. In the quarter, we open 79 new stores, nearly 300,000 square feet across our portfolio. In addition to the tenant that Michael highlighted earlier, we are pleased to have the following retailers open during the quarter. Madewell at Polaris Fashion Place, Athleta at Town Center Plaza, H&M at Boynton Beach, DSW at The Mall at Johnson City, and three Yankee Candle Stores at Lima Mall, Ashland Town Center and Southern Hills Mall. Also in the third quarter, we executed new deals with Planet Fitness at Rushmore Mall in Rapid City, South Dakota and Great Lakes Mall in Cleveland, Ohio. We are excited about the continued strength of food deals. We had 18 restaurants opened in this quarter including, Corner Bakery Cafe at Clay Terrace, MOD Pizza at Bloomingdale Court, and Moe’s Southwest Grill at Dekalb Plaza. In addition, we executed 23 new food deals in the quarter including Trader Joe’s at Nichols Hills Plaza, Zoës Kitchen at Fairfield Town Center and the Mall of Georgia Crossing, Five Guys Burgers and Fries at both Wolf Ranch and Plaza at Buckland Hills. To put our progress into perspective, lease assigned in our mall portfolio were up 36% in the third quarter compared to a year ago. And we opened 22% more in line square footage across our core portfolio in the third quarter. In addition, we had approximately 489,000 square feet of lease assigned but not opened for non-anchored spaces at the end of the quarter, which represents approximately $14 million in annual revenue that will open in the near future. Re-leasing spreads in our core portfolio were positive on a trailing 12-month basis, primarily driven by the continued strength of our community centers, which now have positive spreads of 14.7%. The generally flat spreads in our core mall portfolio were not surprising, as we are measuring near-term success by first improving our occupancy. As we reach higher occupancy over time, we will aggressively focus on driving rent growth. Looking ahead, our leasing, development and propping management teams are executing within our four walls to drive continued progress on our key initiatives. With that, I will turn the call over to Mark.

[Mark Yale:]

Thanks, Butch. Let’s turn to the balance sheet where we continue to take steps to improve our capital structure and liquidity. With our attention shifting towards raising longer tenured debt capital to address the significant concentration of debt maturities we face in fiscal years 2019 and 2020, we’re pleased to announce that the company has received in excess of $320 million of non-binding commitments in support of a new 7-year unsecured term loan. Based upon our current debt levels, pricing will be set initially at LIBOR plus 180 basis points. We plan to use the net proceeds from the term loan to pay down the current outstanding balance on our revolver. We also plan to fix the interest rate on the new term loan with the swap, resulting in an estimated effective interest rate of well under 4%. With the recent volatility in the capital markets, this represents very strategic capital for the company, as it’s attractively priced, extends our debt maturity profile and provides us with the necessary liquidity cushion to be patient on the bond execution front. In terms of the remaining 2015 debt maturities, we paid off the mortgages on Clay Terrace located in Indianapolis and Bloomingdale Court located in the Chicago area during the third quarter, adding to an already high-quality unencumbered pool, which as of today represents over 50% of our NOI and square footage of the total portfolio. Additionally, on October 1, we exercised the first of two options to extend the maturity date by one year for the mortgage loan on Westshore Plaza in Tampa, Florida. I’m going to update you on the progress regarding out over-levered assets with upcoming debt maturities. We continue discussions with the special servicer regarding the Merritt Square Mall in Florida. This non-recourse debt matured in September. And while we’re currently in default, we’re working towards finalizing our plans before the end of the year. Additionally, with respect to the January maturity on River Valley Mall in Lancaster, Ohio, we have recently commenced discussions with the special servicer regarding the impending maturity. During the third quarter, we recorded $9.9 million non-cash impairment charge on Chesapeake Square Mall located in Virginia Beach. We have commenced discussions with the special servicer on the $63 million nonrecourse mortgage encumbering Chesapeake Square, which is scheduled to mature in early 2017. The good news is with the three loans all having debt yields in the single digits, if we proceed with an exit of these malls, it will allow us to improve the company’s overall debt leverage. With regards to our financial flexibility, at the end of the quarter, we had approximately $430 million of liquidity, including $120 million of cash and short-term deposits. This provides us with the sufficient capacity to support our operational and strategic goals, even before considering the proceeds from the 7-year term loan we expect to close next month. Now, let me turn to our quarterly financial results. Our adjusted FFO for the third quarter was $0.46 per diluted share, ahead of our guidance range going into the period. Positive variances and NOI, lease termination income and fee income throughout the upside to our original guidance. The 5% year-over-year increase in AFFO, which excludes cost related to the merger, was primarily attributed to the EBITDA contributions from the Glimcher legacy properties, partially offset by higher G&A and interest expense. As previously mentioned, while operating results were better than our forecast going into the quarter, we are still feeling the burden of retail bankruptcies in terms of our flat quarterly NOI growth in our core malls. Bankruptcies negatively impact the comp NOI in our core portfolio by approximately 190 basis points during the quarter and we anticipate a negative impact of approximately 160 basis points for the full year. Based on the strong third quarter financial results and our current outlook and expectations, we are raising previously issued guidance for full year adjusted FFO to a range of $1.84 to $1.88 per diluted share from a prior range of $1.80 to $1.86. Key guidance assumptions for the full year did not materially change and we continue to expect comp NOI growth in our core portfolio of 0% to 1%. Our adjusted FFO guidance range for the fourth quarter is $0.43 to $0.47 per diluted share. We expect flat comp NOI in the fourth quarter compared to the year as growth will be pressured by one-time real estate tax savings realized in the mall portfolio during the fourth quarter of 2014. Before I turn the call back to Michael for some concluding remarks, I want to provide a few comments on the recent credit rating changes. In October S&P and Moody’s lowered our rating to triple-B-minus and Baa3 respectively with a stable outlook. We do not view these changes as having any significant impact to our broad access to our multiple capital sources, and remain committed to maintaining and improving our investment grade balance sheet. We also believe that having resolution on the previous negative outlook will prove helpful when we decide to approach the bond markets again. The rating changes do impact the pricing on the revolver and the outstanding term loans with increases in the applicable margins of 20 basis points and 30 basis points respectively. This translates to a prospective increase in borrowing costs of approximately $4 million per year. I’d also like to call out a few additions to our quarterly supplemental information packet. We have provided additional balance sheet details, additional debt metrics, key guidance assumptions and additional pro-rata metrics related to CapEx. Consistent with our goal to being increasingly transparent, we hope this additional disclosure is helpful. Michael?

[Michael Glimcher:]

Thank you, Mark. Before we open up the line for questions, I’d like to thank our entire team of associates for their continued hard work and dedication to this new organization. While focused on the integration and building a best-in-class operating platform for the new company, we are delivering improved results. We know we can produce even stronger results by continuing to focus on our stated goals, driving growth across the current portfolio, maintaining and improving our investment grade balance sheet, and rolling out our fully integrated management platform. Now, at this time, we would like to open up our call for any questions.

[Operator:]

[Operator Instructions] And our first question comes from Caitlin Burrows of Goldman Sachs. Your line is now open.

[Caitlin Burrows:]

Hi, good morning. We’ve heard from some other mall REITS that the level of retailer bankruptcies through the end of this year and going into next year should be lower than last year, but it actually might be above the otherwise recent past. I was wondering if you guys are seeing this and agree with this outlook?

[Michael Glimcher:]

It’s Michael, Caitlin. Good morning. From our standpoint, it’s certainly going to widen up relative to the previous year. It could be higher than the last five years probably, because things were very quiet in these years, but we’re very aware of where the holes are. We’re not surprised in the previous year. We don’t intend to be surprised going forward and we’re accounting for that space in our leasing plan and in our numbers.

[Caitlin Burrows:]

Okay. And so, I guess, taking that into account, do you have any idea when we might be able to see the year-over-year occupancy numbers turn positive?

[Michael Glimcher:]

Well, we expect year-end occupancy in the mall portfolio to be right around 91% at the end of the year. And we continue to narrow the gap and that will narrow the gap from the previous year. And we would expect as we get into 2016 that we have an opportunity to match and hopefully exceed that occupancy. But we’re going through the budgeting process as we speak. So we’ll have a better sense of that at our Investor Day in January.

[Caitlin Burrows:]

Okay. And then just one other quick one on occupancy, just to be clear do you guys include temporary tenants in your occupancy numbers?

[Michael Glimcher:]

We do to the extent they have a lease greater than 12 months.

[Caitlin Burrows:]

Okay, great. Thank you.

[Operator:]

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

[Ki Bin Kim:]

Thank you. So Michael, if I go back and think about your days at Glimcher, it seemed like your primary game plan was to upgrade a portfolio, maybe take some dilution risk upfront and spend the money on redevelopment and sell some for quality assets, should we expect kind of similar game plan with WPG, or is that something different?

[Michael Glimcher:]

Ki Bin, good morning. Our goal here is to make the portfolio as valuable, as possible and there are a lot of levers to pull and doing that but in our focus resides within the four walls, redevelopment and leasing up space, if you want look back at my history early on, we moved occupancy from 80s, up into the 90s, here we’re going to move from the low 90s up over time into the mid-90s and it’s all about leasing space redeveloping properties and making them more valuable. So probably not dissimilar from my old job, where all my peers job, all we’re trying to do is make our portfolio more valuable with higher occupancy and grow NOI.

[Ki Bin Kim:]

And so at this point are asset sales, maybe not wholesale asset sales, but is that part of the game plan or not really?

[Michael Glimcher:]

We have no announced asset sale program.

[Ki Bin Kim:]

Okay. And in terms of the synergies that we’ve been talking about for next year $12 million to $16 million, after the O’Connor sales, is there some loss in that synergy because you just own lesser from big valuable malls, or is that still the same run rate we can expect next year?

[Mark Yale:]

Ki Bin, it’s Mark. Those synergies had assumed the O’Connor JV occurring, so there is no impact there. And while you’re on the call I just wanted to follow back up with something in your report that was a little bit confusing in terms of trying to correlate our unbilled receivables to our other income. And just point out that our other income if you look on the income statement for the third quarter made up less than 3% of our total revenues, and for the year less than 2%. So I think that’s right in range and there’s nothing unusual going on with respect to other revenues.

[Ki Bin Kim:]

Okay. And on that same topic, is the - excluding lease termination fees, is the increase in other income a more sustainable run rate or is that something unusual that happen this quarter?

[Michael Glimcher:]

It’s going to be a little bit lumpy just because of the nature of lease termination income and I also believe fee income is in there from the O’Connor JV and that could be a little bit lumpy as well in terms of when we have lease signings and things of that. So it was a bit elevated in the third quarter, but I think all-in-all nothing unusual in terms of what the trends will be on a full year basis.

[Ki Bin Kim:]

All right. Thank you.

[Operator:]

Thank you. And your next question comes from DJ Busch of Green Street Advisors. Your line is now open.

[Daniel Busch:]

Thank you. I just wanted to follow-up on your comments Mark, regarding the ratings agencies. Right now, it looks like you’re about 55% secured debt versus a 45% unsecured, how should we think about that mix going forward and do you have the ability to add secure debt, or how much can you add without putting your ratings at risk?

[Mark Yale:]

Yes. While, I’m not quite sure the numbers you were throwing out, our secured indebtedness to total assets is around just under 25%. So we have an unencumbered pull that comfortably supports our current credit rating that being said we do have a bias towards unencumbering assets, especially assets of high quality. We think the best way to fund this business long term is with unsecured debt, so that’s going to be our plan and we made progress since the spin and since the merger and we expect to continue to make progress from that perspective. But just to be clear, I mean where we are right now with our covenants it supports our current credit rating as it relates to where the size and scope of our unencumbered pull, as well as the level of secured debt in place.

[Daniel Busch:]

Yes. I guess I was just referring, as the mix of the total debt on the balance sheet. But can you, so you mentioned that you have no asset disposition program or anything like that in place, can you just provide a little bit more color on your plans, on how you’re going to delever the balance sheet over the next 12 to 24 months, outside of just cash flow growth?

[Michael Glimcher:]

Yes, well, certainly, cash flow growth is very important. I think we talked about our redevelopment and looking at high single digit returns. And if we’re funding half of that with free cash flow. As that EBITDA comes online we will naturally be able to reduce our net debt to EBITDA. I think the other piece we touched upon it in our remarks is the upcoming debt maturities, so where we have high leverage in place. We look through 2017 and we have five properties where that could be of an issue. And that’s something we’re going to look at. But the good news is the average debt yield on all those properties is under 10%. It’s at 9% right now in terms of the debt yield. And if we do end up moving away from those properties that is certainly a way to de-lever and to be able to de-lever at a level where we’re certainly not getting credit for those assets in terms of our current share price and NAV estimates. And the other thing I would tell you, for those five assets the sales per square foot is well below the average for the portfolio. So, those properties are in the bottom-half.

[Daniel Busch:]

Okay. And then, just as it relates, I know you’ve made us aware in the past that there is tax considerations if you were to consider selling some of the strip portfolio. Given that you have - you’ve kind of highlighted seven non-core properties in the mall portfolio that probably if you were to sell would trigger some type of impairment. Couldn’t you sell some of your lower productivity malls coupled with a piece of the strip center portfolio to offset some of the tax implications to significantly de-lever the balance sheet? Or are you still planning, or is the plan to still hold those, the strip center portfolio as it sits today, given that it is kind of the feel of the growth of the portfolio right now?

[Michael Glimcher:]

DJ, it’s Michael. The community center portfolio is a very important part of our business and like I said earlier there is no plan for asset sales. It’s something that we like to continue, certainly an area when we have the right currency we like to grow in. And so, we’re just focused on running an efficient lean operation and growing NOI and de-levering. We’re just looking inside our four walls. Those are the things that we’re thinking about.

[Daniel Busch:]

Okay. Thank you, guys.

[Operator:]

Thank you. [Operator Instructions] And our next question comes from Christy McElroy of Citi. Your line is now open.

[Christy McElroy:]

Hi, good morning, guys. Just a follow-up on Caitlin’s occupancy question, just regarding the lease rate for the total portfolio of 91.9%, can you disclose what the commenced occupancy rate was at quarter end? So in terms of that $14 million of NOI that has yet to commence that you talked about, what does that represent in your occupancy rate and what’s sort of the timing of that NOI commencing?

[Butch Knerr:]

Christy, hi, this is Butch. The difference between the commenced and the leases in our core portfolio is about 1%.

[Christy McElroy:]

Okay. So that represents the $14 million of NOI, the 1%?

[Butch Knerr:]

Yes.

[Michael Glimcher:]

Yes.

[Christy McElroy:]

And then, how much of that is on the mall side versus the community center side?

[Butch Knerr:]

Well, the mall side is about 1.4%, and the community center is about six-tenth-of-a-percent.

[Michael Glimcher:]

And Christy, I should point out that if you went back to last year it’s about the same delta. So, the year-over-year trends aren’t impacted, it’s pretty reflected in terms of our least occupancy.

[Christy McElroy:]

Okay. And if I think about the $150 million to $200 million piece of annual redevelopment spend that you talked about. And ultimately reaching that 3% same-store NOI growth piece that I think is your goal with redevelopment contribution. Where do you think you could see same-store NOI growth in 2016?

[Michael Glimcher:]

NOI growth in 2016?

[Christy McElroy:]

Right.

[Michael Glimcher:]

Well, okay. So, by 2017, we think we’ll be at 3%. And we haven’t really put out our numbers for next year, but I would say we’ll be well on our way to that level. We’re flat this year. We’ll be well on our way closer to the 3% than not.

[Christy McElroy:]

Okay. And then just lastly, regarding your comment of no plan for asset sales is that more a function of the market today, market demand and the financing market or just function of your desire to sell assets?

[Michael Glimcher:]

Okay. At this point, we’re building a best-in-class operating platform, learning from one of the best in the business in Simon and putting a Simon-like operating system into this organization. We are understanding what the team looks like and putting it altogether all while delivering results. So at this point, we’re analyzing every asset. We’re working through the portfolio. We’re looking for opportunities to create value. And it’s just not something that we’re talking about at all. We’re just talking about taking care of the assets we have.

[Christy McElroy:]

Great. Thanks for taking my question.

[Operator:]

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

[Caitlin Burrows:]

Hi, I just had another question on the redevelopment projects. When we look at the Fairfield Town Center in Houston, I know you guys mentioned that it’s near an outlet center. I think also though the expected yield came down a little from last quarter. So I was just wondering what might be the driver of that and what has changed over the past quarter.

[Mark Yale:]

Hey, Caitlin, it’s Mark. We did lower the bottom-end range just to reflect there is some tax incentives, some payments in place. And we are just hedging a little bit in terms of exactly how productive those ultimately will be and what the contribution will be from those.

[Michael Glimcher:]

As it relates to its proximity, it’s actually just adjacent to the premium outlets and the land was all acquired at one point together and the outlet center was built. There’s been some out-parcel development already, as well as an HEB grocery store and we’re really just filling in the hole. And it is a very desirous location in Northwest Houston.

[Butch Knerr:]

Yes, and I would say that the leasing activity as we mentioned is very strong. And so, it’s not a reflection at all of the demand for the center.

[Caitlin Burrows:]

Got it. Okay. And then, just one more on the development, the mall at Fairfield Commons, I think that was the one that you guys mentioned there or some restaurants still opening in the first quarter. After those opened, then should it be completed, so we should assume that, by that point, then the projects will be all done there?

[Michael Glimcher:]

No, Caitlin, it’s Michael. There’s some additional space there which were in the process of leasing as well. But we’ll have the three larger restaurants done by next year and then we’ll have some additional space which will be retail and restaurants, and opportunity for additional upside in that property.

[Caitlin Burrows:]

Okay. Thank you.

[Operator:]

Thank you. [Operator Instructions] One moment for questions. And I’m showing no further questions at this time. I’d like to turn the conference back over to Lisa Indest for closing remarks.

[Melissa Indest:]

Thank you. At this time, I’d like to highlight two upcoming events on our IR Calendar. We will be attending REITWorld in Las Vegas in a few weeks. And, as previously mentioned, our Investor Day meeting will be held on Friday, January 8 at the Western New York at Times Square. Look for additional details from our Investor Relations team later today. You may contact us directly with any additional questions. Thank you for joining us and have a great day.

[Operator:]

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Have a great day, everyone.