Washington Prime Group Inc.
Q4 2014 Earnings Call Transcript

Published: 27 Feb 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2014 WP Glimcher Earnings Conference Call. My name is Carol, and I'll be your operator for today. At this time all lines are in a listen-only mode. We'll be conducting a question-answer session towards the end of today's conference. [Operator Instructions] As a reminder, this conference is being recorded. At this time, I will turn the call over to your host for today's conference, Ms. Lisa Indest, Chief Accounting Officer. Ma'am?

[Lisa Indest:]

Good morning, and welcome to the first earnings call for WP Glimcher, and for that matter, our predecessor company, Washington Prime. Earlier this morning, a copy of our press release was circulated on the newswire, and hopefully each of you have had the opportunity to review our results. Copies of both the press release and the fourth quarter supplemental information package are available on our Web site at wpglimcher.com. Certain statements made during this conference call, which are not historical, maybe deemed forward-looking statements within the meaning of 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 our forward-looking statements, please refer to our earnings release and to our various SEC filings. Management may also discuss certain non-GAAP financial measures. Reconciliations of each non-GAAP measure to the comparable GAAP measure are included in our earnings release and the financial reports we filed with the Securities and Exchange Commission. Members of management with us today are Mark Ordan, Chairman; Michael Glimcher, CEO; and Mark Yale, CFO. And now, I would like to turn the call over to Mark Ordan.

[Mark Ordan:]

Thanks, Lisa. Good morning. Michael, Mark, and I appreciate you joining today's call. Earlier today, we announced our 2014 results, and also a very positive JV transaction with O'Connor Capital Partners. I will now provide you with more detail on our 2014 financial results. Our reported FFO per share for the full year 2014 of $1.57 was in line with our expectations, when you exclude for the non-recurring expenses related to the merger and spend [ph] of $0.25 per share. When normalizing for the full year impact of the spend [ph] as if it had occurred on January 1 of 2014 and excluding the non-recurring expenses, our FFO per share would have been $1.76. We believe this is the FFO baseline to measure our performance. Our comparable net operating income was 1.6% for the year. We completed our acquisition of Glimcher in January, and therefore have shown our operating metrics for the combined WP Glimcher assets. Our combined year end occupancy was strong at 93.2%. The addition of the 23 malls from Glimcher brings our NOI from malls to 75%, with the remaining 25% from our community lifestyle centers. When we announced our acquisition we said we would form a JV to provide over $300 million to retired debt without any equity issuance. Interest, in fact, was so strong that after a competitive bid process we raised $430 million in equity, surpassing our targeted proceeds, while still leaving us the majority partner in each of these great assets. We are particularly pleased to have the endorsement of O'Connor Capital Partners as our JV partner. This is a world-class investment partnership, and one with real depth in our asset class, having just completed a JV with Westfield. Our pricing in our JV is at an approximate 5.25 cap rate on in-place NOI, which reflects the great asset quality in our portfolio. Our company began in May of last year as a spin-off of Simon. During our short 10-month history, we have made tremendous progress in line with our strategy. Immediately following our spin, we bought out our JV partner of a seven-property pool as well as our JV partner in Clay Terrace. In December, 2014, we purchased the remaining interest in Whitehall Mall, and acquired Canyon View marketplace in January of 2015. Three months after we began we announced the purchase of Glimcher Realty Trust with a portfolio of assets ranging from solid B mall assets to world-class retail destinations. This acquisition provided us an extremely dedicated team of real estate professionals, which in combination with our Indianapolis Community Life Center team, and our team in Bethesda is the core of a great lasting, and growing retail REIT. This transaction also provided me with a likeminded partner, with complementary strengths and background. We closed this transaction sooner than originally projected, in mid January of this year. When Washington Prime's Form 10 was released just over a year ago, we were a company with B mall assets and a thriving open-air community life center portfolio, with a solid balance sheet and a small core team, operating under a two-year transition service agreement with the Simon Property Group. From the start, we said we would be cash flow driven, and would grow by taking advantage of our team, financial strengths, and our relationship with Simon. We also said that for the right strategic opportunity we might take on additional leverage, given our capacity. We said at that time that if we did we would take swift steps to bring our numbers back in line. Our joint venture with O'Connor accomplished just that. Today, our strategy remains consistent; grow cash flow, and maintain a strong balance sheet, along with a successful integration of our operations to emerge as an efficient independent company. Now, let me comment on our portfolio. We see companies trying to sell their portfolio of B malls to repay debt or to get into faster growing areas. We are not sellers of these steady cash flowing assets that have reinvestment opportunities inside them, because we already have those growth portfolios within WP Glimcher. Our B malls are the foundation of our business, growing at a 1% pace, providing the cash flow for our dividend, and for the redevelopment opportunities in our 3%-4% growing community life center assets, along with our top tier mall portfolios. These high growth top tier malls, and CLC properties comprise approximately 40% of our NOI, after applying the pro rata share of our post-O'Connor JV. I would now like to turn the call over to Michael Glimcher.

[Michael Glimcher:]

Thank you, Mark. First, let me be more specific regarding the opportunity Mark described in our B malls. We view 10% vacancy as an invitation for new ideas and for growth. Years ago, our team took a portfolio occupied in the low-80s into the mid-90s. Now, with an incredibly strong team drawn from Glimcher, Simon, and Washington Prime, WP Glimcher is employing a new variation on that same playbook. All ready. We are out in the field with our leasing knowhow, and careful capital discipline, planning to meaningfully move the needle. We said when we announced the merger, having a strong presence in each of these categories provides a huge leasing advantage when leasing our centers. Retailers have scalable footprints that work well in many of these formats, and the diversification that comes with us being a significant player in each asset class is already proving to be quite beneficial. We certainly have felt the impact of the recent wave of tenant bankruptcies, but we were prepared for this and not surprised at all. We are confident that we can replace this income, and in fact, have 50% of the spaces addressed with either signed leases or LOIs. Furthermore, we can't foretell the future of one or two of our anchors. And a number of people ask us, "Aren't they weak?" We respond, that with their strengths and weaknesses it's all baked into our numbers. And they contribute just such a small percentage of our minimum rents. We hope they will improve, and we see some signs of that. We don't depend on that either. What we do depend on is our strong leasing and development teams to put us in the best position when we get the spaces back and new opportunities are created. With a leasing team that is already well in gear, led by Butch Knerr, T.J. Drought, and Paul Ajdaharian, we are well positioned, with a breadth of experience in all categories. We depend on this team to turn vacancies into revenue by identifying non-traditional uses, adding new food and entertainment concepts, and creating density by adding office, residential, or hospitality at many of our sites. We have already toured many of these assets which clearly previously weren't of high priority. I'm now energized by the creative and high-yield ideas that I know we can implement to grow NOI within this portfolio. There is no doubt to me there is a bounty of low-hanging fruit. We are already seeing progress in a short time period together. After only one month, we have established a well-integrated deal-making process. This was vital to remain focused on top line revenue growth on day-one as a new combined company. We are already seeing progress from this alignment. Since closing the merger the team has held more than 30 portfolio meetings, 22 of those in the last 21 business days. This has been a collaboration of our joint leasing teams, and we expect to hold over 50 meetings before a busy recon show, in May. We are aggressively open for business, and pleased by the market reception thus far of this organization. While progress has been made toward maximizing our balance leasing team, we continue to focus on careful planning to be a fully independent and integrated company, hopefully, well before we move off to SPG management contracts before their expiration, in May of 2016. We are in a fortunate position to take the best of GRT and Simon's operations and technology to form an efficient, scalable platform for WP Glimcher, and combine it with a team that has already proven itself within the REIT space. Mark and I are leading a team that is already reducing risk, and just grinding out results. We expect these efforts, in 2015, to yield FFO between $1.75 and $1.85 per share. And now with that said, I'd like to turn the call to Mark Yale, who will provide more detail on our financial results.

[Mark Yale:]

Thanks Michael, and good morning to everybody. Before I dive into these topics, I'd like to provide more detail on the O'Connor joint venture. We will retain a 51% interest and continue to lease and manage the assets. O'Connor will purchase a 49% interest in the Mall at Johnson City, Pearlridge Center, Polaris Fashion Place, Scottsdale Quarter, Town Center Plaza, and Town Center Crossing. The assets were valued at $1.625 billion, and we expect to generate net proceeds of approximately $430 million. We're very pleased with the execution of the transaction. Also, prior to the closing of the joint venture we will be refinancing the mortgages on Pearlridge, and Scottsdale Quarter, targeting proceeds in line with the existing outstanding loans. We expect this transaction will close early in the second quarter. We closed on the merger of Glimcher Realty Trust on January 15, 2015. To facilitate the closing, we drew $1.19 billion on our bridge loan to fund a portion of the transaction. Through the merger we were able to increase our size and scope, with the combined capitalization of the company growing to $8.8 billion post close. However, we have stretched our balance sheet in order to take advantage of the strategic opportunity, but have a clear plan to address our leverage and take out the bridge loan. First, through the O'Connor joint venture we will be able to reduce overall debt levels by approximately $700 million, including generating approximately $430 million to apply against the bridge loan. We also expect, during the second quarter, to move forward with the inaugural bond offering targeting a level of proceeds that will allow us to pay off the remaining balance of the bridge loan. Finally, we do have plans during the second half of the year to move forward with another bond offering, with proceeds being used to unencumber assets, and to pay down balances outstanding, either on the term loan or revolving credit facility. Assuming the closing of all these transactions as planned, our estimated net debt to EBITDA ratio will be approximately seven times on a pro forma basis. When including merger synergies they're expected to be realized in 2016, or pro forma debt to EBITDA drops to the high six times. We expect to make further progress towards our long-term targeted range of 6 to 6.5 times by the end of 2016 through future EBITDA growth, opportunistic asset sales, and potentially common equity if market conditions become more favorable. We have included $185 million of redevelopment spend in our 2015 assumptions, and also expect to have paid down over $200 million of maturing mortgages throughout 2015. Based upon these plans, and considering the generation of free cash flow of approximately $100 million, we plan to have $825 million to $850 million of available liquidity at year end, primarily through capacity on our revolving credit facility. Now, I'd like to discuss our 2015 guidance. In the release, we established our initial guidance range for the year for FFO per share at $1.75 to $1.85. The midpoint of this guidance represents 2% growth compared to our normalized baseline FFO per share, in 2014, of $1.76. Factors driving the moderate growth in 2015 are merger inefficiencies as we transition from Simon, tenant bankruptcies, as Michael discussed, and a larger JV transaction than originally planned. Non-cash purchase accounting adjustments contribute approximately $20 million of additional FFO in 2015. We expect G&A to be around $45 million during the year. Upon completion of the integration or early-2016, we do expect to realize approximately $10 million plus in synergies. The guidance also assumes an annualized dividend rate of $1 per share for 2015. Other than the O'Connor joint venture, the guidance assumes no dispositions, acquisitions, or issuance of common equity during 2015. Finally, the guidance excludes approximately $25 million of merger-related costs, including upfront fees on the bridge loan. As we looked to 2016 we believe we can generate strong growth and FFO over this year once the synergies from the integration are realized the portfolio is stabilized from the bankruptcies and we realize more contribution from our redevelopment investments. At this time, I'd like to turn the call back over to Michael.

[Michael Glimcher:]

Thank you, Mark. In closing, we're all very excited about the future of WP Glimcher. We have assembled an incredible team that is already hard to work driving cash flow growth from a portfolio in closed malls and community lifestyle centers while maintaining an investment great balance sheet. We have a solid integration plan in place designed to ensure a best-in-class scalable platform that will support our aggressive appetite to growth into the future. Now with all that said, we would like to open up our call for any questions you may have.

[Operator:]

Thank you, sir. [Operator Instructions] Gentlemen, your first question will come to you from the line of Anthony Hau of SunTrust. Anthony?

[Anthony Hau:]

Hi guys, thanks for taking my call. Just a quick question regarding the JV sale; you sold five of your best assets in the portfolio, were these assets that you have always been contemplating or was there another pool of poor quality assets that you want to sell? Or is it because the opportunities for the B Mall assets weren't attractive enough?

[Mark Ordan:]

Well, this is Mark. The answer to that is that we had always anticipated a pool of assets like the ones that we included in the JV to generate the level of proceeds that we generated. We thought that was very appropriate, and also it allowed us to still retain ownership of majority of the assets and to continue to manage those assets. Also very helpful because there's redevelopment dollars that go into those assets that now we'll be sharing that expense with O'Connor.

[Michael Glimcher:]

Hi, again, it's Michael. I'd like to add the real positive is our balance sheet is first and foremost to us and it's a thing that we will think about and focus on the most and always will, but what else works in a transaction like this is when our lease team is out and our development team is out working on these properties, no one asks if we we're on a 5% or 100%. They just want to know that it's a WP Glimcher asset, and we lose no leverage in that regard.

[Anthony Hau:]

Okay so how does this define WPG as a Company going forward though? Do you want to upgrade its portfolio quality to a B plus or A minus or do you want to be the best of the B Mall companies?

[Mark Ordan:]

I think we will both tackle that. From the start, we said that we're going to focus on generating cash flow, and we're very proud that we have a portfolio of assets as we've mentioned before that includes solid B mall assets, growing community life center assets and also our top tier mall portfolio; and as I mentioned earlier 40% of our NOI now comes from the combination of our CLC's and our top tier mall portfolio. So we love the fact that we're players in different in different areas of the market, and we have very strong growth that partially being fueled by the cash flow that's generated from our B mall portfolio. So we like where we are. We're not projecting where we're going to go. We like having a combination of these very, very solid assets that have great reinvestment potential along with the growth in our CLC portfolio and our top tier malls. We think this is a very, very well-balanced portfolio.

[Michael Glimcher:]

Yes, I might add with the significant reinvestment back into the portfolio, a strong redevelopment pipeline, a huge leasing pipeline; every asset we have has an opportunity to get a better and have a great NOI growth. So as we said earlier and we'll continue to say we're going to play in many asset classes and if the question is, "Do we want to be in this category or that," we'd like to be in all these categories.

[Mark Ordan:]

And I just remind you that with all of these since where we were just a few months ago, we now have an operating platform in Columbus, Ohio, we're so far along now on our steps to becoming a fully independent company.

[Anthony Hau:]

Okay, thanks guys.

[Mark Ordan:]

Thank you.

[Operator:]

Thank you, Anthony. Gentlemen your next question comes to you from the line of Christy McElroy at Citi. Ma'am?

[Michael Bilerman:]

Actually it's Michael Bilerman. I had a quick question, Michael, I think at the end of your comments you said something about wanting to grow aggressively, did I hear that comment right?

[Michael Glimcher:]

I think the comment was that we're putting a platform in place that as a balance sheet is in better and better shape as we realize the synergies, as we integrate the portfolio; we're building the capacity to grow into the future. So, it's step one is balance sheet, its integration and its NOI growth in the existing portfolio. That's where we're keenly focused. Once we realize that and once we're operating in a precision manner then we'd like the opportunity to grow and we expect that our share price will give us the ability to do so at that point. But today, our focus is on the portfolio that we own, and the balance sheet that we own. Going forward, it will be on growth. And so I think the terminology was into the future.

[Michael Bilerman:]

But the word was aggressively, right, I didn't hear that wrong?

[Micheal Glimcher:]

In the future.

[Michael Bilerman:]

Right, but I guess as we -- as I think about trying to aggressively maybe defined differently by different people, if you're an $8 billion Company today reduced by the sales today, so give or take call it, 7 to 8, you may have a different view of where your gross asset value is, but how should we think about that in the future let's say in five years, what do you want WP Glimcher to be in terms of asset base and in terms of asset size?

[Michael Glimcher:]

We're very comfortable playing in all these categories certainly an asset size is really going to depend on what opportunities are in the market and where our share prices. But very clearly we would like for this to be substantially larger company given the opportunity. And it will be all about smart growth at the right time. Just if you go back to the beginning and what we've done, we said we had a strong balance sheet and you know it's in our DNA to be aggressive and to grow. But we felt that the only way you can do that is from a solid foundation. So we needed to have a fully integrated management platform. So that we could emerge from our two years with Simon or may be even sooner to be able to pursue that growth. And we're confident that if you have that kind of foundation and you have a balanced portfolio along with our growth both organic and through redevelopment that again we'll have currency in our equity over time to allow us to grow aggressively.

[Michael Bilerman:]

Right. And I apologize I missed the opening of the call, but can you provide more details in terms of the joint venture, and if you did I will -- we can talk offline? But out of that $1.625 billion, 5.25% cap rate currently, you obviously with Pearlridge and as well as Scottsdale as things are still going through lease up and you have redevelopment, I guess can you talk about what percentage those assets or try to break it down a little bit in terms of contribution to that $1.625 billion valuation? And how projects like that that are still going through at least in Pearlridge what will be a massive potential redevelopment and change in the NOI stream? And Scottsdale which is obviously has been under increasing lease up but a lower return on cost.

[Mark Yale:]

Michael, its Mark Yale. It's a portfolio deal. It certainly a band of the different cap rats and certainly as relates to Scottsdale we think we got very fair pricing. And I think we're -- we think it's very appropriate for the blend of those assets.

[Mark Ordan:]

And Michael, I also mentioned that - it's Mark; also mentioned that it's important to us that we have a light minded JV partner that knows that these assets will need reinvestment which we can do together. That's part of the fact that we do plan to continue to work our leverage down so that we start to approach the mid to low sixes and if we're bearing the full burden of the redevelopment that gets harder to do.

[Michael Bilerman:]

And all of these were former Glimcher assets, right?

[Mark Ordan:]

Yes.

[Michael Bilerman:]

And then Mark, just from your perspective in the evaluation and the cap rate that you bought Glimcher at, how does the valuation of selling a 49% interest compare to that underwriting?

[Mark Ordan:]

This makes us very happy when we look back at the underwriting strengths of these assets, the future of these assets, the reinvestment in these assets, the cap rate we're doing here what we think is a very strong achievement while giving both us and O'Connor a great return going forward.

[Michael Bilerman:]

So if you have to mark-to-market the assets upon merger, this would have been above the allocated purchase price or in line?

[Mark Ordan:]

What I would say is that when we were first contemplating this deal, we were contemplating a JV very much like this. The size really came about because of the appetite from both O'Connor and others to do a larger JV than a smaller JV, but these were the assets we were thinking about and we were hopeful -- hopeful that would get pricing like this.

[Michael Bilerman:]

Okay, thank you for your time.

[Mark Ordan:]

Thanks. Michael.

[Operator:]

Thank you, sir. [Operator instruction] Gentlemen, your next question will come to you from the line of D.J. Busch of Greenstreet Advisors. Sir?

[D.J. Busch:]

Thank you. Just following up on some of the balance sheet commentary, obviously the O'Connor JV moved you guys in the right direction, but Michael you alluded to continuing to work on the balance sheet. What are the next steps that you guys can take to de-lever further and get back down in line with potentially your peer group average?

[Michael Glimcher:]

Hey, D.J how are you doing? You heard us talk about our inaugural bond offering and then also a subsequent bond offering. So that's certainly one way of dealing with it. Another way of dealing with it is in line growth. And so we're aggressively out leasing a portfolio. I think I talked about the fact that we've addressed probably half of the space that we got back from bankruptcy. So all of a sudden we'll be able to grow and have better coverage. So it's going to be pulling on multiple toggles, but in the short term. It's going to be this bond offering opportunity.

[Mark Ordan:]

And a couple of other things we also mentioned the integration. There are synergies to be realized. Those won't happen till '16, but that certainly helps the net add to EBITDA. So that's very important. And we have other assets in the portfolio that we will opportunistically look to divest if we can get the right pricing. So that's certainly a lever that we have and we're keeping an eye on it that will a key as we're going to be opportunistic with respect to that.

[D.J. Busch:]

And along those lines, the other assets that you would look to divest, is that -- are you agnostic by quality or property type or is there a certain quality or property type that you'd rather divest and as opposed to others?

[Mark Ordan:]

Well, I think as prudent managers, we consider a lot of things. We consider the growth rate of the assets, the cap rate that we could get, what our future is, we've already said that if it take the basic to us that we have a balance. It's very important to us to be in each line of business that we're currently in. so if we were going to sell in any one area we would be -- I don't know how to say. We'd be cautious of all those things. We would certainly not want to do anything that's going to give up material growth to the company unless there were some really preemptive cap rates attached to it. so we just want to be prudent managers while steadily as Michael said, increasing our NOI that brings down our debt down making us as efficient as we can with our synergies and our overheads and also reducing risk as much as possible so that we can do these things in a predictable way.

[D.J. Busch:]

Okay. And then along the lines of NOI growth, I think in a couple of your presentations at the end of last year you highlighted a 4% to 5% '15 NOI growth. I wasn't certain at the time if that was a mixture of same property and external growth, and obviously if so, the O'Connor JV changes that. But how do you think about your NOI growth in '15 and then maybe thereafter?

[Michael Glimcher:]

Well, look, as it relates to '15 it's hampered a bit. Part of it is you don't realize the synergies we talk about until '16 and then the other part of it is we had $14 million of exposure to bankruptcies, 12 that hit us and 6 that we're going to replace; the issue is 6 won't be replaced on an annualized basis. Many of those tenants will open up in the fourth quarter. So we probably had a larger impact when we knew there would be bankruptcies we had a larger and something that happened sooner in the year than we expected. And that certainly out of the impact on what we thought the growth would be for this year. And when we announce this deal we talked about where we saw the growth in the company and future of the company after all, synergies had kicked in. so we knew that 2015 would be little bit of a noisy year. And a lot of that noises I'd say is hand in hand with making sure that our risk is low so that we can transition as soon as possible to being independent. I mean the things you want to see today and the numbers as we're getting out each and every center, we're devising a redevelopment plan and as I talked about, there's a lot of low-hanging fruit to harvest. And it's a matter of if somebody's assets won't be most important asset of the previous owner; perhaps they didn't get not only the capital attention but the human capital. And as we visit our senior team goes out and it gets granular property-by-property, deal-by-deal, I think what you'll see in '16 and you'll see in '17 each year, you will see the benefit of all this work.

[Mark Ordan:]

The only thing I would add with respect to the growth rate of '15 is its redevelopment we mentioned of several times its going to be very important. It's a very minimal impact in '15. We have a lot of great projects in the pipe line that which we did disclose and those benefits are going to come through in '16 and '17 and really start driving the growth rate up as well. So when you think about the redevelopment, you think about recovering from these bankruptcies because we think we're going to get these space released. And we have an opportunity may be at a high rents, that's some nice growth profile as we look into '16 and '17.

[D.J. Busch:]

Okay and then lastly in the supplemental you separated some of the operating metrics by the properties types, the malls and community centers, which is very helpful. Going forward are you going to provide the NOI growth by property type as well to give us a better understanding of the different growth profiles of each property type?

[Mark Ordan:]

Yes. Well, we're working now on additional disclosure which will always help you track our cash flow growth, D.J. So I'd say that you saw in the supplemental step forward and that and as we get our arms fully around the business, we'll be adding to them.

[D.J. Busch:]

Okay, great. Thank you, guys.

[Operator:]

Thank you, sir. Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I'm now going to turn your presentation back to Ms. Lisa Indest for her closing remarks. Ma'am?

[Lisa Indest:]

Thank you everyone for participating in the WP Glimcher fourth quarter 2014 conference call. You may contact us directly with any additional question or access our filings through wpglimcher.com.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you very much for your participation. You may now disconnect. Have a great day.