Washington Prime Group Inc. (fka WPGGQ)

[Enterprising Investor]

Washington Prime Group Reports Second Quarter 2018 Results (7/25/18)

- Company reaffirms fiscal 2018 guidance

- Core portfolio year-to-date total leasing volume at 2.4 million square feet through July 25

COLUMBUS, July 25, 2018 (GLOBE NEWSWIRE) -- Washington Prime Group Inc. (NYSE:WPG) today reported financial and operating results for the second quarter ended June 30, 2018 that reflect continued progress of the execution of the Company’s financial, operating and strategic objectives. A description of each non-GAAP financial measure and the related reconciliation to the comparable GAAP financial measure are included in this release.

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Business Highlights

• The year-over-year difference in net income is primarily due to the sale of a 49% interest in six properties during the second quarter of 2017 as noted below.

• Comparable net operating income (NOI) for the Company’s 41 Tier One enclosed retail properties increased 0.6% during the second quarter of 2018, demonstrating continued stable performance. Tier One occupancy increased 10 basis points to 92.8% as of June 30, 2018.

• Comparable NOI growth for the Company’s 51 Open Air properties increased 2.6% during the second quarter of 2018. Open Air occupancy increased 10 basis points to 95.1% as of June 30, 2018.

• Combined Tier One and Open Air comparable NOI growth increased 1.1% during the second quarter of 2018. As of June 30, 2018, Tier One and Open Air assets represent approximately 90% of core portfolio NOI.

• Occupancy cost for the core portfolio decreased 30 basis points to 12.3% as of June 30, 2018. As of June 30, 2018, occupancy cost for Tier One and Tier Two enclosed retail properties was 12.0% and 13.7%, respectively.

• Year-to-date, leasing continues to be robust with total leasing volume for the core portfolio totaling nearly 2.4 million square feet through July 25, 2018.

• Lifestyle tenancy, which includes food, beverage, entertainment, fitness and services accounted for 44% of total new leasing activity during the first half of 2018.

• Tenant driven redevelopment remains one of the Company’s most intriguing value propositions. Redevelopment efforts include 43 projects currently underway ranging between $1.0 million and $60.0 million, with an average estimated project yield of approximately 10%.

• During the second quarter of 2018, the Company proactively gained control of six Sears department store spaces located at Tier One properties for future redevelopment efforts.

Lou Conforti, CEO and Director stated: "We reported adjusted FFO of $0.37 for the second quarter of 2018 and reaffirmed full year adjusted FFO guidance. From the onset, it was imperative we demonstrated cash flow stability as we rolled up our sleeves and cleaned up our operational and financial acts. As a result, future prospects for Washington Prime Group are brighter today than when I joined the Company two years ago. The reason why is straightforward: Our decision to focus upon financial wherewithal and operational efficacy has resulted in increased visibility.

"There is still a heck of a lot to be accomplished. Notwithstanding, the incremental progress we make every single day confirms that our labor is not Sisyphean in nature. While there is still an 'uphill battle', the slope has become dramatically less steep. We muster our formidable operational, financial and strategic resources in concerted fashion and every time we roll the stone up the hill, it is with purpose. Rest assured, my colleagues and I will keep pushing on until this proverbial boulder gathers momentum and on its way down crushes those pundits who doubted us.

"While the following might qualify me as master of the obvious, if you want cash flow, lease space. To wit, during the six months ended June 30, 2018 total leasing volume for the core portfolio was 2.0 million square feet, of which 44% was to lifestyle tenancy, which includes food, beverage, entertainment and fitness. This excludes an additional 400,000 square feet of total leasing volume completed in July 2018. We continue to incent our leasing professionals as it relates to diversifying tenancy and during the six months ended June 30, 2018 we had 100 leases qualify, which compares to 220 leases in 2017.

"As a percentage of core NOI, Tier Two was closer to 25% when I took the helm of Washington Prime Group. As of June 30, 2018, Tier Two represents approximately 10% of core NOI. Contrary to popular belief, these assets make money. We have pared 13 of these assets with another three recently classified as Noncore. As a reminder, 42% of Tier Two NOI is encumbered with an indebtedness yield of 12.5%, and we have proven several times we are not averse to handing back keys to special servicers when the situation is warranted. In addition, I have previously emphasized the intrinsic volatility within the Tier Two portfolio. These assets require a higher risk adjusted ROIC threshold, hence, a transaction has to make the utmost financial sense before a marginal unit of capital is allocated.

"Turning to inline tenant bankruptcies, the black cloaked, scythe wielding grim reaper of bankruptcy mentioned during last quarter's conference call appears to have reduced his workload for the time being. During 2017, the full year impact was approximately 716,000 square feet, while 2018 inline bankruptcies have totaled approximately 114,000 square feet through June 30, 2018. Recall, since 2014, we had approximately 2.3 million square feet, or nearly 10% of inline space, negatively impacted by tenant bankruptcies. In spite of this, we evidenced minimal variance as it relates to financial and operating metrics. For instance, between 2014 and 2018, comparable occupancy decreased less than 2.0% as of June 30, 2018, while comparable NOI is forecasted to increase 1.0% and tenant allowances have generally decreased for the core portfolio. Make no mistake about it, there will be additional bankruptcies and we have planned accordingly.

"Recent operational improvements are admittedly a source of pride as I have observed our entire Company rally around these measures. I'll quickly mention a couple: Redefining local management. Think about it, General Managers serve as the primary interface for our more than 300 million annual guests. Hence, they should serve as a 'goodwill ambassador' acting as 'local eyes and ears' by identifying relevant goods and services. As a result we have reconsidered their role and have increased their revenue generation responsibilities as it relates to procuring local leasing and sponsorship.

"We also are in the process of implementing what we refer to as 'The Hub' and have 52 locations so far. Let me further explain by evoking the Netflix television series Stranger Things. Instead of sequestering local management in an alternate dimension similar to that of The Upside Down (also known as the 'mall management office'), we have moved them 'front and center' into the common area. As a result, one does not have to journey down a dimly lit labyrinth replete with Demogorgons in order to inquire about the upcoming Easter egg hunt. From the overwhelmingly positive responses we've received, one would think we had invented the Slurpee. Take a look at our website for examples of this highly sophisticated technological innovation. Wait a minute, it's just a large table with electrical outlets and visible signage. Bottom line: A little common sense goes a long way.

"Turning our attention to redevelopment, we currently have 43 projects underway between $1.0 million and $60.0 million with an average estimated yield of approximately 10%. In addition, six projects are currently in the final review phase. As a reminder, we have allocated approximately 90% of redevelopment capital spend to Open Air and Tier One assets since the beginning of 2016. Related to redevelopment is the adaptive reuse of former department stores. In this regard, our proactive approach has served us well. During the second quarter of 2018, the Company proactively gained control of six Sears department store spaces located at Tier One properties for future redevelopment efforts. Currently, Washington Prime Group has 28 department store boxes in our Tier One and Open Air portfolio which we believe will need to be repositioned. This includes Sears, other than those owned by Seritage, and Bon-Ton department stores. Of the 28 locations, we own all but three spaces, and we are currently in various stages of planning and negotiations to replace or redevelop 23 of these locations. To put this into perspective, revenue derived from the aforementioned 28 boxes equates to only 1.7% of total annualized revenue for the combined Tier One and Open Air portfolio.

"In closing, status quo is not acceptable. The late musician Frank Zappa stated 'without deviation from the norm, progress is not possible'. I wholeheartedly embrace this notion of 'thinking outside the box' and the newfound corporate culture of Washington Prime Group reflects this ideal as we continue to grind it out."

Second Quarter Results

Net income attributable to common shareholders for the second quarter of 2018 was $10.1 million, or $0.05 per diluted share, compared to $135.5 million, or $0.72 per diluted share, a year ago. The year-over-year difference in net income primarily relates to the sale of a 49% interest in six properties following the formation of the second joint venture with O’Connor Mall Partners, L.P., an affiliate of O’Connor Capital Partners (“O’Connor”) for a gain of $126.1 million, as well as a $21.2 million gain recognized in conjunction with the discounted pay-off of a mortgage loan secured by Mesa Mall, a Tier One asset located in Grand Junction, Colorado, both of which were completed during the second quarter of 2017. In connection with 2018 disposition activities, the Company recorded a net gain of $8.1 million for the three months ended June 30, 2018 related to the sale of restaurant outparcels, as further discussed below.

Funds from Operations (FFO) for the second quarter of 2018 were $83.8 million, or $0.37 per diluted share. This compares to $110.6 million, or $0.50 per diluted share, during the same quarter a year ago. Results for the second quarter of 2017 include a gain on the extinguishment of debt of $21.2 million. When excluding this item, adjusted FFO (“AFFO”) for the second quarter of 2017 was $89.4 million, or $0.40 per diluted share. There was no such gain during the second quarter of 2018.

Comparable NOI for the core portfolio decreased 0.7% during the second quarter of 2018, compared to the same period a year ago. Comparable NOI growth for the Company’s 41 Tier One enclosed retail properties increased 0.6% during the second quarter of 2018, compared to a year ago, demonstrating continued stable performance. Comparable NOI growth for the Company’s 51 Open Air properties increased 2.6% during the second quarter of 2018, compared to a year ago.

Operational Highlights

Ending occupancy for the core portfolio was 92.7% as of June 30, 2018, compared to 93.0% a year ago. Base rent per square foot for the core portfolio was $21.68 as of June 30, 2018, compared to $21.73 per square foot a year ago. Inline store sales at core enclosed retail properties were $377 per square foot for the twelve months ended June 30 2018, compared to $375 per square foot a year ago. Operating metrics by asset group can be found in the second quarter 2018 Supplemental Information report available on the Company’s website.

Financial Activity

Acquisitions

On April 11, 2018 the Company completed the acquisition of four Sears department stores and adjacent Sears Auto Centers for $28.5 million through a sale-leaseback transaction. The Sears properties are located at the following Tier One enclosed retail properties: Longview Mall, located in Longview, Texas; Polaris Fashion Place®, located in Columbus, Ohio; Southern Hills Mall, located in Sioux City, Iowa; and Town Center at Aurora, located in Aurora, Colorado. The purchase was funded by a combination of $13.4 million from the Company’s credit facility, $9.7 million in proceeds from the restaurant outparcel sale discussed below, and $5.4 million from the Company’s joint venture partner O’Connor.

On April 24, 2018, the Company completed the purchase of Southgate Mall, located in Missoula, Montana, for $58.0 million in conjunction with a planned reverse Section 1031 exchange utilizing the proceeds from the Four Corners transaction as detailed below. Southgate Mall, a Tier One asset, is a dominant hybrid town center which features specialty grocer Lucky’s Market and a nine-screen dine-in AMC theatre.

Dispositions

The Company completed the sale of the first tranche of restaurant outparcels to FCPT Acquisitions, LLC ("Four Corners") pursuant to the purchase and sale agreement executed on September 20, 2017 between the Company and Four Corners. The first tranche, which was completed during the first quarter of 2018, consisted of 10 outparcels, with an allocated purchase price of approximately $13.7 million. A portion of the net proceeds of approximately $13.5 million was used to partially fund the acquisition of four Sears parcels on April 11, 2018, as discussed above, and for general corporate purposes. Additionally, on June 29, 2018, the Company completed the sale of the second tranche, which consisted of five outparcels, for an allocated purchase price of approximately $9.5 million. The Company expects to close on the remaining outparcel sales of approximately $44.1 million of during the second half of 2018, subject to due diligence and closing conditions.

Mortgage Loans

On June 8, 2018, the Company exercised the first of three options to extend the maturity date of the $65.0 million term loan secured by Weberstown Mall, a Tier One asset located in Stockton, California, for one year. The extended maturity date is June 8, 2019, subject to two one-year extensions available at the Company’s option subject to compliance with the terms of the underlying loan agreement and payment of customary extension fees.

Redevelopment Highlights

The Company continues to make progress on its major redevelopment projects. Anchor repositioning and tenant diversification remain among the Company’s most attractive uses of capital given the returns and benefit to a center’s longer term competitive positioning. Recent redevelopment highlights include:

• Grand Central Mall, a Tier One property located in Parkersburg, West Virginia – Ulta Beauty and Five Below will replace a former H. H. Gregg anchor space and are expected to open in the fall of 2018. The addition of Ulta Beauty and Five Below follows the announcement of a 20,000-square-foot H&M opening in the fall of 2018 at Grand Central Mall, which will replace the former Elder-Beerman department store. Apart from Ulta Beauty, Five Below and H&M, Grand Central Mall has seen approximately 37,000 square feet of new or remodeled tenants open over the past 24 months.

• During the second quarter of 2018, the Company proactively gained control of six Sears department store spaces for future redevelopment efforts. The Sears properties are located at the following Tier One enclosed retail properties: Longview Mall, located in Longview, Texas; Polaris Fashion Place®, located in Columbus, Ohio; Southern Hills Mall, located in Sioux City, Iowa; Southern Park Mall, located in Youngstown, Ohio; Town Center at Aurora, located in Aurora, Colorado; and WestShore Plaza, located in Tampa, Florida. With the exception of Southern Park Mall, Sears will continue to operate at these locations while redevelopment plans are finalized.

• The RoomPlace will join the tenant lineup at three of the Company’s enclosed retail properties. The Company has finalized leases with The RoomPlace, a dynamic home furnishings retailer, at the following locations: Dayton Mall, located in Dayton, Ohio; Lincolnwood Town Center, located in Lincolnwood, Illinois; and The Mall at Fairfield Commons, located in Dayton, Ohio. Along with The RoomPlace store at Northwoods Mall, located in Peoria, Illinois, which is performing above the Company’s expectations, the four locations will comprise over 250,000 total square feet within the Washington Prime Group portfolio.

2018 Guidance

The Company reaffirms guidance for fiscal 2018 net income attributable to common shareholders in the range of $0.26 to $0.36 per diluted share and fiscal 2018 FFO in a range of $1.48 to $1.56 per diluted share. The guidance includes the closing of the acquisition of Southgate Mall, located in Missoula, Montana, and assumes the closing of the remaining tranches of the Four Corners outparcel dispositions later in third quarter of 2018. The estimated net income and FFO exclude the impact of potential net gains on the extinguishment of debt and any future gains from the remaining Four Corners outparcel dispositions. There were no other significant changes to key assumptions previously provided, which are detailed in the second quarter 2018 Supplemental Information report available on the Company’s website.

Driven primarily by the impact of full liquidations of some key national retailers, the Company is projecting fiscal 2018 comparable NOI growth from the core portfolio of approximately (1.0%), consistent with the lower end of the original guidance projections.

For the third quarter of 2018, the Company estimates net income attributable to common shareholders to be in the range of $0.04 to $0.07 per diluted share and FFO to be in the range of $0.34 to $0.37 per diluted share.

Earnings Call and Webcast on July 26

Washington Prime Group will host a conference call at 11:00 a.m. ET on Thursday, July 26, 2018, to discuss the Company’s results and future outlook. Live streaming audio of the conference call will be accessible from the investor relations section of the Company’s website.

The dial-in number for the conference call is 844.646.4463 (or +1.615.247.0256 for international callers), and the participant passcode is 2891447. The live audio webcast of the call will be available on the investor relations section of the Company’s website at www.washingtonprime.com.

A replay of the call will be available on the Company’s website, or by calling 855.859.2056 (or +1.404.537.3406 for international callers), passcode is 2891447, beginning on Thursday, July 26, 2018, at approximately 1:00 p.m. Eastern Time through midnight on Thursday, August 9, 2018.

Supplemental Information

For additional details on the Company’s results and properties, please refer to the Supplemental Information report on the investor relations section of the Company’s website. This release as well as the supplemental information have been furnished to the Securities and Exchange Commission (SEC) in a Form 8-K.

About Washington Prime Group

Washington Prime Group Inc. is a retail REIT and a recognized leader in the ownership, management, acquisition and development of retail properties. The Company combines a national real estate portfolio with an investment grade balance sheet, leveraging its expertise across the entire shopping center sector to increase cash flow through rigorous management of assets and provide new opportunities to retailers looking for growth throughout the U.S. Washington Prime Group® and Shelby’s Sugar Shop® are registered trademarks of the Company. Trademark and patent registrations for Tangible™ are currently pending. Learn more at www.washingtonprime.com.

https://www.globenewswire.com/news-release/2018/07/25/1542305/0/en/Washington-Prime-Group-Reports-Second-Quarter-2018-Results.html