Washington Prime Group Inc. (fka WPGGQ)

[Enterprising Investor]

Washington Prime Group Reports Third Quarter 2018 Results (10/24/18)

Total portfolio leasing volume at 3.1 million square feet through September 30

COLUMBUS, Ohio, Oct. 24, 2018 (GLOBE NEWSWIRE) -- Washington Prime Group Inc. (NYSE: WPG) today reported financial and operating results for the third quarter ended September 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 for the three months ended September 30 is primarily due to an impairment loss resulting from property dispositions recorded during the third quarter of 2017, with no such charge occurring in the third quarter of 2018.

Occupancy for the Company’s 41 Tier One enclosed retail properties (“Tier One”) increased 100 basis points to 93.6% as of September 30, 2018, compared to a year ago, demonstrating strong leasing demand.

Combined Tier One and Open Air comparable net operating income (NOI) decreased 0.5% during the third quarter of 2018, demonstrating continued stable performance. As of September 30, 2018, Tier One and Open Air assets represented approximately 90% of core portfolio NOI.

Leasing continues to be robust with total leasing volume for the core portfolio totaling 3.1 million square feet during the nine months ended September 30, 2018.

Lifestyle tenancy, which includes food, beverage, entertainment, home furnishings, fitness and services accounted for 63% of total new leasing activity during the nine months ended September 30, 2018.
The Company has allocated approximately $300 million to $350 million of capital necessary to reposition 28 department store spaces over a three to five year period. These costs are included in the Company's previously anticipated redevelopment spend of approximately $100 million to $125 million per annum. This excludes spaces owned by non-retailers including Seritage Growth Properties (“Seritage”).

Lou Conforti, CEO and Director stated: “Let’s cut to the chase. First, we are reaffirming fiscal 2018 FFO guidance between $1.48 and $1.56 per diluted share, and third quarter 2018 FFO was $0.37. Second, this reaffirmation as well as our increased, yet measured, optimism is in spite of a certain department store established in Chicago 126 years ago filing for Chapter 11 bankruptcy protection on October 15. Remember the Brady Bunch drinking game where everybody had to chug a beverage when Marcia said ‘groovy’ or Alice was caught making out with Sam the Butcher? In similar fashion, Mark, Lisa and I have to imbibe (Fresca, Tab and Fanta Red Cream Soda, respectively) every time the name of this retailer is mentioned. This has become somewhat of an issue as we’ve run out of red plastic cups. One final comment which places this bankruptcy filing into perspective: Where do you think Greg purchased his groovy shirts?

“We recently supplemented our institutional investor presentation and supplemental with a detailed progress report for the 28 department store spaces we consider ‘at risk’. Within our Tier One and Open Air portfolios, excluding those spaces owned by Seritage and other non-retailers, we are actively planning redevelopment and/or are in discussions for 24 of the 28 spaces. Stay tuned. As I stated last quarter, ‘future prospects for Washington Prime Group are brighter today’ and the resolution of the aforementioned department stores provides us with increased visibility to further our dominant secondary town center mandate.

“Turning to operating metrics, leasing space is the most relevant benchmark of a landlord with one caveat: It is imperative we diversify tenancy in order to attract guests which span across the socioeconomic, gender and age continuum. This is exactly what Washington Prime Group has accomplished.

“Total leasing volume for the nine months ended September 30 was a robust 3.1 million square feet, of which 63% of new deals was Lifestyle tenancy as we continue to incent our leasing professionals to diversify tenancy, and over 160 incentive-qualifying leases year-to-date show its working. Of the 3.1 million square feet, 665,000 is attributable to 11 leases in excess of 20,000 square feet and nine of these leases were in excess of 50,000 square feet. This accelerated big box leasing is a testament to our hybrid concept which captures both enclosed and open air components. I am of the adamant belief this serves as a differentiating factor within our secondary marketplaces as these demographic constituencies appreciate the convenience of ‘one stop shopping’ our assets offer. Just to be clear, inline leasing e.g. space under 20,000 square feet hasn’t been neglected as illustrated by a 19% increase for new deals during the first nine months of 2018 when compared to a year ago.

“Overall occupancy for core assets increased 20 basis points year-over-year, of which I am happy to report Tier One rose 100 basis points. Open Air decreased 60 basis points to 94.7%, primarily attributable to the Toys R Us bankruptcy, while Tier Two enclosed properties declined a modest 30 basis points to 86.8%. To place into perspective, the combined occupancy of Tier One and Open Air increased 20 basis points to 94.1% which is the highest in over three years.

“Occupancy cost which provides a measure of tenant operating efficacy is, in my opinion, the quintessential litmus test. Think about it, Washington Prime Group offers its tenancy cost-effective space without the saturated landscape of a primary catchment. We have exhibited one of the best occupancy cost ratios within the sector and the previous quarter was no exception as overall occupancy cost declined 30 basis points compared to a year ago to 12.3%, which included a Tier One decrease of 20 basis points to 12.1% and Tier Two decrease of 30 basis points to 13.6%. Same overall positive trend with respect to inline sales as indicated by an increase of 1.1% to $376 per square foot, compared to a year ago, of which Tier One increased 1.0% to $397 per square foot, while Tier Two decreased 2.0% to $287 per square foot.

“Combined Tier One and Open Air comparable NOI decreased a modest 0.5% during the third quarter of 2018 demonstrating continued stable performance from assets which account for 90% of total NOI. During the third quarter of 2018, Tier One and Tier Two comparable NOI declined 1.4% and 9.5%, respectively, while Open Air increased 1.7%. Overall releasing spreads decreased 7.1% on a trailing 12 month basis, with Enclosed decreasing 9.9% and Open Air increasing 3.6%.

“It is important to address a basic reality. Many of our assets have been neglected for twenty or so years. Nonetheless, we have exhibited cash flow stability for two basic reasons: Our guests continue to shop and tenants operate profitably at our locations. I mention this because as we transform our assets via such measures as operational enhancement, tenant diversification, common area activation and symbiotic redevelopment, we will make decisions which serve to strengthen our Company over the long haul. If this means ‘flattish’ e.g. minimally variant cash flow over the short term, then so be it, as I am confident our strategy will ultimately result in outsized growth. In a utopian idyllic, we’d experience stair step comparable NOI growth and I’d ride to work atop a unicorn traversing a rainbow highway while rocking one of Greg Brady’s groovy shirts. By the way, Washington Prime Group would also not trade with an FFO multiple akin to a de facto liquidating trust.

“The progress Washington Prime Group has witnessed over the previous two years is admirable and I thank my colleagues who contribute by grinding it out every single day. They understand progress is incremental and a dog park in Albuquerque can be just as important as an ALDI-anchored redevelopment in Kokomo. Their hard work has resulted in better assets, improved operations and stronger finances as well as our Company distancing itself from its peers. Bottom line: Washington Prime Group has the foresight, dough and work ethic to achieve our goals and I sure as heck wouldn’t bet against us.”

Third Quarter Results

Net income attributable to common shareholders for the third quarter of 2018 was $0.5 million, or $0.00 per diluted share, compared to net loss of $11.9 million, or $0.06 per diluted share, a year ago. Funds from Operations (FFO) for the third quarter of 2018 were $82.1 million, or $0.37 per diluted share. This compares to $81.5 million, or $0.37 per diluted share, during the same quarter a year ago.
Comparable NOI for the core portfolio decreased 1.5% during the third quarter of 2018, compared to the same period a year ago, primarily due to the impact of retailer bankruptcies. Comparable NOI for the Company’s 41 Tier One enclosed retail properties decreased 1.4% during the third quarter of 2018, compared to the same period a year ago. Comparable NOI growth for the Company’s 51 Open Air properties increased 1.7% during the third quarter of 2018, compared to a year ago.
Operational Highlights

Ending occupancy for the core portfolio was 93.1% as of September 30, 2018, compared to 92.9% a year ago. Base rent per square foot for the core portfolio was $21.71 as of September 30, 2018, compared to $21.75 per square foot a year ago. Inline store sales at core enclosed retail properties were $376 per square foot for the twelve months ended September 30 2018, an increase of 1.1%, compared to $372 per square foot a year ago. Operating metrics by asset group can be found in the third quarter 2018 Supplemental Information report available on the Company’s website.

Financial Activity

Dispositions

On July 27, 2018, the Company completed the sale of the third 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 third tranche consisted of two outparcels for an allocated purchase price of approximately $4.6 million. The Company received net proceeds of approximately $4.5 million, which were used to reduce corporate debt and for ongoing redevelopment efforts. The Company expects to close on the majority of the approximately $43.0 million of remaining outparcels during the fourth quarter of 2018, subject to due diligence and closing conditions.

Mortgage Loans

On September 27, 2018, the Company closed on a $35.0 million loan secured by Southgate Mall, a Tier One property located in Missoula, Montana. The interest-only loan bears interest at a fixed rate of 4.48%. The loan will initially mature on September 27, 2021, 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. Proceeds were used to reduce corporate debt and for ongoing redevelopment efforts.

On October 23, 2018, the $94.0 million mortgage loan secured by Rushmore Mall, located in Rapid City, South Dakota, was extinguished upon the property transition to the lender. The Company will recognize a gain on debt extinguishment related to the transition of approximately $51.0 million during the fourth quarter of 2018.

Redevelopment Highlights

The Company continues to proactively manage its exposure to traditional department stores situated within its Tier One and Open Air assets. This has been accomplished by the continued redevelopment of owned department store spaces as well as the acquisition of high quality spaces owned by retailers. These capital allocation decisions continue to further the Company's dominant secondary town center mandate via differentiated adaptive reuse where sales volume increases up to threefold.

In September 2018, the Company supplemented its institutional investor presentation with a detailed progress report on 28 department store spaces, which includes Sears exposure, in its Tier One and Open Air portfolios, excluding those spaces owned by Seritage or other non-retailers. The Company is in active planning and negotiations to redevelop 24 of the 28 spaces. The aforementioned presentation is available on the investor relations section of the Company’s website. In addition, a summary of the department store redevelopment status can be found in the third quarter 2018 Supplemental Information report available on the Company’s website.
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 excludes gains from the closing of any of the remaining tranches of the Four Corners outparcel dispositions during the fourth quarter as well as the approximately $51.0 million gain on the extinguishment of the Rushmore Mall mortgage debt as discussed above.

Driven primarily by the recent Sears bankruptcy, the Company is now expecting comparable NOI to decline around 2% over the prior year. Additionally, a downward revision of the Company’s estimate for property tax recoveries and some recent adverse property liability claims contributed to the revised outlook for comparable NOI. There were no other significant changes to key assumptions previously provided, which are detailed in the third quarter 2018 Supplemental Information report available on the Company’s website.

Earnings Call and Webcast on October 25

Washington Prime Group will host a conference call at 11:00 a.m. Eastern Time on Thursday, October 25, 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 7075197. 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 will be available on the Company’s website, or by calling 855.859.2056 (or +1.404.537.3406 for international callers) and using the passcode 7075197, beginning on Thursday, October 25, 2018, at approximately 1:00 p.m. Eastern Time through midnight on Thursday, November 8, 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://globenewswire.com/news-release/2018/10/24/1626704/0/en/Washington-Prime-Group-Reports-Third-Quarter-2018-Results.html