Q4 2019 Earnings Call
And friend Group fourth quarter 2019 earnings call.
As time, all participants are in they listen only mode.
After the speaker presentation, there will be a question and answer session.
To ask your question. During this session you will need to press star one on your telephone.
Be advised that todays conference is being recorded and if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to Lisa Indest Executive Vice President and Chief Accounting Officer. Thank you. Please go ahead.
Good morning, and welcome to W.P.G. fourth quarter 2019 earnings call.
During today's call, we will make certain forward looking statements as defined by the federal Securities laws.
Statements relate to expectations beliefs projections plans and other matters that are not historical and are subject to the risks and uncertainties that might affect future events or results for detailed description of these risks. Please refer to our earnings release and various SBC filing.
Management May also discuss certain non-GAAP financial measures reconciliations of non-GAAP financial measure to the comparable GAAP measure are included in our press release supplemental information package and FCC filings, which are available on the Investor Relations section of our website members of management with US today are losing 40.
CEO, Mark Yale CFO Joslin to more head of leasing and Dan Scott Senior Vice President of development now I'll turn the call over to live Thankfully Sun job.
Hey, everybody.
My colleagues and I, we've worked hard and smart to differentiate our company.
First thing, Tennessee, activating common area.
An undertaking value added adaptive reuse.
In addition, we've made sound financial and strategic decisions as well as demonstrating the ability to access traditional as well as more resourceful capital.
Take for instance, our decision during the previous for years to dispose of 17 assets, not including out parcels and alike, and which we considered in Congress to our dominant town center objective.
Regardless of the short term dilution. This action has proved more than prudent, allowing us to devote our time and money to those assets most able to benefit from focus adaptive reuse.
Our progress to date.
And Dan Scott is here and as Josh we can talk them up more about that in a moment that progress to date illustrates we've made the right choices.
Notwithstanding there continues there continue to exist skepticism as it relates to the necessary capital required to accomplish this adaptive reuse mandate.
The reset of the dividend is attendant to alleviate any doubt whatsoever as opposed to <unk> acting out of weakness.
The board proactively made this decision and our earliest available opportunity.
I mean to me, it's just so darn simple our fiduciary responsibility is to allocate capital accordingly.
And this decision to an answer to enhance our liquidity was.
And sense and logical.
I'm going to say the simple table below but that wont work. So this I mean, we provided a very.
Basic cable, which clearly illustrates this improved cash flow.
Several relevant factors should be noted, including a pretty healthy ever very healthy 70 million Bucks of tenant allowance in Capex is deducted from fad.
And this table.
Hinting.
Doesn't call for the need for a dollar of additional credit facility borrowing.
And I am I want everyone to turn to it at their convenience because it shows that long story short that our estimated fad payout ratio is now about 60% to 63%.
And it didn't so in that contemplates the six projects the six adaptive reuse projects and Scott's herculean efforts.
With respect to filling 77% I believe 75% of our boxes.
Six projects in 2019, we anticipate starting another 12 for and eight and 2021 and 22, respectively. That's all included in our careful analysis.
And simple extract extrapolation illustrates we have plenty of frequent cash to deliver these projects.
I want everybody to also think about the following financial metrics and just take a look and see how we stack up against our sector pairs.
Furthermore, when it comes to leasing volume and resolving department store vacancy, while it's difficult to glean comparable information from some of our peers I take the leaders I take the over we are leaders on a relative size basis, and both endeavors those metrics I'm talking about unencumbered NOI to total in Hawaii.
56%.
Open air in Hawaii to total into like 27%.
EBITDA to interest expense 2.6 times.
Combined tier one and open air I know why.
Over total in Hawaii is now 93% and our occupancy cost I believe is the best in Italy in the sector and 11 spot 2%.
I want to do I want to talk about one other point as it relates to open Erazno Y. When you include nine assets, we classify as tier one but have an open air format and these are.
Great Great assets Arbor Hills Arboretum, Clay Terrace, Malibu, Oklahoma City, Scottsdale Town Center Waterford Lakes are open air portfolio increases to 40% of total in Hawaii.
I want you guys. The then say give us the shittiest.
Oh, I'm, sorry, I can't swear give us the crime is multiple.
Have a strip center pair and our assets are quite frankly better than anyone everybody's stay for a couple of field and.
Do that extrapolation coefficient weight that 40%.
During last quarters earnings release, a conference call, we provided a summary of incremental and they be which had a potential of about two bucks or three redevelopment assets.
This analysis assumes we sold the fully entitled land parcels to developers of Renzi residential lodging in office, while we would maintain the responsibility of retail.
The capital investment required to deliver this fully entitled land parcels is the as a deduct from any V.
I bring that up because in this like we're pleased to announce the first them our three redevelopment it's underway it clay terrace lessons from West shore. Other two very large ones. There are certainly underway in that it via the entitlement process and we're making great progress, but clay terrace is really really underway, it's going to be comprised of two.
Under 90, 290 unit multifamily rental project hundred 40 guess remote how.
New office space totaling 200000 square feet, an additional 70000 square feet a space intended for lifestyle tendency for the non retail stuff.
We are far along in negotiating with several very reputable developers.
And we look forward to that as well.
In closing.
You know, we're going to continue to prove our assets via differentiated tendency in dynamic activations.
We're our comedy is also increasingly embracing the fact, we are in essential participant regarding the logistics distribution and delivery of goods and services, which speak to an omni channel perspective, so stay tuned.
As the dominant town center within our respective trade areas. It's imperative we provide convenience. In addition to interesting alternatives, where I guess you need shop work play and live.
With this in mind my colleagues and I were going to get back to our jobs and continue to grind it out and I'm going to say one more thing.
The my colleagues at Washington, Prime Group notches.
The guys and gals sitting around this table are the most amazing group of people that I haven't worked with there the via spread the core in Indiana, certainly interesting sector has really been I just I'm you know it that it is they they make me want to.
Get up every day.
And they give me the intestinal fortitude to listen to some of the questions and I'm gonna be receiving from some of the analyst Mark you're out.
Thanks, Lou we finished the end of 2019 with available liquidity of just over $500 million, when including cash on hand and capacity in our credit facility. Additionally, when considering the expected $50 million that net proceeds this year from the sale of Outparcels and other noncore asset and the over $65 million of and.
Free cash flow availability based on the dividend reset that Lew mentioned, we continue to feel comfortable with our current liquidity levels. We're now well positioned with the current capacity on our credit facility to address the upcoming April 2020 maturity of our $250 million box. Please note. These after mentioned bonds are only unsecured debt much.
Dirty through the end of 2022, when our credit facility unrelated term loans mature. Moreover, we remain well situated to fully commit to our strategic redevelopment pipeline.
In fact, when considering both the dividend reset and the ability to continue to modestly sell noncore assets, we anticipate being able to self fund our redevelopment pipeline for the foreseeable future.
In December we transitioned to the service or the West Ridge Mall and Plaza properties, along with nearly $50 million of secured mortgage debt. We also expect that within the next year to transfer back our remaining non core and close assets of Charlottesville fashion Square Muncie Mall and seminal town center, resulting in additional debt reduction.
Of over $75 million from our current balance sheet.
Once again each of these encumbered noncore assets have single digit that yields, thereby providing us with a very efficient way to de lever.
Beyond these mortgages were making good progress on our remaining secured debt maturities in 2020, we have recently extended the loans secured by them all the Johnson city mortgage with up to five years of additional term based upon this we believe there is a reasonable likelihood that we'll be able to extend the ports Charlotte mortgage similar to the Johnson City extension.
And with respect to the Grand Central mortgage loan maturing later this year, we're going down parallel tracks working on an extension with the service or by also discussing a new loan with several different regional banks.
As Lou mentioned, we're making solid progress with respect to addressing 30 department store boxes in our tier one and open air portfolios, which we believe we'll need to be repositioned overtime. The number did increase by one box when we opportunistically acquired the former elder Beerman store Dayton Mall from a third party during Fourq, you 90 or those third.
The boxes fiber currently occupied by open and operating Sears stores. So when considering the 18 locations address via sign leases or negotiate O wise. This represents over 70% of these vacant boxes. Once again this demonstrates the strong demand for space within our portfolio, while allowing us to continue to diversify the experience for our guests.
With $50 million already incurred as at the end of 2019, we plan to spend up to an additional $300 million over the next three to four years, which is still in line with our original projected estimate to transition all 30 locations remember the full pipeline excuse excludes the 10 boxes owned by non retailers.
Putting seritage.
Now, let me turn to our quarterly financial results when adjusting for the gain on the extinguishment of debt AFFO for the fourth quarter was 31 cents per diluted share landing within our guidance range going into the period, primarily driven by larger than expected outparcel gains and lower corporate overhead expense that offsets.
Lastly, weaker than anticipated and a wide during the period.
While impacted by a handful of unexpected items, including real estate taxes property operating expenses and other ancillary income Campana why did improve sequentially from the third quarter by 90 basis points. Once again, it's worth mentioning that N.Y. performance from our tier one and open air portfolio for the full year 2019, when neutralizing for the.
Pack from Sears Bon ton and toys R us and the first quarter in line bankruptcies would have been down less than 1% versus the negative 5.2% that we reported.
In terms of our outlook, we did introduce our 2020 AFFO guidance within the range of 99 cents to one dollar seven per diluted share. The declines from 2019 AFFO per share levels include nearly eight cents from lower anticipated gains on sale of out parcels in 2020, and a combined six cents a dilution from dispositions.
And loss and Hawaiian or noncore assets from the full year impact of their perennial ground lease transaction and from less noncash mark to market rent amortization.
With respect to comp NOI guidance, we're expecting performance in the range of up 25% to 1.5% from our tier one and open air portfolio, We should point out that Oriental Guy and NOI guidance does include a reserve of nearly 100 basis points for unexpected store closings and rent relief and finally, while we're still tracking to the $10 million.
Of the new and why contribution from our existing redevelopment pipeline around 3 million of this is going to shift into 2021 based simply on timing.
We should see sequential improvement in terms of N.Y. performance from the fourth quarter of last year to the first quarter. This year, but we're still expecting negative growth for the quarter and then turning modestly positive the remainder of the year.
Consistent with our state of practice, we did complete our annual reassessment of the property Tiering within our portfolio. We saw no changes in the prior classifications other than moving Westminster out of the core portfolio due to the major redevelopment now plan that underway on the site.
In terms of department store disruption within our portfolio. During 2020, we'll have to Macy's closings impacting our noncore properties, that's muncie and seminal A.J.C. Penney will shut down and Southgate to make way for a new shields, all sports store and Sears has announced the closings of their stores at Orange bark White Hall and northwards.
All this activity has been appropriately factored into our 2020 budget and guidance.
Finally in terms of our dividend, we believe the reset level at an annual rate of 50 cents is appropriate based upon projected taxable income for the year. We should also point out that this is relatively the first here that we've had the ability to actually lower our dividend rate based upon pass rate distribution requirements of taxable income primarily driven by onetime.
Im gains on property givebacks.
With that we'll now open the call to any of your questions. Thank you.
Ladies and gentlemen in order to ask a question you will need to press Star and then one on your telephone please standby will be compiled accumulate roster.
Your first question is from Christy Mcelroy with Citigroup. Your line is open.
Hey, guys like hey, thanks much.
Mark just wondering if I could revisit some of the co tenancy discussion that you were just talking about you had 14.8 million of impact in 2018, you talked about resolving 18 to 25 Department stores, where you have control.
Can you just sort of put all that in context of what you're expecting for 2020 co tenancy impacts what's what's embedded in that same store range, what's the likelihood of some of that stuff getting cured in 2020 versus some of those tenants gaining kick out rates given that the link of the.
The department store vacancies.
Yep Christie first of all just to clarify that 14 $15 million of impact as a combination of co tenancy and lost rents. So when we pivot to the $10 million and now it's it's closer to $7 million of contribution from redevelopment.
Probably the bigger piece is the rent side of replacing the rents, but there is some co tenancy cures and we are expecting some improvement in co tenancy.
But the bulk of it will will shift probably into 2021 as the co tenancy carriers are really back weighted to the second half of 2020. So I think the good news is we don't have a significant amount of of reversal of co tenancy in 2020.
So what we will see and I think it just even pivots.
To to a nice growth opportunities and 22011, it beyond and we still evidence and that's a good great question anchors and we still evidence.
We're still.
Projecting.
A positive comp comparable Angela underlying growth them those.
Our most Arden task right now is in the hands of Eric Daily and his team.
To deliver.
Not only the boxes that Dan Scott is delivering but the.
What load of inline space that just keeps leasing and the sooner we get that online.
Yeah, the sooner we mitigate the co tenancy.
Thank you and head is that how does that work when you don't have control the box.
So what's embedded in the leases when you telling her control where yes.
So the six it meets its five I.
I think there might be sex with with continents or six boxes within that 30 that we don't have control it today, five or open and operating spheres.
And I think the other location, we've making progress in terms of addressing the co tenancy. So that's just a matter of.
The an opportunistic as well as I mean, Dan you have plans for those five it sounds to me yes.
We certainly want.
Three I can name three of them back I mean, but let's just say again think about and Dan I'm, sorry, but think about what Dan Scott and his team have done we've addressed I'd say, 80%.
Of our vacant.
Box.
Yeah, and Christy on those boxes that we don't down we're always in box in negotiations with the owner of the box.
Evidenced by the fact that at the end of last year, we bought the elder Beerman box and date and at a very good price.
Okay, and then just one last one on the dividend reset.
It looks like the market likes it just maybe I understand the taxable impart income implications of why you couldn't do before but maybe you could talk through some of the background is making that decision and.
Some of the other factors that you were considering.
In that chains.
It it was the.
Easy is in most logical.
Commonsensical does that aware of it that decision that we have ever made electively as a board and senior senior management management. As again, we are we have a fiduciary responsibility to be prudent allocators of capital.
And as well as lots of other things and including operating a.
You know.
Our portfolio on for Us this.
It was simple it was the right size.
And this was our first opportunity to do as such.
So there the there obviously you know there's.
Yes.
To increase incremental cash flow by 108 hundred 10.
<unk> million dollars.
It was in the absolute right thing to do.
[music].
And we are now beginning to deliver although the foundational things that we said we were going to deliver and I just want to emphasize mean the reason why we haven't had the opportunity to do it.
Is really driven primarily by some of these property dispositions transitions faxes service or I.
I think we've moved on from 17 assets that we are very thankful are not part of our portfolio.
Because those would be the ones, where there would be more challenging answers. So that was the right decision. Then now we're in a position where we can make the right decision to direct to the many mass on the number of anchors of each one of those 72 and a half to three anchors and they were by definition our.
Crappiest assets think about the co tenancy, we would not be.
In this position today.
To really deliver all the things that.
We said we were going to do.
Make sense, well Phoenix weaker.
Thank you Christine.
Your next question is from Ki bin Kim with Suntrust. Your line is open.
Thanks, and good morning.
Just a follow up on Christys question.
So why 50% how did you come to that number why not more why not more.
Stock dividends versus cash.
How did you think through all those things.
I mean I.
Dartboard.
With a little bit of analytical and a little bit of capital capital might kept them. So I mean repair monetizable qualitative and quantitative no. It was it was the right amount we look at our surplus cash flow, we looked at whether prospectively should be weak.
Yes, and obviously, we looked at our capital needs.
In conjunction with the healthy room, we have in our financial Covenant.
And.
And Texas, then leases speak up.
Actable income requirement.
As part of it.
But the taxable income requirement you can it can be paid out of stock dividends right and the reason I asked that it's because I am happy you guys cut it but.
Even based on your own projections in your press release.
You know the land sales and things like that are helping you cover for it a capex and that we'd be boundless, but keep in 36 million. This thing that chart.
We have $36 million of surplus cash flow. This our company and every company in practically every sector has a reoccurring.
Dispositions and what are we saying that we're going to $20 million year of dispositions.
We have plenty of cash it's kind of its.
I'm going to be I'm, sorry go on.
I was just going to say, even too I mean.
We were laying out I think we're proving the ability to ensure that the liquidity to fund our redevelopment pipeline. We're stabilizing our cash flows and when you talk about stock dividend, Yes, you don't dilute our shareholders' interests ownership interest, but but you are diluting.
The value of what they out I mean, just think about issue the shares it's incredibly dilutive on a per share basis and if your multiple stays the same office and you got lower share price. So there is a cost. So we're always looking out for what's best for our shareholders Theres a significant costs associated with that stock dividend and we have a path forward.
In terms of our allocating capital.
And.
As Lou said, the reducing the dividend to where we did was absolutely the right decision a pretty straight forward decision I think it positions ourselves, where we can move forward and in essence self fund our redevelopment pipeline, which is ultimately the way we're going to deliver long term value to our shareholders is proving out our portfolio and we're doing it every day.
Okay, and the redevelopment and you guys announced on Clay Terrace.
Is it kinda prototypical redevelopment, where you have metal why coming offline then you'll get that back and then some later or is that more accretive near term because that anvisa ramp artful rates.
Ki bin I was the Champing at the bet that someone would ask that and and and this segue.
So mark spoke treatment as as spoke about department store disruption and we've talked about that.
And the fundamental reality and this is what unless you're in the trenches working your bahar behind the every single day, the world isn't linear and clear cut.
He I'm going to give you a three assets and these are pre kinda sorta random assets. So the impact on clay terrorists.
Southgate.
And southern part the and Hawaii impact by US doing great things not me, but Josh and Dan.
Eric and everyone else. It WG delivering this stuff is about a million 92 million bucks of of and online which is about 50 60 basis points 50 basis points of.
Comparable and NOI growth. So of course. This is curations. This is moving and we were just in meetings and I, Josh is going to give me the Eagle life I management. This is moving X tenant to accommodate this tenant after.
After Dan brings in a shield Southgate, which does on average one of their started to an average 30 35 million 35 million Bucks. The year. This is this isn't as wrote a methodical as ACMI tenant leaves ACMI 10 there.
The subsequent tenant is replaced I get a 1.72% same store rental as same store NOI growth. This is.
And operating business great question. So.
You know to me and as we've said this before.
I want I want everything upward into the right I think statistically that competitor looks good dastin I want everything upward into the right we have changed.
The composition of these assets and yes, one man their work and we were up 6%.
Leasing volume year over year and are we going to lose a little income and while were while were.
Again, while Josh and Dan and team and Lauren and Amy and everybody and working their magic of course, but guess what it's all coming is going to be coming online and these assets are now the dominant ounce centers. So thank you for I'm, sorry, I gave you that soliloquy, but thank you for the question no one get right.
No one gets us back that this is moving pieces around.
Thank you. Thank you.
Your next question is from Vince to both with Green Street Advisors. Your line is open.
Hi, good morning.
Can you talk about some of the factors that led to fourth quarter results to come in a lot weaker than you expected and I think last quarter guidance online or did you listed here, what we said.
Listen to what we just said.
What's changed over the past 90 days, maybe if you can just talk about that I understand did the nuances here, but I guess what changed over since last quarter, but.
Well, we said we would be down for the year.
4% or or so so yes, I mean, we did fall a bit short in terms of where we plan to come in in terms of the fourth quarter was really three care three areas. One was just property taxes, we assume some savings that did not materialize. Some of that is timing help us into 2020 property operating expenses.
Talking about the you know million dollars on a large base and just some some some some ins and outs there some things that we dealt with and then just a you know ancillary income just some odds and ends and when you're talking about three or $4 million that moves it and you're talking about significant base, but I can tell you is yes.
Those items were all appropriately factor in other onetime in nature or had already been factored into our plan for 2020 and does not change our outlook for these properties and we're going to have some some ins and outs from time to time, but none of this was.
The types of items that all of a sudden we're looking at our growth potential or looking at our properties in a different way.
Okay got it and maybe just shifting gears could you talk little about about the refinancing plans. So the 250 mall million dollars bond debt maturing matures in April.
I guess, you're going to pull on the line temporarily or look to get some longer term term loans are transit tap the bond market.
On your thought process, there, we're going to we're going to put on the line.
We're comfortable as we laid out with the dividend reset and looking at non core sales that will be comfortable that we'll have ample capacity on the credit facility move forward.
And then you know as as we've always talked about I mean, we'll continue to look for ways to smartly de lever and enhance our liquidity, but as we look to this year and with the dividend said and all of a sudden having $65 million worth of free cash flow.
And the ability when you talk about nine a almost 100 assets that we have when we look out beyond just 2020, I mean, we're talking about $20 million of of noncore asset sales.
That really lays out a plan, where we can cover our adaptive reuse and we actually have dollars to spend smartly elsewhere in the portfolio. So.
We as we mentioned in the prepared remarks are comfortable with where we are from a liquidity in the leverage perspective.
To move forward here.
Got it makes sense and then so once you do the once you put the bond on the line is there any what's the remaining borrowing capacity.
Do you expect to be on that as it wouldn't be the full size. The line of credit are there any potential covenant that would maybe restrict you from borrowing last call.
Well I mean, it's just.
I mean, we're basically swapping out capacity on our credit facility for an existing liabilities. So that has no impact and as we mentioned, though we are in compliance with our covenants at the end of the year and based upon what we are aware of today our forecast in our guidance. We are comfortable that we will have no covenant issues.
In 2020, and as I also mentioned that we'll have.
The remaining capacity on the credit facility will be ample for us to continue to move forward and execute our business I think about one mark has.
As prudently and live live.
With some artistry when he has done in an extraordinary in an extraordinary period.
56%.
Of our total Leno why is unencumbered and we provided for unum person or within the supplemental we have our financial covenants and.
Look at look at the Dsps that that service have looked at the coverage ratios.
Comparing against.
Others, and honor thing I'll point out as and.
Stole my Thunder, a little bit, but the unencumbered hurdle, we have close to $100 million of unencumbered NOI and our open air portfolio.
If you're worried about our access to liquidity, we can go ahead and get.
And so we can get third party financing tomorrow on the majority of those assets. So we don't need to yes.
It's a great.
Okay. Thank you.
And again, ladies and gentlemen in order to queue for your question you do need to press Star and then one.
Yeah.
Ladies and gentlemen, this does conclude acuity period end today's conference call. Thank you for your participation and that this time you may now disconnect.
Thanks all.
[music].