Q2 2020 Washington Prime Group Inc Earnings Call
[music] welcome to Washington, Prime groups second quarter 2020 earnings Conference call.
At this time all participants are in listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one in your telephone.
I'd now like to him the coverage over to your speaker today, Lisa Indest Executive Vice President and Chief Accounting Officer. Thank you. Please go ahead.
Good morning, and welcome to W.P.G. second quarter 2020 earnings call.
During today's call, we will make certain forward looking statements as defined by the federal security laws. These 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 additional descriptions of these risks please refer to our earnings.
Police and various FCC filings.
Management May also discuss certain non-GAAP financial measures reconciliations of each non-GAAP measure to the comparable GAAP measures are included in our press release supplemental information package and FCC filings, which are available on the robust investor Relations section of our website.
Members of management with US today are Luke and 40 CEO Mark you see also Josh Linda more head of leasing and Dan Scott.
SVP of development now I'll turn the call over to live.
Thanks, Lisa and good afternoon everybody.
Well the impact of coated the cobot 19 pandemic has of course temporarily impacted the company.
My colleagues have displayed in the speed the car, which has more than noteworthy and these efforts have manifested themselves from both a business and philanthropic perspective for instance, W.P. Carey's has performed over 900 community service projects well open for small business has been at the forefront of ensuring not only the survival.
But the prospering of local entrepreneurs and small businesses.
These specific measures have not only provided immediate assistant to those a need they have further solidified our town centers as an essential member of the community they serve.
Well, the well being of guests tenants employees is obviously of the utmost concern what is even more remarkable is our continued operating progress. During this crisis and let me provide you a few highlights which deserve attention.
First and foremost we took any issue regarding our credit facility off of the table.
We received the requisite let lender constant for the modification of our existing $1.3 billion credit facilities, which had included in <unk>, which included an immediate waiver of certain financial covenants as well as less restrictive threshold thereafter consideration is temporary partial collateral with release available beginning.
Third quarter of 21, all in all a.
Hey, great outcomes.
Next on the list.
Leasing volume and I like everybody to listen up cities couple of tidbit. During the first six months exhibited a 7% increase year over year.
Totaling 2.2 million square feet.
And.
As importantly, re let releasing spreads increased 6% in the second quarter reflect reflecting the strongest quarterly improvement over several years and as a matter of fact during the height of new pandemic and March April May and I think Josh June 182 lease.
Says were signed totaling 1.3 million square feet.
Of the 18 adaptive reuse projects, we have underway, you know filling retrofitting and filling a big box a former department store box every single one of the tenants involved have reaffirmed their commitment to occupy the their respective premises admittedly seven of delayed opening until the second quarter of 21.
To take advantage of a seasonality of seasonal factors and Dan Scott and his team and Eric's daily.
Delivers the product or construction, a head they've done an amazing job in.
In one.
Having that those reaffirmation as well as delivering product.
Two quarters ago, we discussed the monetization of a few of our sites and we're pretty pleased to report and yellow why a letter of intent was executed for the mixed used <unk> redevelopment of Westminster value, a mall and evaluation inline with our expectations. In addition to net proceeds in excess of $50 million. This join.
Venture allows W.P.G. to maintain the retail cone component well a nationally recognized development comedy delivers multi family product to the site which of course.
In years to the benefit of retail because more people and.
So on and so forth.
And next to fool inventory the company's recently launched last mile fulfillment initiative has been met with tenant response, which has surpassed everybody's expectations as evidenced by an 80000 square foot medical products fulfillment space to a major university inventory clearance facility to a national sporting goods retailer.
And discussions are underway with several logistics providers and tenants to satisfy portfolio wide fulfillment.
Solution.
The factors that benefit fulfil inventory include well located assets situated long major transportation networks, a financial benefit should tenant, especially when factoring in buy online pickup in store capabilities and the innovative manager quite a man or quite frankly.
Which where we've approached this effort for inventory is going to be a game changer.
I'm going to talk about her in a wide decrease and it's important that we deconstruct and Mark will provide further detail.
As a result of the pandemic.
Our comp in a wire to second quarter Comping, a wide part of me decreased 44.6% comprised of a 53.1% and 24.5%.
For tier one and open air respectively.
Let me explain the following factors first we have the we've taken a tempered view of the future collection of second quarter rents, which continue to be resolved favorably and quite favorably as shown by the most recent collection data, which was 71.3% for July that was comprised of 66 and a half.
5% spring close.
And a very robust 85.2% for open air.
Note and please listen sector pure estimates for Collectability are all over the place as accounting is is based upon internal assessment and again I'd rather manage expectations in this regard.
Next.
Our company's approach when it comes to tenants both large and small is there are long term partners and we took just don't count when negotiating modifications and guess what recent leasing volume adaptive reuse affirmations and of course increase collections validate the strategy.
Third I think I'm third or fourth third.
We're adamant about our assets positioning is the dominant town center and there was no way I'm God's green or as we were going to shirk, our responsibility responsibility during a national crisis.
This isn't the only because all of us should shoulder, helping those in need just as.
Simply being a human being there's also a pragmatic reason and I'm never above a pragmatic reason.
If if indeed its counterparties as is.
Is well intended hosting goes 900 community service projects and serving as a resource at large has enabled us to solidify our community president.
And again look at the recent recent leasing volume adaptive reuse Safra reaffirmation reaffirmation and increase collection and its playing to see this approach is clearly we're working.
And by the way you know, we've also and I guess.
I will try to use a genteel from dislodged several tenants from competition Josh.
We have a little kind of running 10 incentive program, Josh what's the running tally on our are those and those tenants dislodged.
We're we're standing up 17, right now with about a billion seven incremental went away so incremental brand spanking, new and Hawaii is 1.7 million Bucks on 17 tenants.
That quite frankly.
He is a harsher word but.
We're let's just say they were unhappy with.
Where they were hanging out and now they're part of the W.P.G. family.
I'm going to take a moment to point out an interesting observation and I can go into detail if anybody wants to call I'll, probably put a little white paper out but it supports my conviction regarding the viability of mid size cities N.V. extrapolation W.P.G. assets.
And I you can't get a better endorsement than my mentor in this space, who said it couldn't an upset a better yesterday when on his earnings call. He said look for a resurgence in the Midwest.
Okay, So mid mid west.
Good proxy mid size for us and I can say the regression in the correlation which evidences that but midsize them essays of experience more robust growth rate when compared to their larger counterparts ecosystems <unk> cost of living in conducting business. So heck of a lot lower than large counterparts.
There are mid <unk> cities are hotbed of innovation as a result of often being the homes to higher educational institutions and technological advances allow for more disbursed residency and probably wants out there back and 80 980, there was a book by the name of population dispersal, which really.
Offered a forecast of life physical lot agglomeration would diminish and importance.
We need a heck of a lot more time series data to reaffirm this but I will tell you are tending tenant monthly reported sales over the last couple of months.
Has shown just that.
Sohail the mid sized city everybody.
Two more things.
I'm of the belief corporate culture, our corporate culture at W.P.G. emphasizes respect notwithstanding we should always strive to improve in or in you know to address such crucial matters as diversity.
In this regard we've established in inclusion committee to continue to exit execute upon internal and external recommendations and it's very important to me personally as it is my partner sitting around this table.
In closing.
It's important to highlight the cooperation in support of our credit facility participants and other financial partners their confidence of our operational capabilities. It serves as an endorsement as we continue to execute upon our focus objective so in summary.
We did what.
Others have not been able to do with respect to our financial with <unk>.
Credit facility, our leasing was as good as if not better than anybody we have taken a strategic course pursuant to collection, which obviously impacted and know why but guess what collections.
Weren't just for second quarter, and as evidenced by our increased collection rate and.
Our tenants wanting to be our partners.
We're on the right path Mark.
Yeah. Thanks Lou.
Good morning, everybody, obviously, the significant news from a balance sheet perspective involves the pending credit facilities modification.
Today, we have received the requisite lender consent for such modification and we'd expect to close by the end of the weak on the revised facility as Lou mentioned through the immediate waiver of certain financial covenants and less restrictive thresholds into next year, including a permanent increase to limit for overall leverage to 65% the modification.
Should provide us with the bridge to the other side the pandemic well comes with the cost including temporary collateral restrictions through negative covenants and an increase in pricing. It does allow us to run our business and most importantly continue with our strategic redevelopment investment we will provide full details of the modification upon closing.
We should also mentioned that we arent compliance with the bond covenants as of the second quarter of 2020, both prior to and pro forma for the credit facilities modification.
When considering the uncertainty associated with cobot significant reduce risk exist any forecasting in the current environment notwithstanding based upon our current projections. We believe the company's should have the necessary flexibility that will allow us to navigate and maintain compliance with or modified credit facilities and bond covenants for the foreseeable future for covenant Fourq.
Testing purposes. This assumes a slow recovery with continued pressure from the pandemic, especially for the remainder of this year.
We did finished the second quarter of 2020 with available liquidity of approximately $144 million when including cash on hand.
Based upon cash collection trends since the reopening of our properties, including over 70% rate for July we're assuming improved cash flow for the second half a year, which should result in the company, finishing 2020 with $150 million to $175 million of liquidity.
The cash forecast does include approximately $50 million of redevelopment spend over the next six months. It also assumes minimal common dividend payments are needed over the remainder of the year to address redistribution requirements.
We also expect that within the next six months to transfer back our remaining noncore and close assets of Charlottesville fashion square and Muncie mall, resulting in additional debt reduction of over $75 million from our current balance sheet.
In terms of remaining 2020 secured debt maturities, we only have port Charlotte those scheduled to mature in November at this time, we have a deal negotiated with the service or for one year extension without any principal pay downs.
Now, let me turn to our quarterly financial results when adjusting for the impairment charge taken in the settlement of a notes receivable AFFO for the second quarter was a penny per diluted share. These results were directly burdened by the $53.4 million for 24 cents per share decline and property NOI quarter over quarter.
To put this in perspective, 26% or 43 million of our base rents and charges for the second quarter were deemed uncollectable, primarily driven by rent abatements, some bad debt associated with bankrupt tenants.
As Lou reference we have taken a longer term view of relationships with our tenant partners throughout the portfolio. We believe this is reflected in the level of modifications agreed to during the period as we look to help our tenants through these difficult times, especially with respect to our local and regional partners by the way. The vast majority of these deals include a suspension of any co tonnage.
So your kick out provisions that the tenants might have during the period deferred rents remain outstanding.
Additionally, last percentage rent and specialty lease leasing income directly attributed to mandatory property closures resulted in another $10 million a quarter over quarter decline.
But the reopening of our properties, we do expect to see a rebound in this activity during the second half of this year.
We also took a hard look at the Collectability of our 2019 tenant recovery reconciliations that were build during the first half of this year along with our estimates for 2020 reconciliations to be build next year.
Finally, these revenue decreases were partially offset by lower property operating expenses during the period.
When looking beyond second quarter end of why performance to other operating metrics solid leasing volumes positive quarterly releasing spreads an increase in comp sales for the month of June portfolio occupancy and see it nearly 92% and finally, a robust redevelopment pipeline ready to come online within the next year.
We believe we are well positioned as we focus on getting through to the other side of this pandemic.
In terms of department store activity within our portfolio. During 2020, we had one Macy's closing impacting our noncore property Muncie.
JC Penney a shutdown at Southgate to make way for a new shields, all sports store and Sears is close their stores at Orange Park White Hall, and North was at this point, we're not aware of any other plant closures within our portfolio.
Finally, do directly to the Cobot 19 pandemic, we had previously withdrawn or full year 2020 guides.
We have no plans to provide updated guidance at this time.
We will now open the call up to any questions. Thanks.
As a reminder to ask a question you will need to press star one in your telephone to withdraw your question. Please press the pound key please standby well, we compile the Q and a roster.
And again, if you'd like to ask a question it's star one on your telephone keypad.
And we do have a question from the line of Floris Van Dyk I'm from Compass point Your line is open.
Thanks.
Morning, guys I'm learning.
Wanted to a couple of questions. Maybe if you can talk about what percentage of your rent is being impacted by by bankrupt tenants this quarter.
Sure.
Yeah, I mean, what what I can tell you a floor as is.
You know, it's it's certainly a a pretty significant number we had $15 million worth of a bad debts at a that impacted our numbers about a 14, 15% of our base rent and charges and what lease up probably about half of that yet relate specifically to bankruptcies and she.
I'd point out that you know clearly a there there's a narrative that bankruptcies or elevated this year, but we are tracking to last year's activity. So it's not significantly above and beyond what we saw in 2019 and probably for that matter 2018, as well at least within our portfolio.
Okay, and maybe I missed this but did you mention what percentage of your tenants have reopens.
Yep. So we have all of our malls open except for two a in California that are available for curbside, but when you look at the properties are fully open we're somewhere between 90% to 93% of our tenants have reopened.
Great.
And maybe.
If you could give some more details on the on the the joint venture at Westminster Mall and are you, making progress on potential.
Venture.
Initiatives that some of the other properties you had mentioned previously.
Yes, with respect to the progress on below both clay terrace in West shore Floris.
And it's just very simple.
The the joint venture away at.
Westminster, we were adamant about maintaining obviously.
The retail retail retail component along it.
It's on the four or five.
And its main and main and the highest and best for him.
A large swaths a large portion was multifamily we got a very good certainly an acceptable pry evaluation on that we get our cash predicated upon the delivery of as you can imagine zoning some zoning requirements and we maintain the retail.
Component, so pretty straight forward and the other two.
Very close on but quite frankly, very close on one and we're just evaluating.
It's in the best interest so the company.
But you know as as stated you know we were going to monetize those and.
Several other.
You know interesting opportunities within our portfolio and enforce just emphasize I mean, we are in active conversations on the other two.
And this is all transpired.
This year and over the last several months so even in the current environment. There are clearly folks interested in these opportunities at all three of the properties. We had previously identified.
Great just just to make sure that so you got 50 million for for a JV interests, how much more equity or capital do you think you need to commit to this is there no more capital commitments on the residential portion of that or what's your stake on that or are you selling.
Oh, absolutely no there there's no more obligatory commitments on our on our part as it relates to Westminster.
Okay.
But you will keep a stake in the in the residential or have you sold but all we want to keep a stake in the re I did ice as I said retail.
If I, maybe maybe I said I apologize I am I think has had retail but no we're not going to we're not in the residential business and the.
The best course of action, obviously was to find a great.
Apart multifamily developer and do a deal with them.
Got it great.
I'll, let the next person to ask right.
Thanks.
Your next question comes from the line from Ki bin Kim from Trust. Your line is open.
Thanks, Good morning, guys.
Even you Hey can you go back to the comments about sales volume and you said, you're seeing some decent improvement.
Can you provide more color behind that and.
What percent of tenants is actually represent figure in line kind of the data that you're at all.
So and [laughter], because my script was getting too long.
Let's see I was a let's just say I was nudge to omit a portion, but we have and I'm looking as I'm talking.
We have.
Data categorical data for every one of our tenants and its categorize the.
Regions.
Retail merchandising merchandise categories, there's two or three other John had its tenants. It's it's region its retail merchandise Ki bin and then and you can actually go down.
From the mall level and when when you look at the data and I think Lou touched on it. It's it's certainly a small.
Small sample size, but when we look at the data internally and small timeframe all time good good sample when you when you look at it it's certainly.
It's.
Positive in the in particular in the Midwest region, and there are smaller markets. What we're seeing is.
These these retailers seemed to be doing a.
Better then then they are and some of some of our larger markets and we think there's a multitude of things that are that are driving that one customer staying home not wanting to go to a larger market larger more larger center with you know million five 2 million square feet being around people. So we're we're certainly buoyed by.
The information coming out so far and all the talk a ki bin and others.
Yeah as I talk in the actions as it relates to.
Transforming our assets into the dominant town center.
It works and it works.
When we combine.
<unk> beverage entertainment home furnishings fulfillment events activities installation driving movie theaters, so on and so forth edge.
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Hi.
In works and.
By virtue of our location and by virtue of our dominance within that market.
You know again, a couple you know a limited time series does not a.
You know I hypothesis make but.
We believe in this business, we've always believed in this business our lender.
Participants obviously believe in this business our tenants believe in this business as evidenced by more leasing which is.
Yes.
You know my mentors, David Simon and Rick Sokolov will tell you Lou keep your nose to the grain to and then lease goddamn space and we've leased space our adaptive reuse ers.
Dan.
Believe and believe in this.
And.
You know with it.
Mark us to engage us.
On.
Second quarter and know why.
Is maybe the most UBS and you're not not that you're doing it keven, but in this is my pontificating, a little bit but.
It's silly, it's silly look at our collection rate and I'm going to find joy.
And continuing to prove people wrong. This is about leasing space and it's about diversifying tendency it's about doing all the things that we've done and just look at our operating metrics from a lease volume and that for you standpoint.
Well what else you got even.
Got it listed in your opening remarks, but yes, it looks like a high level sales volume as a percent of like last year as volume number.
We did and I.
Let me grab that and they 0.6% we actually had positive June over June sale was a 60 basis points 60 basis points positive the month of June 20, compared them on to June 19.
I mean put that in parts perspective, I don't think you saw that on.
Madison Avenue in a in the sixties and seven needs in New York.
I don't think use and again, it's it's as much that mid sized thesis as well as our.
Idiosyncratically working are behind us to make our assets the places to be and I look at what our tenants are telling us they are signing leases.
[noise], So think okay claims and that'll be interesting to further validate as you get more time series data.
Got it and.
Can return to analyze outperformance I know, it's a snapshot in time and it's just sure for two tier which is probably the bottom.
But just so that we understand the starting point.
The minimum rent decreased 24% or $27 million I'm I'm disease and.
Disclosure for property comparable property NOI.
How much of that is.
Bankruptcy related for says.
His abate listen that number that decrease or would that be in <unk> collectability of rent I'm not sure what goes on what buckets I mean, Ki bin I think probably the best way to look at this and it gets a bit complicated when you started looking at what's in men rents and whats in bad debt and so on but basically a you know we talked about the fact that.
You know, we believe we ultimately will collect through deferrals or cash collected to date still some outstanding receivables at age 74% of our base rent and charges.
That means 20, or 26% was deemed uncollectable, probably maybe lease. So that's 60 40, what I'll call abatements or modifications versus just bad debt.
Then on top of that as I mentioned, the other part a you know to focus on it is our percentage rent and our Oh short term specialty leasing, which would not be and that oh that that number that was another $10 million a drag which we believe we do know with all of our properties open that's going to recover.
And I will recover quickly well and suddenly I'm, sorry to interject, it's not only recovering with respect to existing tenancy by Jim What Josh mentioned with respect to are going out after and this was a concerted.
Company wide effort if of getting low small businesses.
We're not only recapturing our existing.
We're getting those that realized that they.
They benefit from being in a W.P.G.S. sarcoma.
No I think that you know that gives the perspective I also mentioned that we took a hard look at some of the other receivables estimates we had on the books, we actually out our 2019 reconciliation recovery billings, mostly a taxes.
So that was built in the first half of this year and we took a hard look at Collectability there and we also refined our estimates for what we would be able to bill next year and that was close to another $5 million. So from our perspective, a lot of one time items that were associated with that actually being shut down.
And certainly a as you mentioned, we are very confident that the second quarter will be the low point in terms of other than a lie and we will build from here.
Okay and you know.
To further there was there such.
You know relative very there's such a comparative basis hedges variability of course, we look at peers from a comparative standpoint, you know the the litmus test is.
You know future and keeping you pointed this out.
I think as the headline you know our recent Collectability, but you know from an opex.
And I'm going to do quote unquote saving standpoint.
Anybody that putts around with repairs and maintenance.
You know and and didn't.
It's going to bite them in their assets and you know.
We aired on the side of conservatism not only pursuant to our with respect to our estimate, but just you know as well as understanding that the assets that we own and we've been very good and getting rid of those that we do that.
Where the opportunity cost.
Isn't commensurate with the risk you know those assets that we own they are that are dominant town centers and.
We weren't going to.
Not maintain and upkeep. So I see these and align numbers that all over the board and is purely predicated upon one a collectability estimate to how did you winking nod with respect to repairs and maintenance, which is part of Opex.
And.
And I am and as evidenced by.
Our leasing volume they adaptive reuse reaffirmation and so forth.
Our strategic decision was absolutely the right one.
Hello, everyone. Good morning to auction I'm sorry.
Look what no.
No one well my friend.
Oh, So you made a good point about expenses and obviously you can hold back on certain things that our controllable are you guys showed about a.
$6.4 million decreasing expenses year over year I'm talking to the same store pool here or how much of that is sustainable.
Well I, but part of it was a you can see our real estate taxes were actually a negative comps. So I think on just a recoverable operating expenses. It was about 7.6 million certainly we are planning on having a you know savings a in the second half of the.
Sure.
I won't be to that level, but we do have reduced hours I mean, I and I want to be clear I mean, we're taking a look at every dollar that goes out. These were decisions that were made a you know as it relates to repairs and maintenance I was very much that if we had a repair that was going to need to be taking care of and ultimately could end up costing us more money down the road we took care.
But there's some things we decide to do with the properties close that we could get accomplishing a dress without folks and our customers in the property. So all that went into it but we continue to look for ways to to say dollars, that's going to be important as we get to the second half a year and we fully expect to have a expense savings.
In the last six months.
Okay. Thank you.
Thanks <unk>.
And again.
I'm sorry.
And again, if you'd like to ask a question its star what in your telephone and we'll pause for a brief moment.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.
Thanks all.
Uh huh.
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