Washington Prime Group, Inc. (NYSE:WPG) Bank of America Merrill Lynch Tower Global Real Estate Conference September 15, 2020 10:30 AM ET

Company Participants

Louis Conforti – CEO & Director

Mark Yale – EVP & CFO

Joshua Lindimore – EVP & Head, Leasing

Conference Call Participants

Craig Schmidt – Bank of America Merrill Lynch

Craig Schmidt

Welcome. This is Craig Schmidt from the BofA Retail REIT group. I want to welcome you to the Washington Prime Group Roundtable. From Washington Prime Group, we have Lou Conforti, Chief Executive Officer; and Mark Yale, Executive VP, CFO.

We also have from the Retail Research side of Bank of America, Alex Pernokas, who will be monitoring questions as they come through Veracast. Washington Prime Group is a retail REIT, which has ownership, management, acquisition and development of retail properties. The company’s combines a national real estate portfolio with its expertise across an entire field of shopping center sectors.

We’re going to begin with a short overview of the company from Lou. Keep in mind, if you do have a question, you can enter and submit them through Veracast.

Lou, if you can take us away.

Louis Conforti

Thanks. Hey, everybody. We also joining us is 1 of my partners, Josh Lindimore, who heads up all things leasing. He’s our Head of National Leasing, Executive Vice President with us. So I’m going to provide a synopsis of who we are very quickly then what we’ve done, and I’m going to try to be as concise as at all possible. We have a national portfolio of both enclosed and Open Air retail venues, of 100 assets. 93% of our total NOI is allocated to our Tier 1 and Open Air assets. And Open Air accounts for about 40%, a little less, maybe 38% of our total NOI.

We’re diversified by product, size, geography, and tenancy. And I think that’s a diversification. And quite frankly, that format fluidity just allows us to beta test stuff. And we’ll talk about tenant diversification, area activation and our adaptive reuse success in a moment or two. We are increasingly adamant about mixed use. And that mixed-use because it’s just a natural extension and evolution of what a retail space should be and I’ve been known to be a little bit fourth right at times of that.

And this sector was characterized by facility, and it was rent collection and that’s antithetical to us. We’re working our asses off to think about curation. I think about act upon curation, we can evidence that via couple of statistics as Josh will talk about, common area activation and our adaptive reuse on a relative basis, we’ve done more adaptive reuse than anybody. Anything else you want to know about it that’s kind of generic you can read. But let me talk about several things that I want to that that I think are a headline of bull, if I might.

So we have a significant leasing progress in the face of the COVID-19. Leasing volume exhibited a 3.6%, year-over-year increase during the first 8 months of this year, totaling 2.9 million square feet. And again, pursuant to our diversification mandate, 44% of that new leasing was attributable to lifestyle tenancy.

We believe we have a thesis, our dominant town center thesis in a robust secondary trade area. Albeit that’s a bit of a mouthful, it really characterizes of who we are and what we want to be. We want to be the town center in Missoula or Johnson City, Tennessee. And Mike and I actually, in the last page of the presentation, I speak to a quasi-academic reason why you’re going to see population dispersion. And why midsized cities are going to be extraordinarily more of interest to everybody. Over the last four years, we’ve leased nearly 16 million square feet of space. During the height of the pandemic when really, the world was going to heck in a hand basket, if we signed 182 leases totaling 1.3 million square feet, including July and August, we have so again we’ve signed 324 leases. And during those few months, not the entire year, we were at 2 million square feet.

All of our assets are open except for Hawaii and I’m just trying to go quickly. Upon reopening our assets, we reported comparable sale. We increased 1.2% year-over-year in June. We went back down in July, but that should be expected, and it was an anticipated, and we continue to see sequential improvement. Mark, do you want to talk about our collections for a moment, which well, I’ll say about this is that the idea that we were looking at collections and a point in time at the end of second quarter was absolutely the dumbest thing I had ever seen, and we’ve taken a very different approach with our tenants.

Where we have been working with them and that we have been fostering relationships via Josh’s team that these are work in progress. And as evidenced by our today’s release, our collection rate is not only in line, I think it’s better than some of our peers. But more importantly, we enfranchised our tenants in the process and realize that was going to be quick pro quos. Mark?

Mark Yale

Yes. I think Lou touched upon it. Our overall collection rate for the second quarter did improve from when we announced second quarter earnings was 43%. We’re now at 48% collection rate. You factor in the amount that has been contractually deferred along with some rents that are still due. We still anticipate ultimately collecting around 74% of our second quarter rents.

As Lou discussed, we have seen improving trends moving towards stabilization in terms of collection rates. So if we looked at both July and August, and looked at the expected contractual rents and charges to collect, we’re a little over 80% on those months.

So clearly, moving in the right direction. And as we talked about a month ago or so when we did release earnings, so do expect those trends to continue to improve. And that’s really driven by the fact that we have all of our malls open, except for one, about 90% of the tenants that were there going in the pandemic that reopened. And that is helping drive improved collection trends. So certainly things are moving in the right direction. We’re releasing — and leasing space and hopefully moving towards some normalcy and stability as we finish off 2020.

Louis Conforti

Craig, we missed on anything? You want to open it up. What’s next?

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Question-and-Answer Session

Q – Craig Schmidt

Yes. Let me open it up, and we can touch on stuff as we go on. I guess touching on part of the overview. You’ve got 53 million square feet. It’s comprised of enclosed and Open Air venues, you’ve got lifestyle, you got factory outlet, last mile fulfillment. I just wonder if you could kind of run through the operating metric performance and just on running of those businesses over the COVID-19 outbreak, particularly in closed versus Open Air spaces.

Louis Conforti

Yes. Well, we don’t really have factory outlet. I mean, say for Seattle, which is under transformation as evidenced by the signing of some major entertainment venues there. But obviously, closures were impacted. You had more in close, and we actually put out an argument that just via touchpoints and via critical mass and traffic that enclosed are as safe, if not safer than an Open Air or a high street venue.

We actually present that into several municipalities and 1 reopening’s but our Open Air and from a metric standpoint, Mark, I’m just trying to think, what was our Open Air — I guess you can do it via collection, right.

Mark Yale

Probably I can just look at — if you looked at just NOI growth for the 6 months ended June 30 we were down around 30% for closed and down just under 9% for our Open Air which certainly makes sense in terms of the fact that our Open Air did not close through the pandemic and then obviously had a greater percentage of essential tenancy.

Louis Conforti

No what is deemed to be essential tenancy.

Craig Schmidt

Okay. And then right now, the nation, the industry, we’re experiencing record high bankruptcies and store closings through mid-September. What do you guys expect the trajectory of store closings to be in the next 3.5 months of the year?

Mark Yale

Yes. I was just going to say, I mean, certainly, we have seen some bankruptcies this year. I still want to go back and if you looked at the names, and I’m not going to disparage anybody, but certainly, these are tenants that we’re not surprised. And probably there was going to be a day of reckoning and really till the last couple bankruptcies we’ve had a minimal impact, and we’re actually trending well below what we had seen the last couple of years.

And there are challenges on the watch list. But the other thing I would tell you is we just don’t see the concentration of events that we saw in terms of some of the larger, more significant bankruptcies that that hit us this summer and even in 2019 and 2018. So they will be consistent with where the business is. But we just see any of those big hits. And we also view what’s happening with JCPenney, that’s a positive. We think they’re relevant within our portfolio, and it looks like they’re going to have a path to continue to move forward.

And that will be helpful because when you talk about concentration of rents, that’s probably the largest bankruptcy that’s out there on the table for us. And even with that, you’re still only talking about 1% of our annual base rents?

Louis Conforti

Yes, I think it’s important to emphasize than 1%. And Craig and others, take a look in pages, I think 10 and 11 of this presentation of our adaptive reuse. So tell us, again I’ll harken back to diversifying tenancy. And insipid merchandiser like Bon-Ton’s or others that were doing sales volume of $6 million, $7 million. In every instance, we’ve doubled and tripled that sales volume as well as catalyze that corridor of the assets. So there would be confirmation if we were unable to lease space. We have leased space on a pro rata basis more than anybody, and we’ve leased to better tenants.

Craig Schmidt

Good. That leads to my next question. Maybe tell us about who’s out there actively taking space since the COVID outbreak occurred?

Louis Conforti

Well, it’s here, Josh. Yes, it’s a legitimate answer. But for us, the COVID outbreak is — it’s situational. It’s not something god forbid, that’s structural. So it hasn’t been easy, albeit the mindset and our perspective hasn’t changed because of coronavirus. We’ve made those adjustments and evidenced by what we were doing in conjunction with the University of Chicago with our open for small business initiative and ensuring that small businesses actually not only remain but flourish in our assets. But there’s nothing structural about COVID. So the question is, what have we done over the last 3 or 4 years in terms of tenant diversification? Josh?

Joshua Lindimore

Yes. I mean, look, obviously, you can see Lou touched on it before on the adaptive reuse on Page 10 and 11. And then when you talk about COVID and what we’ve done with these tenants is, look, we’ve taken the long view approach so we’ve certainly structured some help in the short-term during the COVID period and working with them as sales continue to increase. But there’s also been some quick pro quo, right? So we’ve gotten extended terms. We’ve gotten relief on co-tenancy if that was needed. So we viewed it as working with these retailers as a partnership because it’s certainly beneficial, not only for us but for them as well as we all navigate through this certain…

Louis Conforti

And our peers either did a step arm for played Ostrich and put their head in the sand. And for us, this was an opportunity to further buttress our robust, dominant town center thesis. And listen, look at the statistics, look at the leasing, look at and then our occupancy cuts as a such, where our stores can be profitable, and they’re not subject to the bastardization of a major metropolis, where you have 18, you fill in the blank, national tenant, where if I get rid of 4 of them, you can play off those that are remaining open.

And for us, we have generally, from a location, we have the location. The tenant has the location in the trade area, in the marketplace, in the catchment. And we’re actually — and we do interesting things other than give them four walls and a little bit of tenant improvement money.

Craig Schmidt

Okay. Maybe you can tell me a little bit about Fulventory. The recently launched initiative?

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Louis Conforti

Sure. So one of the things that always befuddled me and the team was that there seemed to be this binary path where it’s either physical space or e-commerce, and they can’t exist together and we absolutely believe there’s a symbiotic relationship with the two. And this isn’t a disintermediation of Hamid’s business. Because, quite frankly, this isn’t 34-foot clear, high cube pros. This is in effect, smaller hub-and-spoke space that enures to the benefit of buy online pickup in store and conversely return in store.

And when there’s been proven multiplier impact. I think if you go on our website, we have a Fulventory presentation. So very simply your long tenancy utilized space for last-mile fulfillment and again, BOPIS as well as — and here’s where I kind of refer to it as the toggle is inventory clearance. And Josh can tell you that the baying of a company is to sell up discounted merchandise alongside full price. And this provides them the opportunity to do with such.

We didn’t realize it would receive this reception. And quite frankly, we haven’t even got our beta test builds, and we now have several leases signed and including some very large tenants that weren’t existing in the particular asset. They see our tenants and our national retailers see it as hub-and-spoke. They might see it as inventory clearance and we place them in the corridor, which might be a less productive corridor. We combine that with what we call retail to go, which is automating the pickup and delivery of when a guest comes to pick up goods and this is common sense. This is common sense and no one’s going to win a Nobel. There’s no Nobel lorry, it’s any offing for doing this. But shame on this industry for thinking it was either/or.

Craig Schmidt

Okay. And maybe you could describe the modification of your $1.3 billion credit facility?

Louis Conforti

Sure. That nobody — again, well, Mark, why don’t you give it a go?

Mark Yale

Yes. So I mean, we’re certainly pleased to be able to execute on that, have the support of our debt partners really a bridge to get through the other side of the pandemic that was important one, to make sure that we got the flexibility that we believe we needed with our covenants. We also wanted to make sure that we had the flexibility to continue to run our business. And there’s ample flexibility in the modification for us to continue to reinvest through our redevelopment, which is most critical. And it did come at a cost in terms of pricing. We had to provide some temporary collateral, but not full security.

And I think it so demonstrates the fact that our banking partners believe there’s clearly a path forward for us. And they’re being supportive because if they didn’t, they probably would have taken a different tact with regard to the modification. So simply put, it provides a bridge to the other side. And that’s what we were looking for. I do want to be clear, though that it doesn’t mean that we’re just going to be sitting on our hands as it relates to things we can do to enhance our balance sheet and address what are most likely concerns for equity investors. And we continue to look for ways to improve our story, improve our liquidity and improve our financial flexibility. And I think we’ve demonstrated that over the last couple of years, and that will continue. And we appreciate the support of our banking partners.

Louis Conforti

Yes. I mean, I’d just add on just very quickly. Our banking partners throughout the capital structure. And I think is a function of us focusing on operating infrastructure and again, tenant diversification, common area activation, adaptive reuse that we are the logical aggregator in this business. And our debt partners, and again, throughout the habstack in effect, told us as such. And we’re incrementalists. We are doing things on a step-by-step basis, and this was a very favorable outcome, the modification. And they wouldn’t have been — they wouldn’t have evidenced this flexibility if not for their belief in us and just they tuned.

Craig Schmidt

Okay, great. Maybe some of your views on the transaction market, when may it start to get more active? What are you seeing in terms of enclosed assets versus Open Air? What are you seeing out there?

Louis Conforti

I mean there’s no evidencing of price discovery. I mean, we’ve — and in the enclosed, if it does occur — I mean, again, you can put aside the current from a situational standpoint, all things coronavirus and environment. But prior, you were either a primary asset, and you can look at implied cap rates and Craig, that you provide and add a little premium and then you’d — ramp like the corporate cap rates and then you — and want to check what an asset would go for and then there was everything else.

And unfortunately, and this is why that we’re going to prove all the shorts and all the fund that’s wrong. Is that that everything else included shift that we got rid of. The mark was prudent enough to give rid of 17, 18 assets. And there needs to be a little bit more nuancing. And we sold our stuff to folks that they’re not truly operators. They’re not — it’s a different business. It’s a milk cash flow and a probably functionally have to have in business until it goes away, maybe you get a couple of pennies of reversionary value. That’s not our business.

And again, I’m going to quote, look on the transcript, our big brother said, look for a resurgence in midsize and Midwest cities in his earnings call, and that has been something that has been our thesis for a long, long time. And you need to have that nuance that the world isn’t a premier asset in Los Angeles and everything else. So they’re not really meaningful price discovery. And when we’ve got — I quite frankly think that it in nearest to our benefit that there’s going to be opportunities as a result. And I mean Open Air is obviously evidenced in a little bit more stability and a little bit more kind of normal course behavior.

Craig Schmidt

Okay. And then you’re obviously doing a number of changes to your real estate, but what do you think are some of the ways that retail real estate landscape will change on the other side of the pandemic? Are there any big changes ahead for us?

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Louis Conforti

Yes. I think we’ll see an acceleration in the going away of functionally obsolescent product, which we applaud. The embrace of true omnichannel and it’s not just a buzzword. And as evidenced what we’re doing Fulventory retail to go. Hopefully, more tenant diversification. I think that this industry, and we’ve been at the forefront. I would just look. And we won a global award now in terms of activation and sort of the social media group and so kind of weird to say that we had a TikTok event that 12,000 people in a week and 54 million or 55 million views because that was in, I think, mid-January but there needs to be more dynamism. This is not a rent collection business. This is an operating business.

Mark Yale

Yes. And I just want, I think we want to emphasize that our strategy going into this has not changed. We absolutely believe in experiential retail. It’s important to the viability of our centers going forward might be a little bit challenged in the current environment, but there is going to be a post pandemic world.

And we absolutely believe there’s going to be a shift. People just want to get out of the house. They want to touch. They want to feel, they want to be with others and have that shared experience. So everything we’re doing on that front will continue. And we see that commitment from the tenants, even though they’re having their challenges today. They believe in their businesses longer term.

And there will be a benefit. I mean, just people will absolutely want to get out of their houses, their apartments. And that’s a big part of the deals we have coming online, and that’s the other thing I’ll emphasize, when we talked about this before, the deals that Lou talked about in terms of our redevelopment that’s ultimately over a $10 million plus annual type NOI contribution from those tenancy coming online.

Louis Conforti

Every single one of our big adaptive reuse tenants, every single 1 of them reaffirmed with us a couple of months following the outbreak of the pandemic. Admittedly, a couple of them, maybe 3 or 4 of the 17, 18 of them, pushed an opening because there’s seasonality factors, but every single 1 reaffirmed and I am telling you, it has been our — we’ve substantiated both quantitatively and qualitatively that midsized cities who had been so distant demographic constituencies have been just given that’s shown just such a lack of respect. Every time we do something interesting and that really involves a lot of beta testing and doing that at a minimal cost that it resonates. And we will continue to say it to resonate to do things that resonate with our guests and our tenants and everybody else.

Craig Schmidt

And so are the experiential tenants actively working to be able to hit the ground running when we are on the other side of the pandemic?

Louis Conforti

Yes. And guess what, it’s not them, it is a collaboration and it is cooperation, whether it be field house, whether it be I think around [indiscernible] whether it be any food and beverage office, and some of the ghost kitchen concepts that we’ve announced, some of it is working in conjunction with our activation, both our marketing and activation and social media.

So we are providing that support. And we’re providing that, we’re disseminating and conveying them that the information and conveying the message. And this is another, and you asked what are the changes. There’s always been a counterparty tension between landlord and tenant because it was rent collection. It was rent collection. And that’s another one of the [indiscernible] dumbest things that I had seen in this industry when I joined 3, 4 years ago. And that is something that we’re removing it. There shouldn’t be tension. There should be absolute alignment of interest.

And listen, at an 11.2%. And obviously, we were evidencing maybe even lower, 11.2% occupancy cost. Our tenants can be profitable. We might make our job a little bit easier. Not to take anything away from Josh in terms of the relationships and the things that he did. But Josh, as I’m touching on my head, his team has done such an amazing job at really anticipating the needs of our tenants, both large and small. And that’s why — and I’m going to harken back and everyone was guilty. At the end of the second quarter, they published 43%, 46% — and this is a work in process.

And it just — and the reaction — I mean, I just think it was just such a grievous error by those that really emphasize that those point in time metrics. All right. What else?

Craig Schmidt

Okay. I think at this point, we’re running out of time. I have three rapid-fire questions. And if we could get you to please reply with 1 word, quick replies. The first one is, what causes you the most concern in the near to medium term? One, no vaccine or it’s taking longer than expected to get distributed; two, second COVID wave or three, impact of job layoffs to come.

Louis Conforti

Second COVID wave.

Craig Schmidt

Second COVID. Okay. Do you think the worst is behind us in terms of economic conditions? Yes or no. If no, when do you think we’ll see the worst data 4Q ’20, first half ’21, second half ’21?

Louis Conforti

I mean I can’t answer that. I mean is that a macroeconomic? Is that specific? Is there industry specificity, is that to retail, who’s going to be the most adaptable. I mean is it from a macroeconomic, from a GD — from a U.S. standpoint…

Mark Yale

But I don’t think we’re going to see the GDP drop we saw in the second quarter. I might say, the worst is behind us.

Craig Schmidt

Okay. Sounds good. And then last, which of the following real estate sectors will suffer the most long-term damage from the pandemic, lodging, malls…

Louis Conforti

Office.

Craig Schmidt

Office. Okay, office. That’s one of them. Very good. Okay. Listen, I want to thank you.

Louis Conforti

We don’t own malls. Craig, we don’t own malls. We own 75% of our home centers hybrid. Bye.

Craig Schmidt

Home centers. Okay. Okay. Thanks, guys, for appearing. Bye.

Mark Yale

Bye.



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