Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2017March 31, 2020 of Washington Prime Group® Inc. and Washington Prime Group®, L.P. Unless stated otherwise or the context requires otherwise, references to "WPG Inc." mean Washington Prime Group® Inc., an Indiana corporation, and references to "WPG L.P." mean Washington Prime Group®, L.P., an Indiana limited partnership, and its consolidated subsidiaries, in cases where it is important to distinguish between WPG Inc. and WPG L.P. We use the terms "WPG," the "Company,” “we,”" "we," "us," and “our”"our" to refer to WPG Inc., WPG L.P., and entities in which WPG Inc. or WPG L.P. (or any affiliate) has a material interest on a consolidated basis, unless the context indicates otherwise.
WPG Inc. operates as a self-managed and self-administered real estate investment trust (“REIT”). WPG Inc. owns properties and conducts operations through WPG L.P., of which WPG Inc. is the sole general partner and of which it held approximately 84.3%84.6% of the partnership interests (“("OP units”units") at September 30, 2017.March 31, 2020. The remaining OP units are owned by various limited partners. As the sole general partner of WPG L.P., WPG Inc. has the exclusive and complete responsibility for WPG L.P.’s day-to-day management and control. Management operates WPG Inc. and WPG L.P. as one enterprise. The management of WPG Inc. consists of the same persons who direct the management of WPG L.P. As general partner with control of WPG L.P., WPG Inc. consolidates WPG L.P. for financial reporting purposes, and WPG Inc. does not have significant assets other than its investment in WPG L.P. Therefore, the assets and liabilities of WPG Inc. and WPG L.P. are substantially the same on their respective consolidated financial statements and the disclosures of WPG Inc. and WPG L.P. also are substantially similar.
The Company believes, therefore, that the combination into a single report of the quarterly reports on Form 10-Q of WPG Inc. and WPG L.P. provides the following benefits:
enhances investors' understanding of the operations of WPG Inc. and WPG L.P. by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both WPG Inc. and WPG L.P.; and
creates time and cost efficiencies through the preparation of one set of disclosures instead of two separate sets of disclosures.
The substantive difference between WPG Inc.’s and WPG L.P.’s filings is the fact that WPG Inc. is a REIT with shares traded on a public stock exchange, while WPG L.P. is a limited partnership with no publicly traded equity. Moreover, the interests in WPG L.P. held by third parties are classified differently by the two entities (i.e., noncontrolling interests for WPG Inc. and partners' equity for WPG L.P.). In the consolidated financial statements, these differences are primarily reflected in the equity section of the consolidated balance sheets and in the consolidated statements of equity. Apart from the different equity presentation, the consolidated financial statements of WPG Inc. and WPG L.P. are nearly identical.
This combined Form 10-Q for WPG Inc. and WPG L.P. includes, for each entity, separate interim financial statements (but combined footnotes), separate reports on disclosure controls and procedures and internal control over financial reporting, and separate CEO/CFO certifications. In addition, if there were any material differences between WPG Inc. and WPG L.P. with respect to any other financial and non-financial disclosure items required by Form 10-Q, they would be discussed separately herein.
WPG L.P. is a voluntary filer. We are evaluating whether or not WPG L.P. will continue to voluntarily file reports under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
WASHINGTON PRIME GROUP INC. AND WASHINGTON PRIME GROUP, L.P.
FORM 10-Q
INDEX
|
| | |
| PART I: | FINANCIAL INFORMATION | PAGE |
| | | |
| Item 1. | Consolidated Financial Statements (unaudited) | |
| | | |
| | Financial Statements for Washington Prime Group Inc.: | |
| | | |
| | Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 20162019 | |
| | | |
| | Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 | |
| | | |
| | Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 | |
| | | |
| | Consolidated StatementStatements of Equity for the ninethree months ended September 30, 2017March 31, 2020 and 2019 | |
| | | |
| | Financial Statements for Washington Prime Group, L.P.: | |
| | | |
| | Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 20162019 | |
| | | |
| | Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss for the three and nine months ended September 30, 2017March 31, 2020 and 20162019 | |
| | | |
| | Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 | |
| | | |
| | Consolidated StatementStatements of Equity for the ninethree months ended September 30, 2017March 31, 2020 and 2019 | |
| | | |
| | Condensed Notes to Consolidated Financial Statements | |
| | | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| | | |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | |
| | | |
| Item 4. | Controls and Procedures | |
| | | |
| PART II: | OTHER INFORMATION | |
| | | |
| Item 1. | Legal Proceedings | |
| | | |
| Item 1A. | Risk Factors | |
| | | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| | | |
| Item 3. | Defaults Upon Senior Securities | |
| | | |
| Item 4. | Mine Safety Disclosures | |
| | | |
| Item 5. | Other Information | |
| | | |
| Item 6. | Exhibits | |
| | | |
| SIGNATURES | |
PART I
FINANCIAL INFORMATION
| |
| Item 1. | Financial Statements |
Washington Prime Group Inc.
Unaudited Consolidated Balance Sheets
(dollars in thousands, except share and par value amounts)
| | | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
| ASSETS: | | | | | | | | |
| Investment properties at cost | | $ | 5,867,043 |
| | $ | 6,294,628 |
| | $ | 5,918,633 |
| | $ | 5,902,406 |
|
| Less: accumulated depreciation | | 2,127,412 |
| | 2,122,572 |
| | 2,411,754 |
| | 2,397,736 |
|
| | 3,739,631 |
| | 4,172,056 |
| | 3,506,879 |
| | 3,504,670 |
|
| Cash and cash equivalents | | 48,263 |
| | 59,353 |
| | 39,614 |
| | 41,421 |
|
| Tenant receivables and accrued revenue, net | | 90,184 |
| | 99,967 |
| | 81,271 |
| | 82,762 |
|
| Real estate assets held-for-sale | | — |
| | 50,642 |
| |
| Investment in and advances to unconsolidated entities, at equity | | 465,051 |
| | 458,892 |
| | 416,949 |
| | 417,092 |
|
| Deferred costs and other assets | | 210,311 |
| | 266,556 |
| | 202,081 |
| | 205,034 |
|
| Total assets | | $ | 4,553,440 |
| | $ | 5,107,466 |
| | $ | 4,246,794 |
| | $ | 4,250,979 |
|
| LIABILITIES: | | | | | | | | |
| Mortgage notes payable | | $ | 1,412,975 |
| | $ | 1,618,080 |
| | $ | 1,111,344 |
| | $ | 1,115,608 |
|
| Notes payable | | 979,553 |
| | 247,637 |
| | 708,420 |
| | 957,566 |
|
| Unsecured term loans | | 606,380 |
| | 1,334,522 |
| | 686,926 |
| | 686,642 |
|
| Revolving credit facility | | — |
| | 306,165 |
| | 524,430 |
| | 204,145 |
|
| Other indebtedness | | | 97,907 |
| | 97,601 |
|
| Accounts payable, accrued expenses, intangibles, and deferred revenues | | 273,966 |
| | 309,178 |
| | 242,904 |
| | 260,904 |
|
| Distributions payable | | 2,992 |
| | 2,992 |
| | 3,323 |
| | 3,252 |
|
| Cash distributions and losses in unconsolidated entities, at equity | | 15,421 |
| | 15,421 |
| | — |
| | 15,421 |
|
| Total liabilities | | 3,291,287 |
| | 3,833,995 |
| | 3,375,254 |
| | 3,341,139 |
|
| Redeemable noncontrolling interests | | 3,265 |
| | 10,660 |
| | 3,265 |
| | 3,265 |
|
| EQUITY: | | | | | | | | |
| Stockholders' Equity: | | | | | | | | |
| Series H Cumulative Redeemable Preferred Stock, $0.0001 par value, 4,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016 | | 104,251 |
| | 104,251 |
| |
| Series I Cumulative Redeemable Preferred Stock, $0.0001 par value, 3,800,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016 | | 98,325 |
| | 98,325 |
| |
Common stock, $0.0001 par value, 350,000,000 shares authorized;
185,791,421 issued and outstanding as of September 30, 2017 and 300,000,000 shares authorized; 185,427,411 issued and outstanding as of December 31, 2016 | | 19 |
| | 19 |
| |
| Series H Cumulative Redeemable Preferred Stock, $0.0001 par value, 4,000,000 shares issued and outstanding as of March 31, 2020 and December 31, 2019 | | | 104,251 |
| | 104,251 |
|
| Series I Cumulative Redeemable Preferred Stock, $0.0001 par value, 3,800,000 shares issued and outstanding as of March 31, 2020 and December 31, 2019 | | | 98,325 |
| | 98,325 |
|
Common stock, $0.0001 par value, 350,000,000 shares authorized;
187,353,485 and 186,884,276 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | | | 19 |
| | 19 |
|
| Capital in excess of par value | | 1,239,216 |
| | 1,232,638 |
| | 1,257,040 |
| | 1,254,771 |
|
| Accumulated deficit | | (353,997 | ) | | (346,706 | ) | | (675,935 | ) | | (655,492 | ) |
| Accumulated other comprehensive income | | 4,539 |
| | 4,916 |
| |
| Accumulated other comprehensive loss | | | (18,588 | ) | | (5,525 | ) |
| Total stockholders' equity | | 1,092,353 |
| | 1,093,443 |
| | 765,112 |
| | 796,349 |
|
| Noncontrolling interests | | 166,535 |
| | 169,368 |
| | 103,163 |
| | 110,226 |
|
| Total equity | | 1,258,888 |
| | 1,262,811 |
| | 868,275 |
| | 906,575 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,553,440 |
| | $ | 5,107,466 |
| | $ | 4,246,794 |
| | $ | 4,250,979 |
|
The accompanying notes are an integral part of these statements.
Washington Prime Group Inc.
Unaudited Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss
(dollars in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| REVENUE: | | | | | | | |
| Minimum rent | $ | 122,942 |
| | $ | 142,811 |
| | $ | 389,491 |
| | $ | 427,173 |
|
| Overage rent | 1,687 |
| | 2,419 |
| | 5,818 |
| | 7,787 |
|
| Tenant reimbursements | 50,239 |
| | 60,006 |
| | 159,150 |
| | 177,372 |
|
| Other income | 4,452 |
| | 4,686 |
| | 16,426 |
| | 13,359 |
|
| Total revenues | 179,320 |
| | 209,922 |
| | 570,885 |
| | 625,691 |
|
| EXPENSES: |
| |
| | | | |
| Property operating | 37,098 |
| | 41,295 |
| | 109,506 |
| | 124,754 |
|
| Depreciation and amortization | 65,383 |
| | 71,287 |
| | 199,514 |
| | 211,922 |
|
| Real estate taxes | 20,401 |
| | 26,296 |
| | 69,661 |
| | 77,184 |
|
| Advertising and promotion | 2,112 |
| | 2,638 |
| | 6,539 |
| | 7,467 |
|
| Provision for credit losses | 796 |
| | 306 |
| | 4,280 |
| | 2,801 |
|
| General and administrative | 8,108 |
| | 8,139 |
| | 26,027 |
| | 28,375 |
|
| Merger, restructuring and transaction costs | — |
| | (307 | ) | | — |
| | 29,607 |
|
| Ground rent | 237 |
| | 1,142 |
| | 2,264 |
| | 3,242 |
|
| Impairment loss | 20,892 |
| | 20,701 |
| | 29,401 |
| | 20,701 |
|
| Total operating expenses | 155,027 |
| | 171,497 |
| | 447,192 |
| | 506,053 |
|
| OPERATING INCOME | 24,293 |
| | 38,425 |
| | 123,693 |
| | 119,638 |
|
| Interest expense, net | (34,344 | ) | | (32,168 | ) | | (98,113 | ) | | (103,982 | ) |
| Gain on extinguishment of debt, net | — |
| | — |
| | 21,221 |
| | 34,078 |
|
| Income and other taxes | (448 | ) | | (322 | ) | | (2,996 | ) | | (1,415 | ) |
| Loss from unconsolidated entities, net | (165 | ) | | (933 | ) | | (781 | ) | | (2,602 | ) |
| (LOSS) INCOME BEFORE GAIN (LOSS) ON DISPOSITION OF INTERESTS IN PROPERTIES, NET | (10,664 | ) | | 5,002 |
| | 43,024 |
| | 45,717 |
|
| Gain (loss) on disposition of interests in properties, net | — |
| | 181 |
| | 125,436 |
| | (2,116 | ) |
| NET (LOSS) INCOME | (10,664 | ) | | 5,183 |
| | 168,460 |
| | 43,601 |
|
| Net (loss) income attributable to noncontrolling interests | (2,269 | ) | | 313 |
| | 25,070 |
| | 5,394 |
|
| NET (LOSS) INCOME ATTRIBUTABLE TO THE COMPANY | (8,395 | ) | | 4,870 |
| | 143,390 |
| | 38,207 |
|
| Less: Preferred share dividends | (3,508 | ) | | (3,508 | ) | | (10,524 | ) | | (10,524 | ) |
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | (11,903 | ) | | $ | 1,362 |
| | $ | 132,866 |
| | $ | 27,683 |
|
| | | | | | | | |
| (LOSS) EARNINGS PER COMMON SHARE, BASIC & DILUTED | $ | (0.06 | ) | | $ | 0.01 |
| | $ | 0.71 |
| | $ | 0.15 |
|
| | | | | | | | |
| COMPREHENSIVE (LOSS) INCOME: | | | | | | | |
| Net (loss) income | $ | (10,664 | ) | | $ | 5,183 |
| | $ | 168,460 |
| | $ | 43,601 |
|
| Unrealized (loss) income on interest rate derivative instruments | (727 | ) | | 3,500 |
| | (428 | ) | | (15,547 | ) |
| Comprehensive (loss) income | (11,391 | ) | | 8,683 |
| | 168,032 |
| | 28,054 |
|
| Comprehensive (loss) income attributable to noncontrolling interests | (2,378 | ) | | 872 |
| | 25,019 |
| | 2,917 |
|
| Comprehensive (loss) income attributable to common shareholders | $ | (9,013 | ) | | $ | 7,811 |
| | $ | 143,013 |
| | $ | 25,137 |
|
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| REVENUE: | | | |
| Rental income | $ | 147,233 |
| | $ | 163,273 |
|
| Other income | 5,367 |
| | 5,550 |
|
| Total revenues | 152,600 |
| | 168,823 |
|
| EXPENSES: |
| |
|
| Property operating | 37,280 |
| | 39,429 |
|
| Depreciation and amortization | 59,704 |
| | 66,378 |
|
| Real estate taxes | 20,252 |
| | 22,114 |
|
| Advertising and promotion | 1,804 |
| | 1,893 |
|
| General and administrative | 12,264 |
| | 14,125 |
|
| Ground rent | 122 |
| | 203 |
|
| Impairment loss | 1,319 |
| | — |
|
| Total operating expenses | 132,745 |
| | 144,142 |
|
| |
|
| |
|
|
| Interest expense, net | (38,635 | ) | | (36,830 | ) |
| Gain on disposition of interests in properties, net | 26,755 |
| | 9,990 |
|
| Income and other taxes | 617 |
| | (356 | ) |
| Loss from unconsolidated entities, net | (1,032 | ) | | (48 | ) |
| NET INCOME (LOSS) | 7,560 |
| | (2,563 | ) |
| Net income (loss) attributable to noncontrolling interests | 677 |
| | (896 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO THE COMPANY | 6,883 |
| | (1,667 | ) |
| Less: Preferred share dividends | (3,508 | ) | | (3,508 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS | $ | 3,375 |
| | $ | (5,175 | ) |
| | | | |
| INCOME (LOSS) PER COMMON SHARE, BASIC & DILUTED | $ | 0.02 |
| | $ | (0.03 | ) |
| | | | |
| COMPREHENSIVE LOSS: | | | |
| Net income (loss) | $ | 7,560 |
| | $ | (2,563 | ) |
| Unrealized loss on interest rate derivative instruments, net | (15,446 | ) | | (5,110 | ) |
| Comprehensive loss | (7,886 | ) | | (7,673 | ) |
| Comprehensive loss attributable to noncontrolling interests | (1,706 | ) | | (1,688 | ) |
| Comprehensive loss attributable to common shareholders | $ | (6,180 | ) | | $ | (5,985 | ) |
The accompanying notes are an integral part of these statements.
Washington Prime Group Inc.
Unaudited Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| | 2017 | | 2016 | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income | $ | 168,460 |
| | $ | 43,601 |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |
| |
| Net income (loss) | | $ | 7,560 |
| | $ | (2,563 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
|
| |
|
| Depreciation and amortization, including fair value rent, fair value debt, deferred financing costs and equity-based compensation | 199,982 |
| | 216,924 |
| 60,753 |
| | 65,270 |
|
| Gain on extinguishment of debt, net | (21,221 | ) | | (34,078 | ) | |
| (Gain) loss on disposition of interests in properties and outparcels, net | (125,710 | ) | | 2,116 |
| |
| Gain on disposition of interests in properties and outparcels, net | | (26,755 | ) | | (9,990 | ) |
| Impairment loss | 29,401 |
| | 20,701 |
| 1,319 |
| | — |
|
| Provision for credit losses | 4,280 |
| | 2,801 |
| |
| Change in estimate of collectibility of rental income | | 5,291 |
| | 2,980 |
|
| Loss from unconsolidated entities, net | 781 |
| | 2,602 |
| 1,032 |
| | 48 |
|
| Distributions of income from unconsolidated entities | 529 |
| | 241 |
| 772 |
| | 575 |
|
| Changes in assets and liabilities: |
|
| |
|
|
| |
|
| Tenant receivables and accrued revenue, net | 4,415 |
| | (574 | ) | (3,075 | ) | | 1,766 |
|
| Deferred costs and other assets | (27,767 | ) | | (21,402 | ) | (4,466 | ) | | (6,047 | ) |
| Accounts payable, accrued expenses, deferred revenues and other liabilities | 4,509 |
| | (32,980 | ) | (32,419 | ) | | (39,388 | ) |
| Net cash provided by operating activities | 237,659 |
| | 199,952 |
| 10,012 |
| | 12,651 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
| |
|
|
| |
|
| Capital expenditures, net | (109,161 | ) | | (126,605 | ) | (60,013 | ) | | (35,162 | ) |
| Restricted cash reserves for future capital expenditures, net | (1,561 | ) | | (4,997 | ) | |
| Net proceeds from disposition of interests in properties and outparcels | 209,240 |
| | 16,314 |
| 17,239 |
| | 12,084 |
|
| Investments in unconsolidated entities | (48,628 | ) | | (10,419 | ) | (3,225 | ) | | (3,273 | ) |
| Distributions of capital from unconsolidated entities | 56,962 |
| | 35,558 |
| 1,555 |
| | 7,727 |
|
| Net cash provided by (used in) investing activities | 106,852 |
| | (90,149 | ) | |
| Net cash used in investing activities | | (44,444 | ) | | (18,624 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
| |
|
|
| |
|
| Distributions to noncontrolling interest holders in properties | (23 | ) | | — |
| (51 | ) | | (66 | ) |
| Redemption of limited partner units | (90 | ) | | (5 | ) | (521 | ) | | — |
|
| Change in lender-required restricted cash reserves on mortgage loans | 4 |
| | (1,865 | ) | |
| Net proceeds from issuance of common shares, including common stock plans | 13 |
| | 512 |
| — |
| | 1 |
|
| Purchase of redeemable noncontrolling interest | (6,830 | ) | | (339 | ) | |
| Distributions on common and preferred shares/units | (177,126 | ) | | (176,234 | ) | (31,628 | ) | | (59,336 | ) |
| Proceeds from issuance of debt, net of transaction costs | 1,099,347 |
| | 166,801 |
| 350,973 |
| | 75,000 |
|
| Repayments of debt | (1,270,896 | ) | | (157,135 | ) | (285,000 | ) | | (24,142 | ) |
| Net cash used in financing activities | (355,601 | ) | | (168,265 | ) | |
| DECREASE IN CASH AND CASH EQUIVALENTS | (11,090 | ) | | (58,462 | ) | |
| CASH AND CASH EQUIVALENTS, beginning of period | 59,353 |
| | 116,253 |
| |
| CASH AND CASH EQUIVALENTS, end of period | $ | 48,263 |
| | $ | 57,791 |
| |
| Net cash provided by (used in) financing activities | | 33,773 |
| | (8,543 | ) |
| NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (659 | ) | | (14,516 | ) |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | | 75,475 |
| | 61,084 |
|
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | | $ | 74,816 |
| | $ | 46,568 |
|
The accompanying notes are an integral part of these statements.
Washington Prime Group Inc.
Unaudited Consolidated StatementStatements of Equity
(dollars in thousands, except per share/unit amounts)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Series H | | Preferred Series I | | Common
Stock | | Capital in
Excess of
Par Value | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total
Stockholders'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests |
| Balance, December 31, 2016 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,232,638 |
| | $ | (346,706 | ) | | $ | 4,916 |
| | $ | 1,093,443 |
| | $ | 169,368 |
| | $ | 1,262,811 |
| | $ | 10,660 |
|
| Exercise of stock options | | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
| | — |
|
| Redemption of limited partner units | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (90 | ) | | (90 | ) | | — |
|
| Exchange of limited partner units | | — |
| | — |
| | — |
| | 2,463 |
| | — |
| | — |
| | 2,463 |
| | (2,463 | ) | | — |
| | — |
|
| Other | | — |
| | — |
| | — |
| | (109 | ) | | — |
| | — |
| | (109 | ) | | — |
| | (109 | ) | | — |
|
| Equity-based compensation | | — |
| | — |
| | — |
| | 3,943 |
| | — |
| | — |
| | 3,943 |
| | 872 |
| | 4,815 |
| | — |
|
| Adjustments to noncontrolling interests | | — |
| | — |
| | — |
| | (297 | ) | | — |
| | — |
| | (297 | ) | | 297 |
| | — |
| | — |
|
| Purchase of redeemable noncontrolling interest | | — |
| | — |
| | — |
| | 565 |
| | — |
| | — |
| | 565 |
| | — |
| | 565 |
| | (7,395 | ) |
| Distributions on common shares/units ($0.75 per common share/unit) | | — |
| | — |
| | — |
| | — |
| | (140,157 | ) | | — |
| | (140,157 | ) | | (26,288 | ) | | (166,445 | ) | | — |
|
| Distributions declared on preferred shares | | — |
| | — |
| | — |
| | — |
| | (10,524 | ) | | — |
| | (10,524 | ) | | — |
| | (10,524 | ) | | — |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (377 | ) | | (377 | ) | | (51 | ) | | (428 | ) | | — |
|
| Net income, excluding $180 of distributions to preferred unitholders | | — |
| | — |
| | — |
| | — |
| | 143,390 |
| | — |
| | 143,390 |
| | 24,890 |
| | 168,280 |
| | — |
|
| Balance, September 30, 2017 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,239,216 |
| | $ | (353,997 | ) | | $ | 4,539 |
| | $ | 1,092,353 |
| | $ | 166,535 |
| | $ | 1,258,888 |
| | $ | 3,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, 2020 |
| | | Preferred Series H | | Preferred Series I | | Common
Stock | | Capital in
Excess of
Par Value | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total
Stockholders'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests |
| Balance, December 31, 2019 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,254,771 |
| | $ | (655,492 | ) | | $ | (5,525 | ) | | $ | 796,349 |
| | $ | 110,226 |
| | $ | 906,575 |
| | $ | 3,265 |
|
| Redemption of limited partner units | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (521 | ) | | (521 | ) | | — |
|
| Other | | — |
| | — |
| | — |
| | (9 | ) | | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) | | — |
|
| Equity-based compensation | | — |
| | — |
| | — |
| | 1,866 |
| | — |
| | — |
| | 1,866 |
| | — |
| | 1,866 |
| | — |
|
| Adjustments to noncontrolling interests | | — |
| | — |
| | — |
| | 412 |
| | — |
| | — |
| | 412 |
| | (412 | ) | | — |
| | — |
|
| Distributions on common shares/units ($0.125 per common share/unit) | | — |
| | — |
| | — |
| | — |
| | (23,818 | ) | | — |
| | (23,818 | ) | | (4,364 | ) | | (28,182 | ) | | — |
|
| Distributions declared on preferred shares | | — |
| | — |
| | — |
| | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (13,063 | ) | | (13,063 | ) | | (2,383 | ) | | (15,446 | ) | | — |
|
| Net income, excluding $60 of distributions to preferred unitholders | | — |
| | — |
| | — |
| | — |
| | 6,883 |
| | — |
| | 6,883 |
| | 617 |
| | 7,500 |
| | — |
|
| Balance, March 31, 2020 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,257,040 |
| | $ | (675,935 | ) | | $ | (18,588 | ) | | $ | 765,112 |
| | $ | 103,163 |
| | $ | 868,275 |
| | $ | 3,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, 2019 |
| | | Preferred Series H | | Preferred Series I | | Common
Stock | | Capital in
Excess of
Par Value | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total
Stockholders'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests |
| Balance, December 31, 2018 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,247,639 |
| | $ | (456,924 | ) | | $ | 6,400 |
| | $ | 999,710 |
| | $ | 148,561 |
| | $ | 1,148,271 |
| | $ | 3,265 |
|
| Other | | — |
| | — |
| | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) | | — |
| | (7 | ) | | — |
|
| Exercise of stock options | | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
|
| Equity-based compensation | | — |
| | — |
| | — |
| | 1,778 |
| | — |
| | — |
| | 1,778 |
| | 37 |
| | 1,815 |
| | — |
|
| Adjustments to noncontrolling interests | | — |
| | — |
| | — |
| | 79 |
| | — |
| | — |
| | 79 |
| | (79 | ) | | — |
| | — |
|
| Distributions on common shares/units ($0.25 per common share/unit) | | — |
| | — |
| | — |
| | — |
| | (47,088 | ) | | — |
| | (47,088 | ) | | (8,746 | ) | | (55,834 | ) | | — |
|
| Distributions declared on preferred shares | | — |
| | — |
| | — |
| | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | — |
| | (4,318 | ) | | (4,318 | ) | | (792 | ) | | (5,110 | ) | | — |
|
| Net loss, excluding $60 of distributions to preferred unitholders | | — |
| | — |
| | — |
| | — |
| | (1,667 | ) | | — |
| | (1,667 | ) | | (956 | ) | | (2,623 | ) | | — |
|
| Balance, March 31, 2019 | | $ | 104,251 |
| | $ | 98,325 |
| | $ | 19 |
| | $ | 1,249,490 |
| | $ | (509,187 | ) | | $ | 2,082 |
| | $ | 944,980 |
| | $ | 138,025 |
| | $ | 1,083,005 |
| | $ | 3,265 |
|
The accompanying notes are an integral part of this statement.
Washington Prime Group, L.P.
Unaudited Consolidated Balance Sheets
(dollars in thousands, except unit amounts)
| | | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
| ASSETS: | | | | | | | | |
| Investment properties at cost | | $ | 5,867,043 |
| | $ | 6,294,628 |
| | $ | 5,918,633 |
| | $ | 5,902,406 |
|
| Less: accumulated depreciation | | 2,127,412 |
| | 2,122,572 |
| | 2,411,754 |
| | 2,397,736 |
|
| | 3,739,631 |
| | 4,172,056 |
| | 3,506,879 |
| | 3,504,670 |
|
| Cash and cash equivalents | | 48,263 |
| | 59,353 |
| | 39,614 |
| | 41,421 |
|
| Tenant receivables and accrued revenue, net | | 90,184 |
| | 99,967 |
| | 81,271 |
| | 82,762 |
|
| Real estate assets held-for-sale | | — |
| | 50,642 |
| |
| Investment in and advances to unconsolidated entities, at equity | | 465,051 |
| | 458,892 |
| | 416,949 |
| | 417,092 |
|
| Deferred costs and other assets | | 210,311 |
| | 266,556 |
| | 202,081 |
| | 205,034 |
|
| Total assets | | $ | 4,553,440 |
| | $ | 5,107,466 |
| | $ | 4,246,794 |
| | $ | 4,250,979 |
|
| LIABILITIES: | | | | | | | | |
| Mortgage notes payable | | $ | 1,412,975 |
| | $ | 1,618,080 |
| | $ | 1,111,344 |
| | $ | 1,115,608 |
|
| Notes payable | | 979,553 |
| | 247,637 |
| | 708,420 |
| | 957,566 |
|
| Unsecured term loans | | 606,380 |
| | 1,334,522 |
| | 686,926 |
| | 686,642 |
|
| Revolving credit facility | | — |
| | 306,165 |
| | 524,430 |
| | 204,145 |
|
| Other indebtedness | | | 97,907 |
| | 97,601 |
|
| Accounts payable, accrued expenses, intangibles, and deferred revenues | | 273,966 |
| | 309,178 |
| | 242,904 |
| | 260,904 |
|
| Distributions payable | | 2,992 |
| | 2,992 |
| | 3,323 |
| | 3,252 |
|
| Cash distributions and losses in unconsolidated entities, at equity | | 15,421 |
| | 15,421 |
| | — |
| | 15,421 |
|
| Total liabilities | | 3,291,287 |
| | 3,833,995 |
| | 3,375,254 |
| | 3,341,139 |
|
| Redeemable noncontrolling interests | | 3,265 |
| | 10,660 |
| | 3,265 |
| | 3,265 |
|
| EQUITY: | | | | | | | | |
| Partners' Equity: | | | | | | | | |
| General partner | | | | | | | | |
| Preferred equity, 7,800,000 units issued and outstanding as of September 30, 2017 and December 31, 2016 | | 202,576 |
| | 202,576 |
| |
| Common equity, 185,791,421 and 185,427,411 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | | 889,777 |
| | 890,867 |
| |
| Preferred equity, 7,800,000 units issued and outstanding as of March 31, 2020 and December 31, 2019 | | | 202,576 |
| | 202,576 |
|
| Common equity, 187,353,485 and 186,884,276 units issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | | | 562,536 |
| | 593,773 |
|
| Total general partners' equity | | 1,092,353 |
| | 1,093,443 |
| | 765,112 |
| | 796,349 |
|
| Limited partners, 34,783,277 and 35,127,735 units issued and outstanding as of September 30, 2017 and December 31, 2016, respectively | | 165,454 |
| | 168,264 |
| |
| Limited partners, 34,506,965 and 34,682,956 units issued and outstanding as of March 31, 2020 and December 31, 2019, respectively | | | 102,181 |
| | 109,193 |
|
| Total partners' equity | | 1,257,807 |
| | 1,261,707 |
| | 867,293 |
| | 905,542 |
|
| Noncontrolling interests | | 1,081 |
| | 1,104 |
| | 982 |
| | 1,033 |
|
| Total equity | | 1,258,888 |
| | 1,262,811 |
| | 868,275 |
| | 906,575 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,553,440 |
| | $ | 5,107,466 |
| | $ | 4,246,794 |
| | $ | 4,250,979 |
|
The accompanying notes are an integral part of these statements.
Washington Prime Group, L.P.
Unaudited Consolidated Statements of Operations and Comprehensive (Loss) IncomeLoss
(dollars in thousands, except per unit amounts)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| REVENUE: | | | | | | | |
| Minimum rent | $ | 122,942 |
| | $ | 142,811 |
| | $ | 389,491 |
| | $ | 427,173 |
|
| Overage rent | 1,687 |
| | 2,419 |
| | 5,818 |
| | 7,787 |
|
| Tenant reimbursements | 50,239 |
| | 60,006 |
| | 159,150 |
| | 177,372 |
|
| Other income | 4,452 |
| | 4,686 |
| | 16,426 |
| | 13,359 |
|
| Total revenues | 179,320 |
| | 209,922 |
| | 570,885 |
| | 625,691 |
|
| EXPENSES: |
| |
| | | | |
| Property operating | 37,098 |
| | 41,295 |
| | 109,506 |
| | 124,754 |
|
| Depreciation and amortization | 65,383 |
| | 71,287 |
| | 199,514 |
| | 211,922 |
|
| Real estate taxes | 20,401 |
| | 26,296 |
| | 69,661 |
| | 77,184 |
|
| Advertising and promotion | 2,112 |
| | 2,638 |
| | 6,539 |
| | 7,467 |
|
| Provision for credit losses | 796 |
| | 306 |
| | 4,280 |
| | 2,801 |
|
| General and administrative | 8,108 |
| | 8,139 |
| | 26,027 |
| | 28,375 |
|
| Merger, restructuring and transaction costs | — |
| | (307 | ) | | — |
| | 29,607 |
|
| Ground rent | 237 |
| | 1,142 |
| | 2,264 |
| | 3,242 |
|
| Impairment loss | 20,892 |
| | 20,701 |
| | 29,401 |
| | 20,701 |
|
| Total operating expenses | 155,027 |
| | 171,497 |
| | 447,192 |
| | 506,053 |
|
| OPERATING INCOME | 24,293 |
| | 38,425 |
| | 123,693 |
| | 119,638 |
|
| Interest expense, net | (34,344 | ) | | (32,168 | ) | | (98,113 | ) | | (103,982 | ) |
| Gain on extinguishment of debt, net | — |
| | — |
| | 21,221 |
| | 34,078 |
|
| Income and other taxes | (448 | ) | | (322 | ) | | (2,996 | ) | | (1,415 | ) |
| Loss from unconsolidated entities, net | (165 | ) | | (933 | ) | | (781 | ) | | (2,602 | ) |
| (LOSS) INCOME BEFORE GAIN (LOSS) ON DISPOSITION OF INTERESTS IN PROPERTIES, NET | (10,664 | ) | | 5,002 |
| | 43,024 |
| | 45,717 |
|
| Gain (loss) on disposition of interests in properties, net | — |
| | 181 |
| | 125,436 |
| | (2,116 | ) |
| NET (LOSS) INCOME | (10,664 | ) | | 5,183 |
| | 168,460 |
| | 43,601 |
|
| Net loss attributable to noncontrolling interests | — |
| | (4 | ) | | — |
| | (18 | ) |
| NET (LOSS) INCOME ATTRIBUTABLE TO UNITHOLDERS | (10,664 | ) | | 5,187 |
| | 168,460 |
| | 43,619 |
|
| Less: Preferred unit distributions | (3,568 | ) | | (3,568 | ) | | (10,704 | ) | | (10,704 | ) |
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS | $ | (14,232 | ) | | $ | 1,619 |
| | $ | 157,756 |
| | $ | 32,915 |
|
| | | | | | | | |
| NET (LOSS) INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS: | | | | | | | |
| General partner | $ | (11,903 | ) | | $ | 1,362 |
| | $ | 132,866 |
| | $ | 27,683 |
|
| Limited partners | (2,329 | ) | | 257 |
| | 24,890 |
| | 5,232 |
|
| Net (loss) income attributable to common unitholders | $ | (14,232 | ) | | $ | 1,619 |
| | $ | 157,756 |
| | $ | 32,915 |
|
| | | | | | | | |
| (LOSS) EARNINGS PER COMMON UNIT, BASIC & DILUTED | $ | (0.06 | ) | | $ | 0.01 |
| | $ | 0.71 |
| | $ | 0.15 |
|
| | | | | | | | |
| COMPREHENSIVE (LOSS) INCOME: | | | | | | | |
| Net (loss) income | $ | (10,664 | ) | | $ | 5,183 |
| | $ | 168,460 |
| | $ | 43,601 |
|
| Unrealized (loss) income on interest rate derivative instruments | (727 | ) | | 3,500 |
| | (428 | ) | | (15,547 | ) |
| Comprehensive (loss) income | (11,391 | ) | | 8,683 |
| | 168,032 |
| | 28,054 |
|
| Comprehensive loss attributable to noncontrolling interests | — |
| | (4 | ) | | — |
| | (18 | ) |
| Comprehensive (loss) income attributable to unitholders | $ | (11,391 | ) | | $ | 8,687 |
| | $ | 168,032 |
| | $ | 28,072 |
|
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| REVENUE: | | | |
| Rental income | $ | 147,233 |
| | $ | 163,273 |
|
| Other income | 5,367 |
| | 5,550 |
|
| Total revenues | 152,600 |
| | 168,823 |
|
| EXPENSES: | | | |
| Property operating | 37,280 |
| | 39,429 |
|
| Depreciation and amortization | 59,704 |
| | 66,378 |
|
| Real estate taxes | 20,252 |
| | 22,114 |
|
| Advertising and promotion | 1,804 |
| | 1,893 |
|
| General and administrative | 12,264 |
| | 14,125 |
|
| Ground rent | 122 |
| | 203 |
|
| Impairment loss | 1,319 |
| | — |
|
| Total operating expenses | 132,745 |
| | 144,142 |
|
| | | | |
| Interest expense, net | (38,635 | ) | | (36,830 | ) |
| Gain on disposition of interests in properties, net | 26,755 |
| | 9,990 |
|
| Income and other taxes | 617 |
| | (356 | ) |
| Loss from unconsolidated entities, net | (1,032 | ) | | (48 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO UNITHOLDERS | 7,560 |
| | (2,563 | ) |
| Less: Preferred unit distributions | (3,568 | ) | | (3,568 | ) |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON UNITHOLDERS | $ | 3,992 |
| | $ | (6,131 | ) |
| | | | |
| NET INCOME (LOSS) ATTRIBUTABLE TO COMMON UNITHOLDERS: | | | |
| General partner | $ | 3,375 |
| | $ | (5,175 | ) |
| Limited partners | 617 |
| | (956 | ) |
| Net income (loss) attributable to common unitholders | $ | 3,992 |
| | $ | (6,131 | ) |
| | | | |
| INCOME (LOSS) PER COMMON UNIT, BASIC & DILUTED | $ | 0.02 |
| | $ | (0.03 | ) |
| | | | |
| COMPREHENSIVE LOSS: | | | |
| Net income (loss) | $ | 7,560 |
| | $ | (2,563 | ) |
| Unrealized loss on interest rate derivative instruments, net | (15,446 | ) | | (5,110 | ) |
| Comprehensive loss | $ | (7,886 | ) | | $ | (7,673 | ) |
The accompanying notes are an integral part of these statements.
Washington Prime Group, L.P.
Unaudited Consolidated Statements of Cash Flows
(dollars in thousands)
| | | | For the Nine Months Ended September 30, | For the Three Months Ended March 31, |
| | 2017 | | 2016 | 2020 | | 2019 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net income | $ | 168,460 |
| | $ | 43,601 |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
| |
| |
| Net income (loss) | | $ | 7,560 |
| | $ | (2,563 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
| Depreciation and amortization, including fair value rent, fair value debt, deferred financing costs and equity-based compensation | 199,982 |
| | 216,924 |
| 60,753 |
| | 65,270 |
|
| Gain on extinguishment of debt, net | (21,221 | ) | | (34,078 | ) | |
| (Gain) loss on disposition of interests in properties and outparcels, net | (125,710 | ) | | 2,116 |
| |
| Gain on disposition of interests in properties and outparcels, net | | (26,755 | ) | | (9,990 | ) |
| Impairment loss | 29,401 |
| | 20,701 |
| 1,319 |
| | — |
|
| Provision for credit losses | 4,280 |
| | 2,801 |
| |
| Change in estimate of collectibility of rental income | | 5,291 |
| | 2,980 |
|
| Loss from unconsolidated entities, net | 781 |
| | 2,602 |
| 1,032 |
| | 48 |
|
| Distributions of income from unconsolidated entities | 529 |
| | 241 |
| 772 |
| | 575 |
|
| Changes in assets and liabilities: |
|
| |
| | | |
| Tenant receivables and accrued revenue, net | 4,415 |
| | (574 | ) | (3,075 | ) | | 1,766 |
|
| Deferred costs and other assets | (27,767 | ) | | (21,402 | ) | (4,466 | ) | | (6,047 | ) |
| Accounts payable, accrued expenses, deferred revenues and other liabilities | 4,509 |
| | (32,980 | ) | (32,419 | ) | | (39,388 | ) |
| Net cash provided by operating activities | 237,659 |
| | 199,952 |
| 10,012 |
| | 12,651 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
| |
| | | |
| Capital expenditures, net | (109,161 | ) | | (126,605 | ) | (60,013 | ) | | (35,162 | ) |
| Restricted cash reserves for future capital expenditures, net | (1,561 | ) | | (4,997 | ) | |
| Net proceeds from disposition of interests in properties and outparcels | 209,240 |
| | 16,314 |
| 17,239 |
| | 12,084 |
|
| Investments in unconsolidated entities | (48,628 | ) | | (10,419 | ) | (3,225 | ) | | (3,273 | ) |
| Distributions of capital from unconsolidated entities | 56,962 |
| | 35,558 |
| 1,555 |
| | 7,727 |
|
| Net cash provided by (used in) investing activities | 106,852 |
| | (90,149 | ) | |
| Net cash used in investing activities | | (44,444 | ) | | (18,624 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
| |
| | | |
| Distributions to noncontrolling interest holders in properties | (23 | ) | | — |
| (51 | ) | | (66 | ) |
| Redemption of limited partner units | (90 | ) | | (5 | ) | (521 | ) | | — |
|
| Change in lender-required restricted cash reserves on mortgage loans | 4 |
| | (1,865 | ) | |
| Net proceeds from issuance of common units, including equity-based compensation plans | 13 |
| | 512 |
| — |
| | 1 |
|
| Purchase of redeemable noncontrolling interest | (6,830 | ) | | (339 | ) | |
| Distributions to unitholders, net | (177,126 | ) | | (176,234 | ) | |
| Distributions to unitholders | | (31,628 | ) | | (59,336 | ) |
| Proceeds from issuance of debt, net of transaction costs | 1,099,347 |
| | 166,801 |
| 350,973 |
| | 75,000 |
|
| Repayments of debt | (1,270,896 | ) | | (157,135 | ) | (285,000 | ) | | (24,142 | ) |
| Net cash used in financing activities | (355,601 | ) | | (168,265 | ) | |
| DECREASE IN CASH AND CASH EQUIVALENTS | (11,090 | ) | | (58,462 | ) | |
| CASH AND CASH EQUIVALENTS, beginning of period | 59,353 |
| | 116,253 |
| |
| CASH AND CASH EQUIVALENTS, end of period | $ | 48,263 |
| | $ | 57,791 |
| |
| Net cash provided by (used in) financing activities | | 33,773 |
| | (8,543 | ) |
| NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | | (659 | ) | | (14,516 | ) |
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | | 75,475 |
| | 61,084 |
|
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | | $ | 74,816 |
| | $ | 46,568 |
|
The accompanying notes are an integral part of these statements.
Washington Prime Group, L.P.
Unaudited Consolidated StatementStatements of Equity
(dollars in thousands, except per unit amounts)
| | | | | General Partner | | | | | | | | | | | | For the Three Months Ended March 31, 2020 |
| | | Preferred | | Common | | Total | | Limited Partners | | Total
Partners'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests | | General Partner | | | | | | | | | | |
| Balance, December 31, 2016 | | $ | 202,576 |
| | $ | 890,867 |
| | $ | 1,093,443 |
| | $ | 168,264 |
| | $ | 1,261,707 |
| | $ | 1,104 |
| | $ | 1,262,811 |
| | $ | 10,660 |
| |
| Exercise of stock options | | — |
| | 13 |
| | 13 |
| | — |
| | 13 |
| | — |
| | 13 |
| | — |
| |
| | | | Preferred | | Common | | Total | | Limited Partners | | Total
Partners'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests |
| Balance, December 31, 2019 | | | $ | 202,576 |
| | $ | 593,773 |
| | $ | 796,349 |
| | $ | 109,193 |
| | $ | 905,542 |
| | $ | 1,033 |
| | $ | 906,575 |
| | $ | 3,265 |
|
| Redemption of limited partner units | | — |
| | — |
| | — |
| | (90 | ) | | (90 | ) | | — |
| | (90 | ) | | — |
| | — |
| | — |
| | — |
| | (521 | ) | | (521 | ) | | — |
| | (521 | ) | | — |
|
| Limited partner units exchanged to common units | | — |
| | 2,463 |
| | 2,463 |
| | (2,463 | ) | | — |
| | — |
| | — |
| | — |
| |
| Other | | — |
| | (109 | ) | | (109 | ) | | — |
| | (109 | ) | | — |
| | (109 | ) | | — |
| | — |
| | (9 | ) | | (9 | ) | | — |
| | (9 | ) | | — |
| | (9 | ) | | — |
|
| Equity-based compensation | | — |
| | 3,943 |
| | 3,943 |
| | 872 |
| | 4,815 |
| | — |
| | 4,815 |
| | — |
| | — |
| | 1,866 |
| | 1,866 |
| | — |
| | 1,866 |
| | — |
| | 1,866 |
| | — |
|
| Adjustments to limited partners' interests | | — |
| | (297 | ) | | (297 | ) | | 297 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 412 |
| | 412 |
| | (412 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchase of redeemable noncontrolling interest | | — |
| | 565 |
| | 565 |
| | — |
| | 565 |
| | — |
| | 565 |
| | (7,395 | ) | |
| Distributions on common units ($0.75 per common unit) | | — |
| | (140,157 | ) | | (140,157 | ) | | (26,265 | ) | | (166,422 | ) | | (23 | ) | | (166,445 | ) | | — |
| |
| Distributions on common units ($0.125 per common unit) | | | — |
| | (23,818 | ) | | (23,818 | ) | | (4,313 | ) | | (28,131 | ) | | (51 | ) | | (28,182 | ) | | — |
|
| Distributions declared on preferred units | | (10,524 | ) | | — |
| | (10,524 | ) | | — |
| | (10,524 | ) | | — |
| | (10,524 | ) | | (180 | ) | | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | (60 | ) |
| Other comprehensive loss | | — |
| | (377 | ) | | (377 | ) | | (51 | ) | | (428 | ) | | — |
| | (428 | ) | | — |
| | — |
| | (13,063 | ) | | (13,063 | ) | | (2,383 | ) | | (15,446 | ) | | — |
| | (15,446 | ) | | — |
|
| Net income | | 10,524 |
| | 132,866 |
| | 143,390 |
| | 24,890 |
| | 168,280 |
| | — |
| | 168,280 |
| | 180 |
| | 3,508 |
| | 3,375 |
| | 6,883 |
| | 617 |
| | 7,500 |
| | — |
| | 7,500 |
| | 60 |
|
| Balance, September 30, 2017 | | $ | 202,576 |
| | $ | 889,777 |
| | $ | 1,092,353 |
| | $ | 165,454 |
| | $ | 1,257,807 |
| | $ | 1,081 |
| | $ | 1,258,888 |
| | $ | 3,265 |
| |
| Balance, March 31, 2020 | | | $ | 202,576 |
| | $ | 562,536 |
| | $ | 765,112 |
| | $ | 102,181 |
| | $ | 867,293 |
| | $ | 982 |
| | $ | 868,275 |
| | $ | 3,265 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the Three Months Ended March 31, 2019 |
| | | General Partner | | | | | | | | | | |
| | | Preferred | | Common | | Total | | Limited Partners | | Total
Partners'
Equity | | Non-
Controlling
Interests | | Total
Equity | | Redeemable Non-Controlling Interests |
| Balance, December 31, 2018 | | $ | 202,576 |
| | $ | 797,134 |
| | $ | 999,710 |
| | $ | 147,493 |
| | $ | 1,147,203 |
| | $ | 1,068 |
| | $ | 1,148,271 |
| | $ | 3,265 |
|
| Other | | — |
| | (7 | ) | | (7 | ) | | — |
| | (7 | ) | | — |
| | (7 | ) | | — |
|
| Exercise of stock options | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
| | — |
|
| Equity-based compensation | | — |
| | 1,778 |
| | 1,778 |
| | 37 |
| | 1,815 |
| | — |
| | 1,815 |
| | — |
|
| Adjustments to limited partners' interests | | — |
| | 79 |
| | 79 |
| | (79 | ) | | — |
| | — |
| | — |
| | — |
|
| Distributions on common units ($0.25 per common unit) | | — |
| | (47,088 | ) | | (47,088 | ) | | (8,684 | ) | | (55,772 | ) | | (62 | ) | | (55,834 | ) | | — |
|
| Distributions declared on preferred units | | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | — |
| | (3,508 | ) | | (60 | ) |
| Other comprehensive loss | | — |
| | (4,318 | ) | | (4,318 | ) | | (792 | ) | | (5,110 | ) | | — |
| | (5,110 | ) | | — |
|
| Net income (loss) | | 3,508 |
| | (5,175 | ) | | (1,667 | ) | | (956 | ) | | (2,623 | ) | | — |
| | (2,623 | ) | | 60 |
|
| Balance, March 31, 2019 | | $ | 202,576 |
| | $ | 742,404 |
| | $ | 944,980 |
| | $ | 137,019 |
| | $ | 1,081,999 |
| | $ | 1,006 |
| | $ | 1,083,005 |
| | $ | 3,265 |
|
The accompanying notes are an integral part of this statement.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Washington Prime Group Inc. (“("WPG Inc.”") is an Indiana corporation that operates as a fully integrated, self‑administered and self‑managed real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Code"). REITsWPG Inc. will generally not be liablequalify as a REIT for U.S. federal corporate income taxestax purposes as long as they continueit continues to distribute not less than 100%at least 90% of theirits REIT taxable income, exclusive of net capital gains, and satisfy certain other requirements. WPG Inc. will generally be allowed a deduction against its U.S. federal income tax liability for dividends paid by it to REIT shareholders, thereby reducing or eliminating any corporate level taxation to WPG Inc. Washington Prime Group, L.P. (“("WPG L.P.”") is WPG Inc.'s majority‑owned limited partnership subsidiary that owns, develops and manages, through its affiliates, all of WPG Inc.'s real estate properties and other assets. WPG Inc. is the sole general partner of WPG L.P. As of September 30, 2017,March 31, 2020, our assets consisted of material interests in 110101 shopping centers in the United States, consisting of open air properties and enclosed retail properties, comprised of approximately 6054 million square feet of managed gross leasable area.
Unless the context otherwise requires, references to "WPG," the "Company," “we,” “us”"we," "us" or “our”"our" refer to WPG Inc., WPG L.P. and entities in which WPG Inc. or WPG L.P. (or any affiliate) has a material ownership or financial interest, on a consolidated basis.
We derive our revenues primarily from retail tenant leases, including fixed minimum rent leases, overage and percentage rent leases based on tenants’ sales volumes, rent payments pursuant to the terms of offering property operating services to our tenants and others, including energy, waste handling and facility services, and reimbursements from tenants for certain recoverable expenditurescosts such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.expenses.
We seek to enhance the performance of our properties and increase our revenues by, among other things, securing leases of anchor and inline tenant spaces, re‑developing or renovating existing properties to increase the leasable square footage, and increasing the productivity of occupied locations through aesthetic upgrades, re‑merchandising and/or changes to the retail use of the space.
Leadership TransitionSeverance
2017 ActivityDuring the three months ended March 31, 2020, and in response to the COVID-19 pandemic (as discussed in Note 2 - "Basis of Presentation and Principles of Consolidation"), the Company recorded aggregate severance costs of $0.1 million related to workforce reductions, which costs are included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss for period then ended.
On September 28, 2017, Mr. Keric M. "Butch" Knerr,February 5, 2019, the Company's then Executive Vice President, Head of Open Air Centers was terminated without cause from his position and Chief Operating Officer, resigned from the Company. There were noreceived severance payments or accelerated vestingand other benefits pursuant to the terms and conditions of stock compensation benefits in connection with his transition.
2016 Activity
On June 20, 2016, the Company announced the following leadership changes: (1) the resignation of Mr. Michael P. Glimcher as the Company’s Chief Executive Officer and Vice Chairman of the Board; (2) the appointment of Mr. Louis G. Conforti, a current Board member, as Interim Chief Executive Officer; (3) the resignation of Mr. Mark S. Ordan as non-executive Chairman of the Board; and (4) the resignation of Mr. Niles C. Overly from the Board.employment agreement. In July of 2016,addition, the Company terminated, some executive andwithout cause, additional non-executive personnel in the Property Management department as part of an effort to reduce overhead costs.
In connection with and as part of the aforementionedthese management changes, the Company took a chargerecorded aggregate severance charges of $29.6$1.9 million, during the nine months ended September 30, 2016, of which $25.5 million related to severance and restructuring-related costs, including $9.5$0.1 million of non-cash stock compensation in the form of accelerated vesting of equity incentive awards, and $4.1 million related to fees and expenses incurred in connection with the Company's investigation of various strategic alternatives, which costs are included in merger, restructuringgeneral and transaction costsadministrative expense in the accompanying consolidated statements of operations and comprehensive (loss) income.loss for the three months ended March 31, 2019.
| |
| 2. | Basis of Presentation and Principles of Consolidation |
The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated balance sheets as of September 30, 2017March 31, 2020 and December 31, 20162019 include the accounts of WPG Inc. and WPG L.P., as well as their majority owned and controlled subsidiaries. The accompanying consolidated statements of operations include the consolidated accounts of the Company. All intercompany transactions have been eliminated in consolidation. Due to the seasonal nature of certain operational activities, the results for the interim period ended September 30, 2017March 31, 2020 are not necessarily indicative of the results to be expected for the full year.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
These consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and include all of the information and disclosures required by GAAP for interim reporting. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The Company believes that the disclosures made are adequate to prevent the information presented from being misleading. These consolidated unaudited financial statements should be read in conjunction with the audited consolidated and combined financial statements and related notes included in the combined 20162019 Annual Report on Form 10-K for WPG Inc. and WPG L.P. (the "2016"2019 Form 10-K").
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
COVID-19
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus ("COVID-19"). The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and March, as federal, state and local governments reacted to the public health crisis, creating significant uncertainties in the United States economy. In the interest of public health and safety, jurisdictions (national, state and local) where our shopping centers are located, required mandatory closures or capacity limitations or other restrictions for those that continue to operate which have impacted our tenants' ability to pay rent. As of March 31, 2020, all of our enclosed retail properties were closed and our open air properties have been limited to operations that have been deemed essential by the respective jurisdiction in which they operate. As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash flows for the year ended December 31, 2020. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change, including the timing of lifting any restrictions or closure requirements and when our shopping centers and tenants will reopen.
As described in Note 8, we derive almost all of our income from rental payments and other tenant charges. Our revenues and cash flow would be adversely affected if a significant number of our tenants are unable to meet their obligations to us, or if we are unable to lease vacant space in our properties on economically favorable terms. One or more of our tenants may seek the protection of the bankruptcy laws as a result of the prolonged impact of the COVID-19 pandemic which could result in the termination of its lease causing a reduction in our revenues and cash flow. Furthermore, certain of our tenants, including anchor tenants, hold the right under their lease(s) to terminate their lease(s) or reduce their rental rate if certain occupancy conditions are not met, if certain anchor tenants close, if certain sales levels or profit margins are not achieved, all of which could be triggered in the event of one or more tenant bankruptcies.
While the full outcome of the COVID-19 pandemic is unknown, it has and continues to negatively impact the revenues and business of our tenants. Many of our tenants have requested some form of rent relief, and any relief provided may reduce our future revenues and/or defer cash collections to future periods. A further worsening of the financial condition of our tenants may impact our continual assessment of future collectability of rents, which could cause us to write-off accrued rent (straight-line) that has not yet been billed. We are engaged in discussions with many of our tenants but are unable to predict the resolution or impact of these discussions.
We evaluate our real estate assets and other assets for impairment indicators whenever events or changes in circumstances indicate that recoverability of our investment in the asset is not reasonably assured. Furthermore, this evaluation is conducted no less frequently than quarterly, irrespective of changes in circumstances. The prolonged outbreak of the COVID-19 pandemic has resulted in sustained closure of our centers as well as the cessation of the operations of certain of our tenants which will likely result in a reduction in our revenues due to the impaired financial stability of our tenants and ultimately our cash flows for many of our centers as well as other sources of income generated by our properties. In addition to reduced revenues generated by our centers as a result of the COVID-19 outbreak, our ability to obtain sufficient financing for such properties may be impaired as well as our ability to lease or re-lease centers as a result of worsening market and economic conditions produced by the persistence of the COVID-19 pandemic.
As of March 31, 2020, our evaluation of impairment considered our estimate of cash flow declines caused by the COVID-19 pandemic, but our other assumptions, including estimated hold period, were generally unchanged given the highly uncertain environment. The worsening of estimated future cash flows due to a change in our plans, policies, or views of market and economic conditions as it relates to one or more of our properties adversely impacted by the COVID-19 outbreak could result in the recognition of substantial impairment charges imposed on our assets which could adversely impact our financial results.
We continuously project our cash flow sources and needs. In accordance with Accounting Standards Update ("ASU") 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern each reporting period, including interim periods. In evaluating the Company’s ability to continue as a going concern, management evaluated the conditions and events that could raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements were issued (May 7, 2020). Management considered the Company’s current projections of future cash flows, current financial condition, sources of liquidity and debt obligations due on or before May 7, 2021 in considering whether it has the ability to meet its obligations for at least one year from the date of issuance of this Form 10-Q.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Our ability to meet our obligations as they come due may be impacted by our ability to remain compliant with financial covenants in our unsecured debt arrangements or to obtain waivers or amendments that impact the related covenants. As a result of the related events due to the COVID-19 pandemic, we may experience a material adverse effect on our income and expenses that could impact our ability to maintain compliance with our credit facility and bond covenants.
We are engaged in discussions with our unsecured creditors and based upon these discussions we believe, to the extent that the impact of COVID-19 results in potential non-compliance with financial covenants, it is probable that we will remain compliant with such covenants through some combination of waivers, modifications or other amendments to the related agreements. However, no assurances can be made in this regard, and if we are unable to agree on the terms of such waivers or changes, this could create substantial doubt about our ability to continue as a going concern through May 7, 2021.
General
These consolidated financial statements reflect the consolidation of properties that are wholly owned or properties in which we own less than a 100% interest but that we control. Control of a property is demonstrated by, among other factors, our ability, to refinance debt and sell the property without the consent of any other unaffiliated partner or owner, to refinance debt or sell the property and the inability of any other unaffiliated partner or owner to replace us.
We consolidate a variable interest entity ("VIE") when we are determined to be the primary beneficiary. Determination of the primary beneficiary of a VIE is based on whether an entity has (1) the power to direct activities that most significantly impact the economic performance of the VIE and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Our determination of the primary beneficiary of a VIE considers all relationships between us and the VIE, including management agreements and other contractual arrangements.
There have been no changes during the ninethree months ended September 30, 2017March 31, 2020 to any of our previous conclusions about whether an entity qualifies as a VIE or whether we are the primary beneficiary of any previously identified VIE. During the ninethree months ended September 30, 2017,March 31, 2020, we did not provide financial or other support to a previously identified VIE that we were not previously contractually obligated to provide.
Investments in partnerships and joint ventures represent our noncontrolling ownership interests in properties. We account for these investments using the equity method of accounting. We initially record these investments at cost and we subsequently adjust for net equity in income or loss, which we allocate in accordance with the provisions of the applicable partnership or joint venture agreement and cash contributions and distributions, if applicable. The allocation provisions in the partnership or joint venture agreements are not always consistent with the legal ownership interests held by each general or limited partner or joint venture investee primarily due to partner preferences. We separately report investments in joint ventures for which accumulated distributions have exceeded investments in and our share of net income from the joint ventures within cash distributions and losses in unconsolidated entities, at equity in the consolidated balance sheets. The net equity of certain joint ventures is less than zero because of financing or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization, and WPG has historically committed to or intends to fund the venture.
As of September 30, 2017,March 31, 2020, our assets consisted of material interests in 110101 shopping centers. The consolidated financial statements as of that date reflect the consolidation of 9385 wholly owned properties and four4 additional properties that are less than wholly owned, but which we control or for which we are the primary beneficiary. We account for our interests in the remaining 1312 properties, or the joint venture properties, using the equity method of accounting, as we have determined that we have significant influence over their operations.accounting. While we manage the day-to-day operations of the joint venture properties, we do not control the operations as we have determined that our partner or partners have substantive participating rights with respect to the assets and operations of these joint venture properties.properties (see Note 5 - "Investment in Unconsolidated Entities, at Equity" for further details).
We allocate net operating results of WPG L.P. to third parties and to WPG Inc. based on the partners' respective weighted average ownership interests in WPG L.P. Net operating results of WPG L.P. attributable to third parties are reflected in net income (loss) attributable to noncontrolling interests. WPG Inc.'s weighted average ownership interest in WPG L.P. was 84.2%84.5% and 84.1%84.4% for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. As of September 30, 2017March 31, 2020 and December 31, 2016,2019, WPG Inc.'s ownership interest in WPG L.P. was 84.3%84.6% and 84.1%84.5%, respectively. We adjust the noncontrolling limited partners' interests at the end of each period to reflect their interest in WPG L.P.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
| |
| 3. | Summary of Significant Accounting Policies |
Fair Value Measurements
The Company measures and discloses its fair value measurements in accordance with Accounting Standards Codification ("ASC") Topic 820 - “Fair Value Measurement” (“Topic 820”). The fair value hierarchy, as defined by Topic 820, contains three levels of inputs that may be used to measure fair value as follows:
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, foreign exchange rates, and yield curves, that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability which are typically based on an entity's own assumptions, as there is little, if any, related market activity.
The asset or liability's fair value within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Under Topic 820, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction at the measurement date and under current market conditions.
Use of Estimates
We prepared the accompanying consolidated financial statements in accordance with GAAP. This requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. Our actual results could differ from these estimates.
Segment Disclosure
Our primary business is the ownership, development and management of retail real estate. We have aggregated our operations, including enclosed retail properties and open air properties, into one1 reportable segment because they have similar economic characteristics and we provide similar products and services to similar types of, and in many cases, the same tenants.
New Accounting Pronouncements
Adoption of New Standards
In May 2014,June 2016, the Financial Accounting Standards Board ("FASB") issued AccountingASU 2016-13, "Financial Instruments - Credit Losses," which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies that operating lease receivables are outside the scope of the new standard. We adopted this ASU on January 1, 2020, noting our seller-provided bridge financing associated with our other indebtedness (see Note 6 - "Indebtedness" for further details) and certain other miscellaneous accounts are in scope of ASU 2016-13. However, there was no impact to our consolidated financial statements at adoption.
New Standards Update ("ASU") 2014-09, "Revenue from Contracts with CustomersIssued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 606).848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2014-09 revises2020-04 provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Inter-Bank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). Entities can elect not to apply certain modification accounting requirements to contracts affected by offeringreference rate reform, if certain criteria are met. If elected, an entity would not have to remeasure the contracts at the modification date or reassess a single comprehensive revenue recognition standard instead of numerous revenue requirementsprevious accounting determination. Entities electing relief would need to apply it consistently for all eligible modified contracts accounted for under a particular industriescodification topic or transactions, which sometimes resulted in differentindustry subtopic. Additionally, entities can elect various optional expedients that would allow them to continue to apply hedge accounting for economically similar transactions. An entity has the optionhedging relationships affected by reference rate reform, if certain criteria are met. Entities electing relief related to hedging relationships can generally elect to apply the provisions of ASU 2014-09 either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying this standard recognized at the date of initial application. On July 9, 2015, the FASB announced it would defer the effective date by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also decided to permit early adoption of the standard, but not before the original effective date of December 15, 2016. This new standard will be effective for the Companyoptional expedients on January 1, 2018 and, upon effectiveness, certain of our revenue streams will be impacted. The impacted revenue streams primarily consist of fees earned from management, development and leasing services provided to joint ventures in which we own an interest and other ancillary income earned from our properties. During the nine months ended September 30, 2017, these revenues were approximately 2% of consolidated revenue. We expect that fee income earned from our joint ventures for the above-mentioned services will generally be recognized in a manner consistent with our current measurement and patterns of recognition. As a result, we do not expect the adoption of this standard to have a significant impact on our consolidated results of operations upon adoption in 2018. We expect to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of adoption.
In February 2017, the FASB issued guidance that clarified the scope of ASC 610-20, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets," which was finalized in conjunction with ASU 2014-09. ASC 610-20 applies to the sale, transfer and derecognition of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, and eliminates the guidance specific to real estate in ASC 360-20. With respect to full disposals, we expect the recognition pattern to be generally consistent with our current measurement and pattern of recognition. With respect to partial sales of real estate to joint ventures such as the O'Connor Joint Venture II, as defined below (see Note 5 - "Investment in Unconsolidated Entities, at Equity"), the new guidance will require us to recognize a full gain where an equity investment is retained.hedge-by-hedge basis.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
These transactions could result in a basis difference as we will be required to measure our retained equity interest at fair value, whereas the joint venture may continue to measure the assets received at carryover basis. The guidance is effective at the same timeupon issuance and can be applied to modifications of existing contracts made after January 1, 2020 and can be applied to eligible hedging relationships existing as ASU 2014-09, and we expect to adopt the standard using the modified retrospective approach, which requires a cumulative effect adjustment as of the date of adoption.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after the datesame date. The relief is temporary and cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. However, certain optional expedients can be applied to hedging relationships evaluated in periods after December 31, 2022. As of initialMarch 31, 2020, we had approximately $692.0 million (excluding debt issuance costs of $5.6 million) of our aggregate consolidated indebtedness that was indexed to LIBOR. In addition, as of March 31, 2020, we had approximately $641.0 million of consolidated indebtedness swapped to LIBOR plus a fixed spread under hedging relationships. We expect that upon modification, these contracts will generally qualify for the temporary relief upon meeting the certain criteria and we are currently assessing our plans for adoption.
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application with an optionof lease accounting guidance to use certain transition relief. Fromlease concessions provided as a lessee perspective,result of COVID-19. Under existing lease guidance, the Company currently has five material ground leases and two material office leases that,would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the new guidance, will result inenforceable rights and obligations within the recognitionexisting lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease liabilitymodification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and corresponding right-of-use asset. Fromlessors may make this election. The Company is evaluating its election on a lessor perspective,disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the new guidance remains mostly similar to current rules, though contract consideration will now be allocated between lease and non-lease components. Non-lease component allocations will be recognized under ASU 2014-09, and we expect that this will result in a different pattern of recognition for certain non-lease components, including for fixed common-area ("CAM") revenues. In addition, ASU 2016-02 limits the capitalization of leasing costs to initial direct costs, which will likely result in a reduction to our capitalized leasing costs and an increase to general and administrative expenses, though the amount of such changesLease Modification Q&A is highly dependent upon the leasing compensation structuresextent of lease concessions granted to tenants as a result of COVID-19 in placefuture periods and the elections made by the Company at the time of adoption. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.entering into such concessions.
In August 2016, the FASB issued ASU 2016-15, "StatementReconciliation of Cash, Flows (Topic 230)." ASU 2016-15Cash Equivalents, and Restricted Cash
The following is intended to reduce diversity in practice with respect to how certain transactions are classified in the statementa summary of cash flows. It is effective for fiscal yearsour beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted. In addition, in November 2016, the Emerging Issues Task Force ("EITF") of the FASB issued EITF Issue 16-A "Restricted Cash," requiring that a statement of cash flows explain the change during the period in total ofand ending cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally describedtotals as restricted cash would be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statementpresented in our statements of cash flows. This guidanceflows for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | | | | | | | | |
| | Balance at March 31, | | Balance at December 31, |
| | 2020 | | 2019 | | 2019 | | 2018 |
| Cash and cash equivalents | $ | 39,614 |
| | $ | 29,244 |
| | $ | 41,421 |
| | $ | 42,542 |
|
| Restricted cash | 35,202 |
| | 17,324 |
| | 34,054 |
| | 18,542 |
|
| Total cash, cash equivalents and restricted cash | $ | 74,816 |
| | $ | 46,568 |
| | $ | 75,475 |
| | $ | 61,084 |
|
Restricted cash primarily relates to cash held in escrow for payment of real estate taxes and property reserves for maintenance, expansion or leasehold improvements as required by our mortgage loans. Restricted cash is also effective for fiscal years beginning after December 15, 2017, including interim periods. These new standards require a retrospective transition approach. The Company has $28.7 millionincluded in "Deferred costs and $29.2 million of restricted cash on its consolidatedother assets" in the accompanying balance sheets as of September 30, 2017March 31, 2020 and December 31, 2016, respectively, whose cash flow statement classification will change to align with the new guidance upon our adoption of the EITF. We are currently evaluating the impact of the adoption of these new standards.2019.
In January 2017, the FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," that provides guidance to assist entities with evaluating when a set of transferred assets and activities (set) is a business. The new guidance requires an acquirer to determine if substantially all of the fair value of the gross assets acquired is concentrated | |
| 4. | Investment in Real Estate |
2020 Dispositions
On March 13, 2020, Seminole Towne Center, located in a single identifiable asset or group of assets; if so, the set of transferred assets and activities is not a business. The new guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted and will be applied on a prospective basis for transactions that occur within the period of adoption. We early adopted this standard prospectively as of January 1, 2017, as permitted under the standard, and anticipate subsequent property acquisitions to be accounted for under asset acquisition accounting rather than business combination accounting, resulting in capitalization of transactions costs rather than expensing of said costs.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities," to better align the results of hedge accounting with an entity's risk management activities. The new guidance aims to reduce complexity in fair value hedges of interest rate risk and eliminates the requirement to separately measure and report hedge ineffectiveness, generally requiring the entire change in the fair value of the hedging instrument to be presented in the same income statement line as the hedged item. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a cumulative-effect adjustmentSanford, Florida, was transitioned to the balance sheet aslender pursuant to the terms within a deed-in-lieu of foreclosure agreement. This property was held in an unconsolidated joint venture and all involvement between us and the beginning of the fiscal year of adoption,related property ceased in connection with early adoption permittedthis transition (see Note 5 - "Investment in any interim period or fiscal year before the effective date. The updated presentation and disclosure guidance is required only on a prospective basis. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements and related disclosures.Unconsolidated Entities, at Equity" for additional details).
Deferred Costs and Other Assets
On January 4, 2017,14, 2020, we completed the remaining $15.6 million outstanding on the promissory note receivable related to the January 29, 2016 sale of Forest Mall,Matteson Plaza, located in Fond Du Lac, Wisconsin, and Northlake Mall,Matteson, Illinois, to an unaffiliated private real estate investor for a purchase price of $1.1 million. The net proceeds of $0.4 million was used for general corporate purposes.
On January 31, 2020, we completed the sale of Dekalb Plaza, located in Atlanta, Georgia,King of Prussia, Pennsylvania, to an unaffiliated private real estate investor for a purchase price of $13.6 million. The net proceeds of $13.4 million was received by the Company in full. The proceeds were used to reducefund ongoing redevelopment efforts and general corporate debt.purposes.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
DuringWe are party to 2 separate purchase and sale agreements to sell certain outparcels to FCPT Acquisitions, LLC ("Four Corners"). The following table summarizes the ninekey terms of each of the closings that occurred during the three months ended September 30, 2017, the buyer of Knoxville Center, located in Knoxville, Tennessee, amended and extended the maturity of the promissory note receivable that was issued in connection with the August 19, 2016 sale of the property. In conjunction with the amended terms, the buyer paidMarch 31, 2020:
|
| | | | | | | | | | | |
| Sales Date | | Parcels Sold | | Purchase Price | | Sales Proceeds |
| February 13, 2020 | | 2 |
| | $ | 1,961 |
| | $ | 1,945 |
|
Excluding any subsequent amendments thereto, the Company $0.5has approximately $4.6 million of remaining outparcels from the outstanding principal balance. Underfirst purchase and sale agreement and approximately $26.9 million from the amendedsecond purchase and extended terms,sale agreement to close, subject to due diligence and closing conditions. Additionally, during the buyer shall paythree months ended March 31, 2020, the Company monthly principalsold certain undeveloped land parcels and interest payments of approximately $0.1 million until December 31, 2017, at which time the outstanding principal balance is due. As of September 30, 2017, the outstanding principal balance was $5.5 million and the buyer was current on its principal and interest payments.
Redeemable Noncontrolling Interests for WPG Inc.
During the nine months ended September 30, 2017, but prior to the completion of the O'Connor Joint Venture II transaction (see Note 5 - "Investment in Unconsolidated Entities, at Equity" for further details), the Company purchased all of the redeemable noncontrolling interest equity owned by unaffiliated third parties in the joint venture entity that owned Arbor Hills, located in Ann Arbor, Michigan (the "Arbor Hills Venture") and the joint venture (the "Oklahoma City Properties Venture") that owned Classen Curve and The Triangle at Classen Curve, each located in Oklahoma City, Oklahoma and Nichols Hills Plaza, located in Nichols Hills, Oklahoma (the "Oklahoma City Properties," collectively). As of September 30, 2017, the only remaining redeemable noncontrolling interests relate to the outstanding WPG L.P. 7.3% Series I-1 Preferred Units (the "Series I-1 Preferred Units").
| |
4. | Investment in Real Estate |
2017 Dispositions
On June 7, 2017, we completed the sale of Morgantown Commons, located in Morgantown, West Virginia, to an unaffiliated private real estate investor for a purchase price of approximately $6.7 million. The net proceeds were used for general corporate purposes.
On May 16, 2017, we completed the sale of an 80,000 square foot vacant anchor parcel at Indian Mound Mall, located in Heath, Ohio, to an unaffiliated private real estate investor for a purchase price of approximately $0.8 million. The net proceeds were used for general corporate purposes.
On February 21, 2017, we completed the sale of Gulf View Square, located in Port Richey, Florida, and River Oaks Center, located in Chicago, Illinois, to unaffiliated private real estate investorsdeveloped outparcels for an aggregate purchase price of $42.0approximately $1.5 million, which was classified as real estate held for sale on the accompanying consolidated balance sheet asreceiving net proceeds of December 31, 2016.approximately $1.5 million. The net proceeds from the transactiondisposition activities were generally used to reducefund ongoing redevelopment efforts and for general corporate debt.
On January 10, 2017, we completed the sale of Virginia Center Commons, located in Glen Allen, Virginia, to an unaffiliated private real estate investor for a purchase price of $9.0 million, which was classified as real estate held for sale on the accompanying consolidated balance sheet as of December 31, 2016. The net proceeds from the transaction were used to reduce corporate debt.
purposes. In connection with the 2017 dispositions,2020 disposition activities, the Company recorded a net lossesgain of $0.7$26.8 million for the ninethree months ended September 30, 2017,March 31, 2020, which are included in gain (loss) on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive (loss) income.loss.
20162019 Dispositions
On August 19, 2016,The following table summarizes the Company completedkey terms of each of the sale of Knoxville Center to a private real estate investor for a purchase price of $10.1 million, which consisted of $3.9 million in cash and a $6.2 million promissory note (see Note 3 - "Summary of Significant Accounting Policies" for further discussion). closings with Four Corners that occurred during the three months ended March 31, 2019:
|
| | | | | | | | | | | |
| Sales Date | | Parcels Sold | | Purchase Price | | Sales Proceeds |
| January 18, 2019 | | 8 |
| | $ | 9,435 |
| | $ | 9,364 |
|
| February 11, 2019 | | 1 |
| | 2,766 |
| | 2,720 |
|
| | | 9 |
| | $ | 12,201 |
| | $ | 12,084 |
|
| | | | | | | |
The net proceeds from the transaction were used to reduce the balance outstanding under the Revolver, as defined below (see Note 6 - "Indebtedness").
On January 29, 2016, the Company completed the sale of Forest Mallfund ongoing redevelopment efforts and Northlake Mall to unaffiliated private real estate investors for an aggregate purchase price of $30.0 million. The net proceeds from the transaction were used to reduce the balance outstanding under the Revolver, as defined below (see Note 6 - "Indebtedness").
general corporate purposes. In connection with the 2016 dispositions,2019 disposition activities, the Company recorded a $0.2gain of $10.0 million gain and a $2.1 million loss,for the three months ended March 31, 2019, which is included in gain (loss) on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive (loss) incomeloss.
Impairment
During the three months ended March 31, 2020, and in connection with the preparation of the financial statements included in this report, we recorded an impairment charge of approximately $1.3 million related to vacant land at Georgesville Square, located in Columbus, Ohio and a single tenant outparcel located in Topeka, Kansas. The impairment charges in both instances were due to changes in facts and circumstances when we decided to hold the assets for a shorter period which resulted in the carrying value not being recoverable from the projected cash flows. In the case of the vacant land at Georgesville Square, the fair value was based on a recently negotiated purchase and sale agreement with a potential buyer (Level 1 input). In the case of the single tenant outparcel, the fair value was based on general market conditions (Level 3 inputs). Except as described above, the Company recorded no additional impairment charges during the three months ended March 31, 2020.
| |
| 5. | Investment in Unconsolidated Entities, at Equity |
The Company's investment activity in unconsolidated real estate entities during the three months ended March 31, 2020 and March 31, 2019 consisted of investments in the following material joint ventures:
The O'Connor Joint Venture I
This investment consists of a 51% noncontrolling interest held by the Company in a portfolio of 5 enclosed retail properties and related outparcels, consisting of the following: The Mall at Johnson City located in Johnson City, Tennessee; Pearlridge Center located in Aiea, Hawaii; Polaris Fashion Place, located in Columbus, Ohio; Scottsdale Quarter® located in Scottsdale, Arizona; and Town Center Plaza (which consists of Town Center Plaza and the adjacent Town Center Crossing) located in Leawood, Kansas. We retain management, leasing, legal, construction, and development responsibilities for the three and nine months ended September 30, 2016, respectively.
On June 9, 2016 and April 28, 2016, Merritt Square Mall and Chesapeake Square were transitioned to the lenders through a deed in lieu of foreclosure, respectively (see Note 6 - "Indebtedness" for further discussion).O'Connor Joint Venture I.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Impairment
On October 4, 2017,December 20, 2019, the Company entered into a purchase agreementO'Connor Joint Venture I closed on the extension of the mortgage loan secured by The Mall at Johnson City. The extension is effective May 6, 2020 and will extend the maturity of the mortgage loan to sell Colonial Park Mall, located in Harrisburg, Pennsylvania (see Note 12 - "Subsequent Events"). The agreement is subject to closing requirements. Given uncertainties around the property's disposition dueMay 6, 2023, with 2 additional one-year extension options available to the lackjoint venture. The extension requires a $5.0 million principal prepayment on May 6, 2020, in addition to funding certain reserve accounts of $10.0 million for future redevelopment and property improvements. The Company is in advanced discussions with the servicer on a firm commitment as of September 30, 2017,forbearance agreement that will delay the property remains classified as held for use as of September 30, 2017. We shortenedprepayment requirement until the hold period used in assessing impairment for this asset, which resulted in the carrying value not being recoverable from the expected cash flows. The purchase offer represents the best available evidence of fair value for the property. We compared the estimated fair value measurement of the property to its relative carrying value, which resulted in the recording of an impairment charge of approximately $20.9 million in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017.
During the firstfourth quarter of 2017, the Company entered into a purchase and sale agreement to dispose of Morgantown Commons, which was sold in the second quarter of 2017. We shortened the hold period used in assessing impairment for the asset during the quarter ended March 31, 2017, which resulted in the carrying value not being recoverable from the expected cash flows. The purchase offer represented the best available evidence of fair value for this property. We compared the fair value to the carrying value, which resulted in the recording of an impairment charge of approximately $8.5 million in the accompanying consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017.
During, and subsequent to, the third quarter of 2016, the Company entered into purchase and sale agreements to sell Gulf View Square; Richmond Town Square, located in Cleveland, Ohio; River Oaks Center; and Virginia Center Commons. We adjusted the carrying values to the purchase offers and recorded an aggregate impairment charge of $20.7 million in the accompanying consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2016.
| |
5. | Investment in Unconsolidated Entities, at Equity |
The Company's investment activity in unconsolidated real estate entities during the nine months ended September 30, 2017 and September 30, 2016 consisted of investments in the following material joint ventures:2020.
The O'Connor Joint Venture III
This investment consists of a 51% noncontrolling interest held by the Company in a portfolio of five enclosed retail properties and related outparcels, consisting of the following: The Mall at Johnson City located in Johnson City, Tennessee; Pearlridge Center located in Aiea, Hawaii; Polaris Fashion Place® located in Columbus, Ohio; Scottsdale Quarter® located in Scottsdale, Arizona; and Town Center Plaza (which consists of Town Center Plaza and the adjacent Town Center Crossing) located in Leawood, Kansas. We retained management, leasing, and development responsibilities for the O'Connor Joint Venture I.
On March 2, 2017, the O'Connor Joint Venture I closed on the purchase of Pearlridge Uptown II, a 180,000 square foot wing of Pearlridge Center, for a gross purchase price of $70.0 million.
On March 30, 2017, the O'Connor Joint Venture I closed on a $43.2 million non-recourse mortgage note payable with an eight year term and a fixed interest rate of 4.071% secured by Pearlridge Uptown II. The mortgage note payable requires monthly interest only payments until April 1, 2019, at which time monthly interest and principal payments are due until maturity.
On March 29, 2017, the O'Connor Joint Venture I closed on a $55.0 million non-recourse mortgage note payable with a ten year term and a fixed interest rate of 4.36% secured by sections of Scottsdale Quarter® known as Block K and Block M. The mortgage note payable requires monthly interest only payments until May 1, 2022, at which time monthly interest and principal payments are due until maturity.
The O'Connor Joint Venture II
During the quarter ended June 30, 2017, we completed an additional joint venture transaction with O'Connor Mall Partners, L.P. ("O'Connor"), an unaffiliated third party and our partner in the O'Connor Joint Venture I, with respect to the ownership and operation of seven of the Company's7 retail properties and certain related outparcels, (the "O'Connor Joint Venture II"), consisting of the following: The Arboretum, located in Austin, Texas; Arbor Hills; theHills, located in Ann Arbor, Michigan; Classen Curve and The Triangle at Classen Curve, each located in Oklahoma City, Properties;Oklahoma and Nichols Hills Plaza, located in Nichols Hills, Oklahoma (the "Oklahoma City Properties"); Gateway Centers, located in Austin, Texas; Malibu Lumber Yard, located in Malibu, California; Palms Crossing I and II, located in McAllen, Texas; and The Shops at Arbor Walk, located in Austin, Texas. The transaction valued the properties at $598.6 million before closing adjustmentsTexas (the "O'Connor Joint Venture II"). We retain management, leasing, legal, construction, and debt assumptions. Under the terms of the joint venture agreement, we retained a non-controlling 51% interest indevelopment responsibilities for the O'Connor Joint Venture II and sold the remaining 49% to O'Connor.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
The transaction generated net proceeds to the Company of approximately $138.9 million, after taking into consideration costs associated with the transaction and the assumption of debt (including the new mortgage loans on The Arboretum, Gateway Centers, and Oklahoma City Properties which closed prior to the joint venture transaction; see Note 6 - "Indebtedness" for net proceeds to the Company from the new mortgage loans), which we used to reduce the Company's debt as well as for general corporate purposes. Since we no longer control the operations of the properties included in the O'Connor Joint Venture II, we deconsolidated the properties and recorded a gain in connection with this partial sale of $126.1 million, which is included in gain (loss) on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017. The gain was recorded pursuant to ASC 360-20 and calculated based upon proceeds received, less 49% of the book value of the deconsolidated net assets. Our retained 51% non-controlling equity method interest was valued at historical cost based upon the pro rata book value of the retained interest in the net assets. We retained management and leasing responsibilities for the properties included in the O'Connor Joint Venture II, though our partner's substantive participating rights over certain decisions most important to the operations of the O'Connor Joint Venture II preclude our control and consolidation of this venture. In connection with the formation of this joint venture, we recorded transaction costs of approximately $6.4 million as part of our basis in this investment.II.
The Seminole Joint Venture
This investment consistsconsisted of a 45% legal interest held by the Company in Seminole Towne Center, an approximate 1.1 million square foot enclosed regional retail property located in the Orlando, Florida area.property. The Company'sCompany had 0 effective financial interest in this property (after preferences) is estimateddue to be approximately 22% for 2017.preferences. On March 13, 2020, the property held through this venture was transitioned to the lender pursuant to the terms within a deed-in-lieu of foreclosure agreement and all involvement between us and the related property ceased in connection with this transition. We retain managementrecorded a gain of $15.4 million related to our cash distributions and leasing responsibilities forlosses in the Seminole Joint Venture. During the three and nine months ended September 30, 2017, the Company received cashVenture, which is included in gain on disposition of $0.2 million (after preferences) related to our share of the proceeds from the sale of an outparcel, which was recordedinterests in loss from unconsolidated entities,properties, net in the accompanying consolidated statements of operations and comprehensive (loss) income.loss.
Individual agreements specify which services the Company is to provide to each joint venture. The Company, through its affiliates, provideprovides management, development,leasing, legal, construction marketing, leasing and legaldevelopment services for a fee to each of the joint ventures describedas noted above. Related to performing these services, weWe recorded management feesfee income of $2.3$2.2 million and $5.8$2.7 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 and $1.7 million and $4.9 million for the three and nine months ended September 30, 2016,2019, respectively, which are included in other income in the accompanying consolidated statements of operations and comprehensive (loss) income.loss. Advances to the O'Connor Joint Venture Ijoint ventures totaled $0.8 million and O'Connor Joint Venture II totaled $6.7$0.5 million as of September 30, 2017March 31, 2020 and with respect to the O'Connor Joint Venture I only, $2.5 million as of December 31, 2016,2019, respectively, which isare included in investment in and advances to unconsolidated entities, at equity in the accompanying consolidated balance sheets. Management deems this balance to be collectible and anticipates repayment within one year.
The following table presents the combined statements of operations for the O'Connor Joint Venture II from May 12, 2017 (the closing date of the venture), and in the case of Malibu Lumber Yard from June 13, 2017 (the date the venture acquired the property), through September 30, 2017 and the O'Connor Joint Venture I, the Seminole Joint Venture, and an indirect 12.5% ownership interest in certain real estate for all periods presented during which the Company accounted for these investments as unconsolidated entitiesour joint ventures for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | |
| | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Total revenues | $ | 63,222 |
| | $ | 66,022 |
|
| Operating expenses | 27,809 |
| | 26,829 |
|
| Depreciation and amortization | 25,389 |
| | 25,757 |
|
| Operating income | 10,024 |
| | 13,436 |
|
| Gain on extinguishment of debt | 15,605 |
| | — |
|
| Interest expense, taxes, and other, net | (12,427 | ) | | (13,065 | ) |
| Net income of the Company's unconsolidated real estate entities | $ | 13,202 |
| | $ | 371 |
|
| | | | |
| Our share of loss from the Company's unconsolidated real estate entities | $ | (1,032 | ) | | $ | (48 | ) |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Total revenues | $ | 63,403 |
| | $ | 47,530 |
| | $ | 170,689 |
| | $ | 141,336 |
|
| Operating expenses | 25,848 |
| | 19,730 |
| | 70,845 |
| | 58,292 |
|
| Depreciation and amortization | 24,483 |
| | 20,401 |
| | 65,743 |
| | 60,125 |
|
| Operating income | 13,072 |
| | 7,399 |
| | 34,101 |
| | 22,919 |
|
| Gain on sale of interests in unconsolidated entities | 1,585 |
| | 1,014 |
| | 1,585 |
| | 1,014 |
|
| Interest expense, taxes, and other, net | (12,958 | ) | | (8,423 | ) | | (32,992 | ) | | (24,588 | ) |
| Net income (loss) from the Company's unconsolidated real estate entities | 1,699 |
| | (10 | ) | | 2,694 |
| | (655 | ) |
| Our share of loss from the Company's unconsolidated real estate entities | $ | (165 | ) | | $ | (933 | ) | | $ | (781 | ) | | $ | (2,602 | ) |
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Mortgage Debt
Total mortgage indebtedness at September 30, 2017 and December 31, 2016 was as follows:
|
| | | | | | | | |
| | | September 30,
2017 | | December 31,
2016 |
| Face amount of mortgage loans | | $ | 1,407,974 |
| | $ | 1,610,429 |
|
| Fair value adjustments, net | | 8,967 |
| | 12,661 |
|
| Debt issuance cost, net | | (3,966 | ) | | (5,010 | ) |
| Carrying value of mortgage loans | | $ | 1,412,975 |
| | $ | 1,618,080 |
|
A roll forward of mortgage indebtedness from December 31, 2016 to September 30, 2017 is summarized as follows:
|
| | | |
| Balance at December 31, 2016 | $ | 1,618,080 |
|
| Debt amortization payments | (14,896 | ) |
| Repayment of debt | (63,000 | ) |
| Debt issuances, net of debt issuance costs | 213,574 |
|
| Debt cancelled upon partial paydown | (24,250 | ) |
| Debt transferred to unconsolidated entities, net of debt issuance costs and fair value adjustments | (314,595 | ) |
| Amortization of fair value and other adjustments | (2,846 | ) |
| Amortization of debt issuance costs | 908 |
|
| Balance at September 30, 2017 | $ | 1,412,975 |
|
On April 25, 2017, the Company completed a discounted payoff of the $87.3 million mortgage loan secured by Mesa Mall, located in Grand Junction, Colorado (see "Covenants" section below for additional details).
On May 10, 2017 and prior to the deconsolidation of these properties due to the sale of 49% of our interests (see Note 5 - "Investment in Unconsolidated Entities, at Equity" for further details), the Company closed on non-recourse mortgage loans encumbering The Arboretum, Gateway Centers, and Oklahoma City Properties. The following table summarizes the key terms of each mortgage loan:
|
| | | | | | | | | | | | | | | | | |
| Property | | Principal | | Debt issuance costs | | Net debt issuance | | Interest Rate | | Maturity Date |
| The Arboretum | | $ | 59,400 |
| | $ | (452 | ) | | $ | 58,948 |
| | 4.13 | % | | June 1, 2027 |
| Gateway Centers | | 112,500 |
| | (709 | ) | | 111,791 |
| | 4.03 | % | | June 1, 2027 |
| Oklahoma City Properties | | 43,279 |
| | (427 | ) | | 42,852 |
| | 3.90 | % | | June 1, 2027 |
| Total | | $ | 215,179 |
| | $ | (1,588 | ) | | $ | 213,591 |
| | | | |
The Arboretum and Gateway Centers loans require monthly interest only payments until July 1, 2021, at which time monthly interest and principal payments are due until maturity. The Oklahoma City Properties loan requires monthly interest only payments until July 1, 2022, at which time monthly interest and principal payments are due until maturity. We used the net proceeds to repay a portion of the outstanding balance on the Revolver, as defined below. These three loans were deconsolidated during the quarter ended June 30, 2017, in connection with the completion of the O'Connor Joint Venture II transaction.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Unsecured Debt
The following table identifiespresents the combined balance sheets of our total unsecured debt outstanding at September 30, 2017joint ventures as of March 31, 2020 and December 31, 2016:2019:
|
| | | | | | | | |
| | | September 30,
2017 | | December 31,
2016 |
| Notes payable: | | | | |
Face amount - the Exchange Notes(1) | | $ | 250,000 |
| | $ | 250,000 |
|
Face amount - 5.950% Notes due 2024(2) | | 750,000 |
| | — |
|
| Debt discount, net | | (11,424 | ) | | (47 | ) |
| Debt issuance costs, net | | (9,023 | ) | | (2,316 | ) |
| Total carrying value of notes payable | | $ | 979,553 |
| | $ | 247,637 |
|
| | | | | |
Unsecured term loans:(8) | | | | |
Face amount - Term Loan(3)(4) | | $ | — |
| | $ | 500,000 |
|
Face amount - December 2015 Term Loan(5) | | 340,000 |
| | 340,000 |
|
Face amount - June 2015 Term Loan(6) | | 270,000 |
| | 500,000 |
|
| Debt issuance costs, net | | (3,620 | ) | | (5,478 | ) |
| Total carrying value of unsecured term loans | | $ | 606,380 |
| | $ | 1,334,522 |
|
| | | | | |
Revolving credit facility:(3)(7) | | | | |
| Face amount | | $ | — |
| | $ | 308,000 |
|
| Debt issuance costs, net | | — |
| | (1,835 | ) |
| Total carrying value of revolving credit facility | | $ | — |
| | $ | 306,165 |
|
|
| | | | | | | | |
| | | March 31, 2020 | | December 31, 2019 |
| Assets: | | | | |
| Investment properties at cost, net | | $ | 1,864,053 |
| | $ | 1,905,336 |
|
| Construction in progress | | 39,354 |
| | 38,280 |
|
| Cash and cash equivalents | | 38,007 |
| | 43,137 |
|
| Tenant receivables and accrued revenue, net | | 31,922 |
| | 31,238 |
|
Deferred costs and other assets (1) | | 292,516 |
| | 301,133 |
|
| Total assets | | $ | 2,265,852 |
| | $ | 2,319,124 |
|
| Liabilities and Members’ Equity: | | |
| | |
|
| Mortgage notes payable | | $ | 1,227,467 |
| | $ | 1,282,307 |
|
Accounts payable, accrued expenses, intangibles, and deferred revenues(2) | | 284,738 |
| | 297,163 |
|
| Total liabilities | | 1,512,205 |
| | 1,579,470 |
|
| Members’ equity | | 753,647 |
| | 739,654 |
|
| Total liabilities and members’ equity | | $ | 2,265,852 |
| | $ | 2,319,124 |
|
| Our share of members’ equity, net | | $ | 396,600 |
| | $ | 384,332 |
|
| | | | | |
| Our share of members’ equity, net | | $ | 396,600 |
| | $ | 384,332 |
|
| Advances and excess investment | | 20,349 |
| | 17,339 |
|
Net investment in and advances to unconsolidated entities, at equity(3) | | $ | 416,949 |
| | $ | 401,671 |
|
(1)The Exchange Notes were issued at a 0.028% discount, bear interest at 3.850% per annum and mature on April 1, 2020.
| |
| (1) | Includes value of acquired in-place leases and acquired above-market leases with a net book value of $75,489 and $79,457 as of March 31, 2020 and December 31, 2019, respectively. Additionally, includes right-of-use assets of $173,069 and $172,991 related to ground leases for which our joint ventures are the lessees as of March 31, 2020 and December 31, 2019, respectively. |
| |
| (2) | Includes the net book value of below market leases of $42,442 and $45,757 as of March 31, 2020 and December 31, 2019, respectively. Additionally, includes lease liabilities of $173,069 and $172,991 related to ground leases for which our joint ventures are the lessees as of March 31, 2020 and December 31, 2019, respectively. |
| |
| (3) | Includes $416,949 and $417,092 of investment in and advances to unconsolidated entities, at equity as of March 31, 2020 and December 31, 2019, respectively, and $0 and $15,421 of cash distributions and losses in unconsolidated entities, at equity as of March 31, 2020 and December 31, 2019, respectively. |
(2)On August 4, 2017, WPG L.P. completed the issuance of $750.0 million of unsecured notes. The notes were issued at a 1.533% discount, with an interest rate of 5.950% per annum, and mature on August 15, 2024. Proceeds from the unsecured notes offering were used to pay down the Term Loan (defined below) and for partial repayment of the June 2015 Term Loan as discussed below. The interest rate could vary in the future based upon changes to the Company's credit ratings.
(3)The unsecured revolving credit facility, or "Revolver" and unsecured term loan, or "Term Loan" are collectively known as the "Facility."
(4)The Term Loan bore interest at one-month LIBOR plus 1.45% per annum. We had interest rate swap agreements totaling $200.0 million, which effectively fixed the interest rate on a portion of the Term Loan at 2.04% per annum. During the three months ended September 30, 2017, the Term Loan was repaid in full and the Company wrote off $0.2 million of debt issuance costs.
(5)The December 2015 Term Loan bears interest at one-month LIBOR plus 1.80% per annum and will mature on January 10, 2023. We have interest rate swap agreements totaling $340.0 million, which effectively fix the interest rate at 3.51% per annum through maturity.
(6)The June 2015 Term Loan bears interest at one-month LIBOR plus 1.45% per annum and will mature on March 2, 2020. We have interest rate swap agreements totaling $270.0 million, which effectively fix the interest rate at 2.56% per annum through June 30, 2018. During the three months ended September 30, 2017, the Company repaid $230.0 million of the June 2015 Term Loan and wrote off $0.9 million of debt issuance costs.
(7)The Revolver provides borrowings on a revolving basis up to $900.0 million, bears interest at one-month LIBOR plus 1.25%, and will initially mature on May 30, 2018, subject to two six-month extensions available at our option subject to compliance with terms of the Facility and payment of a customary extension fee. At September 30, 2017, we had an aggregate available borrowing capacity of $899.7 million under the Revolver, net of $0.3 million reserved for outstanding letters of credit. At September 30, 2017, the applicable interest rate on the Revolver was one-month LIBOR plus 1.25%, or 2.48%.
(8)While we have interest rate swap agreements in place that fix the LIBOR portion of the rates as noted above, the spread over LIBOR could vary in the future based upon changes to the Company's credit ratings.Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Mortgage Debt
Total mortgage indebtedness at March 31, 2020 and December 31, 2019 was as follows:
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| Face amount of mortgage loans | | $ | 1,113,242 |
| | $ | 1,117,242 |
|
| Fair value adjustments, net | | 2,887 |
| | 3,463 |
|
| Debt issuance cost, net | | (4,785 | ) | | (5,097 | ) |
| Carrying value of mortgage loans | | $ | 1,111,344 |
| | $ | 1,115,608 |
|
A roll forward of mortgage indebtedness from December 31, 2019 to March 31, 2020 is summarized as follows:
|
| | | |
| Balance at December 31, 2019 | $ | 1,115,608 |
|
| Debt amortization payments | (4,000 | ) |
| Amortization of fair value and other adjustments | (576 | ) |
| Amortization of debt issuance costs | 312 |
|
| Balance at March 31, 2020 | $ | 1,111,344 |
|
On February 14, 2020, the Company exercised the second of 2 options to extend the maturity of the $51.0 million mortgage note payable secured by Town Center at Aurora, located in Aurora, Colorado for one year. The extended maturity is April 1, 2021.
Corporate Debt
On February 28, 2020, the Company redeemed the Exchange Notes (as defined below) in advance of the April 1, 2020 maturity date. The repayment was funded utilizing borrowings on the Revolver (as defined below).
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
The following table identifies our total corporate debt outstanding at March 31, 2020 and December 31, 2019:
|
| | | | | | | | |
| | | March 31,
2020 | | December 31,
2019 |
| Notes payable: | | | | |
Face amount - the Exchange Notes(1) | | $ | — |
| | $ | 250,000 |
|
Face amount - Senior Notes due 2024(2) | | 720,900 |
| | 720,900 |
|
| Debt discount, net | | (7,489 | ) | | (7,864 | ) |
| Debt issuance costs, net | | (4,991 | ) | | (5,470 | ) |
| Total carrying value of notes payable | | $ | 708,420 |
| | $ | 957,566 |
|
| | | | | |
Unsecured term loans:(7) | | | | |
Face amount - Term Loan(3)(4) | | $ | 350,000 |
| | $ | 350,000 |
|
Face amount - December 2015 Term Loan(5) | | 340,000 |
| | 340,000 |
|
| Debt issuance costs, net | | (3,074 | ) | | (3,358 | ) |
| Total carrying value of unsecured term loans | | $ | 686,926 |
| | $ | 686,642 |
|
| | | | | |
Revolving credit facility:(3)(6) | | | | |
| Face amount | | $ | 527,000 |
| | $ | 207,000 |
|
| Debt issuance costs, net | | (2,570 | ) | | (2,855 | ) |
| Total carrying value of revolving credit facility | | $ | 524,430 |
| | $ | 204,145 |
|
| | | | | |
Other indebtedness:(8) | | | | |
| Face amount | | $ | 98,900 |
| | $ | 98,900 |
|
| Debt issuance costs, net | | (1,548 | ) | | (1,561 | ) |
| Accretion adjustment | | 555 |
| | 262 |
|
| Total carrying value of other indebtedness | | $ | 97,907 |
| | $ | 97,601 |
|
(1)The Exchange Notes were issued at a 0.028% discount and bore interest at 3.850% per annum.
(2)The Senior Notes due 2024 were issued at a 1.533% discount, bore interest at 5.950% per annum through August 14, 2019, at which time the interest rate increased to 6.450% per annum. The Senior Notes due 2024 mature on August 15, 2024.
(3)The unsecured revolving credit facility, or "Revolver" and unsecured term loan, or "Term Loan" are collectively known as the "Facility."
(4)The Term Loan bears interest at one-month LIBOR plus 2.10% per annum and will mature on December 30, 2022. We have interest rate swap agreements totaling $250.0 million, which effectively fix the interest rate on a portion of the Term Loan at 4.86% through June 30, 2021. At March 31, 2020, the applicable interest rate on the unhedged portion of the Term Loan was one-month LIBOR plus 2.10% or 3.09%.
(5)The December 2015 Term Loan bears interest at one-month LIBOR plus 2.35% per annum and will mature on January 10, 2023. We have interest rate swap agreements totaling $340.0 million which effectively fix the interest rate at 4.06% per annum through maturity.
(6)The Revolver provides borrowings on a revolving basis up to $650.0 million, bears interest at one-month LIBOR plus 1.80%, and will initially mature on December 30, 2021, subject to 2 six month extensions available at our option subject to compliance with terms of the Facility and payment of a customary extension fee. At March 31, 2020, we had an aggregate available borrowing capacity of $122.8 million under the Revolver, net of $0.2 million reserved for outstanding letters of credit. At March 31, 2020, the applicable interest rate on the Revolver was one-month LIBOR plus 1.80% or 2.79%. The interest rate on the Revolver may vary in the future based upon the Company's credit rating and leveraged levels.
(7)While we have interest rate swap agreements in place that fix the LIBOR portion of the rates as noted above, the spread over LIBOR could vary in the future based upon changes to the Company's credit ratings and leveraged levels.
(8) Represents the financial liability associated with our failed sale and leaseback of land at Edison Mall, located in Fort Myers, Florida; Great Lakes Mall, located in Mentor, Ohio; Irving Mall, located in Irving, Texas; and Jefferson Valley Mall, located in Yorktown Heights, New York (collectively, the "Properties"). The face amount represents the sales price of the fee interest in the land at the Properties. The master ground lease has a 99-year term and includes fixed annual payments at an initial annualized rate of 7.4%, with annual rent escalators over the aforementioned term. The agreement also includes an option to repurchase the fee interest in the land at $109.3 million in year 30 of the master ground lease, which is being accreted to the financial liability during the repurchase period. Proceeds received at closing were net of $55.0 million in bridge financing provided by the Company, which is included in "Deferred costs and other assets" on the accompanying consolidated balance sheet at March 31, 2020 andDecember 31, 2019. Expense is being recognized utilizing an effective interest rate of 8.56% during the repurchase period.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Covenants
Our unsecured debt agreements contain financial and other covenants. If we were to fail to comply with these covenants, after the expiration of the applicable cure periods, the debt maturity could be accelerated or other remedies could be sought by the lender including adjustments to the applicable interest rate. As of September 30, 2017,March 31, 2020, management believes the Company is in compliance with all covenants of its unsecured debt.
The total balance of mortgages was approximately $1.4$1.1 billion as of September 30, 2017.March 31, 2020. At September 30, 2017,March 31, 2020, certain of our consolidated subsidiaries were the borrowers under 2720 non-recourse loans oneand 2 full-recourse loan and one partial-recourse loanloans secured by mortgages encumbering 3224 properties, including one1 separate pool of cross-defaulted and cross-collateralized mortgages encumbering a total of four4 properties. Under these cross-default provisions, a default under any mortgage included in the cross-defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non-financial covenants which are specific to the properties which serve as collateral for that debt. If the borrower fails to comply with these covenants, the lender could accelerate the debt and enforce its right against their collateral. Our existing non-recourse mortgage loans generally prohibit our subsidiaries that are borrowers thereunder from incurring additional indebtedness, subject to certain customary and limited exceptions. In addition, certain of these instruments limit the ability of the applicable borrower's parent entity from incurring mezzanine indebtedness unless certain conditions are satisfied, including compliance with maximum loan to value ratio and minimum debt service coverage ratio tests. Further, under certain of these existing agreements, if certain cash flow levels in respect of the applicable mortgaged property (as described in the applicable agreement) are not maintained for at least two2 consecutive quarters, the lender could accelerate the debt and enforce its right against its collateral.
On March 30, 2017, the Company transferred the $40.0 million mortgage loan secured by Valle Vista Mall, located in Harlingen, Texas, to the special servicer at the request of the borrower, a consolidated subsidiary of the Company. On May 18, 2017,February 21, 2020, we received a notice of default letter, dated that same date, from the special servicer because the borrower did not repay the loan in full by its May 10, 2017 maturity date. On October 3, 2017, an affiliate of WPG Inc. transitioned the property to the lender (see Note 12 - "Subsequent Events").
On June 6, 2016, we received a notice of default letter, dated June 3, 2016, from the special servicer to the borrower of the $99.7 million mortgage loan secured by Southern Hills Mall, located in Sioux City, Iowa. The letter was sent becausenotifying the borrower, a consolidated subsidiary of WPG L.P., that the $33.1 million mortgage loan secured by Muncie Mall, located in Muncie, Indiana, was transferred to special servicing because the borrower notified the lender that future projected cash flows will be insufficient to ensure future compliance with the mortgage loan due to the loss of certain tenants. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options. The Company did not repaycontinues to manage and lease the property (See Note 12 - "Subsequent Events" for additional information).
On November 5, 2019, we received a letter dated October 30, 2019, from the lender notifying the borrower, a consolidated subsidiary of WPG L.P., that the $45.1 million mortgage loan secured by Charlottesville Fashion Square, located in full by its June 1, 2016 maturity date.Charlottesville, Virginia, was transferred to special servicing because the borrower notified the lender that future projected cash flows will be insufficient to ensure future compliance with the mortgage loan due to the loss of certain tenants. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options. On October 27, 2016,March 17, 2020, we received notification that a receiver had been appointed to manage and lease the property. On October 17, 2017, anAn affiliate of WPG Inc. completed a discounted payoff of the mortgage loan for $55.0 million and will retain ownership and management of the property (see Note 12 - "Subsequent Events").
On June 30, 2016, we received a notice, dated that same date, that the $87.3 million mortgage loan secured by Mesa Mall had been transferred to the special servicer due to the payment default that occurred when the borrower, a consolidated subsidiary of the Company did not repay the loan in full by its June 1, 2016 maturity date. On April 25, 2017, the Company completed a discounted payoff of the mortgage loan for $63.0 million and retained ownership and management ofstill holds title to the property.
Upon the discounted payoff of the mortgage note payable secured by Mesa Mall, the Company recognized a gain of $21.2 million, based on the cancellation of the remaining outstanding mortgage loan balance of $24.3 million, less settlement of accrued interest, escrows and closing costs of $3.1 million, which is included in gain on extinguishment of debt, net in the accompanying consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company recognized a net gain of $34.1 million related to the $115.3 million mortgage debt cancellation and ownership transfers of Chesapeake Square, located in Chesapeake, Virginia and Merritt Square Mall, located in Merritt Island, Florida, which is included in gain on extinguishment of debt, net in the accompanying consolidated statements of operations and comprehensive (loss) income for the periods then ended.
At September 30, 2017,March 31, 2020, management believes the applicable borrowers under our other non-recourse mortgage loans were in compliance with all covenants where non-compliance could individually, or giving effect to applicable cross-default provisions in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. The Company has assessed each of thesethe defaulted properties for impairment indicators and have concluded no impairment charges were warranted as of September 30, 2017.March 31, 2020.
Fair Value of Debt
The carrying values of our variable-rate loans approximate their fair values. We estimate the fair values of fixed-rate mortgages and fixed-rate corporate debt (including variable-rate unsecured debt swapped to fixed-rate and our other indebtedness, as discussed above) using cash flows discounted at current borrowing rates or Level 2 inputs. We estimate the fair values of consolidated fixed-rate unsecured notes payable using Level 1 quoted market prices, or, if no quoted market prices are available, we use quoted market prices for securities with similar terms and maturities or Level 2 inputs.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Fair Value of Debt
The carrying values of our variable-rate loans approximate their fair values. We estimate the fair values of fixed-rate mortgages and fixed-rate unsecured debt (including variable-rate unsecured debt swapped to fixed-rate) using cash flows discounted at current borrowing rates. We estimate the fair values of consolidated fixed-rate unsecured notes payable using quoted market prices, or, if no quoted market prices are available, we use quoted market prices for securities with similar terms and maturities.
The book value and fair value of these financial instruments and the related discount rate assumptions as of September 30, 2017March 31, 2020 and December 31, 20162019 are summarized as follows:
| | | | | September 30, 2017 | | December 31, 2016 | | March 31, 2020 | | December 31, 2019 |
Book value of fixed-rate mortgages(1) | | $1,156,874 | | $1,359,329 | | $1,048,242 | | $1,052,242 |
| Fair value of fixed-rate mortgages | | $1,192,412 | | $1,403,103 | | $1,072,388 | | $1,062,205 |
| Weighted average discount rates assumed in calculation of fair value for fixed-rate mortgages | | 3.84 | % | | 3.79 | % | | 3.86 | % | | 4.24 | % |
| | | | | | | | | |
Book value of fixed-rate unsecured debt(1) | | $1,610,000 | | $1,290,000 | |
| Fair value of fixed-rate unsecured debt | | $1,620,761 | | $1,261,858 | |
| Weighted average discount rates assumed in calculation of fair value for fixed-rate unsecured debt | | 4.24 | % | | 2.86 | % | |
Book value of fixed-rate corporate debt(1) | | | $1,410,355 | | $1,660,062 |
| Fair value of fixed-rate corporate debt | | | $1,172,513 | | $1,673,105 |
| Weighted average discount rates assumed in calculation of fair value for fixed-rate corporate debt | | | 9.13 | % | | 6.03 | % |
(1) Excludes debt issuance costs and applicable debt discounts.
| |
| 7. | Derivative Financial Instruments |
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its debt funding and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future uncertain cash amounts, the value of which are determined by interest rates. The Company's derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company's known or expected cash payments related to the Company's borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives the Company primarily uses interest rate swaps or caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company may also enter into forward starting swaps or treasury lock agreements to set the effective interest rate on a planned fixed-rate financing. In a forward starting swap or treasury lock agreement that the Company cash settles in anticipation of a fixed rate financing or refinancing, the Company will receive or pay an amount equal to the present value of future cash flow payments based on the difference between the contract rate and market rate on the settlement date.
The effective portion of changes in the fair value ofFor derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in other comprehensive income ("OCI") or other comprehensive loss (“OCL”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Net realized gains or losses resulting from derivatives that were settled in conjunction with planned fixed-rate financings or refinancings continue to be included in accumulated other comprehensive income or loss ("AOCI" or "AOCL") during the term of the hedged debt transaction. Any ineffective portion
Amounts reported in AOCL relate to derivatives that will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. Realized gains or losses on settled derivative instruments included in AOCL are recognized as an adjustment to income over the term of the change inhedged debt transaction. During the next twelve months, the Company estimates that an additional $11.8 million will be reclassified as an increase to interest expense. As of March 31, 2020, the Company had 11 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk with a current notional value of $641.0 million.
The table below presents the fair value of the derivatives is recognized directly in earnings. The Company recognized $52Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of hedge ineffectiveness as a decrease to earningsMarch 31, 2020 and $76 of hedge ineffectiveness as an increase to earnings during the three and nine months ended September 30, 2017, respectively. The Company recognized $1,692 of hedge ineffectiveness as an increase to earnings and $1,220 of hedge ineffectiveness as a decrease to earnings during the three and nine months ended September 30, 2016, respectively, primarily resulting from a mismatch in the terms of the December 2015 Term Loan and the corresponding derivative. The December 2015 Term Loan includes a 0% LIBOR floor while the corresponding derivative does not.31, 2019:
|
| | | | | | | | | | |
| Derivatives designated as hedging instruments: | Balance Sheet
Location | | March 31, 2020 | | December 31, 2019 |
| Interest rate products | Liability derivatives | Accounts payable, accrued expenses, intangibles, and deferred revenue | | $ | 22,009 |
| | $ | 6,592 |
|
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Amounts reported in AOCI relate to derivatives that will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. Realized gains or losses on settledThere were 0 asset derivative instruments included in AOCI are recognized as an adjustment to income over the term of the hedged debt transaction. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as a decrease to interest expense.
On August 4, 2017, the Company terminated six interest rate derivatives and partially terminated one interest rate derivative with an aggregate notional amount of $430,000, upon the repayment of the Term Loan and partial repayment of the June 2015 Term Loan, receiving cash proceeds of approximately $2.0 million upon settlement. As of September 30, 2017, the Company had 9 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk with a notional value of $709,600.
The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the consolidated balance sheets as of September 30, 2017at March 31, 2020 and December 31, 2016:
|
| | | | | | | | | | |
| Derivatives designated as hedging instruments: | Balance Sheet Location | | September 30, 2017 | | December 31, 2016 |
| Interest rate products | Asset derivatives | Deferred costs and other assets | | $ | 3,829 |
| | $ | 5,754 |
|
| Interest rate products | Liability derivatives | Accounts payable, accrued expenses, intangibles and deferred revenues | | $ | — |
| | $ | 2 |
|
The asset derivative instruments were reported at their fair value of $3,829 and $5,754 in deferred costs and other assets at September 30, 2017 and December 31, 2016, respectively, with a corresponding adjustment to OCI for the unrealized gains and losses (net of noncontrolling interest allocation).2019. The liability derivative instruments were reported at their fair value of $0$22,009 and $2 in accounts payable, accrued expenses, intangibles, and deferred revenues$6,592 at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively, with a corresponding adjustment to OCL for the unrealized gains and losses (net of noncontrolling interest allocation). Over time, the unrealized gains and losses held in AOCIAOCL will be reclassified to earnings. This reclassification will correlate with the recognition of the hedged interest payments in earnings.
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations and comprehensive (loss) incomeloss for the three and nine months ended September 30, 2017March 31, 2020 and 2016:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships | | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | | Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | | Three Months Ended | | | | Three Months Ended | | | Three Months Ended |
| | | September 30, | | | | September 30, | | | September 30, |
| | | 2017 | | 2016 | | | | 2017 | | 2016 | | | 2017 | | 2016 |
| Interest rate products | | $ | (577 | ) | | $ | 1,651 |
| | Interest expense | | $ | (150 | ) | | $ | 1,849 |
| Interest expense | | $ | (52 | ) | | $ | 1,692 |
|
|
| | | | | | | | | | |
Derivatives in Cash Flow Hedging Relationships
(Interest rate products) | | Location of Gain or Loss Recognized in Income on Derivatives | | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Amount of Loss Recognized in OCL on Derivative | | Interest expense | | $ | (16,209 | ) | | $ | (4,565 | ) |
| | | | | | | |
| Amount of Loss or (Gain) Reclassified from AOCL into Income | | Interest expense | | $ | 763 |
| | $ | (545 | ) |
The table below presents the effect of the Company's derivative financial instruments on the consolidated statements of operations for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| Effect of Cash Flow Hedges on Consolidated Statements of Operations | | For the Three Months Ended March 31, |
| | 2020 | | 2019 |
| Total interest expense presented in the consolidated statements of operations in which the effects of cash flow hedges are recorded | | $ | (38,635 | ) | | $ | (36,830 | ) |
| | | | | |
| Amount of loss or (gain) reclassified from accumulated other comprehensive loss into interest expense | | $ | 763 |
| | $ | (545 | ) |
| | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships | | Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion) | | Location of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | | Amount of Gain or (Loss) Reclassified from AOCI into Income (Effective Portion) | Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
| | | Nine Months Ended | | | | Nine Months Ended | | | Nine Months Ended |
| | | September 30, | | | | September 30, | | | September 30, |
| | | 2017 | | 2016 | | | | 2017 | | 2016 | | | 2017 | | 2016 |
| Interest rate products | | $ | (1,858 | ) | | $ | (21,237 | ) | | Interest expense | | $ | 1,430 |
| | $ | 5,690 |
| Interest expense | | $ | 76 |
| | $ | (1,220 | ) |
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Credit Risk-Related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision that if the Company either defaults or is capable of being declared in default on any of its consolidated indebtedness, then the Company could also be declared in default on its derivative obligations.
The Company has agreements with its derivative counterparties that incorporate the loan covenant provisions of the Company's indebtedness with a lender affiliate of the derivative counterparty. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.
As of September 30, 2017,March 31, 2020, the Company did not have any derivative instruments that contain credit-risk related contingent features that arefair value of the derivatives in a net liability position.position, plus accrued interest but excluding any adjustment for nonperformance risk, related to these agreements was $22,009. As of March 31, 2020, the Company has not posted any collateral related to these agreements. The Company is not in default with any of these provisions as of March 31, 2020. If the Company had breached any of these provisions at March 31, 2020, it would have been required to settle its obligation under these agreements at their termination value of $22,009.
Fair Value Considerations
Currently, the Company uses interest rate swaps and caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates, and implied volatilities. Based on these inputs the Company has determined that its interest rate swap and cap valuations are classified within Level 2 of the fair value hierarchy.
To comply with the provisions of Topic 820, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2017March 31, 2020 and December 31, 2016,2019, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The tables below presents the Company’s net assets and liabilities(liabilities) measured at fair value as of September 30, 2017March 31, 2020 and December 31, 20162019 aggregated by the level in the fair value hierarchy within which those measurements fall:
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at September 30, 2017 |
| Derivative instruments, net | $ | — |
| | $ | 3,829 |
| | $ | — |
| | $ | 3,829 |
|
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at March 31, 2020 |
| Derivative instruments, net | $ | — |
| | $ | (22,009 | ) | | $ | — |
| | $ | (22,009 | ) |
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at December 31, 2019 |
| Derivative instruments, net | $ | — |
| | $ | (6,592 | ) | | $ | — |
| | $ | (6,592 | ) |
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at December 31, 2016 |
| Derivative instruments, net | $ | — |
| | $ | 5,752 |
| | $ | — |
| | $ | 5,752 |
|
We receive rental income from the leasing of retail and other space under operating leases, as we retain substantially all of the risks and benefits of ownership of the investment properties. The majority of these leases contain extension options, typically at the lessee's election, and/or early termination provisions. Further, our leases do not contain any provisions that would allow the lessee to purchase the underlying assets throughout the lease term. In most cases, consideration received typically includes a fixed minimum rent component, reimbursement of a fixed portion of our property operating expenses, including utility, security, janitorial, landscaping, food court and other administrative expenses included in common area maintenance, or CAM, and reimbursement of lessor costs such as real estate taxes and insurance, computed based upon a formula in accordance with the lease terms. When not reimbursed by the fixed CAM component, CAM expense reimbursements and lessor costs are based on the tenant's proportionate share of the allocable operating expenses and CAM capital expenditures for the property. We accrue reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. We recognize differences between estimated recoveries and the final billed amounts in the subsequent year. Additionally, a large number of our tenants are also required to pay overage rents based on sales during the applicable lease year over a base amount stated in the lease agreement. We recognize overage rents only when each tenant's sales exceed the applicable sales threshold as defined in their lease. We also collect lease termination income from tenants to allow for the tenant to vacate their space prior to their scheduled lease termination date. We recognize lease termination income in the period when a termination agreement is signed, collectability is assured, and we are no longer obligated to provide space to the tenant. In the event that a tenant is in bankruptcy when the termination agreement is signed, termination fee income is deferred and recognized when, and if, it is received. We record an adjustment to rental income in the period there is a change in our assessment of whether the collectibility of operating lease payments is probable.
We have elected the practical expedient in ASU 2016-02 to not separate non-lease components from lease components as our underlying leases qualify as operating leases and the timing and pattern of transfer of the lease and non-lease components are the same. We note that the predominant component of our leases is the lease component and thus account for the combined lease and non-lease (CAM) component of the non-cancelable lease term on a straight-line basis in accordance with ASC 842.
Rental income also includes accretion related to above-market and below-market lease intangibles related to the acquisition of operating properties. We amortize any tenant inducements as a reduction of rental income utilizing the straight-line method over the term of the related lease or occupancy term of the tenant, if shorter.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
The following table summarizes our rental income for the three months ended March 31, 2020 and 2019:
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Operating lease payments, fixed | | $ | 131,505 |
| | $ | 144,176 |
|
| Operating lease payments, variable | | 19,104 |
| | 18,062 |
|
| Amortization of straight-line rent, inducements, and rent abatements | | 809 |
| | 1,109 |
|
| Net amortization/accretion of above and below-market leases | | 1,106 |
| | 2,906 |
|
| Change in estimate of collectibility of rental income | | (5,291 | ) | | (2,980 | ) |
| Total rental income | | $ | 147,233 |
| | $ | 163,273 |
|
Future payments to be received under non-cancelable operating leases for each of the next five years and thereafter, excluding variable payments of tenant reimbursements, percentage or overage rents, and lease termination payments as of March 31, 2020 are as follows:
|
| | | | |
| 2020 (April - December) | | $ | 354,190 |
|
| 2021 | | 399,072 |
|
| 2022 | | 334,192 |
|
| 2023 | | 270,266 |
|
| 2024 | | 209,109 |
|
| Thereafter | | 646,995 |
|
| | | $ | 2,213,824 |
|
Exchange Rights
Subject to the terms of the limited partnership agreement of WPG L.P., limited partners in WPG L.P. have, at their option, the right to exchange all or any portion of their units for shares of WPG Inc. common stock on a one‑for‑one basis or cash, as determined by WPG Inc. Therefore, the common units held by limited partners are considered by WPG Inc. to be share equivalents and classified as noncontrolling interests within permanent equity, and classified by WPG L.P. as permanent equity. The amount of cash to be paid if the exchange right is exercised and the cash option is selected will be based on the market value of WPG Inc.'s common stock as determined pursuant to the terms of the WPG L.P. Partnership Agreement. During the nine months ended September 30, 2017, WPG Inc. issued 314,577 shares of common stock to a limited partner of WPG L.P. in exchange for an equal
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
number of units pursuant to the WPG L.P. Partnership Agreement. This transaction increased WPG Inc.’s ownership interest in WPG L.P. At September 30, 2017,March 31, 2020, WPG Inc. had reserved 34,783,27734,506,965 shares of common stock for possible issuance upon the exchange of units held by limited partners.
The holders of the Series I-1 Preferred Units have, at their option, the right to have their units purchased by WPG L.P. subject to the satisfaction of certain conditions. Therefore, the Series I-1 Preferred Units are classified as redeemable noncontrolling interests outside of permanent equity.
Stock Based Compensation
On May 28, 2014, the WPG Inc. Board of Directors (the "Board") adopted the Washington Prime Group, L.P. 2014 Stock Incentive Plan (the "Plan""2014 Plan"), which permitspermitted the Company to grant awards to current and prospective directors, officers, employees and consultants of the Company or any affiliate. An aggregate of 10,000,000 shares of common stock has beenwere reserved for issuance, under the Plan. In addition, thewith a maximum number of awards to be granted to a participant in any calendar year isof 500,000 shares/units. On May 16, 2019, the common shareholders of WPG Inc. approved the Washington Prime Group, L.P. 2019 Stock Incentive Plan (the "2019 Plan"), which replaced the 2014 Plan with respect to the issuance of new awards. The Board and its Compensation Committee (the "Committee") previously approved and adopted the 2019 Plan, subject to WPG Inc. common shareholder approval, during the Board and Committee's regular meetings in February 2019. An aggregate of 7,290,000 shares of common stock are reserved for issuance, excluding carryover shares from the 2014 Plan. Awards may be in the form of stock options, stock appreciation rights, restricted stock, restricted stock units ("RSUs") or other stock-based awards in WPG Inc., long term incentive units ("LTIP units" or "LTIPs") or performance units ("Performance LTIP Units") in WPG L.P. The 2019 Plan terminates on May 28, 2024.16, 2029.
The following is a summary by type of the awards that the Company issued during the ninethree months ended September 30, 2017March 31, 2020 and September 30, 2016March 31, 2019 under the 2014 Plan and 2019 Plan.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
Annual Long-Term Incentive Awards
On February 21, 2017 (the "Adoption Date"),During the three months ended March 31, 2020 and 2019, the Company approved the terms and conditions of the 20172020 and 2019 annual award ("2017awards (the "2020 Annual Long-Term Incentive Awards") and "2019 Long-Term Incentive Awards," respectively) for certain executive officers and employees of the Company. Under the terms of the 2017 Annual Long-Term Incentive Awardsawards program, each participant is provided the opportunity to receive (i) time-based RSUs and (ii) performance-based stock units ("PSUs"). RSUs represent a contingent right to receive one1 WPG Inc. common share for each vested RSU. During the nine months ended September 30, 2017, the Company issued 358,198 time-based RSUs with a grant date fair value of $3.4 million, which will vest in one-third installments on each annual anniversary of February 21, 2018, 2019, and 2020,the respective Grant Date (as referenced below), subject to the participant's continued employment with the Company through each vesting date and the participant's continued compliance with certain applicable covenants. During the service period, dividend equivalents will be paid in cash accruals or under some circumstances, common shares, with respect to the RSUs corresponding to the amount of any cash dividends paid by the Company to the Company's common shareholders for the applicable dividend payment dates. Compensation expense is recognized on a straight-line basis over the three year vesting term. During the nine months ended September 30, 2017, the Company issued 358,198 PSUs, at target, with a grant date fair value of $2.8 million. Actual PSUs earned may range from 0%-150% of the PSUs allocated to the award recipient, based on the Company's total shareholder return ("TSR") compared to a peer group based on companies with similar assets and revenue over a three-year performance period that commenced on the Adoption Date.respective Grant Date (as referenced below). During the performance period, dividend equivalents corresponding to the amount of any regular cash dividends paid by the Company to the Company’s common shareholders for the applicable dividend payment dates will accrue and be deemed reinvested in additional PSUs, which will be settled in common shares at the same time and only to the extent that the underlying PSU is earned and settled in common shares. Payout of the PSUs is also subject to the participant’s continued employment with the Company through the end of the performance period. The awardsPSUs were valued through the use of a Monte Carlo model and the related compensation expense is recognized over the three-year performance period.
During 2016,The following table summarizes the Company approved the performance criteria and maximum dollar amountissuance of the 2016 annual awards (the "2016 Annual Long-Term Incentive Awards"), that generally range from 30%-100% of annual base salary, for certain executive officers and employees of the Company. The number of awards was determined by converting the cash value of the award to a number of RSUs (the "Allocated RSUs") based on the closing price of WPG Inc.'s common shares for the final 15 trading days of 2016. Recipients were eligible to receive a percentage of the Allocated RSUs based on the Company's performance on its strategic goals detailed in the Company's 2016 cash bonus plan and the Company's relative TSR compared to a peer group based on companies with similar assets and revenue. Payout for 50% of the Allocated RSUs was based on the Company's performance on the strategic goals and the payout on the remaining 50% was based on the Company's TSR performance. Both the strategic goal component as well the TSR performance were achieved at target, resulting in a 100% payout. During the nine months ended September 30, 2017, the Company awarded 324,237 of Allocated RSUs, with a grant date fair value of $2.2 million, related to the 20162020 Annual Long-Term Incentive Awards which will vestand 2019 Annual Long-Term Incentive Awards, respectively:
|
| | | | |
| | | 2020 Annual Long-Term Incentive Awards | | 2019 Annual Long-Term Incentive Awards |
| Grant Date | | February 25, 2020 | | February 20, 2019 |
| | | | | |
| RSUs issued | | 1,373,422 | | 572,163 |
| Grant date fair value per unit | | $2.41 | | $5.77 |
| | | | | |
| PSUs issued | | 1,373,422 | | 572,163 |
| Grant date fair value per unit | | $1.74 | | $4.98 |
During the three months ended March 31, 2020, the performance period related to PSUs awarded in one-third installments on eachconjunction with the 2017 annual award ended. There was 0 payout as the Company's TSR rank did not exceed the minimum required threshold for payout and 262,787 PSUs were forfeited.
Stock Options
During the three months ended March 31, 2020, 0 stock options were granted to employees, 0 stock options were exercised by employees and 13,583 stock options were canceled, forfeited or expired. As of February 21, 2018,March 31, 2020, there were 587,706 stock options outstanding. During the three months ended March 31, 2019, 0 stock options were granted to employees, 391 stock options were exercised by employees and 2020.6,299 stock options were canceled, forfeited or expired.
Share Award Related Compensation Expense
During the three months ended March 31, 2020 and 2019, the Company recorded compensation expense pertaining to the awards granted of $1.9 million and $1.8 million, respectively, in general and administrative and property operating expense within the consolidated statements of operations and comprehensive loss. In certain instances, employment agreements and stock compensation programs provide for accelerated vesting when executives are terminated without cause. Additionally, the Committee may, in its discretion, accelerate the vesting for retiring Board members.
Distributions
During the three months ended March 31, 2020 and 2019, the Board declared common share/unit dividends of $0.125 and $0.25 per common share/unit, respectively.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
During 2015, the Company approved the performance criteria and maximum dollar amount of the 2015 annual LTIP unit awards (the "2015 Annual Long-Term Incentive Awards"), that generally range from 30%-300% of annual base salary, for certain executive officers and employees of the Company. The number of awards was determined by converting the cash value of the award to a number of LTIP units (the "Allocated Units") based on the closing price of WPG Inc.'s common shares for the final 15 trading days of 2015. Eventual recipients were eligible to receive a percentage of the Allocated Units based on the Company's performance on its strategic goals detailed in the Company's 2015 cash bonus plan and the Company's relative TSR compared to the MSCI REIT Index. Payout for 40% of the Allocated Units was based on the Company's performance on the strategic goals and the payout on the remaining 60% was based on the Company's TSR performance. The strategic goal component was achieved in 2015; however, the TSR was below threshold performance, resulting in only a 40% payout for this annual LTIP award. During the nine months ended September 30, 2016, the Company awarded 323,417 LTIP units related to the 2015 Annual Long-Term Incentive Awards, of which 108,118 vest in one-third installments on each of January 1, 2017, 2018 and 2019. The 94,106 LTIP units awarded to our former Executive Chairman fully vested on the grant date and the 121,193 LTIP units awarded to certain former executive officers fully vested on the applicable severance dates during 2016 pursuant to the underlying severance arrangements.
Stock Options
During the nine months ended September 30, 2017, no stock options were granted from the Plan to employees, 2,739 stock options were exercised by employees and 48,077 stock options were canceled, forfeited or expired. As of September 30, 2017, there were 926,760 stock options outstanding.
During the nine months ended September 30, 2016, 247,500 stock options were granted from the Plan to employees, 13,970 stock options were exercised by employees and 179,640 stock options were canceled, forfeited or expired.
WPG Restricted Stock Units
During the nine months ended September 30, 2017 and 2016, the Company issued 161,000 RSUs, with a grant-date fair value of $1.2 million, and 228,297 RSUs, with a grant-date fair value of $2.6 million, respectively, to certain employees and non-employee members of the Board. The RSUs are service-based awards and the related fair value is expensed over the applicable service periods, except in instances that result in accelerated vesting due to severance arrangements or retirement of Board members.
Share Award Related Compensation Expense
During the three and nine months ended September 30, 2017 and 2016, the Company recorded share award related compensation expense pertaining to the award and option plans noted above within the consolidated statements of operations and comprehensive (loss) income as indicated below (amounts in millions):
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Merger, restructuring and transaction costs | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9.5 |
|
| General and administrative | | 1.5 |
| | 1.1 |
| | 4.8 |
| | 3.3 |
|
| Total expense | | $ | 1.5 |
| | $ | 1.1 |
| | $ | 4.8 |
| | $ | 12.8 |
|
In certain instances, employment agreements and stock compensation programs provide for accelerated vesting when executives are terminated without cause. Additionally, the Compensation Committee of the Board may, in its discretion, accelerate the vesting for retiring Board members.
Distributions
During the three and nine months ended September 30, 2017 and 2016, the Board declared common share/unit dividends of $0.25 and $0.75 per common share/unit, respectively.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
| |
9.10. | Commitments and Contingencies |
Litigation
We are involved from time-to-time in various legal proceedings that arise in the ordinary course of our business, including, but not limited to commercial disputes, environmental matters, and litigation in connection with transactions including acquisitions and divestitures. We believe that such litigation, claims and administrative proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable and the amount can be reasonably estimated.
Concentration of Credit Risk
Our properties rely heavily upon anchor or major tenants to attract customers; however, these retailers do not constitute a material portion of our financial results. Additionally, many anchor retailers in the enclosed retail properties own their spaces further reducing their contribution to our operating results. All operations are within the United States and no customer or tenant accounts for 5% or more of our consolidated revenues.
| |
10. | Related Party Transactions |
Transactions with Simon Property Group Inc.Lease Commitments
As of March 31, 2020, a total of 4 consolidated properties are subject to ground leases. The Company was formed in 2014 throughtermination dates of these ground leases range from 2026 to 2076. These ground leases generally require us to make fixed annual rental payments, or a spin-off of certain properties from Simon Property Group, Inc. ("SPG"). SPG managed the day-to-day operations of our legacy SPG enclosed retail properties through February 29, 2016 in accordance with property management agreements that expired as of May 31, 2016. Additionally, WPG and SPG entered intofixed annual rental plus a transition services agreement pursuant to which SPG provided to WPG, on an interim, transitional basis after May 28, 2014 through May 31, 2016, the date on which it was terminated, various services including administrative support for the open air properties through December 31, 2015, information technology, property management, accounts payable and other financial functions, as well as engineering support, quality assurance support and other administrative services for the enclosed retail properties until March 1, 2016. Under the transition services agreement that terminated on May 31, 2016, SPG charged WPG,percentage rent component based upon SPG's allocationthe revenues or total sales of certain shared costs such as insurance premiums, advertisingthe property. Some of these leases also include escalation clauses and promotional programs, leasing and development fees. Amounts chargedrenewal options. For the three months ended March 31, 2020, we incurred ground lease expense of $122, of which $5 related to straight-line rent expense, for property management and common costs, services, and other as well as insurance premiums arewhich is included in property operating expensesground rent in the accompanying consolidated statements of operations and comprehensive (loss) income. Additionally, leasing and development fees charged by SPG are capitalized by the property. WPG terminated the transition services agreement, all applicable property management agreements with SPG, and the property development agreement effective May 31, 2016.
We did not incur any charges pertaining to the transition services agreements forloss. For the three and nine months ended September 30, 2017. Charges forMarch 31, 2019, we incurred ground lease expense of $203, of which $5 related to straight-line rent expense. Additionally, the consolidatedCompany has 2 material office leases and unconsolidated properties for1 material garage lease. The termination dates of these leases range from 2023 to 2026. These leases generally require us to make fixed annual rental payments, plus our share of CAM expense and real estate taxes and insurance. For the three and nine months ended September 30, 2016March 31, 2020, we incurred lease expense of $649, which is included in general and administrative expenses in the accompanying consolidated statements of operations and comprehensive loss. For the three months ended March 31, 2019, we incurred lease expense of $631.
Future minimum lease payments due under these leases for each of the next five years and thereafter, excluding applicable extension options, as of March 31, 2020 are as follows:
|
| | | | |
| 2020 (April - December) | | $ | 1,539 |
|
| 2021 | | 2,069 |
|
| 2022 | | 2,099 |
|
| 2023 | | 1,427 |
|
| 2024 | | 999 |
|
| Thereafter | | 20,378 |
|
| Total lease payments | | 28,511 |
|
| Less: Discount | | 16,014 |
|
| Present value of lease liabilities | | $ | 12,497 |
|
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2016 | | 2016 |
| | | Consolidated | | Unconsolidated | | Consolidated | | Unconsolidated |
| Property management and common costs, services and other | | $ | 344 |
| | $ | 72 |
| | $ | 8,791 |
| | $ | 196 |
|
| Advertising and promotional programs | | $ | — |
| | $ | — |
| | $ | 102 |
| | $ | 6 |
|
| Capitalized leasing and development fees | | $ | 683 |
| | $ | 15 |
| | $ | 3,166 |
| | $ | 23 |
|
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
| |
| 11. | Earnings (Loss) Earnings Per Common Share/Unit |
WPG Inc. Earnings (Loss) Earnings Per Common Share
We determine WPG Inc.'s basic earnings (loss) earnings per common share based on the weighted average number of shares of common stock outstanding during the period and we consider any participating securities for purposes of applying the two-class method. We determine WPG Inc.'s diluted earnings (loss) earnings per share based on the weighted average number of shares of common stock outstanding combined with the incremental weighted average shares that would have been outstanding assuming all potentially dilutive securities were converted into common shares at the earliest date possible.
The following table sets forth the computation of WPG Inc.'s basic and diluted (loss) earnings per common share:
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| (Loss) Earnings Per Common Share, Basic: | | | | | | | | |
| Net (loss) income attributable to common shareholders - basic | | $ | (11,903 | ) | | $ | 1,362 |
| | $ | 132,866 |
| | $ | 27,683 |
|
| Weighted average shares outstanding - basic | | 187,133,517 |
| | 185,633,393 |
| | 186,755,128 |
| | 185,519,649 |
|
| (Loss) earnings per common share, basic | | $ | (0.06 | ) | | $ | 0.01 |
| | $ | 0.71 |
| | $ | 0.15 |
|
| | | | | | | | | |
| (Loss) Earnings Per Common Share, Diluted: | | | | | | | | |
| Net (loss) income attributable to common shareholders - basic | | $ | (11,903 | ) | | $ | 1,362 |
| | $ | 132,866 |
| | $ | 27,683 |
|
| Net (loss) income attributable to common unitholders | | (2,329 | ) | | 257 |
| | 24,890 |
| | 5,232 |
|
| Net (loss) income attributable to common shareholders - diluted | | $ | (14,232 | ) | | $ | 1,619 |
| | $ | 157,756 |
| | $ | 32,915 |
|
| Weighted average common shares outstanding - basic | | 187,133,517 |
| | 185,633,393 |
| | 186,755,128 |
| | 185,519,649 |
|
| Weighted average operating partnership units outstanding | | 34,680,662 |
| | 34,304,444 |
| | 34,852,985 |
| | 34,304,652 |
|
| Weighted average additional dilutive securities outstanding | | — |
| | 896,199 |
| | 504,160 |
| | 789,756 |
|
| Weighted average common shares outstanding - diluted | | 221,814,179 |
| | 220,834,036 |
| | 222,112,273 |
| | 220,614,057 |
|
| (Loss) earnings per common share, diluted | | $ | (0.06 | ) | | $ | 0.01 |
| | $ | 0.71 |
| | $ | 0.15 |
|
For the three and nine months ended September 30, 2017 and 2016, additional potentially dilutive securities include contingently-issuable outstanding stock options and performance based components of annual awards. For the three months ended September 30, 2017, the effect of 495,848 securities were excluded as their inclusion would be anti-dilutive. We accrue distributions when they are declared.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
The following table sets forth the computation of WPG Inc.'s basic and diluted earnings (loss) per common share:
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Earnings (Loss) Per Common Share, Basic: | | | | |
| Net income (loss) attributable to common shareholders - basic | | $ | 3,375 |
| | $ | (5,175 | ) |
| Weighted average shares outstanding - basic | | 189,143,319 |
| | 188,082,289 |
|
| Earnings (Loss) per common share, basic | | $ | 0.02 |
| | $ | (0.03 | ) |
| | | | | |
| Earnings (Loss) Per Common Share, Diluted: | | | | |
| Net income (loss) attributable to common shareholders - basic | | $ | 3,375 |
| | $ | (5,175 | ) |
| Net income (loss) attributable to limited partner unitholders | | 617 |
| | (956 | ) |
| Net income (loss) attributable to common shareholders - diluted | | $ | 3,992 |
| | $ | (6,131 | ) |
| Weighted average common shares outstanding - basic | | 189,143,319 |
| | 188,082,289 |
|
| Weighted average operating partnership units outstanding | | 34,593,887 |
| | 34,731,075 |
|
| Weighted average additional dilutive securities outstanding | | 812,751 |
| | — |
|
| Weighted average common shares outstanding - diluted | | 224,549,957 |
| | 222,813,364 |
|
| Earnings (Loss) per common share, diluted | | $ | 0.02 |
| | $ | (0.03 | ) |
For the three months ended March 31, 2020 and 2019, additional potentially dilutive securities include contingently-issuable outstanding stock options, restricted stock units, and performance based components of annual or special arrangement awards. For the three months ended March 31, 2019, the potential dilutive effect of 673,051 contingently-issuable outstanding stock options and 1,305,005 performance based components of annual or special arrangement awards were excluded as their inclusion would be anti-dilutive. We accrue distributions when they are declared.
WPG L.P. Earnings (Loss) Earnings Per Common Unit
We determine WPG L.P.'s basic earnings (loss) earnings per common unit based on the weighted average number of common units outstanding during the period and we consider any participating securities for purposes of applying the two-class method. We determine WPG L.P.'s diluted earnings (loss) earnings per unit based on the weighted average number of common units outstanding combined with the incremental weighted average units that would have been outstanding assuming all potentially dilutive securities were converted into common units at the earliest date possible.
The following table sets forth the computation of WPG L.P.'s basic and diluted earnings (loss) earnings per common unit:
|
| | | | | | | | |
| | | For the Three Months Ended March 31, |
| | | 2020 | | 2019 |
| Earnings (Loss) Per Common Unit, Basic & Diluted: | | | | |
| Net income (loss) attributable to common unitholders - basic and diluted | | $ | 3,992 |
| | $ | (6,131 | ) |
| Weighted average common units outstanding - basic | | 223,737,206 |
| | 222,813,364 |
|
| Weighted average additional dilutive securities outstanding | | 812,751 |
| | — |
|
| Weighted average units outstanding - diluted | | 224,549,957 |
| | 222,813,364 |
|
| Earnings (Loss) per common unit, basic & diluted | | $ | 0.02 |
| | $ | (0.03 | ) |
|
| | | | | | | | | | | | | | | | |
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| (Loss) Earnings Per Common Unit, Basic and Diluted: | | | | | | | | |
| Net (loss) income attributable to common unitholders - basic and diluted | | $ | (14,232 | ) | | $ | 1,619 |
| | $ | 157,756 |
| | $ | 32,915 |
|
| Weighted average common units outstanding - basic | | 221,814,179 |
| | 219,937,837 |
| | 221,608,113 |
| | 219,824,301 |
|
| Weighted average additional dilutive securities outstanding | | — |
| | 896,199 |
| | 504,160 |
| | 789,756 |
|
| Weighted average units outstanding - diluted | | 221,814,179 |
| | 220,834,036 |
| | 222,112,273 |
| | 220,614,057 |
|
| (Loss) earnings per common unit, basic and diluted | | $ | (0.06 | ) | | $ | 0.01 |
| | $ | 0.71 |
| | $ | 0.15 |
|
For the three and nine months ended September 30, 2017March 31, 2020 and 2016,2019, additional potentially dilutive securities include contingently-issuable units related to WPG Inc.'s outstanding stock options, restricted stock units, and WPG Inc.'s performance based components of annual awards, and WPG L.P.'s annual LTIP unitor special arrangement awards. For the three months ended September 30, 2017,March 31, 2019, the potential dilutive effect of 495,848 securities673,051 contingently-issuable outstanding stock options and 1,305,005 performance based components of annual awards were excluded as their inclusion would be anti-dilutive. We accrue distributions when they are declared.
Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)
On October 2, 2017,April 28, 2020, the Company received notice from the New York Stock Exchange ("NYSE") that as of April 27, 2020, its Common Stock is no longer in compliance with NYSE continued listing criteria set forth in Section 802.01C of the Listed Company Manual of the NYSE, which require listed companies to maintain an average closing share price of at least $1.00 over a period of 30 consecutive trading days. The Company has until January 1, 2021, inclusive of extensions of the cure period provided by the Securities and Exchange Commission in response to the COVID-19 pandemic, to regain compliance with the continued listing criteria. During this period, the Company's Common Stock will continue to trade on the NYSE.
The Company intends to actively evaluate and monitor the price of its Common Stock between now and January 1, 2021, and will consider implementation of various options available to the Company if its Common Stock does not trade at a level that is likely to regain compliance. A delisting of our Common Stock from the NYSE could negatively impact us by, among other things, reducing liquidity and market price of our Common Stock.
On April 14, 2020, the Company received notification that a receiver had been appointed to manage and lease Muncie Mall. An affiliate of WPG Inc. repaid the $99.6Company continues to hold title to the property.
On April 3, 2020, the Company exercised the third of 3 options to extend the maturity of the $65.0 million mortgageterm loan on WestShore Plaza,secured by Weberstown Mall, located in Tampa, Florida. This repayment was funded by borrowings onStockton, California, for one year. The extended maturity date is June 8, 2021.
COVID-19 Updates
Based upon continued uncertainties due to COVID-19, the Revolver.Company has taken the following measures to enhance liquidity and financial flexibility:
•On October 3, 2017,April 14, 2020 the Company drew down an affiliateadditional $120.0 million from the Revolver. After this draw, the Company has approximately $3.0 million of WPG Inc. transferred title of Valle Vista Mall toborrowing capacity remaining under the mortgage lender pursuant to the terms of a deed-in-lieu of foreclosure agreement entered into by the WPG Inc.'s affiliateRevolver.
•The Company and the mortgage lender concerningBoard have temporarily suspended the $40.0 million mortgage loan. The Company will recordquarterly cash dividend for common shares and operating partnership units throughout the remainder of 2020 with a gainpotential true up of approximately $27.0 million related to this debt extinguishment during the fourth quarter 2020 dividend payment in order to address the Company’s REIT taxable income distribution requirements.
•Effective April 5, 2020, the Company temporarily reduced the base salaries of 2017.
On October 4, 2017, an affiliate of WPG Inc. entered into a purchase agreementits senior leadership team ranging from 5% to sell Colonial Park Mall to an unaffiliated private real estate investor for approximately $15.0 million. The sale is subject to customary closing requirements,25%. These reductions impacted Senior Vice Presidents, Executive Vice Presidents, the Company’s Chief Counsel, Chief Financial Officer and the proceedsChief Executive Officer.
•On April 3, 2020 the Company furloughed or laid off approximately 20% of associates to reduce corporate overhead and operating expenses. These actions impacted both property and corporate office colleagues whose workload has been significantly reduced by the COVID-19 pandemic. Those colleagues who are temporarily furloughed will be used for general corporate purposes. Duringcontinue to receive existing Company-provided benefits throughout their absence. As circumstances change, the three and nine months ended September 30, 2017, we recorded an impairment charge of approximately $20.9 million (see Note 4 - "Investment in Real Estate" for further details).
On October 17, 2017, an affiliate of WPG Inc. completed a discounted payoff of the $99.7 million mortgage loan secured by Southern Hills Mall for $55.0 million and will retain ownership and management of the property. This repayment was funded by borrowings on the Revolver. The Company will recordmake every effort to bring these furloughed associates back to work as soon as possible. Additionally, the Company has mandated a gain between $40.0 millionhiring freeze and $45.0 million related to this repayment during the fourth quarter of 2017.terminated third party vendor contracts when applicable.
| |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in this report.
Overview - Basis of Presentation
Washington Prime Group™Group Inc. (“("WPG Inc.”") is an Indiana corporation that operates as a fully integrated, self‑administered and self‑managed real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended (the "Code"). REITsWPG Inc. will generally not be liablequalify as a REIT for U.S. federal corporate income taxestax purposes as long as they continueit continues to distribute not less than 100%at least 90% of theirits REIT taxable income, exclusive of net capital gains, and satisfy certain other requirements. WPG Inc. will generally be allowed a deduction against its U.S. federal income tax liability for dividends paid by it to REIT shareholders, thereby reducing or eliminating any corporate level taxation to WPG Inc. Washington Prime Group, L.P. (“("WPG L.P.”") is WPG Inc.'s majority‑owned limited partnership subsidiary that owns, develops and manages, through its affiliates, all of WPG Inc.'s real estate properties and other assets. WPG Inc. is the sole general partner of WPG L.P. As of September 30, 2017,March 31, 2020, our assets consisted of material interests in 110101 shopping centers in the United States, consisting of open air properties and enclosed retail properties, comprised of approximately 6054 million square feet of managed gross leasable area.
Unless the context otherwise requires, references to "WPG," the "Company," “we,” “us”"we," "us" and “our”"our" refer to WPG Inc., WPG L.P. and entities in which WPG Inc. or WPG L.P. (or any affiliate) has a material ownership or financial interest, on a consolidated basis.
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The consolidated balance sheets as of September 30, 2017March 31, 2020 and December 31, 20162019 include the accounts of WPG Inc. and WPG L.P., as well as their majority owned and controlled subsidiaries. The consolidated statements of operations include the consolidated accounts of the Company. All intercompany transactions have been eliminated in consolidation. In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented. The Company believes that the disclosures made are adequate to prevent the information presented from being misleading.
COVID-19
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus ("COVID-19"). The Companypandemic has filed a trademark application withsignificantly impacted the economic conditions in the United States, Trademarkwith accelerated effects in February and Patent OfficeMarch, as federal, state and local governments reacted to the public health crisis, creating significant uncertainties in the United States economy. In the interest of public health and safety, jurisdictions (national, state and local) where our shopping centers are located, required mandatory closures or capacity limitations or other restrictions for those that continue to operate which have impacted our tenants' ability to pay rent. As of March 31, 2020, all of our enclosed retail properties were closed and our open air properties have been limited to operations that have been deemed essential by the respective jurisdiction in which they operate, resulting in approximately 57% of our properties remaining open. A robust effort has been underway to ensure an optimal transition for the name "Washington Prime Group"full reopening of all properties, including tenant discussions and a comprehensive reopening processes and best practices manual. As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash flows for the year ended December 31, 2020. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19will change including the timing of lifting any restrictions or closure requirements, when our shopping centers and tenants will reopen, and shopper re-engagementwith our brand.
In response to this pandemic, we have taken the following cost saving and capital preservations steps:
•Furloughed or laid off approximately 20% of our workforce. Additionally, we implemented a hiring freeze and terminated third party vendor contracts when applicable;
•Temporarily reduced senior management base compensation ranging from 5% to 25%;
•Drew an additional $120.0 million under the Revolver on April 14, 2020 to increase liquidity and preserve financial flexibility; and
•Temporarily suspended the quarterly common share and operating partnership unit cash dividend for the remainder of 2020 (with a potential true up of the fourth quarter 2020 dividend payment in order to address the Company's REIT taxable income distribution requirements), which will result in cash savings in excess of $80.0 million for the remainder of the year, exclusive of any aforementioned true up.
Additionally, the Company is working with various lenders on agreements to delay the timing of the debt service payments on several secured mortgages for a period generally ranging from three to six months. While these forbearance agreements will not reduce the Company’s debt obligations, it remains pending.will enhance cash flow during the period of lower rent collections from tenants. The Company estimates approximately $10 million to $15 million of delayed payments from these arrangements. In certain instances, the Company did not pay debt service in advance of finalizing agreements with the lenders and may be in technical default in such circumstances.
Leadership Transition
On September 28, 2017, Mr. Keric M. "Butch" Knerr, Executive Vice PresidentFurther, we are engaged in discussions with our unsecured creditors and Chief Operating Officer, resigned frombased upon these discussions we believe, to the Company. There wereextent that the impact of COVID-19 results in potential non-compliance with financial covenants, it is probable that we will remain compliant with such covenants through some combination of waivers, modifications or other amendments to the related agreements. However, no severance paymentsassurances can be made in this regard, and if we are unable to agree on the terms of such waivers or accelerated vesting of stock compensation benefits in connection with his transition.changes, this could create substantial doubt about our ability to continue as a going concern through May 7, 2021.
The O'Connor Joint VenturesNew Accounting Pronouncements
Adoption of New Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") ASU 2016-13, "Financial Instruments - Credit Losses," which introduced new guidance for an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities, and net investments in leases as well as reinsurance and trade receivables. In November 2018, the FASB issued ASU 2018-19, which clarifies that operating lease receivables are outside the scope of the new standard. We adopted this ASU on January 1, 2020, noting our seller-provided bridge financing associated with our other indebtedness (see "Financing and Debt" for further details) and certain other miscellaneous accounts are in scope of ASU 2016-13. However, there was no impact to our consolidated financial statements at adoption.
New Standards Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04 "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." ASU 2020-04 provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the London Inter-Bank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate ("SOFR"). Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. If elected, an entity would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Entities electing relief would need to apply it consistently for all eligible modified contracts accounted for under a particular codification topic or industry subtopic. Additionally, entities can elect various optional expedients that would allow them to continue to apply hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met. Entities electing relief related to hedging relationships can generally elect to apply the optional expedients on a hedge-by-hedge basis.
The guidance is effective upon issuance and can be applied to modifications of existing contracts made after January 1, 2020 and can be applied to eligible hedging relationships existing as of or entered into after the same date. The relief is temporary and cannot be applied to contract modifications that occur after December 31, 2022 or hedging relationships entered into or evaluated after that date. However, certain optional expedients can be applied to hedging relationships evaluated in periods after December 31, 2022. As of March 31, 2020, we had approximately $692.0 million (excluding debt issuance costs of $5.6 million) of our aggregate consolidated indebtedness that was indexed to LIBOR. In addition, as of March 31, 2020, we had approximately $641.0 million of consolidated indebtedness swapped to LIBOR plus a fixed spread under hedging relationships. We expect that upon modification, these contracts will generally qualify for the temporary relief upon meeting the certain criteria and we are currently assessing our plans for adoption.
In April 2020, the FASB issued a question-and-answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of COVID-19. Under existing lease guidance, the Company has multiple joint ventures with O'Connor Mall Partners, L.P. ("O'Connor").
•The O'Connor Joint Venture I
This investment consistswould have to determine, on a lease by lease basis, if a lease concession was the result of a 51% interest heldnew arrangement reached with the tenant (treated with the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A clarifies that entities may elect to not evaluate whether lease-related relief that lessors provide to mitigate the economic effects of COVID-19 on lessees is a lease modification under Topic 842, Leases. Instead, an entity that elects not to evaluate whether a concession directly related to COVID-19 is a modification can then elect whether to apply the modification guidance (i.e. assume the relief was always contemplated by the contract or assume the relief was not contemplated by the contract). Both lessees and lessors may make this election. The Company is evaluating its election on a disaggregated basis, with such election applied consistently to leases with similar characteristics and similar circumstances. The future impact of the Lease Modification Q&A is dependent upon the extent of lease concessions granted to tenants as a result of COVID-19 in future periods and the elections made by the Company in a portfolioat the time of five enclosed retail propertiesentering into such concessions.
Four Corners Outparcel Sales
We are party to two separate purchase and relatedsale agreements to sell certain outparcels consistingto FCPT Acquisitions, LLC ("Four Corners"). The following table summarizes the key terms of each of the following: The Mall at Johnson City locatedclosings that occurred during the three months ended March 31, 2020 (dollars in Johnson City, Tennessee; Pearlridge Center located in Aiea, Hawaii; Polaris Fashion Place® located in Columbus, Ohio; Scottsdale Quarter® located in Scottsdale, Arizona; and Town Center Plaza (which consists of Town Center Plaza and the adjacent Town Center Crossing) located in Leawood, Kansas. We retained management, leasing, and development responsibilities for the O'Connor Joint Venture I.thousands):
On March 2, 2017, the O'Connor Joint Venture I acquired an additional section at Pearlridge Center for a gross purchase price of $70.0 million. Pearlridge Center is currently comprised of two distinct enclosed venues commonly referred to as Uptown and Downtown. The newly acquired 180,000-square-foot section, which is part of Uptown (and referenced herein as Pearlridge Uptown II), is anchored by Ross Dress for Less and TJ Maxx. Subsequent to the purchase, the joint venture placed secured debt on the property (see below for details). Our share of the purchase price was funded by a combination of our share of the secured debt and availability on our credit facility.On March 30, 2017, the O'Connor Joint Venture I closed on a $43.2 million non-recourse mortgage note payable with an eight year term and a fixed interest rate of 4.071% secured by Pearlridge Uptown II. The mortgage note payable requires monthly interest only payments until April 1, 2019, at which time monthly interest and principal payments are due until maturity. Our pro-rata share of the mortgage note payable issuance is $22.0 million. |
| | | | | | | | | | | |
| Sales Date | | Parcels Sold | | Purchase Price | | Sales Proceeds |
| February 13, 2020 | | 2 |
| | $ | 1,961 |
| | $ | 1,945 |
|
On March 29, 2017, the O'Connor Joint Venture I closed on a $55.0 million non-recourse mortgage note payable with a ten year term and a fixed interest rate of 4.36% secured by sections of Scottsdale Quarter® known as Block K and Block M. The mortgage note payable requires monthly interest only payments until May 1, 2022, at which time monthly interest and principal payments are due until maturity. Our pro-rata share of the mortgage note payable issuance is $28.1 million.
•The O'Connor Joint Venture II
During the quarter ended June 30, 2017, we completed an additional joint venture transaction with O'Connor, an unaffiliated third party and our partner in the O'Connor Joint Venture I, with respect to the ownership and operation of seven of the Company's retail properties and certain related outparcels (the "O'Connor Joint Venture II"), consisting of the following: The Arboretum, located in Austin, Texas; Arbor Hills, located in Ann Arbor, Michigan; Classen Curve and The Triangle at Classen Curve, each located in Oklahoma City, Oklahoma and Nichols Hills Plaza, located in Nichols Hills, Oklahoma (the "Oklahoma City Properties," collectively); Gateway Centers, located in Austin, Texas; Malibu Lumber Yard, located in Malibu, California; Palms Crossing I and II, located in McAllen, Texas and The Shops at Arbor Walk, located in Austin, Texas. The transaction valued the properties at $598.6 million before closing adjustments and debt assumptions. Under the terms of the joint venture agreement, we retained a non-controlling 51% interest in the O'Connor Joint Venture II and sold the remaining 49% to O'Connor. The transaction generated net proceeds to the Company of approximately $138.9 million, after taking into consideration costs associated with the transaction and the assumption of debt (including the new mortgage loans on The Arboretum, Gateway Centers, and Oklahoma City Properties which closed prior to the joint venture transaction; see "Financing and Debt" below for net proceeds to the Company from the new mortgage loans), which wewere generally used to reduce the Company's debt, as well asfund ongoing redevelopment efforts and for general corporate purposes. Since we no longer control the operations of the properties included in the O'Connor Joint Venture II, we deconsolidated the properties and recorded a gain in connection with this partial sale of $126.1 million, which is included in gain (loss) on disposition of interests in properties, net in the consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017. The gain was recorded pursuant to ASC 360-20 and calculated based upon proceeds received, less 49% of the book value of the deconsolidated net assets. Our retained 51% non-controlling equity method interest was valued at historical cost based upon the pro rata book value of the retained interest in the net assets. We retained management and leasing responsibilities of the properties, though our partner's substantive participating rights over the decisions most important to the operations of the O'Connor Joint Venture II preclude our control and consolidation of this venture.
In connection with the formation of this joint venture, we recorded transaction costs of approximately $6.4 million as part of our basis in this investment.
Outparcel Sale
On September 20, 2017,Excluding any subsequent amendments thereto, the Company executed aexpects to close on the approximately $4.6 million of remaining outparcels from the first purchase and sale agreement with an affiliate of Four Corners Property Trust, Inc. to sell 41 restaurant outparcels located on 22and the majority of the Company's enclosed retail properties and open air properties for a purchase price of approximately $67.2 million. The Company expects the transaction to close in two tranches beginning in the fourth quarter of 2017 withremaining $26.9 million from the second tranche to be completedpurchase and sale agreement in the first half of 2018,2020, subject to due diligence and closing conditions. Given the uncertainties that the disposition is probable within one year due to the aforementioned closing and diligence requirements, the outparcels remain classified as held for use as of September 30, 2017.
Impairment
On October 4, 2017, the Company entered into a purchase agreement to sell Colonial Park Mall, located in Harrisburg, Pennsylvania, to an unaffiliated private real estate investor for approximately $15.0 million. The agreement is subject to closing requirements. Given uncertainties around the property's disposition due to the lack of a firm commitment as of September 30, 2017, the property remains classified as held for use as of September 30, 2017. We shortened the hold period used in assessing impairment for this asset, which resulted in the carrying value not being recoverable from the expected cash flows. The purchase offer represents the best available evidence of fair value for the property. We compared the estimated fair value measurement of the property to its relative carrying value, which resulted in the recording of an impairment charge of approximately $20.9 million in the consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2017.
During the first quarter of 2017, the Company entered into a purchase and sale agreement to dispose of Morgantown Commons, located in Morgantown, West Virginia, which was sold in the second quarter of 2017. We shortened the hold period used in assessing impairment for the asset during the quarter ended March 31, 2017, which resulted in the carrying value not being recoverable from the expected cash flows. The purchase offer represented the best available evidence of fair value for this property. We compared the fair value to the carrying value, which resulted in the recording of an impairment charge of approximately $8.5 million in the consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017.
During, and subsequent to, the third quarter of 2016, the Company entered into purchase and sale agreements to sell Gulf View Square, located in Port Richey, Florida; Richmond Town Square, located in Cleveland, Ohio; River Oaks Center, located in Chicago, Illinois; and Virginia Center Commons, located in Glen Allen, Virginia. We adjusted the carrying values to the purchase offers and recorded an aggregate impairment charge of $20.7 million in the consolidated statements of operations and comprehensive (loss) income for the three and nine months ended September 30, 2016.
Hurricane Harvey and Hurricane Irma
During the quarter ended September 30, 2017, Hurricane Harvey and Hurricane Irma made landfall in Houston, Texas and Southern Florida, respectively. The Company had 15 assets experience damage attributed to the hurricanes, but no asset sustained catastrophic damage. Further, no asset experienced a significant loss of business. The Company recognized approximately $900,000 of expense attributed to the damage, repairs and asset write-offs, which was below insurance deductible thresholds.
Business Opportunities
We derive our revenues primarily from retail tenant leases, including fixed minimum rent leases, percentage rent leases based on tenants' sales volumes and reimbursements from tenants for certain expenses. We seek to re-lease our spaces at higher rents and increase our occupancy rates, and to enhance the performance of our properties and increase our revenues by, among other things, adding or replacing anchors or big-box tenants, re-developing or renovating existing properties to increase the leasable square footage, and increasing the productivity of occupied locations through aesthetic upgrades, re-merchandising and/or changes to the retail use of the space. We seek growth in earnings, funds from operations ("FFO") and cash flows by enhancing the profitability and operation of our properties and investments.
Additionally, we feel there are opportunities to enhance our portfolio and balance sheet through active portfolio management. We believe that there are opportunities for us to acquire additional shopping centers that match our investment and strategic criteria. We invest in real estate properties to maximize total financial return which includes both operating cash flows and capital appreciation. We also seek to dispose of or contribute to a joint venture assets that no longer meet our strategic criteria. These dispositions will be a combination of asset sales and transitions of over-levered properties to lenders.
We consider FFO, net operating income, or NOI, and comparable NOI (NOI for properties owned and operating in both periods under comparison) to be key measures of operating performance that are not specifically defined by GAAP. We use these measures internally to evaluate the operating performance of our portfolio and provide a basis for comparison with other real estate companies. Reconciliations of these measures to the most comparable GAAP measure are included elsewhere in this report.
Portfolio Data
The portfolio data discussed in this overview includes key operating statistics for the Company including ending occupancy, average base minimum rent per square foot and comparable NOI for the core properties owned and managed at September 30, 2017. Southern Hills Mall is excluded from the metrics as the management and leasingMarch 31, 2020. The Company generates approximately 91% of the NOI from our Tier 1 and open air properties. As these properties are core to our future growth and receive the majority of our capital allocation, we disclose our operating metrics for this portion of our portfolio and exclude our noncore properties as well as our Tier 2 properties. Refer to Item 7 of Part II of the 2019 Form 10-K for our property was transferred tolisting.
When excluding the receiver duringimpact of the fourth quarter2019 bankruptcies of 2016 (see the "FinancingCharlotte Russe, Gymboree, and Debt" section for further details).
CorePayless Shoesource, business fundamentals in the overallour core portfolio for the thirdfirst quarter of 20172020 were generally stable compared to 2016.2019. Ending occupancy for the portfolioTier 1 and open air properties was 92.3%92.9% as of September 30, 2017,March 31, 2020, as compared to 92.7%93.8% as of September 30, 2016.March 31, 2019. Average base minimum rent per square foot for the core portfolio was unchangeddecreased 2.0% when comparing September 30, 2017March 31, 2020 to September 30, 2016.March 31, 2019. Comparable NOI decreased 1.4% for the portfolioTier 1 and open air properties decreased 3.0% in the thirdfirst quarter of 20172020 when compared to the thirdfirst quarter of 2016.2019. The enclosed retailTier 1 properties had a decrease in comparable NOI of 2.9%7.2%, which was driven primarily byand the impact of tenant bankruptcies filed in 2016 and 2017. The open air properties had an increase in comparable NOI growth of 3.4%7.6% in the thirdfirst quarter of 20172020 as compared to the third quarter 2016.same period in 2019. This quarterly decrease in NOI of $3.2 million for the Tier 1 and open air properties relate to lower revenue of $2.1 million from the 2019 bankruptcies of Charlotte Russe, Gymboree, and Payless Shoesource. The remaining variance can be attributed to lower percentage and overage rent primarily attributed to the impact of property closures in March due to the COVID-19 global pandemic.
The following table sets forth key operating statistics for the combined portfolio of properties or interests inthe Tier 1 and open air properties:
|
| | | | | | |
| | | September 30, 2017 | | September 30, 2016 | | % Change |
| Ending occupancy (1) | | 92.3% | | 92.7% | | (0.4)% |
| Average base minimum rent per square foot (2) | | $21.64 | | $21.64 | | —% |
|
| | | | | | |
| | | March 31, 2020 | | March 31, 2019 | | % Change |
Ending occupancy(1) | | 92.9% | | 93.8% | | (0.9)% |
Average base minimum rent per square foot(2) | | $21.35 | | $21.78 | | (2.0)% |
| |
| (1) | Ending occupancy is the percentage of gross leasable area, or GLA, which is leased as of the last day of the reporting period. We include all Company-owned space except for anchors, majors, freestanding office and outlots at our enclosed retail properties in the calculation of ending occupancy. Open air property GLA included in the calculation relates to all Company-owned space other than office space. |
| |
| (2) | Average base minimum rent per square foot is the average base minimum rent charge in effect for the reporting period for all tenants that would qualify to be included in ending occupancy. |
Current Leasing Activities
During the ninethree months ended September 30, 2017,March 31, 2020, we signed new leases and renewal leases with terms in excess of a year (excluding enclosed retail property anchors, majors, offices, and in-line spaces in excess of 10,000 square feet) across the Tier 1 and open air portfolio, comprising approximately 1,946,000783,100 square feet.feet, an increase of 54% from the prior year. The average annual initial base minimum rent for new leases was $27.83$19.69 per square foot ("psf") and for renewed leases was $25.56$16.28 psf. For these leases, the average for tenant allowances was $35.30$28.56 psf for new leases and $3.31$3.21 psf for renewals. During the ninethree months ended September 30, 2016,March 31, 2019, we signed new leases and renewal leases with terms in excess of a year (excluding enclosed retail property anchors, majors, offices, and in-line spaces in excess of 10,000 square feet) across the Tier 1 and open air portfolio, comprising approximately 2,031,400509,800 square feet. The average annual initial base minimum rent for new leases was $22.86$23.80 psf and for renewed leases was $26.88$28.36 psf. For these leases, the average for tenant allowances was $36.88$44.62 psf for new leases and $5.74$12.74 psf for renewals.
Results of Operations
Activities Affecting Results
The following acquisitions and dispositionsproperty related transactions affected our results in the comparative periods:
•On June 13, 2017, we sold 49% of our interest in Malibu Lumber Yard as part of the O'Connor Joint Venture II transaction.
•On June 7, 2017,January 31, 2020, we completed the sale of Morgantown Commons.Dekalb Plaza, located in King of Prussia, Pennsylvania, to an unaffiliated private real estate investor.
•On May 16, 2017,January 14, 2020, we completed the sale of an 80,000 square foot vacant anchor parcel at Indian Mound Mall,Matteson Plaza, located in Heath, Ohio.Matteson, Illinois, to an unaffiliated private real estate investor.
•On May 12, 2017, we completed the transaction forming the O'Connor Joint Venture II with regard to the ownership and operation of six of the Company's retail properties and certain related outparcels. Under the terms of the joint venture agreement, we retained a 51% non-controlling interest and sold a 49% interest to O'Connor, the third party partner.
•On April, 25, 2017, we completed a discounted payoff of the mortgage loan secured by Mesa Mall, located in Grand Junction, Colorado.
•On February 21, 2017,During 2020, we completed the sale of Gulf View Square and River Oaks Center.2 outparcels with Four Corners (see further details in Note 4 of the Condensed Notes to the Unaudited Consolidated Financial Statements in Part I, Item 1).
•On January 10, 2017,December 19, 2019, we completed the sale of Virginia Center Commons.Charles Towne Square, located in Charleston, South Carolina, to an unaffiliated private real estate investor.
•On December 29, 2016,18, 2019, we transitioned River ValleyWest Ridge Mall and Plaza ("West Ridge," collectively), located in Lancaster, Ohio,Topeka, Kansas, to the lender.
•On November 10, 2016,July 1, 2019, we transitioned Towne West Square, located in Wichita, Kansas, to the lender.
•During 2019, we completed the sale of Richmond Town Square.
•On August 19, 2016, we completed25 outparcels with Four Corners (see further details in Note 4 of the sale of Knoxville Center, located in Knoxville, Tennessee.
•On June 9, 2016, we transitioned Merritt Square Mall, located in Merritt Island, Florida,Condensed Notes to the lender.Unaudited Consolidated Financial Statements in Part I, Item 1).
•On April 28, 2016, we transitioned Chesapeake Square, located in Chesapeake, Virginia, to the lender.
•On January 29, 2016, we completed the sale of Forest Mall, located in Fond Du Lac, Wisconsin, and Northlake Mall, located in Atlanta, Georgia.
For the purposes of the following comparisons, the transactions listed above (excluding the properties included in the O'Connor Joint Venture II, which are referred to as the "O'Connor Properties") are referred to as the "Property Transactions," and "comparable properties" refers to the remaining properties we owned and operated throughout both of the periods under comparison.
Three Months Ended September 30, 2017March 31, 2020 vs. Three Months Ended September 30, 2016March 31, 2019
Minimum rentsRental income decreased $19.9 million primarily due to a $7.5 million decrease attributable to the Property Transactions, a $9.3 million decrease attributable to the O'Connor Properties, and a $3.1 million net decrease attributable to the comparable properties, primarily attributable to a reduction in the amortization of fair value of leases and straight-line rents. Tenant reimbursements decreased $9.8$16.0 million due to a $2.3 million decrease attributable to the Property Transactions, a $3.6 million decrease attributable to the O'Connor Properties and a $3.9$11.1 million decrease attributable to the comparable properties, primarily related to $2.6 million of less rental income due to rent restructuresthe 2019 bankruptcies and anchor vacancy related co-tenancy claims, a $2.4 million decrease attributed to national retailers that filed bankruptcyour change in 2017collectibility of straight-line rents primarily due to the COVID-19 pandemic, a $1.9 million decrease related amortization of above/below-market leases and 2016.
inducements, and a net $1.5 million decrease in temporary tenant rents, overage rents, and termination income. A further decrease of $4.9 million was attributable to the Property Transactions.
Property operating expenses decreased $4.2$2.1 million, of which $3.1$1.8 million was attributable to the Property Transactions and $1.6$0.3 million was attributable to the O'Connor Properties, offset by a $0.5 million increase attributable to the comparable properties. Depreciation and amortization decreased $5.9$6.7 million, primarily due to a $3.4$2.6 million decrease attributable to the Property Transactions, and a $4.7$4.1 million decrease attributable to the O'Connor Properties offset by a $2.2 million increase attributable toin the comparable properties which was primarily duerelated to developmentthe accelerated depreciation of certain building and land improvement assets placed into service.during the first quarter of 2019. Real estate taxes decreased $5.9$1.9 million, primarily due to a $2.3$1.0 million decrease in the comparable properties due to reduced tax assessments and capitalization of real estate taxes associated with redevelopment efforts and a $0.9 million decrease attributable to the Property Transactions, a $2.4Transactions. General and administrative expenses decreased $1.9 million, decreasewhich was primarily attributable to severance costs incurred during the O'Connor Properties,first quarter of 2019. The $1.3 million impairment charge recorded in the 2020 period related to the write down of land at Georgesville Square, located in Columbus, Ohio, and a $1.2 million decrease attributable to the comparable properties.single tenant outparcel located in Topeka, Kansas.
Interest expense, net, increased $2.2$1.8 million, of which $6.2a net $1.8 million increase was attributable to corporate debt activity primarily related to our other indebtedness (see "Financing and Debt" for further details) and a $1.4 million increase primarily attributable to the August 2017 bond offering offset by reduced Revolver activity, issuance costs amortization, and swap ineffectiveness, and $0.8 million related to otherApril 2019 financing activities.of Waterford Lakes Town Center, located in Orlando, Florida. Offsetting these increases were decreaseswas a decrease of $2.2$1.4 million attributable to the payofftransitions of the mortgage loan secured by Mesa Mall, $1.3Towne West Square and West Ridge.
Gain on disposition of interests in properties, net increased $16.8 million attributablewhich is primarily attributed to the O'Connor Properties, $0.8recording of a $15.4 million gain related to our disposition of interests in Seminole Towne Center, located in Sanford, Florida, in the Property Transactions, and $0.5 million related to default interest on properties transitioned, or to befirst quarter of 2020 as this property, which was held in an unconsolidated joint venture, was transitioned to lender.the lender pursuant to the terms within a deed-in-lieu of foreclosure agreement and all involvement between us and the related property ceased in connection with this transition.
Income and other taxes decreased $1.0 million, which is primarily attributed to certain federal income tax relief granted under the newly enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") in response to the COVID-19 pandemic.
For WPG Inc., net income (loss) attributable to noncontrolling interests primarily relates to the allocation of income (loss) to third parties based on their respective weighted average ownership interest in WPG L.P., which percentage remained consistent over the periods.
Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016
Minimum rents decreased $37.7 million primarily due to a $25.2 million decrease attributable to the Property Transactions and a $14.0 million decrease attributable to the O'Connor Properties, offset by a $1.5 million net increase attributable to the comparable properties, primarily attributable to the amortization of fair value of leases and straight-line rents and recent development activity coming online. Overage rents decreased $2.0 million due to a $0.5 million decrease attributable to the Property Transactions, a $0.4 million decrease attributable to the O'Connor Properties, and a $1.1 million decrease attributable to the comparable properties. Tenant reimbursements decreased $18.2 million due to a $9.3 million decrease attributable to the Property Transactions, a $4.5 million decrease attributable to the O'Connor Properties, and a $4.4 million decrease attributable to the comparable properties. Other income increased $3.1 million, primarily due to a $2.5 million increase attributable to lease settlements that occurred in 2017 and a $0.9 million increase in management, leasing and development fee income from the unconsolidated joint ventures to which we provide such services offset by a $0.3 million decrease attributable to ancillary property income.
Property operating expenses decreased $15.2 million, of which $10.8 million was attributable to the Property Transactions, $2.1 million was attributable to the O'Connor Properties, and $2.3 million was attributable to the comparable properties, primarily involving a reduction in management fee expense related to the termination of certain transition service agreements with Simon Property Group, Inc. in connection with the 2014 spin-off. Depreciation and amortization decreased $12.4 million, primarily due to a $12.7 million decrease attributable to the Property Transactions and a $6.9 million decrease attributable to the O'Connor Properties, offset by a $7.2 million increase attributable to the comparable properties, which was primarily due to development assets placed into service. Real estate taxes decreased $7.5 million, primarily due to a $6.4 million decrease attributable to the Property Transactions and a $2.8 million decrease attributable to the O'Connor Properties, offset by a $1.7 million increase attributable to the comparable properties, which was primarily due to a real estate tax refund related to Westminster Mall, located in Westminster, California during 2016 that did not occur in 2017. Provision for credit losses increased $1.5 million, primarily attributable to tenant bankruptcies during 2017. General and administrative expenses decreased $2.3 million, primarily due to reductions in legal, consulting, and audit fees and travel and entertainment expenses. The decrease in merger, restructuring and transaction costs of $29.6 million was attributable to the management transition as well as strategic alternatives explored during 2016 and no comparable costs occurring in 2017. The increase of $8.7 million in impairment losses recorded in 2017 relate to the write down of Colonial Park Mall and Morgantown Commons, as described in further detail under "Impairment," when compared to the impairments taken during the comparable period in 2016.
Interest expense, net, decreased $5.9 million, of which $6.7 million was attributable to the Property Transactions, $3.2 million was attributable to the payoff of the mortgage loan secured by Mesa Mall, and $2.1 million was attributable to the O'Connor Properties. Offsetting these decreases were increases of $1.2 million related to default interest on properties transitioned, or to be transitioned, to lender, $4.3 million related to corporate debt activity, primarily related to the August 2017 bond offering offset by reduced Revolver activity, issuance costs amortization, and swap ineffectiveness, and $0.6 million related to other financing activities.
Gain on extinguishment of debt, net recognized in the 2017 period consisted of the $21.2 million gain related to the discounted payoff of the $87.3 million mortgage loan secured by Mesa Mall. The gain on extinguishment of debt, net recognized in the 2016 period consisted of the $34.1 million net gain from the transitioning of Merritt Square Mall and Chesapeake Square to the lenders.
Income and other taxes increased $1.6 million, which was attributable primarily to a nonrecurring state use tax that was incurred in 2017.
Gain (loss) on disposition of interests in properties, net in the 2017 period consisted of a net gain of $125.4 million from the sales of: Morgantown Commons, the sale of a vacant anchor parcel at Indian Mound Mall, the O'Connor Joint Venture II transaction, Gulf View Square, River Oaks Center, and Virginia Center Commons and in the 2016 period consisted of the $2.1 million loss from the sale of Knoxville Center, Forest Mall and Northlake Mall.
For WPG Inc., net income attributable to noncontrolling interests primarily relates to the allocation of income to third parties based on their respective weighted average ownershiplimited partnership interest in WPG L.P., which percentage remained consistent over the periods.
Liquidity and Capital Resources
Our primary uses of cash include payment of operating expenses, working capital, debt repayment, including principal and interest, reinvestment in properties, development and redevelopment of properties, tenant allowance and dividends. Our primary sources of cash are operating cash flow and borrowings under our debt arrangements, including our seniorRevolver (as defined in "Financing and Debt"), unsecured revolving credit facility, or "Revolver,"notes payable and three senior unsecured term loans as further discussed below.
WeAnnually, we derive most of our liquidity from leases that generate positive net cash flow from operations. Total cash flows from operations the total of which was $237.7 million during the ninethree months ended September 30, 2017.March 31, 2020 was $10.0 million. Due to the seasonal nature of certain operational activities as well as the impact of COVID-19, the cash flows from operations for the three months ended March 31, 2020 are not necessarily indicative of the cash flows from operations expected for the full year.
Our balance of cash and cash equivalents decreased $11.1$1.8 million during 20172020 to $48.3$39.6 million as of September 30, 2017.March 31, 2020. The decrease was primarily due to net repayment of debt, dividend distributions, and capital expenditures, partially offset by operating cash flow from properties, net distributions from our joint ventures, and the net proceeds from the disposition of properties.properties, and net proceeds from the issuance of debt. See "Cash Flows" below for more information.
Because we own primarily long-lived income-producing assets, our financing strategy relies on a combination of long-term mortgage debt as well as unsecured debt supported by a quality unencumbered asset pool, providing us with ample flexibility from a liquidity perspective. Our strategy is to have the majority of our debt fixed either through fixed rate mortgages or interest rate swaps that effectively fix the interest rate. At September 30, 2017,March 31, 2020, floating rate debt (excluding loans hedged to fixed interest rates)interest) comprised 8.3%22.6% of our total consolidated debt. We will continue to monitor our borrowing mix to limit market risk.
During the third quarter of 2017, we successfully completed the issuance of $750.0 million of unsecured notes. The notes are due on August 15, 2024 and the proceeds were used to repay the $500.0 million Term Loan (as defined in "Financing and Debt"), with a maturity date of May 30, 2018 and $230.0 million of the June 2015 Term Loan (as defined in "Financing and Debt") with a maturity date of March 2, 2020, respectively. The transaction is reflective of our strategy to access the unsecured debt markets to extend our weighted average debt maturity.
On September 30, 2017,March 31, 2020, we had an aggregate available borrowing capacity of $899.7$122.8 million under the Revolver, net of outstanding borrowings of $0.3$527.0 million and $0.2 million reserved for outstanding letters of credit. There were no borrowings under the Revolver during the three months ended September 30, 2017. The weighted average interest rate on the Revolver was 2.1%3.3% during the ninethree months ended September 30, 2017.March 31, 2020. The decrease in our borrowing capacity is primarily attributed to utilizing our Revolver to complete the payoff of the $250.0 million Exchange Notes on February 28, 2020 (capitalized terms as defined in "Financing and Debt"). Additionally, on April 14, 2020, we borrowed an additional $120.0 million under the Revolver to enhance our liquidity as we anticipate lower cash receipts in the second quarter as a result of the COVID-19 global pandemic (refer to "COVID-19" for additional details on our response to enhance short-term liquidity). Following this draw, we have approximately $3.0 million in borrowing capacity on the Revolver.
The consolidated indebtedness of our business was approximately $3.0$3.1 billion as of September 30, 2017,March 31, 2020, or a decreasean increase of approximately $507.5$67.5 million from December 31, 2016.2019. The change in consolidated indebtedness from December 31, 20162019 is described in greater detail under "Financing and Debt."
Outlook
Our business model and WPG Inc.'s status as a REIT require us to regularly access the debt markets to raise funds for acquisition, development and redevelopment activity, and to refinance maturing debt. We may also, from time to time, access the equity capital markets to accomplish our business objectives. We believe we have sufficient cash on hand, availability under the Revolver and cash flow from operations to address our debt maturities, distributions and capital needs through 2017.throughout 2020.
The successful execution of our business strategy will require the availability of substantial amounts of operating and development capital both currently and over time. Sources of such capital could include additional bank borrowings, public and private offerings of debt or equity, including rights offerings, sale of certain assets and joint ventures. The major credit rating agencies have assigned us investment grade credit ratings, but there can be no assurance that the Company will achieve a particular rating or maintain a particular rating in the future.
Cash Flows
Our net cash flow from operating activities totaled $237.7$10.0 million during the ninethree months ended September 30, 2017.March 31, 2020. During this period we also:
funded capital expenditures and redevelopment projects of $109.2 million;
funded net amounts of restricted cash reserves held for future capital expenditures of $1.6$60.0 million;
received net proceeds from the sale of interests in properties and outparcels of $209.2$17.2 million;
funded investments in unconsolidated entities of $48.6$3.2 million;
received distributions of capital from unconsolidated entities of $57.0$1.6 million;
funded thereceived net proceeds from our debt financing, refinancing and repayment activities of debt of $171.5$66.0 million; and
funded distributions to common and preferred shareholders and unitholders of $177.1$31.6 million.
In general,Prior to the COVID-19 global pandemic, we anticipateanticipated that cash generated from operations will bewould have been sufficient in 2020 to meet operating expenses, monthly debt service, recurring capital expenditures, and cover the majority of distributions to shareholders necessary to maintain WPG Inc.'s status as a REIT on a long-term basis. In addition, we expectexpected to be able to generate or obtain capital for nonrecurring capital expenditures, such as acquisitions, major building renovations and expansions, as well as for scheduled principal maturities on outstanding indebtedness, from:
excess cash generated from operating performance and working capital reserves;
borrowings on our debt arrangements;
opportunistic asset sales;
additional secured or unsecured debt financing; or
additional equity raised in the public or private markets.
We expectexpected to generate positive cash flow from operations in 2017,2020, and we considerconsidered these projected cash flows in our sources and uses of cash. These cash flows arewere projected to be principally derived from rents paid by our retail tenants. ADue to the COVID-19 global pandemic, we anticipate a significant deterioration in projected cash flows from operations could causewhich has caused us to increase our reliance on available funds from our debt arrangements, curtail planned capital expenditures, ortemporarily suspend common dividend distributions, and seek other additional sources of financing as discussed above. Based on our current projections that have been stress tested for various COVID-19 scenario outcomes, we anticipate having sufficient liquidity to meet our financial obligations for the remainder of the year.
Financing and Debt
Mortgage Debt
Total mortgage indebtedness at September 30, 2017March 31, 2020 and December 31, 20162019 was as follows (in thousands):
| | | | | September 30,
2017 | | December 31,
2016 | | March 31,
2020 | | December 31,
2019 |
| Face amount of mortgage loans | | $ | 1,407,974 |
| | $ | 1,610,429 |
| | $ | 1,113,242 |
| | $ | 1,117,242 |
|
| Fair value adjustments, net | | 8,967 |
| | 12,661 |
| | 2,887 |
| | 3,463 |
|
| Debt issuance cost, net | | (3,966 | ) | | (5,010 | ) | | (4,785 | ) | | (5,097 | ) |
| Carrying value of mortgage loans | | $ | 1,412,975 |
| | $ | 1,618,080 |
| | $ | 1,111,344 |
| | $ | 1,115,608 |
|
A roll forward of mortgage indebtedness from December 31, 20162019 to September 30, 2017March 31, 2020 is summarized as follows (in thousands):
|
| | | |
| Balance at December 31, 2016 | $ | 1,618,080 |
|
| Debt amortization payments | (14,896 | ) |
| Repayment of debt | (63,000 | ) |
| Debt issuances, net of debt issuance costs | 213,574 |
|
| Debt cancelled upon partial paydown | (24,250 | ) |
| Debt transferred to unconsolidated entities, net of debt issuance costs and fair value adjustments | (314,595 | ) |
| Amortization of fair value and other adjustments | (2,846 | ) |
| Amortization of debt issuance costs | 908 |
|
| Balance at September 30, 2017 | $ | 1,412,975 |
|
|
| | | |
| Balance at December 31, 2019 | $ | 1,115,608 |
|
| Debt amortization payments | (4,000 | ) |
| Amortization of fair value and other adjustments | (576 | ) |
| Amortization of debt issuance costs | 312 |
|
| Balance at March 31, 2020 | $ | 1,111,344 |
|
On April 25, 2017,3, 2020, the Company completed a discounted payoffexercised the third of three options to extend the maturity of the $87.3$65.0 million mortgageterm loan secured by MesaWeberstown Mall, (see "Covenants" section belowlocated in Stockton, California, for additional details).one year. The extended maturity date is June 8, 2021.
On May 10, 2017 and prior to the deconsolidation of these properties in connection with the sale of 49% of our interests in the O'Connor Joint Venture II (see ""Overview - Basis of Presentation - The O'Connor Joint Ventures" for further details),February 14, 2020, the Company closed on non-recourse mortgage loans encumbering The Arboretum, Gateway Centers, and Oklahoma City Properties. The following table summarizesexercised the key termssecond of each mortgage loan (dollar amounts in thousands):
|
| | | | | | | | | | | | | | | | | |
| Property | | Principal | | Debt issuance costs | | Net debt issuance | | Interest Rate | | Maturity Date |
| The Arboretum | | $ | 59,400 |
| | $ | (452 | ) | | $ | 58,948 |
| | 4.13 | % | | June 1, 2027 |
| Gateway Centers | | 112,500 |
| | (709 | ) | | 111,791 |
| | 4.03 | % | | June 1, 2027 |
| Oklahoma City Properties | | 43,279 |
| | (427 | ) | | 42,852 |
| | 3.90 | % | | June 1, 2027 |
| Total | | $ | 215,179 |
| | $ | (1,588 | ) | | $ | 213,591 |
| | | | |
The Arboretum and Gateway Centers loans require monthly interest only payments until July 1, 2021, at which time monthly interest and principal payments are due until maturity. The Oklahoma City Properties loan requires monthly interest only payments until July 1, 2022, at which time monthly interest and principal payments are due until maturity. We usedtwo options to extend the net proceeds to repay a portionmaturity of the outstanding balance on the Revolver, as defined below. These three loans were deconsolidated during the quarter ended June 30, 2017, in connection with the O'Connor Joint Venture II transaction.
On October 2, 2017, the Company repaid the $99.6$51.0 million mortgage loan on WestShore Plaza, located in Tampa, Florida. This repayment was fundednote payable secured by borrowings on the Revolver.Town Center at Aurora for one year. The extended maturity is April 1, 2021.
Highly-levered Assets
As of September 30, 2017,March 31, 2020, we hadhave identified two consolidated mortgage loans encumbering Southern Hills Mall in Sioux City, Iowa and Valle Vista Mall, in Harlingen, Texas that hadhave leverage levels in excess of our targeted leverage. Subsequent to September 30, 2017, we settledleverage and are working with the special servicers on these non-recourse mortgages. These mortgage loans total $78.1 million and encumber Charlottesville Fashion Square, located in Charlottesville Virginia and Muncie Mall, located in Muncie, Indiana, both of which have been identified as noncore properties. We expect to improve our leverage once both, or a portion of them, are transitioned to the lenders, with various strategies that were availableminimal impact to us.net cash flows. See "Covenants" below for further discussion.discussion on these highly-levered assets as of March 31, 2020.
UnsecuredCorporate Debt
The following table identifies our total unsecuredcorporate debt outstanding at September 30, 2017March 31, 2020 and December 31, 20162019 (in thousands):
| | | | | September 30,
2017 | | December 31,
2016 | | March 31,
2020 | | December 31,
2019 |
| Notes payable: | | | | | | | | |
Face amount - the Exchange Notes(1) | | $ | 250,000 |
| | $ | 250,000 |
| | $ | — |
| | $ | 250,000 |
|
Face amount - 5.950% Notes due 2024(2) | | 750,000 |
| | — |
| |
Face amount - Senior Notes due 2024(2) | | | 720,900 |
| | 720,900 |
|
| Debt discount, net | | (11,424 | ) | | (47 | ) | | (7,489 | ) | | (7,864 | ) |
| Debt issuance costs, net | | (9,023 | ) | | (2,316 | ) | | (4,991 | ) | | (5,470 | ) |
| Total carrying value of notes payable | | $ | 979,553 |
| | $ | 247,637 |
| | $ | 708,420 |
| | $ | 957,566 |
|
| | | | | | | | | |
Unsecured term loans:(8)(7) | | | | | | | | |
Face amount - Term Loan(3)(4) | | $ | — |
| | $ | 500,000 |
| | $ | 350,000 |
| | $ | 350,000 |
|
Face amount - December 2015 Term Loan(5) | | 340,000 |
| | 340,000 |
| | 340,000 |
| | 340,000 |
|
Face amount - June 2015 Term Loan(6) | | 270,000 |
| | 500,000 |
| |
| Debt issuance costs, net | | (3,620 | ) | | (5,478 | ) | | (3,074 | ) | | (3,358 | ) |
| Total carrying value of unsecured term loans | | $ | 606,380 |
| | $ | 1,334,522 |
| | $ | 686,926 |
| | $ | 686,642 |
|
| | | | | | | | | |
Revolving credit facility:(3)(7) | | | | | |
Revolving credit facility:(3)(6) | | | | | |
| Face amount | | $ | — |
| | $ | 308,000 |
| | $ | 527,000 |
| | $ | 207,000 |
|
| Debt issuance costs, net | | — |
| | (1,835 | ) | | (2,570 | ) | | (2,855 | ) |
| Total carrying value of revolving credit facility | | $ | — |
| | $ | 306,165 |
| | $ | 524,430 |
| | $ | 204,145 |
|
| | | | | | |
Other indebtedness:(8) | | | | | |
| Face amount | | | $ | 98,900 |
| | $ | 98,900 |
|
| Debt issuance costs, net | | | (1,548 | ) | | (1,561 | ) |
| Accretion adjustment | | | 555 |
| | 262 |
|
| Total carrying value of other indebtedness | | | $ | 97,907 |
| | $ | 97,601 |
|
(1)The Exchange Notes were issued at a 0.028% discount bearand bore interest at 3.850% per annum and mature on April 1, 2020.annum.
(2)On August 4, 2017, WPG L.P. completed the issuance of $750.0 million of unsecured notes. The notesSenior Notes due 2024 were issued at a 1.533% discount, with anbore interest rate ofat 5.950% per annum andthrough August 14, 2019, at which time the interest rate increased to 6.450% per annum. The Senior Notes due 2024 mature on August 15, 2024. Proceeds from the unsecured notes offering were used to pay down the Term Loan and for partial repayment of the June 2015 Term Loan as discussed below. The interest rate could vary in the future based upon changes to the Company's credit ratings.
(3)The unsecured revolving credit facility, or "Revolver" and unsecured term loan, or "Term Loan" are collectively known as the "Facility."
(4)The Term Loan borebears interest at one-month LIBOR plus 1.45%2.10% per annum.annum and will mature on December 30, 2022. We hadhave interest rate swap agreements totaling $200.0$250.0 million, which effectively fixedfix the interest rate on a portion of the Term Loan at 2.04% per annum. During4.86% through June 30, 2021. At March 31, 2020, the three months ended September 30, 2017,applicable interest rate on the unhedged portion of the Term Loan was repaid in full and the Company wrote off $0.2 million of debt issuance costs.one-month LIBOR plus 2.10% or 3.09%.
(5)The December 2015 Term Loan bears interest at one-month LIBOR plus 1.80%2.35% per annum and will mature on January 10, 2023. We have interest rate swap agreements totaling $340.0 million which effectively fix the interest rate at 3.51%4.06% per annum through maturity.
(6)The June 2015 Term Loan bears interest at one-month LIBOR plus 1.45% per annum and will mature on March 2, 2020. We have interest rate swap agreements totaling $270.0 million, which effectively fix the interest rate at 2.56% per annum through June 30, 2018. During the three months ended September 30, 2017, the Company repaid $230.0 million of the June 2015 Term Loan and wrote off $0.9 million of debt issuance costs.
(7)The Revolver provides borrowings on a revolving basis up to $900.0$650.0 million, bears interest at one-month LIBOR plus 1.25%1.80%, and will initially mature on MayDecember 30, 2018,2021, subject to two six-monthsix month extensions available at our option subject to compliance with terms of the Facility and payment of a customary extension fee. At September 30, 2017,March 31, 2020, we had an aggregate available borrowing capacity of $899.7$122.8 million under the Revolver, net of $0.3$0.2 million reserved for outstanding letters of credit. At September 30, 2017,March 31, 2020, the applicable interest rate on the Revolver was one-month LIBOR plus 1.25%,1.80% or 2.48%2.79%. The interest rate on the Revolver may vary in the future based upon the Company's credit rating and leveraged levels.
(8)(7)While we have interest rate swap agreements in place that fix the LIBOR portion of the rates as noted above, the spread over LIBOR could vary in the future based upon changes to the Company's credit ratings.ratings and leveraged levels.
(8) Represents the financial liability associated with our failed sale and leaseback of land at Edison Mall, located in Fort Myers, Florida; Great Lakes Mall, located in Mentor, Ohio; Irving Mall, located in Irving, Texas; and Jefferson Valley Mall, located in Yorktown Heights, New York (collectively, the "Properties"). The face amount represents the sales price of the fee interest in the land at the Properties. The master ground lease has a 99-year term and includes fixed annual payments at an initial annualized rate of 7.4%, with annual rent escalators over the aforementioned term. The agreement also includes an option to repurchase the fee interest in the land at $109.3 million in year 30 of the master ground lease, which is being accreted to the financial liability during the repurchase period. Proceeds received at closing were net of $55.0 million in bridge financing provided by the Company, which is included in "Deferred costs and other assets" on the consolidated balance sheet at March 31, 2020 andDecember 31, 2019. Expense is being recognized utilizing an effective interest rate of 8.56% during the repurchase period.
Covenants
Our unsecured debt agreements contain financial and other covenants. If we were to fail to comply with these covenants, after the expiration of the applicable cure periods, the debt maturity could be accelerated or other remedies could be sought by the lender including adjustments to the applicable interest rate. As of September 30, 2017,March 31, 2020, management believes the Company is in compliance with all covenants of its unsecured debt.
The total balance of mortgages was approximately $1.4$1.1 billion as of September 30, 2017.March 31, 2020. At September 30, 2017,March 31, 2020, certain of our consolidated subsidiaries were the borrowers under 2720 non-recourse loans oneand two full-recourse loan and one partial-recourse loanloans secured by mortgages encumbering 3224 properties, including one separate pool of cross-defaulted and cross-collateralized mortgages encumbering a total of four properties. Under these cross-default provisions, a default under any mortgage included in the cross-defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non-financial covenants which are specific to the properties which serve as collateral for that debt. If the borrower fails to comply with these covenants, the lender could accelerate the maturity for the debt and enforce its right against their collateral. Our existing non-recourse mortgage loans generally prohibit our subsidiaries that are borrowers thereunder from incurring additional indebtedness, subject to certain customary and limited exceptions. In addition, certain of these instruments limit the ability of the applicable borrower's parent entity from incurring mezzanine indebtedness unless certain conditions are satisfied, including compliance with maximum loan to value ratio and minimum debt service coverage ratio tests. Further, under certain of these existing agreements, if certain cash flow levels in respect of the applicable mortgaged property (as described in the applicable agreement) are not maintained for at least two consecutive quarters, the lender could accelerate the maturity for the debt and enforce its right against its collateral.
On March 30, 2017,February 21, 2020, we received a letter, dated that same date, from the Company transferred the $40.0 million mortgage loan secured by Valle Vista Mall to the special servicer at the request oflender notifying the borrower, a consolidated subsidiary of WPG L.P., that the Company.$33.1 million mortgage loan secured by Muncie Mall, located in Muncie, Indiana was transferred to special servicing because the borrower notified the lender that future projected cash flows will be insufficient to ensure future compliance with the mortgage loan due to the loss of certain tenants. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options. On May 18, 2017,April 14, 2020, the Company received notification that a receiver had been appointed to manage and lease the property. An affiliate of the Company continues to hold title to the property.
On November 5, 2019, we received a notice of default letter, dated that same date,October 30, 2019, from the special servicer because the borrower did not repay the loan in full by its May 10, 2017 maturity date. On October 3, 2017, an affiliate of WPG Inc. transferred title of the property to the mortgage lender pursuant to the terms of a deed-in-lieu of foreclosure agreement entered into by the Company's affiliate and the mortgage lender. The Company will record a gain of approximately $27.0 million related to this debt extinguishment during the fourth quarter of 2017.
On June 6, 2016, we received a notice of default letter, dated June 3, 2016, from the special servicer to the borrower of the $99.7 million mortgage loan secured by Southern Hills Mall. The letter was sent becausenotifying the borrower, a consolidated subsidiary of WPG L.P., that the Company, did not repay$45.1 million mortgage loan secured by Charlottesville Fashion Square, located in Charlottesville, Virginia was transferred to special servicing because the borrower notified the lender that future projected cash flows will be insufficient to ensure future compliance with the mortgage loan in full by its June 1, 2016 maturity date.due to the loss of certain tenants. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options. On October 27, 2016,March 17, 2020, we received notification that a receiver had been appointed to manage and lease the property. On October 17, 2017, anAn affiliate of WPG Inc. completed a discounted payoff of the mortgage loan for $55.0 million and will retain ownership and management of the property as the property exited receivership upon the discounted payment. The Company will record a gain between $40.0 million and $45.0 million related to this repayment during the fourth quarter of 2017.
On June 30, 2016, we received a notice, dated that same date, that the $87.3 million mortgage loan secured by Mesa Mall had been transferred to the special servicer due to the payment default that occurred when the borrower, a consolidated subsidiary of the Company did not repay the loan in full by its June 1, 2016 maturity date. On April 25, 2017, the Company completed a discounted payoff of the mortgage loan for $63.0 million and retained ownership and management ofstill holds title to the property.
Upon the discounted payoff of the mortgage note payable secured for Mesa Mall, the Company recognized a gain of $21.2 million, based on the cancellation of the remaining outstanding mortgage loan balance of $24.3 million, less settlement of accrued interest, escrows and closing costs of $3.1 million, which is included in gain on extinguishment of debt, net in the consolidated statements of operations and comprehensive (loss) income for the nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company recognized a net gain of $34.1 million related to the $115.3 million mortgage debt cancellation and ownership transfers of Chesapeake Square and Merritt Square Mall, which is included in gain on extinguishment of debt, net in the consolidated statements of operations and comprehensive (loss) income for the periods then ended.
At September 30, 2017,March 31, 2020, management believes the applicable borrowers under our other non-recourse mortgage loans were in compliance with all covenants where non-compliance could individually, or giving effect to applicable cross-default provisions in the aggregate, have a material adverse effect on our financial condition, results of operations or cash flows. The Company has assessed each of these properties for impairment indicators and have concluded no impairment charges were warranted as of September 30, 2017.
Summary of Financing
Our consolidated debt and the effective weighted average interest rates as of September 30, 2017March 31, 2020 and December 31, 2016,2019, consisted of the following (dollars in thousands):
| | | | | September 30, 2017 | | Weighted Average Interest Rate | | December 31, 2016 | | Weighted Average Interest Rate | | March 31, 2020 | | Weighted Average Interest Rate | | December 31, 2019 | | Weighted Average Interest Rate |
Fixed-rate debt, face amount (1) | | $ | 2,766,874 |
| | 4.91 | % | | $ | 2,649,329 |
| | 4.23 | % | | $ | 2,458,597 |
| | 5.31 | % | | $ | 2,712,304 |
| | 5.17 | % |
| Variable-rate debt, face amount | | 251,100 |
| | 3.11 | % | | 859,100 |
| | 2.25 | % | | 692,000 |
| | 2.88 | % | | 372,000 |
| | 3.73 | % |
| Total face amount of debt | | 3,017,974 |
| | 4.76 | % | | 3,508,429 |
| | 3.75 | % | | 3,150,597 |
| | 4.77 | % | | 3,084,304 |
| | 5.00 | % |
| Note discount | | (11,424 | ) | | | | (47 | ) | | | | (7,489 | ) | | | | (7,864 | ) | | |
| Fair value adjustments, net | | 8,967 |
| | | | 12,661 |
| | | | 2,887 |
| | | | 3,463 |
| | |
| Debt issuance costs, net | | (16,609 | ) | | | | (14,639 | ) | | | | (16,968 | ) | | | | (18,341 | ) | | |
| Total carrying value of debt | | $ | 2,998,908 |
| | | | $ | 3,506,404 |
| | | | $ | 3,129,027 |
| | | | $ | 3,061,562 |
| | |
(1)Includes variable rate debt whose interest rates have been fixed via swap agreements.
Contractual Obligations
The following table summarizes the material aspects of the Company's future obligations for consolidated entities as of September 30, 2017,March 31, 2020, for the remainder of 20172020 and for subsequent years thereafter assuming the obligations remain outstanding through maturities noted below (in thousands):
| | | | | 2017 | | 2018 - 2019 | | 2020 - 2021 | | Thereafter | | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter | | Total |
Long term debt(1) | | $ | 243,422 |
| | $ | 196,834 |
| | $ | 869,918 |
| | $ | 1,707,800 |
| | $ | 3,017,974 |
| | $ | 92,176 |
| | $ | 1,287,559 |
| | $ | 1,390,559 |
| | $ | 390,133 |
| | $ | 3,160,427 |
|
Interest payments(2) | | 35,526 |
| | 249,611 |
| | 190,686 |
| | 98,784 |
| | 574,607 |
| | 109,326 |
| | 269,607 |
| | 136,440 |
| | 291,405 |
| | 806,778 |
|
Distributions(3) | | 3,508 |
| | 3,028 |
| | — |
| | — |
| | 6,536 |
| | 3,568 |
| | — |
| | — |
| | — |
| | 3,568 |
|
Ground rent(4) | | 136 |
| | 1,044 |
| | 1,041 |
| | 20,978 |
| | 23,199 |
| |
Ground rent/operating leases(4) | | | 1,662 |
| | 4,312 |
| | 2,461 |
| | 20,377 |
| | 28,812 |
|
Purchase/tenant obligations(5) | | 72,998 |
| | 2,718 |
| | 2,473 |
| | 3,390 |
| | 81,579 |
| | 99,990 |
| | 33,330 |
| | — |
| | — |
| | 133,320 |
|
| Total | | $ | 355,590 |
| | $ | 453,235 |
| | $ | 1,064,118 |
| | $ | 1,830,952 |
| | $ | 3,703,895 |
| | $ | 306,722 |
| | $ | 1,594,808 |
| | $ | 1,529,460 |
| | $ | 701,915 |
| | $ | 4,132,905 |
|
(1) Represents principal maturities only and therefore excludes net fair value adjustments of $8,967,$2,887, debt issuance costs of $(16,609)$(16,968) and bondnote discount of $(11,424)$(7,489) as of September 30, 2017. In addition, theMarch 31, 2020. The principal maturities reflect any available extension options within the control of the Company. Additionally, includes the difference between our carrying value of the financial liability of $99.5 million and the repurchase option payment of $109.3 million related to our failed sale and leaseback transaction (see "Financing and Debt - Corporate Debt" for additional details).
(2) Variable rate interest payments are estimated based on the LIBOR rate at September 30, 2017.March 31, 2020.
(3) Since there is no required redemption, distributions on the Series H Preferred Shares/Units, Series I Preferred Shares/Units and Series I-1 Preferred Units may be paid in perpetuity; for purposes of this table, such distributions wereare included through the optional redemption dates of August 10, 2017, March 27, 2018 and March 27, 2018, respectively, or upon declaration by the Board if subsequent toas the optional redemption dates.preferred shares/units are callable at the Company's discretion.
(4) Represents minimum future lease payments due through the end of the initial lease term.term under executed leases.
(5) Includes amounts due under executed leases and commitments to vendors for development and other matters.
The following table summarizes the material aspects of the Company's proportionate share of future obligations for unconsolidated entities as of September 30, 2017,March 31, 2020, for the remainder of 20172020 and for subsequent years thereafter assuming the obligations remain outstanding through maturities noted below (in thousands):
| | | | | 2017 | | 2018 - 2019 | | 2020 - 2021 | | Thereafter | | Total | | 2020 | | 2021 - 2022 | | 2023 - 2024 | | Thereafter | | Total |
Long term debt(1) | | $ | 670 |
| | $ | 6,100 |
| | $ | 81,146 |
| | $ | 537,577 |
| | $ | 625,493 |
| | $ | 6,647 |
| | $ | 48,001 |
| | $ | 21,374 |
| | $ | 541,178 |
| | $ | 617,200 |
|
Interest payments | | 7,038 |
| | 51,801 |
| | 50,554 |
| | 85,516 |
| | 194,909 |
| | 20,258 |
| | 47,310 |
| | 44,393 |
| | 22,652 |
| | 134,613 |
|
Ground rent(2) | | 898 |
| | 7,461 |
| | 7,699 |
| | 174,986 |
| | 191,044 |
| |
Ground rent/operating leases(3) | | | 2,988 |
| | 8,056 |
| | 8,468 |
| | 185,327 |
| | 204,839 |
|
Purchase/tenant obligations(3)(4) | | 20,061 |
| | — |
| | — |
| | — |
| | 20,061 |
| | 15,984 |
| | 5,328 |
| | — |
| | — |
| | 21,312 |
|
| Total | | $ | 28,667 |
| | $ | 65,362 |
| | $ | 139,399 |
| | $ | 798,079 |
| | $ | 1,031,507 |
| | $ | 45,877 |
| | $ | 108,695 |
| | $ | 74,235 |
| | $ | 749,157 |
| | $ | 977,964 |
|
Off-balance sheet arrangements consist primarily of investments in joint ventures which are common in the real estate industry. Joint ventures typically fund their cash needs through secured debt financings obtained by and in the name of the joint venture entity. The joint venture debt is secured by a first mortgage, is without recourse to the joint venture partners, and does not represent a liability of the partners, except to the extent the partners or their affiliates expressly guarantee the joint venture debt. As of September 30, 2017,March 31, 2020, there were no guarantees of joint venture related mortgage indebtedness. In addition to obligations under mortgage indebtedness, our joint ventures have obligations under ground leases and purchase/tenant obligations. Our share of obligations under joint venture debt, ground leases and purchase/tenant obligations is quantified in the unconsolidated entities table within "Contractual Obligations" above. WPG may elect to fund cash needs of a joint venture through equity contributions (generally on a basis proportionate to our ownership interests), advances or partner loans, although such fundings are not required contractually or otherwise.
Subject to the terms of the limited partnership agreement of WPG L.P., limited partners in WPG L.P. have, at their option, the right to exchange all or any portion of their units for shares of WPG Inc. common stock on a one‑for‑one basis or cash, as determined by WPG Inc. Therefore, the common units held by limited partners are considered by WPG Inc. to be share equivalents and classified as noncontrolling interests within permanent equity, and classified by WPG L.P. as permanent equity. The amount of cash to be paid if the exchange right is exercised and the cash option is selected will be based on the market value of WPG Inc.'s common stock as determined pursuant to the terms of the WPG L.P. Partnership Agreement. During the nine months ended September 30, 2017, WPG Inc. issued 314,577 shares of common stock to a limited partner of WPG L.P. in exchange for an equal number of units pursuant to the WPG L.P. Partnership Agreement. This transaction increased WPG Inc.’s ownership interest in WPG L.P. At September 30, 2017,March 31, 2020, WPG Inc. had reserved 34,783,27734,506,965 shares of common stock for possible issuance upon the exchange of units held by limited partners.
The following is a summary by type of the awards that the Company issued during the ninethree months ended September 30, 2017March 31, 2020 and September 30, 2016March 31, 2019 under the 2014 Plan and 2019 Plan.
Buy-sell, marketing rights, and other exit mechanisms are common in real estate partnership agreements. Most of our partners are institutional investors who have a history of direct investment in retail real estate. We and our partners in our joint venture properties may initiate these provisions (subject to any applicable lock up or similar restrictions). If we determine it is in our shareholders' best interests for us to purchase the joint venture interest and we believe we have adequate liquidity to execute the purchase without hindering our cash flows, then we may initiate these provisions or elect to buy. If we decide to sell any of our joint venture interests, we expect to use the net proceeds to reduce outstanding indebtedness or to reinvest in development, redevelopment, or expansion opportunities.
The following table summarizes total consolidated capital expenditures on a cash basis for the ninethree months ended September 30, 2017March 31, 2020 (in thousands):