Washington Prime Group, Inc. (WPG) CEO Louis Conforti on Q3 2018 Results - Earnings Call Transcript

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About: Washington Prime Group, Inc. (WPG)
by: SA Transcripts

Washington Prime Group, Inc. (NYSE:WPG) Q3 2018 Earnings Conference Call October 25, 2018 11:00 AM ET

Executives

Melissa Indest - SVP, Finance & CAO

Louis Conforti - CEO & Director

Mark Yale - EVP & CFO

Paul Ajdaharian - EVP & Head, Open Air Centers

Joshua Lindimore - Senior VP & Head, Leasing

Gregory Zimmerman - EVP, Development

Analysts

Caitlin Burrows - Goldman Sachs Group

Spenser Allaway - Green Street Advisors

Ian Gaule - SunTrust Robinson Humphrey

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Washington Prime Group Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Lisa Indest, Senior Vice President and Chief Accounting Officer. Please go ahead, ma'am.

Melissa Indest

Good morning, and welcome to WPG's Third Quarter 2018 Earnings Call. During today's call, we may make certain forward-looking statements as defined by the Federal Securities Laws. These statements relate to expectations, beliefs, projections, plans and other matters that are not historical and are subject to the risks and uncertainties that might affect future events or results. For a detailed description of these risks, please refer to our earnings release and various SEC filings.

Management may also discuss certain non-GAAP financial measures. Reconciliations of each non-GAAP measure to the comparable GAAP measure are included in our press release, supplemental information packet and SEC filings, which are available on the Investor Relations section of our website.

Members of management with us today are Lou Conforti, CEO; Mark Yale, CFO; Greg Zimmerman, Head of Development; Paul Ajdaharian, Head of Open Air Leasing; and Josh Lindimore, Head of Leasing. Now I'll turn the call over to Lou.

Louis Conforti

Thanks, Lisa. Hey, everybody. Let's cut to the chase. First, we are reaffirming fiscal 2018 FFO guidance between $1.48 and $1.56, and third quarter FFO was $0.37, which was $0.01 above consensus. Second, this reaffirmation as well as our measured optimism is in spite of a certain department store filing for Chapter 11 bankruptcy protection on October 15. Remember Brady Bunch drinking game where everybody had to chug a beverage, when Marcia said 'groovy' or Alice was caught making out with Sam, the Butcher? In similar fashion, Mark, Lisa and I have to imbibe every single time the name of this retailer is mentioned within our presence.

Retail is about 14.7 million times and has become somewhat of an issue as we have now run out of red plastic cups. Let's continue talking about department stores.

We recently supplemented our institutional investor presentation with a detailed progress report for the 28 department store spaces we consider at risk. Within Tier 1 and Open Air, excluding spaces owned by Seritage and other third parties, we are actively planning redevelopment or - and/or are in discussions for 24 to 28 spaces. Stay tuned. As I stated last quarter, future prospects for us are brighter today and resolving this department store - resolving department stores, in general, provides us with increased visibility, and allows us to further our dominant secondary town center mandate.

Now furthermore, we've allocated $300 million to $325 million of capital necessary to retrofit the aforementioned 28 spaces, with consideration over a 3 to 5 year period and that is included within our previously announced redevelopment spend of $100 million per annum. Don't get me wrong. While losing a tenant even a lackluster one, it's the pain in the behind. We've prepared ourselves financially and operationally. And now we're in a position to reap the rewards of replacing these department stores with heaven forbid things that people actually want. Therein lies the opportunity. I guess, the Damocles Sword which Pendants saw dangling over our head, pretty much turned out to be a butter knife. And this was because Mark, Lisa, Greg, Josh, everybody, we were proactive and we acted accordingly.

Turning to operating metrics. Leasing space is the most relevant benchmark of a landlord and with a caveat. It's imperative we diversify tenancy in order to attract guests, which span across the socioeconomic, gender and age continuums. And this is exactly what we have accomplished and we are not done yet. For instance, leasing volume year-to-date was a robust 3.1 million square feet, and 63% of it was attributable to new Lifestyle tenancy. We continue to incent our leasing professionals in this regard with respect to diversifying tenancy, and nearly a 160 leases qualified for our incentive program and kind of shows that it's working. Of the 3.1 million square feet, 665,000 square feet of it was attributable to 12 leases in excess of 20,000 square feet and nine in excess of 50,000 square feet. I bring this up for a reason. This accelerated big box leasing is testimony to our hybrid concept, which captures both Enclosed and Open Air components. I'm of the adamant belief this serves as a differentiating factor within secondary marketplaces as our guests appreciate the convenience of the one-stop shopping our assets offer.

Just to be clear, we cranked in-line leasing as well as stuff under 20,000 square feet as illustrated by a 19% year-over-year increase. Oh, I almost forgot, we've addressed 93% of our 2018 renewals. Overall, occupancy for core assets increased 20 basis points year-over-year, of which Tier 1 Enclosed rose 100 basis points. Open Air decreased 60 bps, primarily attributable to Toys "R" Us, while Tier 2 Enclosed declined a modest 30 bps to 86.8%. To place it into perspective, the combined occupancy of Tier 1 and Open Air increased 20 basis points to 94.1%, which is the highest level in over three years.

Occupancy cost, which provides a measure of operate - tenant operating efficacy, it's - at least, in my opinion, it's a quintessential litmus test of physical retailing. Think about it. We can offer our tenancy cost-effective space without the saturated landscape of a primary catchment. We have exhibited one of the best occupancy cost ratios within the sector. And the previous quarter is no exception as overall occupancy cost declined 30 basis points to 12.3%. Same overall positive trend with respect to overall in-line sales, as indicated by an increase of 110 basis points to $376 per square foot, of which Tier 1 increased 100 basis points to $397 per square foot.

Combined Tier 1 and Open Air comp NOI growth decreased a modest - decreased a modest 50 basis points during the third quarter and still demonstrating continued stable performance. And remember, these assets account for 90% of our total NOI.

Tier 1 and Tier 2 declined 1.4% and 9.5%, respectively, while Open Air increased to 170 basis points. While Mark will provide detail regarding the bankruptcies of 3 folks: one, they who shall not be named; two, Bon-Ton stores; and three, Toys "R" Us. Interesting to note, absent loss rental income, bad debt expense and cotenancy impact of these 3, Tier 1 and Open Air would have actually experienced positive comp NOI growth this quarter.

The base rental income for the entire portfolio was $21.71 a square foot, basically flat, and overall releasing spreads decreased 7.1%, closed down 9.9%, while Open Air is up 360 basis points.

Let me address a basic reality. Many of our assets have been neglected for 20-or-so years. Nonetheless, we have exhibited cash flow stability for two basic reasons: our guests continue to shop at our assets, and tenants are able to operate profitability. I mention this because as we transform assets via such measures as operational enhancement, tenant diversification, common area activation and symbiotic prudent redevelopment, we'll make decisions which serve to strengthen our company over the long haul.

If this means flattish, minimally variant cash flow over the short term, then so be it, I'm confident our strategy is ultimately going to result in outsized growth.

Listen, in the Utopian Nirvana, we experienced stair step increases in comp NOI growth, I'd be riding to work on a Unicorn or along a rainbow highway while rocking one of Greg Brady's shirts. Yes, I almost forgot, in a paradise, we also wouldn't trade at an absurd FFO multiple akin to a defect or liquidating trust.

The progress Washington Prime Group has witnessed over the previous two years is admirable. And I would like to thank my colleagues who contributed by grinding it out every single day. They understand progress is incremental and a dog park in Albuquerque can be just as important as an ALDI-anchored redevelopment in Kokomo. Their hard work has resulted in better assets, improved operations and stronger finances as well as our company distancing itself from its peers.

Bottom line, as I wrote yesterday, Washington Prime Group has the foresight, the dough and the work ethic to achieve our goals and I wouldn't bet against us.

Mark, you're up, you're going to discuss financial highlights and then we'll open the floor up to questions.

Mark Yale

Thanks, Lou, and good morning, to everybody. We finished the quarter with approximately $430 million of current available liquidity when considering cash on hand capacity on our credit facility. We are also still expecting another $40 million of proceeds from the remaining Four Corners outparcel transactions, which should put us in a position to outrun $0.5 billion of liquidity at year-end.

Accordingly, this capacity, along with free cash flow after payment of our dividend, allows us to fully commit to our current redevelopment pipeline, which we believe represents our best and most strategic use of capital today. From a borrowing perspective, we have no unsecured debt maturities until 2020. Additionally when considering the payoff in early October of the mortgage debt on the Whitehall Open Air property, we only have $50 million of secured debt maturities through the end of 2019. These maturities relate solely to four Open Air centers with a debt yield of over 30%, providing us ample flexibility of payoff or refinance the secure debt.

Moreover, effective earlier this week, the borrower for Rushmore Mall, which was previously identified as a noncore asset, transitioned legal ownership of that center to a lender affiliate in exchange for a complete satisfaction of the $94 million non-recourse mortgage loan. A court-appointed receiver continues to manage Towne West Square for a lender until we can transition this second noncore asset like Rushmore back to the lender, which we anticipate to occur sometime during the first half of next year. Our third and final noncore asset, West Ridge Mall, is secured by a performing non-recourse loan that has not yet transferred to the special servicer. Remember when looking at the single-digit debt yields on the noncore assets, these transitions afford us a nice opportunity to efficiently delever.

Finally, when looking at our balance sheet, we believe it's important to remember that our unencumbered properties generate over 60% of our total core NOI and that our Tier 1 and Open Air portfolios represent over 90% of this unencumbered NOI. We also continue to refine our estimates in terms of the capital spend required to address the 28 department store boxes in our Tier 1 and Open Air portfolios, which we believe will need to be repositioned over time. Even in light of the recent Sears bankruptcy announcement, we are still estimating our share of additional capital investment to be approximately $300 million to $350 million to transition this real estate.

This estimate excludes the 13 boxes owned by non-retailers, including Seritage. With a 3 to 5 year investment time horizon, we are comfortable that we'll have the necessary capital to address these opportunities. As we stated before, while we remain realistic with respect to the macro challenges facing our sector, we believe we have a sound balance sheet that will enable us to address the inherent risk and more importantly, the opportunities that are currently in front of us.

Now let me turn to our quarterly financial results. Our FFO for the third quarter was $0.37 per diluted share, falling towards the upper end of our guidance range going into the period. Net gains on the third tranche for the Four Corners of outparcel sales were partially offset by lower property operating income and higher interest cost driven by default interest that we thought would reverse by quarter end in connection with the Rushmore transition.

As expected, we did see some challenges with respect to our quarterly NOI performance, which was down 1.5% for the core portfolio. While our Tier 1 saw a decline of 1.4%, our Open Air portfolio did experience growth of 1.7%, allowing for relative stability from the combined Tier 1 and Open Air portfolios, but down just 0.5%, all while working earnestly to reposition our properties for the future.

When considering the financial performance delivered during the third quarter and as Lou previously mentioned, we have reaffirmed our outlook for fiscal year 2018 FFO guidance in a range of $1.48 to $1.56 per diluted share. The guidance excludes the impact of the net gain on the Rushmore debt extinguishment and any future gains from the remaining Four Corners outparcel disposition.

Driven primarily by the recent Sears bankruptcy, we now are expecting comp NOI do decline closer to 2% over the prior year. Additionally, a downward revision of our estimate for property tax recoveries and some recent adverse property liability claims contributed to the revised outlook for comp NOI.

Of interest, if you isolate loss trends and applicable cotenancy impact from the Bon-Ton, Sears and Toys "R" Us bankruptcies, these amounts represent approximately 120 basis points of the decrease from 2017. In fact, if we just focus on Tier 1 and the Open Air portfolios, we would actually expect to see modest growth through the year when excluding these factors.

Specifically, in terms of cotenancy, we have updated our estimates to reflect all actual and announced department store closings to date and to include the conservative assumption that the remaining Sears stores currently open within our portfolio are all closed by the end of the year. To be clear, we have no inside knowledge of their bankruptcy plans, but simply want to provide a comprehensive estimate that covers the potential downside.

We are now including $1.5 million of related cotenancy impact in our updated 2018 guidance and are estimating additional cotenancy impact of between $7 million to $8 million in fiscal year 2019. This assumes tenants with cotenancy rights convert to alternative rent and no tier by the landlord other than where we assign leases already in hand.

We do believe this estimate will prove conservative as we do see prospects throughout the portfolio to address these cotenancy rights via additional available replacement opportunities with new tenancy, amendments to current cotenancy language and the potential for a portion of our Sear stores to stay open into 2019.

While the potential lost rents and cotenancy impact from the Bon-Ton and Sears bankruptcy is significant going into 2019, we are expecting growth from our Open Air portfolio and a significant contribution coming online from a redevelopment pipeline next year that together will help partially offset this lost income.

As we look beyond 2019, we remain confident in our ability to ultimately replace the lost rent and address related cotenancy from disclosings, especially within our Tier 1 and Open Air portfolio.

Finally, in terms of our dividend, we remain comfortable with current coverage, which will allow us to generate approximately $50 million to $55 million of free cash flow during fiscal year 2018. We also intend to be in a position to absorb any taxable gains incurred in connection with the resolution of our aforementioned noncore assets.

So with that, we'll now open the call up for any of your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows

I just was wondering if you could just start on the FFO guidance and how that kind of compares to the lowering of the same-store guidance, was it just a result of delay in the Four Corners transaction? Or was it something else?

Mark Yale

In terms of holding our FFO guidance overall?

Caitlin Burrows

That's right.

Mark Yale

Yes. Well, I think a couple of factors would be - certainly, we did see a downward revision in our comp NOI guidance, but that was offset, as I said, partially by some gains recognized during the third quarter on the Four Corners transaction. And really those two things kind of allowed us to hold on to our guidance.

Caitlin Burrows

Okay. And then just on 2019 potential cotenancy impacts, I think you mentioned it was a potential $7 million to $8 million, if you didn't clear anything. I think you also mentioned that was assuming that all Sears closed. So I was wondering if you had any commentary just based on the closures that you know today. And how much different that could be versus the $7 million to $8 million or the $3 million to $4 million that you had mentioned in the past?

Louis Conforti

Well, it can only so - what Mark envisages Caitlin is the most draconian scenario that is predicated upon the December 31, closing of Sears, which we don't have any extraordinary insight, and nothing happens over the course of 2019. So if a continuum with that $7 million to $8 million being the worse, you can make some expectancies. And without forward looking, we're doing what we're doing and doing, but that is the worst scenario. Does that answer your question?

Caitlin Burrows

I guess, I'm trying to figure out, if that's the worst, like what is more likely in terms of trying to estimate like if $8 million is the worst, is like $4 million reasonable? Or is it just too hard to say at this point?

Mark Yale

I was just going to say, I mean, previous to incorporating the Sears into our cotenancy analysis and there were actually some Sears closings had been announced. So a handful have been included. We were at $3 million to $4 million in terms of incremental cotenancy in 2019. So I mean, the range is going to be somewhere between that $3 million to $4 million to $7 million and $8 million.

Louis Conforti

Wouldn't you rather have us and our peers err on the side of the holy you know what scenario, and then do the things that we've been doing. We have been evidencing and prove it up. And I think it just has some - just - our inherent conservatism with respect to, from a financial standpoint will err on the side of being overly negative.

Mark Yale

And I would say, by the time we are ready to provide detailed guidance for 2019, including comp NOI, we should have much better visibility to how the bankruptcy is going to play out. So we should be able to refine that range, because we certainly understand it pretty well.

Caitlin Burrows

Okay. And then maybe last one for now, just in terms of the $300 million to $350 million that it could cost to reposition the 28 department stores. I know you've talked about the 3 to 5 year time horizon in thinking about the potential cotenancy impacts, just wondering if there is any sense of urgency to speed it up to take maybe 2 to 3 years or if 3 to 5 is what you're targeting?

Louis Conforti

Yes.

Mark Yale

No.

Louis Conforti

Yes. It would be no. And I think the reality is, we have some situations where we have a couple vacant department stores, and we're addressing one in the right way and in a thoughtful way. We can be patient with respect to the others. So when we came up with that $300 million to $350 million in a 3 to 5 year time horizon, I mean, we, in our minds were assuming we would have all these boxes. We've got an idea of the cotenancy and all that has been factored into our planning.

Joshua Lindimore

And again, although Greg and - Greg Zimmerman and Paul on the Open Air side, they work miracles. It takes time to get entitlement and zoning and we are not going to do anything that jeopardizes the holistic view we have for the assets that we own that they should be the dominant hybrid town centers and...

Mark Yale

And we're prepared for it and we view it as an opportunity. And that's what we're going to execute.

Louis Conforti

Think about it, if we haven't gotten rid of 13 or 14 assets, I always get it wrong by one, and we were - and those assets, definitionally were assets that were [indiscernible]. And 2.5 anchors per or whatever that average might be. We might be in a heck of a lot different situation today. Hence, the measured optimism, the scrolling away of dough, and Paul and Josh and Greg and everybody just now, we are finding pretty darn cool replacements that add to the dynamism of our assets.

Operator

[Operator Instructions]. Our next question is from Caitlin Burrows of Goldman Sachs.

Caitlin Burrows

Hello, again, well I guess, it's a busy day with calls. I guess, I was wondering if you could also go through just on the dividend side, how the current dividend compares to taxable income? And I'm just wondering if now you're paying more than you need to, but you're comfortable with it? Or if there is something else related to disposition and the lender transitions that may be means your taxable income is higher than people appreciate?

Mark Yale

Yes. I think Caitlin that's a good point. And we've alluded to the fact that these give backs typically generate significant gains, makes it lumpy. And we want to make sure we are in a position that our current dividend will cover taxable income. So we have Rushmore $94 million loan that went back. That is something we need to address in 2018. I think we alluded to the fact that we have two more in the works that could happen in 2019. So that's, certainly, top of mind when it comes to our dividend.

Caitlin Burrows

Okay. And then I think last one just on Southgate Mall, you guys mentioned a new $35 million loan secured there. And I know there has been recent discussion about bank's willingness to lend on retail uses mall encloser, potentially Open Air. So wondering if you can comment on what types of lenders you're working with? And what sorts of properties are more easily financed than others? And if you expect additional transactions like this?

Louis Conforti

Yes, Mark?

Mark Yale

Yes. I'll keep it specific to Southgate. Sears had already been repositioned in a very attractive way. Lucky's supermarket, brand-new AMC. And we did the deal with First Interstate Bank, Montana Bank, who have been involved in Missoula, and wanted to be affiliated with the mall. And it's great to have that type of partnership going forward. So they understand the market. They understand how dynamic the asset is. And they're very comfortable lending to - against the property and to Washington Prime. And I think that's going to be the common theme that we're focused on right now. Let's take the questions off the table, reposition the department store, so we don't have those questions. And we think if we can do that in a thoughtful way with our sponsorship, putting in fresh equity that there's going to be opportunities that these assets become financeable.

Louis Conforti

Yes, I mean, if I could, just two quick comments. One, we knew the benefit of having regional banks and life insurance companies express quite a bit of interest in our assets as well we're beginning to see the CMBS market at least open up a little bit, but let me make one thing perfectly clear. We're an unsecured, this is about maintaining option that - borrower, pardon me. This is about maintaining optionality and every so often for various reasons it's good to do a secured or a collateral mortgage. And with us, we don't need nor would we ever go for that last dollar. I mean, if you - the fundamental problem is prime assets got financed at way too high levels and it is somewhat generic, but we're comfortable and within our range. And again, I just can't stress we are an unsecured borrower and that is our focus.

Caitlin Burrows

Got it. And then maybe just one on the leasing environment. Just wondering how you guys are thinking about weighing occupancy versus pricing right now? It looks like the leasing spreads were a little lower, again, this quarter, so just kind of what you're seeing there?

Louis Conforti

I'm going to provide a prefatory because this is very important and I attempted to address this. We are going through a refashioning of our assets by diversifying tenancy, by continuing to incorporate our hybrid town center concept, which is now 76%, 75% of all our Tier 1 Open Air Enclosed. And I don't want to sound flippant, but in order to get the right tenant that is a greater than 1x multiplier to a particular asset, what I'm not all that - we can't be overly concerned about relapsed spreads or releasing spreads. And - but the - I'll let Josh speak to the climate of Josh and Paul and Greg and whomever, but we're seeing pretty robust demand.

Joshua Lindimore

Hey, Caitlin, it is Josh. I mean, look, obviously, evidenced by the increase in occupancy, the demand is there for most of the assets. And Lou kind of touched on it. I mean, look, if you pull 5 deals out of those numbers, we'd actually be slightly up on a trailing 12. And reality is, we don't lease the spreads. We're going to make the decision based on what's the right thing to do for the property and its constituents and sometimes that results in a negative spread. Sometimes, it doesn't. But we're always going to look long term versus short term because we believe that's what's the best for the property, the company and our shareholders.

Caitlin Burrows

Okay. And then maybe just the last one on the occupancy cost. Actually, you guys - it's been coming down over the past few years, which is good in terms of the retailer profitability. I guess, how much further, you are at 12.3% now? Do you think that has to go before that kind of...

Louis Conforti

I'm sorry, Caitlin, we lost, how much further, and then we lost you.

Caitlin Burrows

Sorry, I don't know what happened. But just in terms of the occupancy cost, you've gone from 12.7% at the end of '14 to '15 to 12.3% now, which is good in terms of profitability for the retailer, but just wondering how much more there is to go in terms of resetting occupancy cost lower for existing retailers?

Mark Yale

Oh boy, oh boy, I mean, that's so multivariate to predicate it upon, the deposit margins of the individual. I have no idea. I have never thought about it like that. Great question. I just need to be kind of deconstruct it.

Louis Conforti

It's all specific to the retailer.

Mark Yale

Yes.

Louis Conforti

And it's also a function of sales increases as well.

Caitlin Burrows

Yes.

Mark Yale

Yes, I mean - so, yes, I mean, the numerator and denominator have lots of different things kind of happen in them.

Paul Ajdaharian

Caitlin, this is Paul. I think if you look at some of the combinary activation, so lot of the creative things that the company has done, that's going to reflect in increased sales and that will affect those numbers as well.

Joshua Lindimore

And if you look at the - Caitlin, it is Josh. If you look at the kind of the Tier 1 and Open Air portfolio, I mean, I'm making generalized statement and say we're probably fairly close to stabilization.

Louis Conforti

One more comment with respect to it, I think I've mentioned it, but we are seeing increasing demand and interest because, one, given the occupancy cost. And you can be a dominant retailer in our catchment. If you think about it, you are not going to compete against yourself and against other folks and other similar retail or just categories in general. And it's us understanding what our demographic constituencies want and us finding those retailers, and we'll make sure they operate profitably.

Operator

Our next question is from Spenser Allaway with Green Street Advisors.

Spenser Allaway

Lou, I know you said that it takes time to back sell the anchor spaces with the entitlements and zoning. And ideally, you guys want to spend that $300 million to $500 million over the next five years. However, in the event that you have more scenarios where you have several Tier 1 malls with multiple anchor vacancies, how does your prioritization in terms of capital and time? How does that change in regards to preventing some of those cotenancy clauses being triggered?

Louis Conforti

I can answer that on an absolute basis as well as at a relative basis. So there's two components. One, every deal that is brought into Investment Committee competes against every other deal on a risk-adjusted basis. So this is - we are extraordinarily rigorous pursuant to our investment methodology. And there is no wink and a nod. There is a no taking indirect adjacencies that we are going to pick up a x-percent just because, it's very methodical, our approach. So that's from a relative standpoint. The deals have to compete against each other. I don't even know, I mean, realistically, there is capacity utilization of us. We think about kind of fixed variable expense. There is only so much, I don't like Zimmerman sitting here right now when he should be developing stuff, but you know that 3 to 5 years and that few - the $325-million-some-odd dollars, I don't know if I take the over and the under, but every single dollar that we're going, and every marginal unit of capital that we invest is going to endure the benefit of shareholders from a return on invested capital standpoint and from a holistic standpoint of what they do to our - what it does to our asset.

Gregory Zimmerman

The other thing I would mention is - it's Greg Zimmerman, Mark mentioned a minute ago, when we have multiple department store vacancies, we don't necessarily have to solve both at the same time to reduce substantially cotenancy. So I would use as an example our recently announced deal with the Mall at Fairfield Commons. We proactively terminated Sears. We're replacing with the Room Place and Round 1. We hope that to open at the end of next year. We have a vacant Elder-Beerman, because of that ability to replace the Sears, we have some time now to do something with Elder-Beerman that's a little more creative. And we're actually working on that.

Louis Conforti

And guess what, you do a couple interesting deals, it feeds upon itself. We're not receiving...

Gregory Zimmerman

Reverse inquiry.

Louis Conforti

Inquiry, and from national as well as regionals and locals. So it's a iterative process.

Spenser Allaway

Okay. So that makes a ton of sense on a relative basis, you're going to pursue the projects with a higher risk-adjusted return. But if that's still be the case, if, for instance, by foregoing the inferior project, let's say, you risk the scenario in which that mall becomes obsolete because now you have, let's call it, three vacant anchors and you have a lot of pushback from your in-line tenants whether able to kind of walk away from leases and the mall risks entering into a spiral.

Louis Conforti

Everybody at once kind of got to the mic because they want to answer that question. I - the inferior property is a no subject to functional obsolesce and that are truly begun to act as liquidating front. We've gotten rid of those already. We've gotten rid of those. And there was something else I wanted to say that I thought was hyper, but obviously, I just forgot about it.

I was just going to say, I mean, that was the whole exercise and disclosure around the 28 boxes we've already identified. So we've already gone through that analysis of where we need to allocate the capital, where it would be impactful. That's the 28. We allocated $300 million to $350 million. So it's going to move around a little bit, but that's all based upon specific plans. And we've been preparing for this day, not just the last couple of months, not just - even the couple of years and we've been preparing to get control of this real estate, and get control of these department store boxes for many years. And I think we're very excited, no longer be talking about it, but actually being able to do something and take advantage of what we believe is a great opportunity.

Gregory Zimmerman

Yes. And then lastly, I would say, we publicly disclosed that we have acted on 24 of the 28. So it's not like we're rank ordering them in terms of where the best assets are. We're looking at everything. And of the 18 Sears...

Louis Conforti

You said it. You said it. You're not supposed to say it.

Gregory Zimmerman

Of the 18, in our disclosure, there's - we control eight of those already. So there's only 10 that aren't controlled. So we've been very proactive.

Louis Conforti

We wouldn't be careless about identifying that 24 out of 28 nor flippant to use that word again. Does that answer your question?

Spenser Allaway

Yes. Definitely.

Louis Conforti

Well, we can go on and on and on...

Spenser Allaway

Oh, we look forward to hearing more. So thank you. But maybe just the last one. So kind of on the same line, but how are discussions been with the in-line tenants at some of those Tier 1 malls where you have multiple vacancies? Have there been much push back in terms of rent relief? Or is it kind of business as usual?

Joshua Lindimore

Knock on wood, its Josh. Knock on wood, it has been business as usual. I mean, we've had some discussions, but not a lot. And the fact of the matter is the cotenancy, there is probably anywhere between 6 and 8 tenants that usually have it. The rest has more of a cataclysmic type cotenancy where, I mean, everything would just have to basically the mall have to fall apart.

Louis Conforti

And as evidenced by a 19% in line year-over-year entries, we can be anecdotal, but that's what you all want to hear. And we've picked up a 19% year-over-year on our in-line space.

Joshua Lindimore

Right. And I would also preface - listen, I mean, the retailers are our partners as well, right. I mean, It's a two way street. So I think we've - I don't think I know we've evidenced, take Mall at Fairfield Commons, some of the other centers where we've done the redevelopment, they're excited to see what we're going to do. And they're excited to partner and work with us to fix it because at the end of the day, it benefits everyone, retailer and landlord alike.

Operator

Our next question is from Ian Gaule of SunTrust.

Ian Gaule

Sorry, if this has already been asked, but how many more mortgage transitions are you planning to do in the next year or so back to the lenders.

Louis Conforti

Its two, it's Towne West and West Ridge is what we focus on and identify.

Ian Gaule

Okay. And I know the maturity date for those mortgages are not till a couple of years out, but really the trigger to do it sooner the fact that the cash flows are maybe getting pretty close to that interest payment or below.

Gregory Zimmerman

Well, Town West, we are actually in default, so that gets into the special servicer. And we have the path towards the exit there. West Ridge, we are not in default, but when we start thinking through some of the department store transitions and bankruptcies, we do see a potential default Next Year. And that would lead to a dialogue in terms of the path towards an exit.

Ian Gaule

Okay. And then the NOI has probably been decreasing for these noncore assets. So the debt yield is probably coming down. What was it for Rushmore when you transitioned it out for the other two?

Mark Yale

On a $94 million mortgage, I think it was around 8% was the debt yield.

Ian Gaule

And the remaining two similar to 8%?

Mark Yale

Single digit. Yes, somewhere 8%, 9%.

Ian Gaule

Okay. And I realized given these assets back to lender creates taxable gains and you have to buffer that to your dividend level, so you can't probably don't want to adjust that today. But as you hand back the keys for the last two malls, doesn't that make sense in a way to revisit that dividend to retain the cash flow?

Mark Yale

No. No. I mean I'll defer to my - our board. Our dividend policy, it is accommodatorial, it is a function of lumpy transactions as well as our forecasting of a stream of one through in cash flows that - and no.

Ian Gaule

Yes. I've asked that because I know you have some NOI coming in from rebuild on projects that you're doing, but almost kind of like trying to save for a rainy day, you're paying up pretty close to all your cash flow from dividends that style would make sense to readjust that, thought like I answered. That's it for me. Thanks.

Operator

Our next question is from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows

Any recent discussions you've been having with the rating agencies? And how that's potentially...

Louis Conforti

Hey, Caitlin, I'm sorry. We're getting about every fifth word or so. You want to call - you want to off-line and we could - we can try to answer this. You want to try again.

Caitlin Burrows

Okay. One more time. It was just about the rating agencies, wondering what your conversations with them have been like recently? And if they've changed over the past, call it, 6 to 12 months?

Gregory Zimmerman

We have ongoing dialogue with all three of our rating agencies. Certainly, they are concerned about the macro backdrop. They have seen, certainly, a stabilization in sales. I think they understand what we're doing. And all we can do is continue to lay out our plans. And you've seen how candid and transparent we've been. And certainly, they've an understanding of our path forward in terms of addressing our portfolio. So it's going to be an ongoing dialogue. And I do and I think what's predicated in their views of Washington Prime or much more from a macro perspective and their concerns over all in terms of the retail environment.

Louis Conforti

That's so true. And I can, from a - maybe just ask them, but from an idiosyncratic standpoint, from us doing every single thing that we are supposed to do, financially and operationally, I think we get maybe a gold star or something like that. But there's other factors, but we are - I mean, you tell me what we should be what else we should be doing. So we have a very open mark and at least I will have a very open dialogue. And I think we get maybe at least a pat on the head if not a gold star.

Caitlin Burrows

All right. Does it seem like they appreciate what you guys are doing? And are able to kind of differentiate that from the macro?

Louis Conforti

Yes. Yes, yes, yes. Now does it - does - how do they coefficient weight exogenous industry and idiosyncratic factors, I don't know. But they're very, very - I don't want to - they appreciate what Mark and Lisa had all have done from a financial standpoint, from an operational standpoint. So, yes.

Operator

[Operator Instructions]. Thank you. And that concludes our Q&A session for today. I'd like to thank, everyone, for participating in today's call. This does conclude today's program. You may all disconnect. Everyone, have a great day.

Louis Conforti

Thanks, all.