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Washington Prime Turning Over Pair of Malls to Lenders; Will Buyback One

Analysts Wonder if CMBS Market will Remain Viable Alternative for Lower-Productivity Malls
October 5, 2017
Washington Prime Group will repurchase Southern Hills Mall in Sioux City, IA, from the lender after turning it over.
Washington Prime Group will repurchase Southern Hills Mall in Sioux City, IA, from the lender after turning it over.
Washington Prime Group Inc. (NYSE: WPG) continued its portfolio re-construction agreeing to turn two malls over to lenders but with plans to buyback one of them. It also sold an additional mall and repaid the debt on a fourth.

"As previously stated, within our Tier 2 portfolio there are certain assets which, save for the fact that they are overleveraged, exhibit Tier 1 characteristics," said Lou Conforti, CEO of Columbus, OH-based Washington Prime. "We have addressed all 2017 mortgage debt maturities and now have nearly $316 million of net operating income being generated from our unencumbered properties, or approximately 57% of total property NOI."

Only 15% of the REIT’s net operating income is now represented by Tier 2 assets, of which about half are unencumbered, Conforti added.

Washington Prime agreed to transfer the Southern Hills Mall in Sioux City, IA, to the lender. Currently encumbered with the $99.7 million mortgage loan, it is currently anticipated that a wholly-owned affiliate of Washington Prime Group will repurchase the 571,465-square-foot property from the lender for $55 million or about $96/square foot. Washington Prime will recognize a $45 million in gain on debt extinguishment.

The debt yield on the current mortgage loan is approximately 7.5% with a yield on the anticipated purchase of approximately 13.5%. The transaction is expected to close this month, subject to due diligence and customary closing conditions, the company said.

In note discussing the deal, analysts at Morgan Stanley Research said, "We agree that it a compelling way to reduce debt loads, but we wonder if the CMBS market will remain a viable lending alternative for lower productivity malls if it ultimately results in a 'heads I win, tails you lose' outcome in favor of the borrower."

As previously disclosed, Washington Prime also surrendered Valle Vista Mall in Harlingen, TX, to its lender on this week. The company will recognize a $27 million in gain on debt extinguishment.

Also this week, the REIT agreed to sell the 738,798-square-foot Colonial Park Mall in Harrisburg, PA, to an as-of-yet unidentified private real estate investor for $15 million or about $20/square foot. The company expects to record a non-cash impairment charge of $20.9 million on the sale.

Lastly this week, Washington Prime repaid a $99.6 million mortgage loan on WestShore Plaza in Tampa, adding the Tier 1 enclosed property to its unencumbered pool of assets.

After the completion of these strategic transactions, over 85% of the unencumbered NOI for the REIT is from open air and Tier 1 enclosed properties, according to the company.

"Our strategic efforts to reduce leverage has positioned WPG as one of the best within the U.S. regional mall REIT sector from a leverage standpoint, great progress from where leverage levels were a year ago," Conforti said.

Separately this week, Washington Prime announced the resignation of Butch Knerr, its executive vice president and chief operating officer.

"As it is our continued objective to streamline the organization and improve corporate efficacy, we will not be replacing the chief operating officer position," Conforti said.

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