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"). REITs will generally not be liable for federal corporate income taxes as long as they continue to distribute not less than 100% of their taxable income and satisfy certain other requirements. 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
March 31, 2017
, our assets consisted of material interests in
111
shopping centers in the United States, consisting of community centers and enclosed retail properties, comprised of approximately
60 million
square feet of gross leasable area.
Unless the context otherwise requires, references to "WPG," the "Company," “we,” “us” or “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, offering property operating services to our tenants and others, including energy, waste handling and facility services, and reimbursements from tenants for certain recoverable expenditures such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenditures.
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.
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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
March 31, 2017
and
December 31, 2016
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
March 31, 2017
are not necessarily indicative of the results to be expected for the full year.
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 2016 Annual Report on Form 10-K for WPG Inc. and WPG L.P. (the "2016 Form 10-K").
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, 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.
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)
There have been no changes during the
three
months ended
March 31, 2017
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
three
months ended
March 31, 2017
, 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 partnerships and joint ventures, 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 committed to or intends to fund the venture.
As of
March 31, 2017
, our assets consisted of material interests in
111
shopping centers. The consolidated financial statements as of that date reflect the consolidation of
101
wholly owned properties and four 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 six properties, or the joint venture properties, using the equity method of accounting, as we have determined that we have significant influence over their operations. We manage the day-to-day operations of the joint venture properties, but 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.
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 attributable to noncontrolling interests. WPG Inc.'s weighted average ownership interest in WPG L.P. was
84.1%
for both the
three
months ended
March 31, 2017 and 2016
. As of
March 31, 2017
and
December 31, 2016
, WPG Inc.'s ownership interest in WPG L.P. was
84.2%
and 84.1%, respectively. We adjust the noncontrolling limited partners' interests at the end of each period to reflect their interest in WPG L.P.
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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.
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)
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 community centers, into one 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
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." ASU No. 2014-09 revises GAAP by offering a single comprehensive revenue recognition standard instead of numerous revenue requirements for particular industries or transactions, which sometimes resulted in different accounting for economically similar transactions. An entity has the option to apply the provisions of ASU No. 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 Company 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, sales of real estate and other ancillary income earned from our properties. During the
three
months ended
March 31, 2017
, these revenues were less than 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 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." ASU No. 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 date of initial application, with an option to use certain transition relief. From a lessee perspective, the Company currently has seven ground leases that, under the new guidance, will result in the recognition of a lease liability and corresponding right-of-use asset. From a lessor perspective, 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 changes is highly dependent upon the leasing compensation structures in place at the time of adoption. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230)." ASU No. 2016-15 is intended to reduce diversity in practice with respect to how certain transactions are classified in the statement of cash flows. It is effective for fiscal years 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 of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described 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 statement of cash flows. This guidance 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 $30.8 million and $29.2 million of restricted cash on its consolidated balance sheets as of
March 31, 2017
and
December 31, 2016
, respectively, whose cash flow statement classification will change to align with the new guidance upon adoption of the EITF. We are currently evaluating our plans regarding the adoption of these new standards.
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 in a single identifiable asset or group of assets; if so, the set of transferred assets and activities is not a business. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years with early adoption permitted. The new guidance will be applied on a prospective basis for transactions that occur within the period of adoption. Upon
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)
adoption of this standard, the Company anticipates that more property acquisitions will be accounted for under asset acquisition accounting rather than business combination accounting, which will result in the capitalization of transactions costs rather than expensing of said costs under the current guidance. We early adopted this standard prospectively as of January 1, 2017, as permitted under the standard.
Deferred Costs and Other Assets
On January 4, 2017, the remaining $15.6 million outstanding on the promissory note receivable related to the January 29, 2016 sale of Forest Mall, located in Fond Du Lac, Wisconsin, and Northlake Mall, located in Atlanta, Georgia, was received by the Company in full. The proceeds were used to reduce the balance of corporate debt.
On February 28, 2017, the buyer of Knoxville Center, located in Knoxville, Tennessee, extended the maturity of the $6.2 million promissory note receivable, issued during the August 19, 2016 sale of the property, to April 28, 2017 and paid the Company $0.4 million of the outstanding principal balance. As of
March 31, 2017
, the buyer was current on their interest payments.
Redeemable Noncontrolling Interests for WPG Inc.
Redeemable noncontrolling interests represent the underlying equity held by unaffiliated third parties in the consolidated joint venture entity that owns Arbor Hills, located in Ann Arbor, Michigan (the "Arbor Hills Venture") and the consolidated joint venture that owns 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 Venture," collectively) as well as the outstanding WPG L.P. 7.3% Series I-1 Preferred Units (the "Series I-1 Preferred Units"). The unaffiliated third parties have, at their option, the right to have their equity purchased by the Company subject to the satisfaction of certain conditions. During the
three
months ended
March 31, 2017
, the Company purchased all of the equity owned by such unaffiliated third parties related to the Arbor Hills Venture and the Oklahoma City Properties Venture, respectively. As of
March 31, 2017
, the aforementioned properties were wholly owned by the Company, and the only remaining redeemable noncontrolling interests relate to Series I-1 Preferred Units.
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|
4.
|
Investment in Real Estate
|
2017 Dispositions
On February 21, 2017, we completed the sale of Gulf View Square and River Oaks Center to private real estate investors for an aggregate purchase price of $42 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.
On January 10, 2017, we completed the sale of Virginia Center Commons to a private real estate investor for a purchase price of $9 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.
In connection with the sales noted above, the Company recorded a $0.1 million gain, which is included in gain (loss) on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive income for the
three
months ended
March 31, 2017
.
2016 Dispositions
On January 29, 2016, the Company completed the sale of Forest Mall and Northlake Mall to 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").
In connection with the sale noted above, the Company recorded a $2.2 million loss, which is included in gain (loss) on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive income for the
three
months ended
March 31, 2016
.
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
During the
three
months ended
March 31, 2017
, the Company entered into a purchase and sale agreement to dispose of a community center asset. The agreement is subject to customary closing and diligence requirements. Given uncertainties that the disposition is probable within one year due to the aforementioned closing and diligence requirements, this property remains classified as held for use as of
March 31, 2017
. In connection with the preparation of our financial statements included in this Form 10-Q, we shortened the hold period used in assessing impairment for the 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 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 income for the
three
months ended
March 31, 2017
.
Intangible Assets and Liabilities Associated with Acquisitions
The table below identifies the types of intangible assets and liabilities, their location on the consolidated balance sheets, their weighted average amortization period, and their book value, which is net of accumulated amortization, as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
Intangible
Asset/Liability
|
|
Location on the
Consolidated Balance Sheets
|
|
Weighted Average Remaining Amortization
(in years)
|
|
March 31, 2017
|
|
December 31, 2016
|
Above-market leases - Company is lessor
|
|
Deferred costs and other assets
|
|
7.3
|
|
$
|
32,119
|
|
|
$
|
34,337
|
|
Below-market leases - Company is lessor
|
|
Accounts payable, accrued expenses, intangibles and deferred revenues
|
|
13.5
|
|
$
|
100,112
|
|
|
$
|
104,540
|
|
Above-market lease - Company is lessee
|
|
Accounts payable, accrued expenses, intangibles and deferred revenues
|
|
30.2
|
|
$
|
2,363
|
|
|
$
|
2,383
|
|
In-place leases
|
|
Deferred costs and other assets
|
|
10.0
|
|
$
|
65,972
|
|
|
$
|
70,907
|
|
|
|
5.
|
Investment in Unconsolidated Entities, at Equity
|
The Company's investment activity in unconsolidated real estate entities during the
three
months ended
March 31, 2017
and
March 31, 2016
consisted of investments in the following material joint ventures:
|
|
•
|
The O'Connor Joint Venture
|
This investment consists of a 51% 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 (collectively the "O'Connor Properties"). We retained management, leasing, and development responsibilities for the O'Connor Joint Venture.
On March 2, 2017, the O'Connor Joint Venture 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 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 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.
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 Seminole Joint Venture
|
This investment consists 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. The Company's effective financial interest in this property (after preferences) is estimated to be approximately 22% for 2017. We retain management and leasing responsibilities for the Seminole Joint Venture.
Individual agreements specify which services the Company is to provide to each joint venture. The Company, through its affiliates, provide management, development, construction, marketing, leasing and legal services for a fee to each of the joint ventures described above. Related to performing these services, we recorded management fees of $1.6 million and $1.5 million for the
three
months ended
March 31, 2017 and 2016
, respectively, which are included in other income in the accompanying consolidated statements of operations and comprehensive income. Advances to the O'Connor Joint Venture totaled $2.6 million and $2.5 million as of
March 31, 2017
and
December 31, 2016
, respectively, which are 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, 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 entities for the
three
months ended
March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Total revenues
|
$
|
48,434
|
|
|
$
|
46,312
|
|
Operating expenses
|
20,591
|
|
|
19,306
|
|
Depreciation and amortization
|
19,034
|
|
|
20,044
|
|
Operating income
|
8,809
|
|
|
6,962
|
|
Interest expense, taxes, and other, net
|
(8,460
|
)
|
|
(7,889
|
)
|
Net income (loss) from the Company's unconsolidated real estate entities
|
349
|
|
|
(927
|
)
|
Our share of loss from the Company's unconsolidated real estate entities
|
$
|
(444
|
)
|
|
$
|
(1,161
|
)
|
Mortgage Debt
Total mortgage indebtedness at
March 31, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Face amount of mortgage loans
|
|
$
|
1,603,806
|
|
|
$
|
1,610,429
|
|
Fair value adjustments, net
|
|
11,691
|
|
|
12,661
|
|
Debt issuance cost, net
|
|
(4,695
|
)
|
|
(5,010
|
)
|
Carrying value of mortgage loans
|
|
$
|
1,610,802
|
|
|
$
|
1,618,080
|
|
A roll forward of mortgage indebtedness from
December 31, 2016
to
March 31, 2017
is summarized as follows:
|
|
|
|
|
Balance at December 31, 2016
|
$
|
1,618,080
|
|
Debt amortization payments
|
(6,623
|
)
|
Amortization of fair value and other adjustments
|
(970
|
)
|
Amortization of debt issuance costs
|
315
|
|
Balance at March 31, 2017
|
$
|
1,610,802
|
|
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 Facility
On May 15, 2014, we closed on a senior unsecured revolving credit facility, or "Revolver," and a senior unsecured term loan, or "Term Loan" (collectively referred to as the "Facility"). 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 the terms of the Facility and payment of a customary extension fee. The Term Loan provides borrowings in an aggregate principal amount up to $500.0 million, bears interest at one-month LIBOR plus 1.45%. During the
three
months ended
March 31, 2017
, we extended the maturity of the Term Loan from May 30, 2017 to May 30, 2018. We have one, 12-month extension available at our option subject to compliance with the terms of the Facility and payment of a customary extension fee. On July 6, 2016, the Company executed interest rate swap agreements totaling $200.0 million, which effectively fixed the interest rate on a portion of the Term Loan at 2.04% through August 1, 2018. The interest rate on the Facility may vary in the future based on the Company's credit rating.
At
March 31, 2017
, borrowings under the Facility consisted of
$293.0 million
outstanding under the Revolver (before debt issuance costs, net of
$1.5 million
) and
$499.7 million
, net of
$0.3 million
of debt issuance costs, outstanding under the Term Loan. On
March 31, 2017
, we had an aggregate available borrowing capacity of
$606.7 million
under the Revolver, net of
$0.3 million
reserved for outstanding letters of credit. At
March 31, 2017
, the applicable interest rate on the Revolver was one-month LIBOR plus 1.25%, or
2.23%
, and the applicable interest rate on the unhedged portion of the Term Loan was one-month LIBOR plus 1.45%, or
2.43%
.
Term Loans
On December 10, 2015, the Company borrowed $340.0 million under a term loan (the "December 2015 Term Loan"), pursuant to a commitment received from bank lenders. The December 2015 Term Loan bears interest at one-month LIBOR plus 1.80% and will mature in January 2023. On December 11, 2015, the Company executed interest rate swap agreements totaling $340.0 million, which effectively fixed the interest rate on the December 2015 Term Loan at 3.51% through January 2023. The interest rate on the December 2015 Term Loan may vary in the future based on the Company's credit rating. As of
March 31, 2017
, the balance was
$337.1 million
, net of
$2.9 million
of debt issuance costs.
On June 4, 2015, the Company borrowed $500.0 million under a term loan (the "June 2015 Term Loan"), pursuant to a commitment received from bank lenders. The June 2015 Term Loan bears interest at one-month LIBOR plus 1.45% and will mature in March 2020. On June 19, 2015, the Company executed interest rate swap agreements totaling $500.0 million, with an effective date of July 6, 2015, which effectively fixed the interest rate on the June 2015 Term Loan at 2.56% through June 2018. The interest rate on the June 2015 Term Loan may vary in the future based on the Company's credit rating. As of
March 31, 2017
, the balance was
$497.8 million
, net of
$2.2 million
of debt issuance costs.
Notes Payable
On March 24, 2015, WPG L.P. closed on a private placement of $250.0 million of 3.850% senior unsecured notes (the "Notes Payable") at a 0.028% discount due April 1, 2020. WPG L.P. received net proceeds from the offering of $248.4 million, which it used to repay a portion of outstanding borrowings under the bridge loan dated as of September 16, 2014 (the "Bridge Loan"). The Notes Payable contain certain customary covenants and events of default which, if any such event of default occurs, would permit or require the principal, premium, if any, and accrued and unpaid interest on all of the then-outstanding Notes Payable to be declared immediately due and payable (subject in certain cases to customary grace and cure periods).
On October 21, 2015, WPG L.P. completed an offer to exchange (the "Exchange Offer") up to $250.0 million aggregate principal amount of the Notes Payable for a like principal amount of its 3.850% senior unsecured notes that have been registered under the Securities Act of 1933 (the "Exchange Notes"). On October 21, 2015, $250.0 million of Exchange Notes were issued in exchange for $250.0 million aggregate principal amount of the Notes Payable that were tendered in the Exchange Offer.
As of
March 31, 2017
, the balance outstanding under the Exchange Notes was
$247.8 million
, net of
$2.2 million
of debt discount and issuance costs.
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
March 31, 2017
, management believes the Company is in compliance with all covenants of its unsecured debt.
The total balance of mortgages was approximately
$1.6 billion
as of
March 31, 2017
. At
March 31, 2017
, certain of our consolidated subsidiaries were the borrowers under
30
non-recourse loans, one full-recourse loan and one partial-recourse loan secured by mortgages encumbering
36
properties, including two separate pools of cross-defaulted and cross-collateralized mortgages encumbering a total of six 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. 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 debt and enforce its right against its collateral. If the borrower fails to comply with these covenants, the lender could accelerate the debt and enforce its right against their 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. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options. The Company will continue to manage and lease the property.
On June 30, 2016, we received a notice, dated that same date, that the $87.3 million mortgage loan secured by Mesa Mall, located in Grand Junction, Colorado 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. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options including restructuring, extending and other options, including transitioning 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 $99.5 million mortgage loan secured by Southern Hills Mall, located in Sioux City, Iowa. The letter was sent because the borrower, a consolidated subsidiary of the Company, did not repay the loan in full by its June 1, 2016 maturity date. On October 27, 2016, we received notification that a receiver had been appointed to manage and lease the property. An affiliate of the Company still holds title to the property.
At
March 31, 2017
, 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
March 31, 2017
.
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.
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 book value and fair value of these financial instruments and the related discount rate assumptions as of
March 31, 2017
and
December 31, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
Book value of fixed-rate mortgages
(1)
|
|
$1,352,706
|
|
$1,359,329
|
Fair value of fixed-rate mortgages
|
|
$1,395,559
|
|
$1,403,103
|
Weighted average discount rates assumed in calculation of fair value for fixed-rate mortgages
|
|
3.80
|
%
|
|
3.79
|
%
|
|
|
|
|
|
Book value of fixed-rate unsecured debt
(1)
|
|
$1,290,000
|
|
$1,290,000
|
Fair value of fixed-rate unsecured debt
|
|
$1,265,188
|
|
$1,261,858
|
Weighted average discount rates assumed in calculation of fair value for fixed-rate unsecured debt
|
|
2.86
|
%
|
|
2.86
|
%
|
(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 of derivatives designated and that qualify as cash flow hedges 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 ("AOCI") during the term of the hedged debt transaction. Any ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company recognized $0.1 million of hedge ineffectiveness as an increase to earnings during the
three
months ended
March 31, 2017
. The Company recognized $2.3 million of hedge ineffectiveness as a decrease to earnings during the
three
months ended
March 31, 2016
, 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.
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 settled 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 $0.4 million will be reclassified as a decrease to interest expense.
As of
March 31, 2017
, the Company had 15 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk with a notional value of $1,139,600.
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 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
Balance Sheet
Location
|
|
March 31, 2017
|
|
December 31, 2016
|
Interest rate products
|
Asset derivatives
|
Deferred costs and other assets
|
|
$
|
8,223
|
|
|
$
|
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 $8,223 and $5,754 in deferred costs and other assets at
March 31, 2017
and
December 31, 2016
, respectively, with a corresponding adjustment to OCI for the unrealized gains and losses (net of noncontrolling interest allocation). The liability derivative instruments were reported at their fair value of $0 and $2 in accounts payable, accrued expenses, intangibles, and deferred revenues at
March 31, 2017
and
December 31, 2016
, 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 AOCI 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 income for the
three
months ended
March 31, 2017 and 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
March 31,
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
2017
|
|
2016
|
|
|
|
2017
|
|
2016
|
|
|
2017
|
|
2016
|
Interest rate products
|
|
$
|
1,263
|
|
|
$
|
(15,397
|
)
|
|
Interest expense
|
|
$
|
1,086
|
|
|
$
|
1,931
|
|
Interest expense
|
|
$
|
92
|
|
|
$
|
(2,342
|
)
|
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
March 31, 2017
, the fair value of derivatives in a net liability position, plus accrued interest but excluding any adjustment for nonperformance risk, related to these agreements was $0. As of
March 31, 2017
, the Company has not posted any collateral related to these agreements. The Company is not in default with any of these provisions. If the Company had breached any of these provisions at
March 31, 2017
, it would have been required to settle its obligations under the agreements at their termination value of $0.
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.
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)
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.
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
March 31, 2017
and
December 31, 2016
, 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 measured at fair value as of
March 31, 2017
and
December 31, 2016
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 March 31, 2017
|
Derivative instruments, net
|
$
|
—
|
|
|
$
|
8,223
|
|
|
$
|
—
|
|
|
$
|
8,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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. At
March 31, 2017
, WPG Inc. had reserved
35,127,735
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 Board adopted the Washington Prime Group, L.P. 2014 Stock Incentive Plan (the "Plan"), which permits 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 been reserved for issuance under the Plan. In addition, the maximum number of awards to be granted to a participant in any calendar year is 500,000 shares/units. 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 Plan terminates on May 28, 2024.
The following is a summary by type of the awards that the Company issued during the
three
months ended
March 31, 2017
and
March 31, 2016
under the 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"), the Company approved the terms and conditions of the 2017 annual award ("2017 Annual Long-Term Incentive Awards") for certain executive officers and employees of the Company. Under the terms of the 2017 Annual Long-Term Incentive Awards 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 one WPG Inc. common share for each vested RSU. During the
three
months ended
March 31, 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 of February 21, 2018, 2019, and 2020, 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 with respect to the RSUs corresponding to the amount of any 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
three
months ended
March 31, 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 target PSUs, 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. 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 awards 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 Company approved the performance criteria and maximum dollar amount 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
three
months ended
March 31, 2017
, the Company awarded 324,237 of Allocated RSUs, with a grant date fair value of $2.2 million, related to the 2016 Annual Long-Term Incentive Awards, which will vest in one-third installments on each of February 21, 2018, 2019 and 2020.
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
three
months ended
March 31, 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 date during 2016 pursuant to the underlying severance arrangements.
Stock Options
During the
three
months ended
March 31, 2017
, no stock options were granted from the Plan to employees,
1,566
stock options were exercised by employees and
34,452
stock options were canceled, forfeited or expired. As of
March 31, 2017
, there were
941,558
stock options outstanding.
During the
three
months ended
March 31, 2016
, no stock options were granted from the Plan to employees, no stock options were exercised by employees and 1,000 stock options were canceled, forfeited or expired.
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)
Share Award Related Compensation Expense
During the
three
months ended
March 31, 2017 and 2016
, the Company recorded share award related compensation expense pertaining to the award and option plans noted above of $1.5 million and $1.9 million (excluding the $1.2 million reversal of previously recorded stock compensation expense associated with the forfeiture of grants to former executives during the
three
months ended
March 31, 2016
), respectively, in general and administrative expense within the consolidated statements of operations and comprehensive income. In certain instances, employment agreements and stock compensation programs provide for accelerated vesting when executives are terminated without cause.
Distributions
During the
three
months ended
March 31, 2017 and 2016
, the Board declared common share/unit dividends of $0.25 per common share/unit.
|
|
9.
|
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.
The Company was formed in 2014 through 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 into 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 community centers 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, based upon SPG's allocation of certain shared costs such as insurance premiums, advertising and promotional programs, leasing and development fees. Amounts charged to expense for property management and common costs, services, and other as well as insurance premiums are included in property operating expenses in the consolidated statements of operations and comprehensive 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 for the
three
months ended
March 31, 2017
. Charges for the consolidated and unconsolidated properties for the
three
months ended
March 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2016
|
|
|
Consolidated
|
|
Unconsolidated
|
Property management and common costs, services and other
|
|
$
|
5,238
|
|
|
$
|
124
|
|
Insurance premiums
|
|
$
|
—
|
|
|
$
|
—
|
|
Advertising and promotional programs
|
|
$
|
102
|
|
|
$
|
6
|
|
Capitalized leasing and development fees
|
|
$
|
1,168
|
|
|
$
|
8
|
|
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 Per Common Share/Unit
|
WPG Inc. Earnings Per Common Share
We determine WPG Inc.'s basic 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 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 earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Earnings Per Common Share, Basic:
|
|
|
|
|
Net income attributable to common shareholders - basic
|
|
$
|
9,302
|
|
|
$
|
8,514
|
|
Weighted average shares outstanding - basic
|
|
186,278,173
|
|
|
185,436,932
|
|
Earnings per common share, basic
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
|
|
|
|
Earnings Per Common Share, Diluted:
|
|
|
|
|
Net income attributable to common shareholders - basic
|
|
$
|
9,302
|
|
|
$
|
8,514
|
|
Net income attributable to common unitholders
|
|
1,754
|
|
|
1,605
|
|
Net income attributable to common shareholders - diluted
|
|
$
|
11,056
|
|
|
$
|
10,119
|
|
Weighted average common shares outstanding - basic
|
|
186,278,173
|
|
|
185,436,932
|
|
Weighted average operating partnership units outstanding
|
|
34,986,704
|
|
|
34,304,835
|
|
Weighted average additional dilutive securities outstanding
|
|
525,629
|
|
|
657,575
|
|
Weighted average common shares outstanding - diluted
|
|
221,790,506
|
|
|
220,399,342
|
|
Earnings per common share, diluted
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
For the
three
months ended
March 31, 2017 and 2016
, additional potentially dilutive securities include contingently-issuable outstanding stock options and performance based components of annual awards. We accrue distributions when they are declared.
WPG L.P. Earnings Per Common Unit
We determine WPG L.P.'s basic 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 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.
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 L.P.'s basic and diluted earnings per common unit:
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
|
2017
|
|
2016
|
Earnings Per Common Unit, Basic and Diluted:
|
|
|
|
|
Net income attributable to common unitholders - basic and diluted
|
|
$
|
11,056
|
|
|
$
|
10,119
|
|
Weighted average common units outstanding - basic
|
|
221,264,877
|
|
|
219,741,767
|
|
Weighted average additional dilutive securities outstanding
|
|
525,629
|
|
|
657,575
|
|
Weighted average units outstanding - diluted
|
|
221,790,506
|
|
|
220,399,342
|
|
Earnings per common unit, basic and diluted
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
For the
three
months ended
March 31, 2017 and 2016
, additional potentially dilutive securities include contingently-issuable units related to WPG Inc.'s outstanding stock options, WPG Inc.'s performance based components of annual awards, and WPG L.P.'s annual LTIP unit awards. We accrue distributions when they are declared.
On April 25, 2017, the Company completed a discounted payoff of the $87.3 million mortgage loan secured by Mesa Mall for $63.0 million and will retain ownership and management of the property. The Company will record a gain related to this repayment of approximately $21.0 million for the three and six months ended June 30, 2017.