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Pennsylvania Real Estate Investment Trust (NYSE:PEI)
Q2 2019 Earnings Call
Jul 31, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Amy and I'll be your conference operator today. At this time, I would like to welcome everyone to the PREIT Second Quarter 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. (Operator Instructions)

I would now like to turn the conference over to Heather Crowell, EVP Strategy and Communications. Please go ahead.

Heather Crowell -- Executive Vice President of Strategy & Communications

Thank you, Amy. Good morning and thank you all for joining us for PREITs second quarter 2019 earnings call. During this call, we will make certain forward looking statements within the meaning of federal securities laws. ***part 2***

These statements relate to expectations, beliefs, projections, trends, and other matters that are not historical facts and are subject to risks and uncertainties that might affect future events or results. Descriptions of these risks are set forth in the company's SEC filings. Statements that PREIT makes today might be accurate only as of today July 31, 2019, and PREIT makes no undertaking to update any such statements.

Also certain non-GAAP measures will be discussed. PREIT has included reconciliations of such measures to the comparable GAAP measures in it's earnings release and other documents filed with the SEC. Members of management on the call today are Joe Coradino, PREIT's Chairman and CEO; and Bob McCadden, our CFO. Joe?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Thanks, Heather. And good morning, everyone. As we sit here today, we're seven weeks away from opening our marquee project, Fashion District, which will stabilize at over 18 million of NOI at our share, representing almost 10% of additional same store NOI. We've taken decisive action to create a quality portfolio that will deliver results over the long-term. We set upon a course which included disposition on lower quality assets, anchor replacements, redevelopment and in line remerchandising, all of which have had the result of increasing sales, traffic and portfolio quality.

The plan was put in place with the expectation of driving shareholder value through balance sheet improvement, earnings growth and multiple expansion. We're confident in the decisions we've made as we look to a strong 2020 and monetizing the multi-family opportunities within our portfolio to drive earnings and recapitalize the company. We're leading the way in transforming a national shopping experience and despite challenges among individual retailers, it is working. We've reinvented 13 department stores that we're paying less than $2 per square foot with tenants paying an average rent of $17 a square foot, an increase of nearly 10 times. We've diversified our tenant mix with our top 20 tenants now, including TJX, Regal Cinema and Dave and Busters.

45% of our portfolio excluding department stores, is now comprised of open air and experiential tenants. Tenants in our portfolio are performing with sales continuing to improve up 5.6% to a new record of 531 per square foot. Notably, this is without any (ph) testable locations and only four Apple stores. Traffic is up an average of 5% following our redevelopment efforts. Leasing pace remains brisk. ***part 3***

New small format transactions increased 28% over Q1 and renewal spreads improved sequentially by 360 basis points to 6.1%. We continue to have a healthy volume of leases that are signed for future occupancy, with 500,000 square feet coming online this year, paying annualized rent of $11.4 million and another 200,000 square feet signed for 2020, paying $3.6 million.

Looking in the rear view mirror for a minute at a difficult Q2 before pivoting the updates on our major projects and the leasing environment generally, the bankruptcy and liquidation backdrop has obviously presented challenges most impactful in the second quarter. Since the end of the first quarter, we've experienced additional bankruptcies impacting our portfolio. Year-to-date, 72 stores have been affected, resulting in a $1.7 million impact to the quarter. We have commitments for 84% of the space vacated by bankrupt tenants. Approximately half of this is with permanent tenants. The balance is with short-term merchants while we work on longer-term replacement tenants paying higher rents with improved credit.

The negative impact from bankruptcies was slightly offset by incremental revenues from 358,000 square feet of space leased to anchor replacements and big box tenants that have opened since last June. Bear in mind that as we look forward to 2020, this anchor replacement program will generate an incremental revenue of over $7 million. Regarding changes to our outlook this year, we're a small company and minor changes in assumptions create volatility. You look at our inventory of space, we filled 84% of the space impacted by bankruptcy, some of which is seasonal tenants that pay lower rents. And as we have better visibility into our pipeline today, we concluded that this new supply has impacted our ability to lease marginal space in the near-term.

But we are confident that we will deliver on our pipeline of permanent tenants over the longer-term and are on track for a strong 2020. While there has been near-term impact from bankruptcies, the long-term picture remains positive. We're confident just as we delivered on our anchor replacement and disposition programs, as our leased inventory comes on line. And our redeveloped portfolio continues to drive traffic and sales. We will see ***part 4***

growth as anticipated in 2020 and beyond. As this revenue comes on line, our dividend payout ratio returns to more normalized levels.

I want to take a moment and highlight the changing nature of our business driven by our early mover advantage. We see malls becoming less ubiquitous. The solution is more than just local and regional tenants and dining and entertainment, although these have had a positive impact on the new mall paradigm. The challenge is to identify the optimal mix of uses, which is unique to each property.

This has led us to special and distinct uses like REC Philly, a co creating space for independent artists to collaborate. Uniquely Philly, where four Philadelphia's small businesses will have the opportunity to merchandise very unique offerings at our Fashion District. (ph) Digitally (ph) native brands getting physical and mature brands are executing pop-up stores. We will open our first Murphy this year, we've had success with Palatine and we will open three Hollister pop-up stores this holiday season.

We are leaving no stone unturned and are currently negotiating transactions with Canadian, Chinese and Australian retailers. In less than 75 days, we will change the face of our company with Fashion District and Woodland Mall reopening and the new anchor space of Plymouth Meeting opening, a milestone autumn for the company. We're in the final stretch in our transformative project Fashion District, set to transform Philadelphia and PREIT. The properties are beehive of tenant construction activity and we are nonstop planning every detail. The first wave of tenants opens on 9/19/19. By holiday, the project will be over 70% occupied with the addition of AMC Theater, Round 1 and Wonderspaces. Within a year of opening, we will be stabilized at 90% occupancy.

When we started this journey 16 years ago, we knew we wanted to do something spectacular for the city and transformative for the company. All of our work culminates now. Fashion District will be a gathering place for Philadelphians, and our visitors with over 35 million annual customers within blocks. We expect this property will generate sales and expect a (ph) $700 (ph) a foot. It's truly a special mix of first to market experiences that includes City Winery, a winery restaurant and live entertainment venue, only the seventh in the US. ***Part 5***

AMC Movie Theater, the first theater to open in 30 years in Center City, Wonderspaces, an immersive art experience with rotating shows inspired by making art accessible for all, trendy, popular fashion, accessories and cosmetics at affordable prices including Nike, Levis, Ulta, H&M, Columbia, Express, Pandora, American Eagle, (ph) Airy , Justice and many more, grabbing go food accessible on a regional rail platform with liquor available, co-working facilities that span industries putting traditional co-working artists co-working with over 1 million in original art spanning nine permanent installations. With opportunities to incubate small businesses alongside coveted national brands, our project is for Philly, by Philly and Philadelphians are eagerly awaiting its arrival. We could not be more proud of what we are delivering at this project.

At Woodland Mall, the mall addition opens on October 12. This market (ph) domination asset, with sales currently over $600 per square foot, grows even stronger with the presence of a new Von Maur fashion department store, which is complemented by the area's only REI, Cheesecake Factory, Urban Outfitters and Apple Store. The people of Grand Rapids have long awaited the entry of Von Maur experience, and we are confident that Von Maur will deliver a high quality, sophisticated experience they're known for. Grand Rapids as the second largest city in Michigan, has been named the number one fastest growing economy in the US by Forbes and a New York Times top-52 places to visit.

At Plymouth Meeting, mid-September marks a significant occasion for this perfectly situated real estate. As some of you may recall, we added one of nine Legoland discovery centers in the country to do this property just as Macy's closed this redundant location. Legoland has done great things for the property, and in just seven weeks, we'll add Dick's Sporting Goods, Burlington, Millers Jailhouse, H Fitness, Michaels Arts and Crafts. We're confident that this will cement the property as a regional destination, and we expect the new tenants will deliver four times the sales volume of the former Macy's store.

While these are monumental accomplishments, there's more to be done as we move into 2020, including Studio Movie Grill at Willow Grove. Burlington replacing shares at Dartmouth Moore -- Mall. Dick's Sporting Goods replacing Sears at Valley Mall and construction is under way on

all of these and we expect that the new tenants in place and paying rent in the first half of 2020. The opportunity to add multi-family units throughout our Philly and D.C. portfolios continues to strengthen as we move toward entitlements. We've created a competitive environment for our multi-family land portfolio. We'd point out that 15 qualified prospective buyers have seven executed CA's with all groups accessing our data room and engaged in active discussion. We remain optimistic that we will bring this (ph) closure recapitalizing the company with $150 million to $300 million in proceeds.

Now, before turning it over to Bob, let me remind you that the 2019 Q4 revenue from (ph) STP (ph) , PLymouth, and Woodland along with additional lease-up of these and other projects, annualizes in 2020 at approximately $25 million. So we are on track to deliver a strong growth in 2020.

Robert McCadden -- Executive Vice President Chief Financial Officer

Thanks, Joe. I am going to start my comments by reviewing sources and uses of capital. Earlier this month, our Fashion District joint venture modified its existing $250 million term loan to increase potential borrowings by up to $100 million. We're pleased that our lenders have recognized the significant value that's being created on this project by agreeing to this expansion. We ended the quarter with $153 million of liquidity, including our cash on hand and borrowing capacity under our credit line. Since the end of the quarter, we raised an additional $14.5 million from draws under the Fashion District term loan in our outparcel sale.

During the third quarter, we anticipate closing on the remaining land parcel in Gainesville, Florida, which will bring in an additional $10 million. Our credit facility borrowing capacity is governed by the NOI, generated by our unencumbered assets. As the incremental NOI from anchor replacements and other tenants opening at Plymouth Meeting, Moorestown and then the former Sears parcel with the mall comes on line over the next several quarters, this is expected to create additional borrowing capacity of approximately $25 million a year from now and $50 million by the end of 2020. This results in approximately $230 million of additional liquidity before any densification proceeds. As Joe mentioned, we continue to make progress on monetizing this land which will add to our liquidity position.

During the second quarter, we spent approximately $45 million on our anchor replacement and redevelopment program, bringing our year-to-date spending total to $68 million. As of June 30th, we had commitments for ***Part 7***

construction contracts and tenant allowances at our redevelopment properties, including our shared Fashion District of approximately $76 million. Those expenditures will be made through the balance of this year into early 2020.

Last week, we announced that we will pay 170th consecutive dividend in September. Our FAD payout ratio for the trailing 12 months ending June 30th ticked over a 100%. With our pipeline of new leases, the majority of our anchor replacements opening later this year, and Fashion District opening in September, we anticipate seeing a reduction to a reasonable payout level in 2020 and continued reduction over time as these projects stabilize. In our release last evening, we revised our same-store NOI guidance. We now expect same-store NOI to range from negative 1% to positive 0.5%.

Through the end of the second quarter, same-store NOI was minus 0.4%. While we have replacement tenants identified for a significant portion of the closed space, many of those tenants won't take occupancy until later this year and in some cases in 2020. Program store openings for anchor replacements will largely offset the impact of bankruptcies later in the year. We're forecasting total occupancy at our core malls to increase by 75 basis points to 100 basis points by the end of 2019. Regarding other key assumptions, we've raised the lower end of our lease termination revenues to $3 million and maintain the upper end at $4 million.

Year to date, we've recognized about a $0.5 million in lease terminations and we're currently working on several transactions that would bring us to the midpoint of our guidance range. The lower same-store NOI outlook also flows through the income statement down to FFO. As we progressed through the entitlement process at several of our projects, and have greater visibility into land values, we're more comfortable with expected values where some of the properties that are (ph) furthest (ph) along. As a result, we have increased our estimate of gains from the sale of multi-family and hotel parcels at both the upper end and lower end of our guidance range.

We did not include the potential impact of any conveyance of Wyoming Valley Mall. The carrying value of this property is significantly less than the debt balance with a non-recourse mortgage loan. We will recognize a gain of approximately $36 million or $0.46 a share. When this transaction is completed.

Just a quick recap on our second quarter financial results. As expected, our second quarter results reflected impact from bankruptcies. Thanks to NOI, excluding lease terminations decreased by $1.3 million or 3%. In our same-store portfolio, bankruptcies reduced same store NOI by $1.6 million, offsetting 0.7 ***Part 8***

million of incremental revenues provided by anchor replacements and box openings since June 30th of 2018. Lease termination revenues were $6.4 million lower in 2018 second quarter, which had an unusually high concentration of termination fees. We received net insurance recoveries of $1.9 million during the quarter and expect to receive more than $3 million more in August. The income statement benefits from these recoveries are included in our NAREIT defined FFO guidance, but are excluded from our FFO as adjusted guidance.

Occupancy at our core malls remained stable at 93.7% when compared to June 2018, despite the impact of store closings. In June of last year, bankruptcy related store closings reduced occupancy by 215,000 square feet at our core malls. We've opened replacement tenants in 57,000 square feet per net impact of 158,000 square feet. These closings impact the total occupancy in our core malls by 147 basis points. Our average renewals spreads showed sequential improvement over the first quarter, and as we had previously communicated, a material reduction in the number of tenants converting to leases, paying us a percentage of their sales in lieu of minimum rents. To put this in perspective, as of June 30th, a total of 89 tenants in our core malls were paying us percentage in lieu of fixed rent.

So before we open up for questions, I wanted to remind you of the valuation gap that exists in our stock today. At the NAREIT conference in June, we shared with you our view of NAV for the top five properties in our portfolio. Using a reasonable range of cap rates from public sources, we estimated our top five assets to be worth $10 to $12 a share after debt. We also estimated the land value of our densification opportunities to be between $2 and $4 a share. At the midpoint of that range, our entire portfolio is trading at less than 50% of the value of our top five assets. That analysis didn't even factor in the value of Fashion District, which was still under construction at that time.

With a transformed high quality portfolio, no vacant anchors in our core malls, the imminent opening of our major projects this fall and the end of our capital spending cycle in sight, we expect investors to see the compelling value opportunity in our shares and with that we'll open it up for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question today comes from the line of Ki Bin Kim of SunTrust. Your line is open.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Hi, everyone. Can we first start off ***part 9***

by just talking about the kind of large occupancy drops in Lehigh Mall, Viewmont, Patrick Henry, and Cumberland, despite some of the, perhaps successes you've had on leasing, it just seems like a pretty notable drop.

Robert McCadden -- Executive Vice President Chief Financial Officer

So i'll start with the Cumberland Mall. We had Toys R US and a Bath and Body Works that closed since June of last year and about 50,000 square feet. And we have replacement tenants in the pipeline for oh, Bed, Bath and Beyond, I'm sorry, total of 50,000 feet, we have replacement tenants identified. We're in negotiation with them that would cover 40,000 of that 50,000 feet. Some of the impacts also at Lehigh Valley, we also had Babies R US, which was a big tenant and Viewmont and others were largely impacted by the 2019 bankruptcies.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay and just, I guess, overall, I didn't try and reconcile every earnings note, but it does seem like for the past couple, maybe few years, you're even missing guidance not just on FFO per share, because I really don't care about quarter-to-quarter FFO per share, but on the more of the underlying business fundamentals like same-store NOI and maybe leasing spreads, things like that. So I'm just curious, is it just because, maybe you're not being conservative enough at the onset? Or is the underlying business and tenant demand changing at a more rapid pace than you've initially thought, and it's just kind of surprising you quarter-to-quarter?

Robert McCadden -- Executive Vice President Chief Financial Officer

So, I think when --- certainly we take the 2019 bankruptcies and I think the retail world has changed more in the last couple of years than we've experienced historically. That previously when tenants filed for bankruptcy, we saw more often than not, they were reorganizing and continuing business. The impacts could have been rev reduction, maybe a few store closings, but the landscape which for some tenants has changed more significantly where when they're filing for bankruptcy, at least the 2019's and many to 2018 tenants basically moved right from store closure to liquidation. That's probably been the biggest change that we've seen in our portfolio.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

I would add two additional things to that Ki Bin. Number one, the size and scale of the portfolio. So we -- given our size, we're more impacted by relatively smaller changes in revenue. And the second thing is that, I think we've been a bit more aggressive in terms of taking space back. ***part 10***

because it's -- it's our belief that the portfolio we've created is one that we can repopulate in relatively short order, which was basically our theme today, that -- that while, you know, this is a -- this is a blip, if you will, in terms and not a little blip, but, you know, a sizable one, but one that we believe we'll recover from and fill up the bankruptcy vacated space.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. But, you know, ignoring the fact of the tentacles and technical bankruptcy or for store closures this quarter or next quarter or next year, I mean, you guys have a real time sense of how profitable, how relevant each of your tenants are doing, because you get the financial reporting from sales productivity. So why not configure some of that kind of insight into a media wider guidance range or something a little more conservative at the onset. Because I think it does really do a disservice to your multiple when, you know, more often than not, you know, misguides us.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

That's -- it's a good comment Ki Bin, thank you.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. And just going back to the dividend. I know you're -- there's gonna be some upside from Fashion District next year and maybe the year after, but it does feel like, you know, that's a pretty easy -- I know I'm seeing it from the outside looking in, but it's an easy lever to pull to retain capital, there's no guarantee that you'll get the proceeds you want from landfills or some of the monetization efforts and even if those things do work out, you're not creating a reserve for a potential recession at some point. Right? So what keeps you guys from proactively rightsizing that dividend?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Essentially from proactively lowering the dividend?

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Yeah, I mean you're not covering it today, even if Fashion District comes online and you get the yield that you expect ...

Joseph F. Coradino -- Chairman and Cheif Executive Officer

It's not just Fashion District...

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

And other, yeah.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

It's Fashion District, It's Woodland, it's Plymouth Meeting, it's Dartmouth, it's Valley and we've got -- we've got a lot coming on line that will normalize our -- our dividend payout. We just don't think that it's a prudent decision at this point -- at this point.

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Caitlin Burrows of Goldman Sachs. Your line is open.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi, good morning. I guess maybe starting with a question regarding liquidity and Fashion District. So given ***part 11***

that you are getting close to some debt covenant limits and further capacity on the revolver is somewhat limited. How much of TI's for Fashion District will be covered by the extra $100 million of capacity on the Fashion District term loan, it seems from the press release that a decent amount of that has already been drawn, given that $13 million of the availability that was shown?

Robert McCadden -- Executive Vice President Chief Financial Officer

No, just to clarify the -- the term loan, the additional term loan, we've only drawn a small fraction of what we -- of the $100 million. So the funding for the 10 allowances, that Fashion District can come from several different sources. The way we have been doing it, PREIT-Macerich is contributing, the money is from general (inaudible) that they have available as well as the term loan.

So the term loan is is significantly yet to be drawn at the full $100 million. At this point we don't have commitments for the $100 million. But that is really just an additional source of capital that could be available to us if necessary. But at this point, we're not relying on that additional $100 million dollars to fund. Yeah, the completion of the Fashion District, we can fund that through and or partner through available capital sources. That's just diversifying the source of potential funding.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay and then maybe following up on Ki Bin's question, I know that you've mentioned and we know that as NOI comes online from Fashion District and other redevelopments, the dividend payout should improve. I guess I'm just wondering, though, when you look forward whether it's next quarter or next year, what factors kind of will you consider when establishing the quarterly dividend amount and that the rate you have today is the right one.

Robert McCadden -- Executive Vice President Chief Financial Officer

So there's a couple of things. We obviously look at our dividend coverage ratio, that's a key consideration. And as importantly, we also look at the redistribution requirements. We have a significant amount of activity in terms of land sales, which will potentially generate significant capital gains for the company. So that's also a major consideration that we will be evaluating in terms of our taxable income in the future, as well as the prospect of having a recognized capital gains.

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it. And I guess when you model out multi-year earnings of the company, when do you think that current $0.84 per share per year becomes covered by recurring operations rather than things like one-time when sales and the like?

Robert McCadden -- Executive Vice President Chief Financial Officer

Yeah. We think next year in 2020, we should be covering it from operations.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then maybe just related to the potential proceeds from the land sales to the multi-family developers. I was previously under the impression that a large portion of that could be realized in 2019. ***part 12***

So I was just wondering, is that still the case, kind of what is the progress, what's been going on in the past couple of months, and if not 2019, what's impacting the timing?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Well, we've expanded the group of prospective buyers in the interest of creating a highly competitive environment. As I mentioned in the script, we have -- we have seven qualified institutions in the data room at this point and with, you know, with meetings and -- and property tours being scheduled regularly. It was our expectation that we would close this year. We're still pushing hard to do that. We think, you know, the fallback would be Q1.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay, thanks. I'll go back in the queue.

Operator

Your next question comes from the line of Christy McElroy of Citi. Your line is open.

Christy McElroy -- Citi Investment Research -- Analyst

Thank you. Good morning, everyone. Just wanted to follow up on Ki Bin's question on guidance, with regard to your same-store NOI range. Just trying to understand the biggest changes to expectations or surprises from the Q1 results. When you reported Q1 results today, it seemed like a quarter ago you did have certain expectations in there for incremental bankruptcy impact in the numbers, the bulk of the liquidations that have been announced weren't known at this point. And at that point, that was running close to the higher end of your initial expectations. So you were sort of implying the lower end of the range at that point, even though you didn't change it. But just want to understand, between then and till now, you know what the biggest changes have been between the different buckets of additional closures that you're now expecting, additional rent relief. And you also mentioned the mix of temp versus perm and timing of the backfill.

Robert McCadden -- Executive Vice President Chief Financial Officer

This is probably -- I don't know if I can draw around one single reason, but we did have additional bankruptcies subsequent to the end of the first quarter, Topshop, Charming Charlie is a local jeweler, that was not anticipated that they would again file and liquidate. We had a couple of delayed store openings that a couple of -- at several of our properties that were pushed from Q4 to Q1, 2020. Originally, I think we anticipated that Charlotte Russe was going to maintain stores in a number of our properties based on their level of performance and our negotiations with them at the time and that was a little bit of a surprise that they closed all their stores. And then, you know, we saw some erosion in our common area revenues. We've grown that program pretty significantly over the last couple of years and had anticipated***part 13***

strong growth and we've seen some weakness in that area as well.

Christy McElroy -- Citi Investment Research -- Analyst

How much did you lose in rent from the Topshop closure at Springfield?

Robert McCadden -- Executive Vice President Chief Financial Officer

It's about -- I guess I don't want to give that specific -- it's a tenant specific number.

Christy McElroy -- Citi Investment Research -- Analyst

Okay, so maybe related to that, there are a couple of your larger ABR exposure tenants with larger stores that have hired restructuring advisors. Maybe you can provide some color into some of the conversations that you're having, sort of a bigger picture, not necessarily specific tenants, but with -- with struggling tenants outside of the bankruptcy process. Is there a risk of rent relief or closures or downsizing? And how is that factored into your second half outlook? I know you did mention, you raised your lease termination fee guidance, maybe that has something to do with that, maybe some more color there?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Well, we are in active discussions with one major tenant that has a 13 stores in our portfolio. We actually feel pretty good about the outcome. Because there we don't have any oversized stores in our portfolio. And so we're working through a restructuring and downsizing in two stores and some rent relief.

Christy McElroy -- Citi Investment Research -- Analyst

Okay that -- that one specific tenant with the 13 stores, so that's something where we would see lower rent and that's factored into your guidance.

Robert McCadden -- Executive Vice President Chief Financial Officer

Yes.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Yes.

Christy McElroy -- Citi Investment Research -- Analyst

Okay and then just lastly, in addition to the base rents being down and just the expense recovery rate was also lower year-over-year. How much of that was related to the bankruptcies and sort of this discussion versus sort of a collection timing issue that we could see made up later in the year?

Robert McCadden -- Executive Vice President Chief Financial Officer

Yeah, I think a lot of that has to do with the -- we talked about the lost rent from the bankrupt tenants, a lot of that was in the extras, we're seeing that, the fact that we dropped at the bottom line.

Christy McElroy -- Citi Investment Research -- Analyst

Okay, so mostly bankruptcy related.

Robert McCadden -- Executive Vice President Chief Financial Officer

Right.

Christy McElroy -- Citi Investment Research -- Analyst

Okay, thank you.

Operator

(Operator Instructions) Your next question comes from the line of Karin Ford of MUFG Securities. Your line is open.

Karin Ford -- Mitsubishi UFJ -- Analyst

Oh, hi, good morning. i was wondering if you could bridge us on the new FFO guidance from the $0.22 result you had in 2Q up to what looks to be $0.39 quarterly average for the back half of the year at the midpoint?

Robert McCadden -- Executive Vice President Chief Financial Officer

So if you look at the third quarter, we expect the ***part 14***

third quarter results to be kind of roughly in line with where we delivered Q2. And then if you -- that kind of implies roughly $0.55 to the midpoint of our range for the fourth quarter and that compares to $0.52 cents a year ago and given the amount of activity that we have in our anchor redevelopments coming online, Fashion District, et cetera, we think that the incremental $0.03 cents is very achievable.

Karin Ford -- Mitsubishi UFJ -- Analyst

Okay. And that -- and that bridges mostly store openings and rent commencements, offset by some of the -- some of the additional rent relief that you just talked about, et cetera.

Robert McCadden -- Executive Vice President Chief Financial Officer

Right, if you think about the second and third quarters, you have basically the lost rent from the bankruptcies, and you're -- you don't have any mitigating impact from your new store openings and you also have the normal seasonal tick-up and seasonal reverence that occurs in the fourth quarter that generally makes the fourth quarter stronger than the previous three.

Karin Ford -- Mitsubishi UFJ -- Analyst

Okay. Thanks for that. And then just my second question is, can you just give us any updated thoughts on the JC Penney's in your portfolio and how they're doing and any anticipated closures there?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Sure. We have we have 13 JC Penney's in the core portfolio. It's so worthy, they all have supports, which is, I guess, sort of speaks in terms of the level of -- level of quality and sales volume they're producing and at this point, we don't really have any, you know, any concern that there's any imminent closings at any of the JC Penney's. And we are not in discussions with respect to rent relief in any of them either.

Karin Ford -- Mitsubishi UFJ -- Analyst

Great, thank you.

Operator

Your next question comes from the line of Michael Mueller of JP Morgan. Your line is open.

Michael Mueller -- JPMorgan -- Analyst

Yeah, hi. Just a couple questions. First, in your NAV analysis with the top five assets, curious what cap rate you applied to the -- to the -- to the top five assets. And then secondly, is there any sort of an update with respect to the non-core properties, what the status for those is?

Robert McCadden -- Executive Vice President Chief Financial Officer

The cap rate was in the -- roughly 6% to 7% range, I think it averaged about 675.

Michael Mueller -- JPMorgan -- Analyst

Okay.

Robert McCadden -- Executive Vice President Chief Financial Officer

And on the non-core -- and then the non -- the non-core status, we continue to work with the lender at Wyoming, Valley and again toward a transaction that we would hope to be completed in the third quarter of this year. ***part 15***

Michael Mueller -- JPMorgan -- Analyst

Okay. And the other? Or is that the only one at this point?

Robert McCadden -- Executive Vice President Chief Financial Officer

Yes at this point, Valley View has a 20 -- mid year 2020 maturity and there's really no progress on that.

Michael Mueller -- JPMorgan -- Analyst

Got it. Okay , thank you.

Operator

Your next question comes from the line of Caitlin Burrows of Goldman Sachs. Your line is open.

Caitlin Burrows -- Goldman Sachs -- Analyst

Hi again. I was just wondering if we could go through some of the Fashion District details. So I know you're planning to open in mid-September. I was wondering what the progress is on tenants preparing their space, and are you still expecting 70% of this space to open at that time?

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Well, the way in which it will open is as follows. Initially on September 19th, we'll be slightly north of 60% in terms of tenant openings. And I think we've got close to 50 tenants under construction right now at the property. A few weeks after that, you will open up three additional sizable tenants, including the AMC Theater, Round One and Wonderspace. And that will take us north of 70%, and then it will be a continued sort of queue of tenants opening between -- between now or September 19th and a year later, where we'll hit 90% stabilized.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then in the earnings release, you mentioned over $18 million of NOI is expected at your share at stabilization. But if I just multiply your expected cost and the midpoint of the return, I get to like $15 million, so I was just wondering what the difference is there?

Robert McCadden -- Executive Vice President Chief Financial Officer

So, Caitlin, this is Bob. There's two things, one is that that's an incremental return. So when the return is computed in the supplemental, that's incremental NOI over what was then in existence at the time, we effectively took a property off line. And the second thing is we're currently working on creating an additional 40,000 square feet of space that was not contemplated in the initial underwriting. So the extent we bring that transaction to a conclusion, the project costs will go up for that additional amount and the return will stay roughly the same. But that's essentially what's driving the difference. It's the incremental NOI as well as the the additional space that we're creating.

Caitlin Burrows -- Goldman Sachs -- Analyst

Got it and just on the incremental NOI. Today it's the assumption that it's zero, but that one day it could be over 18. ***part 16***

or today, it's actually something?

Robert McCadden -- Executive Vice President Chief Financial Officer

Yeah, I mean, today it's essentially zero. But we wanted to take credit, in fact, not take credit for disrupting the NOI in terms of looking at the incremental return from an investment perspective. So...

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay.

Robert McCadden -- Executive Vice President Chief Financial Officer

Yeah, the -- the 18 is kind of a stabilized, you know, '20, '21 run rate.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. And then last one, I guess, just thinking about, I know you don't have that much more leasing to do, but how could any NOI returns be impacted by the mix of tenants that lease the remaining space, Guess I'm just wondering for more experiential tenants such as Wonderspaces and the others that you have. How do their rents compare to the traditional retailers that you've also announced?

Robert McCadden -- Executive Vice President Chief Financial Officer

I think it's a -- I think they compare favorably. I mean, we're -- we're not buying deals there.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. That's all.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Was that your question? Is that your point?

Caitlin Burrows -- Goldman Sachs -- Analyst

Yes. Just wondering how they compare, but it sounds like they compare well.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Yes. So now -- look, it's -- it's a very exciting project. I went over in number, that's a real number 35 million potential customers within a couple of blocks of the property. That's not -- that's not a fabricated number. That's -- that's a real count. Looking at the transportation system, looking at the historic district, the convention -- the convention center, et cetera. We expect that -- we expect the property to stabilize north of $700 a foot in sales and we are very optimistic that we'll be able to capitalize from the lease up and have been capitalizing from the lease up given the potential of the project.

Caitlin Burrows -- Goldman Sachs -- Analyst

Actually, will you -- that made me think of just when you talked about the amount of people in the area. Will you guys have traffic counters at the property or is that not really...

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Yes, we will.

Robert McCadden -- Executive Vice President Chief Financial Officer

Yes, we will.

Caitlin Burrows -- Goldman Sachs -- Analyst

Okay. Thank you.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Thank you.

Operator

Your next question comes from the line of Karin Ford of MUFG Securities. Your line is open.

Karin Ford -- Mitsubishi UFJ -- Analyst

Hi. Just staying on the Fashion District topic. Can you just remind us how does the -- how does the capitalized interest stop as the project is completed? Is it all stopped on September 19th and if not, how is it staged and when does the property start becoming a breakeven from an FFO standpoint?

Robert McCadden -- Executive Vice President Chief Financial Officer

So we stop capitalizing interest as the project comes online. So using a simple example, day one, we open at 60% occupancy, we would stop capitalizing interest on 60% of the ***part 17***

of the project cost, a month later we take up another 10% -- we would take 10% of the capitalized interest calculation. Generally we and Macerich have the same policy so that whatever is left at the end of one year following grand opening, we essentially see as capitalization on the project as a whole. So we would expect, given the yield on the project and the incremental costs of recapitalizing interests, call it roughly 4% and the yield is north of 7. So we'd expect, -- sometime during 2020 to actually be generating a strong FFO contribution to the company's performance.

Karin Ford -- Mitsubishi UFJ -- Analyst

Got it. Thank you.

Operator

Now, ladies and gentlemen, this does conclude our Q&A session for today. I now turn the call back to the presenters.

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Thank you all for being on the call. Before we hang up, though. I want to say that, I want to remind you again that 2019 Q4 revenue from SDP, Plymouth and Woodland along with the additional lease up of the other projects annualizes in 2020 at $25 million. So we're on track to deliver strong growth next year and look forward to seeing you in the coming months and actually keep an eye out for a save the date for an investor event at Fashion District in early December. Thank you all for being on the call and have a great day.

Operator

And this concludes today's conference call. You may now disconnect. ***Part 18***

Duration: 47 minutes

Call participants:

Heather Crowell -- Executive Vice President of Strategy & Communications

Joseph F. Coradino -- Chairman and Cheif Executive Officer

Robert McCadden -- Executive Vice President Chief Financial Officer

Ki Bin Kim -- SunTrust Robinson Humphrey -- Analyst

Caitlin Burrows -- Goldman Sachs -- Analyst

Christy McElroy -- Citi Investment Research -- Analyst

Karin Ford -- Mitsubishi UFJ -- Analyst

Michael Mueller -- JPMorgan -- Analyst

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