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EX-31.3 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER FOR WASHINGTON PRIME GROUP, L.P. - WASHINGTON PRIME GROUP INC.exhibit313washprimelpfor10.htm
EX-32.2 - CERTIFICATION BY THE CEO AND CFO FOR WASHINGTON PRIME GROUP L.P. - WASHINGTON PRIME GROUP INC.exhibit322washprimelpfor10.htm
EX-32.1 - CERTIFICATION BY THE CEO AND CFO FOR WASHINGTON PRIME GROUP INC. - WASHINGTON PRIME GROUP INC.exhibit321washprimegroupin.htm
EX-31.4 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER FOR WASHINGTON PRIME GROUP, L.P. - WASHINGTON PRIME GROUP INC.exhibit314washprimelpfor10.htm
EX-31.2 - CERTIFICATION BY THE CHIEF FINANCIAL OFFICER FOR WASHINGTON PRIME GROUP INC. - WASHINGTON PRIME GROUP INC.exhibit312washprimegroupin.htm
EX-31.1 - CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER FOR WASHINGTON PRIME GROUP INC. - WASHINGTON PRIME GROUP INC.exhibit311washprimegroupin.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Washington Prime Group Inc.
Washington Prime Group, L.P.
(Exact name of Registrant as specified in its charter)

Indiana (Both Registrants)
(State of incorporation or organization)

001-36252 (Washington Prime Group Inc.)
333-205859 (Washington Prime Group, L.P.)
(Commission File No.)
180 East Broad Street
Columbus, Ohio 43215
(Address of principal executive offices)
46-4323686 (Washington Prime Group Inc.)
46-4674640 (Washington Prime Group, L.P.)
(I.R.S. Employer Identification No.)
(614) 621-9000
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Washington Prime Group Inc. Yes x No o
 
Washington Prime Group, L.P. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Washington Prime Group Inc. Yes x  No o
 
Washington Prime Group, L.P. Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Washington Prime Group Inc. (Check One):
 
Large accelerated filer  x  Accelerated filer o
 
 
Non-accelerated filer o  Smaller reporting company o
 
 
Emerging growth company o
                (Do not check if a smaller reporting company)
 
 
 
Washington Prime Group, L.P.  (Check One):
 
Large accelerated filer  o           Accelerated filer o
 
 
Non-accelerated filer x  Smaller reporting company o
 
 
Emerging growth company o
                (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Washington Prime Group Inc. Yes o  No x
 
Washington Prime Group, L.P. Yes o  No x
As of July 25, 2018, Washington Prime Group Inc. had 186,050,048 shares of common stock outstanding. Washington Prime Group, L.P. has no publicly traded equity and no common stock outstanding.

1



EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2018 of Washington Prime Group® Inc. and Washington Prime Group, L.P. Unless stated otherwise or the context requires otherwise, references to "WPG Inc." mean Washington Prime Group Inc., an Indiana corporation, and references to "WPG L.P." mean Washington Prime Group, L.P., an Indiana limited partnership, and its consolidated subsidiaries, in cases where it is important to distinguish between WPG Inc. and WPG L.P. We use the terms "WPG," the "Company,” “we,” "us," and “our” to refer to WPG Inc., WPG L.P., and entities in which WPG Inc. or WPG L.P. (or any affiliate) has a material interest on a consolidated basis, unless the context indicates otherwise.

WPG Inc. operates as a self-managed and self-administered real estate investment trust (“REIT”). WPG Inc. owns properties and conducts operations through WPG L.P., of which WPG Inc. is the sole general partner and of which it held approximately 84.4% of the partnership interests (“OP units”) at June 30, 2018. The remaining OP units are owned by various limited partners. As the sole general partner of WPG L.P., WPG Inc. has the exclusive and complete responsibility for WPG L.P.’s day-to-day management and control. Management operates WPG Inc. and WPG L.P. as one enterprise. The management of WPG Inc. consists of the same persons who direct the management of WPG L.P. As general partner with control of WPG L.P., WPG Inc. consolidates WPG L.P. for financial reporting purposes, and WPG Inc. does not have significant assets other than its investment in WPG L.P. Therefore, the assets and liabilities of WPG Inc. and WPG L.P. are substantially the same on their respective consolidated financial statements and the disclosures of WPG Inc. and WPG L.P. also are substantially similar.
The Company believes, therefore, that the combination into a single report of the quarterly reports on Form 10-Q of WPG Inc. and WPG L.P. provides the following benefits:
enhances investors' understanding of the operations of WPG Inc. and WPG L.P. by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both WPG Inc. and WPG L.P.; and
creates time and cost efficiencies through the preparation of one set of disclosures instead of two separate sets of disclosures.
The substantive difference between WPG Inc.’s and WPG L.P.’s filings is the fact that WPG Inc. is a REIT with shares traded on a public stock exchange, while WPG L.P. is a limited partnership with no publicly traded equity. Moreover, the interests in WPG L.P. held by third parties are classified differently by the two entities (i.e., noncontrolling interests for WPG Inc. and partners' equity for WPG L.P.). In the consolidated financial statements, these differences are primarily reflected in the equity section of the consolidated balance sheets and in the consolidated statements of equity. Apart from the different equity presentation, the consolidated financial statements of WPG Inc. and WPG L.P. are nearly identical.
This combined Form 10-Q for WPG Inc. and WPG L.P. includes, for each entity, separate interim financial statements (but combined footnotes), separate reports on disclosure controls and procedures and internal control over financial reporting, and separate CEO/CFO certifications. In addition, if there were any material differences between WPG Inc. and WPG L.P. with respect to any other financial and non-financial disclosure items required by Form 10-Q, they would be discussed separately herein.

2



WASHINGTON PRIME GROUP INC. AND WASHINGTON PRIME GROUP, L.P.
FORM 10-Q

INDEX
PART I:
FINANCIAL INFORMATION
PAGE
 
 
 
Item 1.
Consolidated Financial Statements (unaudited)
 
 
 
 
 
Financial Statements for Washington Prime Group Inc.:
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statement of Equity for the six months ended June 30, 2018
 
 
 
 
Financial Statements for Washington Prime Group, L.P.:
 
 
 
 
 
Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017
 
 
 
 
Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017
 
 
 
 
Consolidated Statement of Equity for the six months ended June 30, 2018
 
 
 
 
Condensed Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II:
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES

3



PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements
Washington Prime Group Inc.
Unaudited Consolidated Balance Sheets
(dollars in thousands, except share and par value amounts)
 
 
June 30, 2018
 
December 31, 2017
ASSETS:
 
 
 
 
Investment properties at cost
 
$
5,913,473

 
$
5,807,760

Less: accumulated depreciation
 
2,226,646

 
2,139,620


 
3,686,827

 
3,668,140

Cash and cash equivalents
 
53,987

 
52,019

Tenant receivables and accrued revenue, net
 
79,363

 
90,314

Investment in and advances to unconsolidated entities, at equity
 
443,963

 
451,839

Deferred costs and other assets
 
207,928

 
189,095

Total assets
 
$
4,472,068

 
$
4,451,407

LIABILITIES:
 
 
 
 
Mortgage notes payable
 
$
1,060,687

 
$
1,157,082

Notes payable
 
981,026

 
979,372

Unsecured term loans
 
684,939

 
606,695

Revolving credit facility
 
275,440

 
154,460

Accounts payable, accrued expenses, intangibles, and deferred revenues
 
251,422

 
264,998

Distributions payable
 
2,992

 
2,992

Cash distributions and losses in unconsolidated entities, at equity
 
15,421

 
15,421

Total liabilities
 
3,271,927

 
3,181,020

Redeemable noncontrolling interests
 
3,265

 
3,265

EQUITY:
 
 
 
 
Stockholders' Equity:
 
 
 
 
Series H Cumulative Redeemable Preferred Stock, $0.0001 par value, 4,000,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017
 
104,251

 
104,251

Series I Cumulative Redeemable Preferred Stock, $0.0001 par value, 3,800,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017
 
98,325

 
98,325

Common stock, $0.0001 par value, 350,000,000 shares authorized;
186,050,048 and 185,791,421 issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
19

 
19

Capital in excess of par value
 
1,244,211

 
1,240,483

Accumulated deficit
 
(418,472
)
 
(350,594
)
Accumulated other comprehensive income
 
12,403

 
6,920

Total stockholders' equity
 
1,040,737

 
1,099,404

Noncontrolling interests
 
156,139

 
167,718

Total equity
 
1,196,876

 
1,267,122

Total liabilities, redeemable noncontrolling interests and equity
 
$
4,472,068

 
$
4,451,407


The accompanying notes are an integral part of these statements.

4



Washington Prime Group Inc.
Unaudited Consolidated Statements of Operations and Comprehensive Income
(dollars in thousands, except per share amounts)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE:
 
 
 
 
 
 
 
Minimum rent
$
121,787

 
$
129,433

 
$
245,126

 
$
266,549

Overage rent
1,415

 
1,299

 
3,429

 
4,131

Tenant reimbursements
47,594

 
52,121

 
96,238

 
108,911

Other income
7,932

 
6,318

 
14,275

 
11,974

Total revenues
178,728

 
189,171

 
359,068

 
391,565

EXPENSES:

 

 
 
 
 
Property operating
35,945

 
35,164

 
72,311

 
72,408

Depreciation and amortization
63,796

 
66,620

 
125,090

 
134,131

Real estate taxes
21,094

 
23,253

 
43,135

 
49,260

Advertising and promotion
2,240

 
2,275

 
4,011

 
4,427

Provision for credit losses
611

 
1,903

 
3,957

 
3,484

General and administrative
11,191

 
9,091

 
20,845

 
17,919

Ground rent
198

 
996

 
395

 
2,027

Impairment loss

 

 

 
8,509

Total operating expenses
135,075

 
139,302

 
269,744

 
292,165

OPERATING INCOME
43,653

 
49,869

 
89,324

 
99,400

Interest expense, net
(34,701
)
 
(31,281
)
 
(69,045
)
 
(63,769
)
Gain on extinguishment of debt, net

 
21,221

 

 
21,221

Income and other taxes
(601
)
 
(522
)
 
(1,086
)
 
(2,548
)
(Loss) income from unconsolidated entities, net
(895
)
 
(172
)
 
267

 
(616
)
INCOME BEFORE GAIN ON DISPOSITION OF INTERESTS IN PROPERTIES, NET
7,456

 
39,115

 
19,460

 
53,688

Gain on disposition of interests in properties, net
8,063

 
125,385

 
16,244

 
125,436

NET INCOME
15,519

 
164,500

 
35,704

 
179,124

Net income attributable to noncontrolling interests
1,925

 
25,525

 
4,586

 
27,339

NET INCOME ATTRIBUTABLE TO THE COMPANY
13,594

 
138,975

 
31,118

 
151,785

Less: Preferred share dividends
(3,508
)
 
(3,508
)
 
(7,016
)
 
(7,016
)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
10,086

 
$
135,467

 
$
24,102

 
$
144,769

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE, BASIC
$
0.05

 
$
0.73

 
$
0.13

 
$
0.78

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE, DILUTED
$
0.05

 
$
0.72

 
$
0.13

 
$
0.77

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Net income
$
15,519

 
$
164,500

 
$
35,704

 
$
179,124

Unrealized income (loss) on interest rate derivative instruments, net
602

 
(2,050
)
 
5,819

 
299

Comprehensive income
16,121

 
162,450

 
41,523

 
179,423

Comprehensive income attributable to noncontrolling interests
2,024

 
25,206

 
5,506

 
27,397

Comprehensive income attributable to common shareholders
$
14,097

 
$
137,244

 
$
36,017

 
$
152,026


The accompanying notes are an integral part of these statements.

5



Washington Prime Group Inc.
Unaudited Consolidated Statements of Cash Flows
(dollars in thousands)
 
For the Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
35,704

 
$
179,124

Adjustments to reconcile net income to net cash provided by operating activities:


 

Depreciation and amortization, including fair value rent, fair value debt, deferred financing costs and equity-based compensation
126,545

 
132,289

Gain on extinguishment of debt, net

 
(21,221
)
Gain on disposition of interests in properties and outparcels, net
(16,244
)
 
(125,710
)
Impairment loss

 
8,509

Provision for credit losses
3,957

 
3,484

(Income) loss from unconsolidated entities, net
(267
)
 
616

Distributions of income from unconsolidated entities
2,817

 
161

Changes in assets and liabilities:


 

Tenant receivables and accrued revenue, net
9,017

 
3,288

Deferred costs and other assets
(15,858
)
 
(11,479
)
Accounts payable, accrued expenses, deferred revenues and other liabilities
(9,900
)
 
(9,814
)
Net cash provided by operating activities
135,771

 
159,247

CASH FLOWS FROM INVESTING ACTIVITIES:


 

Acquisitions, net of cash acquired
(80,108
)
 

Capital expenditures, net
(59,772
)
 
(70,967
)
Net proceeds from disposition of interests in properties and outparcels
23,402

 
203,624

Investments in unconsolidated entities
(12,054
)
 
(36,747
)
Distributions of capital from unconsolidated entities
22,923

 
56,962

Net cash (used in) provided by investing activities
(105,609
)
 
152,872

CASH FLOWS FROM FINANCING ACTIVITIES:


 

Distributions to noncontrolling interest holders in properties
(5
)
 
(23
)
Redemption of limited partner units
(25
)
 
(12
)
Net proceeds from issuance of common shares, including common stock plans

 
13

Purchase of redeemable noncontrolling interest

 
(6,830
)
Distributions on common and preferred shares/units
(118,385
)
 
(118,073
)
Proceeds from issuance of debt, net of transaction costs
593,714

 
368,199

Repayments of debt
(492,548
)
 
(540,003
)
Net cash used in financing activities
(17,249
)
 
(296,729
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
12,913

 
15,390

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
70,201

 
88,514

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
83,114

 
$
103,904


The accompanying notes are an integral part of these statements.

6



Washington Prime Group Inc.
Unaudited Consolidated Statement of Equity
(dollars in thousands, except per share/unit amounts)
 
 
Preferred Series H
 
Preferred Series I
 
Common
Stock
 
Capital in
Excess of
Par Value
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total
Stockholders'
Equity
 
Non-
Controlling
Interests
 
Total
Equity
 
Redeemable Non-Controlling Interests
Balance, December 31, 2017
 
$
104,251

 
$
98,325

 
$
19

 
$
1,240,483

 
$
(350,594
)
 
$
6,920

 
$
1,099,404

 
$
167,718

 
$
1,267,122

 
$
3,265

Cumulative effect of accounting standards
 

 

 

 
(389
)
 
1,890

 
584

 
2,085

 
389

 
2,474

 

Redemption of limited partner units
 

 

 

 

 

 

 

 
(25
)
 
(25
)
 

Other
 

 

 

 
(89
)
 

 

 
(89
)
 

 
(89
)
 

Equity-based compensation
 

 

 

 
3,771

 

 

 
3,771

 
490

 
4,261

 

Adjustments to noncontrolling interests
 

 

 

 
435

 

 

 
435

 
(435
)
 

 

Distributions on common shares/units ($0.50 per common share/unit)
 

 

 

 

 
(93,870
)
 

 
(93,870
)
 
(17,384
)
 
(111,254
)
 

Distributions declared on preferred shares
 

 

 

 

 
(7,016
)
 

 
(7,016
)
 

 
(7,016
)
 

Other comprehensive income
 

 

 

 

 

 
4,899

 
4,899

 
920

 
5,819

 

Net income, excluding $120 of distributions to preferred unitholders
 

 

 

 

 
31,118

 

 
31,118

 
4,466

 
35,584

 

Balance, June 30, 2018
 
$
104,251

 
$
98,325

 
$
19

 
$
1,244,211

 
$
(418,472
)
 
$
12,403

 
$
1,040,737

 
$
156,139

 
$
1,196,876

 
$
3,265


The accompanying notes are an integral part of this statement.

7



Washington Prime Group, L.P.
Unaudited Consolidated Balance Sheets
(dollars in thousands, except unit amounts)
 
 
June 30, 2018
 
December 31, 2017
ASSETS:
 
 
 
 
Investment properties at cost
 
$
5,913,473

 
$
5,807,760

Less: accumulated depreciation
 
2,226,646

 
2,139,620


 
3,686,827

 
3,668,140

Cash and cash equivalents
 
53,987

 
52,019

Tenant receivables and accrued revenue, net
 
79,363

 
90,314

Investment in and advances to unconsolidated entities, at equity
 
443,963

 
451,839

Deferred costs and other assets
 
207,928

 
189,095

Total assets
 
$
4,472,068

 
$
4,451,407

LIABILITIES:
 
 
 
 
Mortgage notes payable
 
$
1,060,687

 
$
1,157,082

Notes payable
 
981,026

 
979,372

Unsecured term loans
 
684,939

 
606,695

Revolving credit facility
 
275,440

 
154,460

Accounts payable, accrued expenses, intangibles, and deferred revenues
 
251,422

 
264,998

Distributions payable
 
2,992

 
2,992

Cash distributions and losses in unconsolidated entities, at equity
 
15,421

 
15,421

Total liabilities
 
3,271,927

 
3,181,020

Redeemable noncontrolling interests
 
3,265

 
3,265

EQUITY:
 
 
 
 
Partners' Equity:
 
 
 
 
General partner
 
 
 
 
Preferred equity, 7,800,000 units issued and outstanding as of June 30, 2018 and December 31, 2017
 
202,576

 
202,576

Common equity, 186,050,048 and 185,791,421 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
838,161

 
896,828

Total general partners' equity
 
1,040,737

 
1,099,404

Limited partners, 34,756,137 and 34,760,026 units issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
155,086

 
166,660

Total partners' equity
 
1,195,823

 
1,266,064

Noncontrolling interests
 
1,053

 
1,058

Total equity
 
1,196,876

 
1,267,122

Total liabilities, redeemable noncontrolling interests and equity
 
$
4,472,068

 
$
4,451,407


The accompanying notes are an integral part of these statements.


8



Washington Prime Group, L.P.
Unaudited Consolidated Statements of Operations and Comprehensive Income
(dollars in thousands, except per unit amounts)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
REVENUE:
 
 
 
 
 
 
 
Minimum rent
$
121,787

 
$
129,433

 
$
245,126

 
$
266,549

Overage rent
1,415

 
1,299

 
3,429

 
4,131

Tenant reimbursements
47,594

 
52,121

 
96,238

 
108,911

Other income
7,932

 
6,318

 
14,275

 
11,974

Total revenues
178,728

 
189,171

 
359,068

 
391,565

EXPENSES:

 

 
 
 
 
Property operating
35,945

 
35,164

 
72,311

 
72,408

Depreciation and amortization
63,796

 
66,620

 
125,090

 
134,131

Real estate taxes
21,094

 
23,253

 
43,135

 
49,260

Advertising and promotion
2,240

 
2,275

 
4,011

 
4,427

Provision for credit losses
611

 
1,903

 
3,957

 
3,484

General and administrative
11,191

 
9,091

 
20,845

 
17,919

Ground rent
198

 
996

 
395

 
2,027

Impairment loss

 

 

 
8,509

Total operating expenses
135,075

 
139,302

 
269,744

 
292,165

OPERATING INCOME
43,653

 
49,869

 
89,324

 
99,400

Interest expense, net
(34,701
)
 
(31,281
)
 
(69,045
)
 
(63,769
)
Gain on extinguishment of debt, net

 
21,221

 

 
21,221

Income and other taxes
(601
)
 
(522
)
 
(1,086
)
 
(2,548
)
(Loss) income from unconsolidated entities, net
(895
)
 
(172
)
 
267

 
(616
)
INCOME BEFORE GAIN ON DISPOSITION OF INTERESTS IN PROPERTIES, NET
7,456

 
39,115

 
19,460

 
53,688

Gain on disposition of interests in properties, net
8,063

 
125,385

 
16,244

 
125,436

NET INCOME ATTRIBUTABLE TO UNITHOLDERS
15,519

 
164,500

 
35,704

 
179,124

Less: Preferred unit distributions
(3,568
)
 
(3,568
)
 
(7,136
)
 
(7,136
)
NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS
$
11,951

 
$
160,932

 
$
28,568

 
$
171,988

 
 
 
 
 
 
 
 
NET INCOME ATTRIBUTABLE TO COMMON UNITHOLDERS:
 
 
 
 
 
 
 
General partner
$
10,086

 
$
135,467

 
$
24,102

 
$
144,769

Limited partners
1,865

 
25,465

 
4,466

 
27,219

Net income attributable to common unitholders
$
11,951

 
$
160,932

 
$
28,568

 
$
171,988

 
 
 
 
 
 
 
 
EARNINGS PER COMMON UNIT, BASIC
$
0.05

 
$
0.73

 
$
0.13

 
$
0.78

 
 
 
 
 
 
 
 
EARNINGS PER COMMON UNIT, DILUTED
$
0.05

 
$
0.72

 
$
0.13

 
$
0.77

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME:
 
 
 
 
 
 
 
Net income
$
15,519

 
$
164,500

 
$
35,704

 
$
179,124

Unrealized income (loss) on interest rate derivative instruments, net
602

 
(2,050
)
 
5,819

 
299

Comprehensive income
$
16,121

 
$
162,450

 
$
41,523

 
$
179,423


The accompanying notes are an integral part of these statements.

9



Washington Prime Group, L.P.
Unaudited Consolidated Statements of Cash Flows
(dollars in thousands)
 
For the Six Months Ended June 30,
 
2018
 
2017
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
35,704

 
$
179,124

Adjustments to reconcile net income to net cash provided by operating activities:


 

Depreciation and amortization, including fair value rent, fair value debt, deferred financing costs and equity-based compensation
126,545

 
132,289

Gain on extinguishment of debt, net

 
(21,221
)
Gain on disposition of interests in properties and outparcels, net
(16,244
)
 
(125,710
)
Impairment loss

 
8,509

Provision for credit losses
3,957

 
3,484

(Income) loss from unconsolidated entities, net
(267
)
 
616

Distributions of income from unconsolidated entities
2,817

 
161

Changes in assets and liabilities:


 

Tenant receivables and accrued revenue, net
9,017

 
3,288

Deferred costs and other assets
(15,858
)
 
(11,479
)
Accounts payable, accrued expenses, deferred revenues and other liabilities
(9,900
)
 
(9,814
)
Net cash provided by operating activities
135,771

 
159,247

CASH FLOWS FROM INVESTING ACTIVITIES:


 

Acquisitions, net of cash acquired
(80,108
)
 

Capital expenditures, net
(59,772
)
 
(70,967
)
Net proceeds from disposition of interests in properties and outparcels
23,402

 
203,624

Investments in unconsolidated entities
(12,054
)
 
(36,747
)
Distributions of capital from unconsolidated entities
22,923

 
56,962

Net cash (used in) provided by investing activities
(105,609
)
 
152,872

CASH FLOWS FROM FINANCING ACTIVITIES:


 

Distributions to noncontrolling interest holders in properties
(5
)
 
(23
)
Redemption of limited partner units
(25
)
 
(12
)
Net proceeds from issuance of common units, including equity-based compensation plans

 
13

Purchase of redeemable noncontrolling interest

 
(6,830
)
Distributions to unitholders
(118,385
)
 
(118,073
)
Proceeds from issuance of debt, net of transaction costs
593,714

 
368,199

Repayments of debt
(492,548
)
 
(540,003
)
Net cash used in financing activities
(17,249
)
 
(296,729
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
12,913

 
15,390

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
70,201

 
88,514

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
83,114

 
$
103,904


The accompanying notes are an integral part of these statements.

10



Washington Prime Group, L.P.
Unaudited Consolidated Statement of Equity
(dollars in thousands, except per unit amounts)
 
 
General Partner
 
 
 
 
 
 
 
 
 
 
 
 
Preferred
 
Common
 
Total
 
Limited Partners
 
Total
Partners'
Equity
 
Non-
Controlling
Interests
 
Total
Equity
 
Redeemable Non-Controlling Interests
Balance, December 31, 2017
 
$
202,576

 
$
896,828

 
$
1,099,404

 
$
166,660

 
$
1,266,064

 
$
1,058

 
$
1,267,122

 
$
3,265

Cumulative effect of accounting standards
 

 
2,085

 
2,085

 
389

 
2,474

 

 
2,474

 

Redemption of limited partner units
 

 

 

 
(25
)
 
(25
)
 

 
(25
)
 

Other
 

 
(89
)
 
(89
)
 

 
(89
)
 

 
(89
)
 

Equity-based compensation
 

 
3,771

 
3,771

 
490

 
4,261

 

 
4,261

 

Adjustments to limited partners' interests
 

 
435

 
435

 
(435
)
 

 

 

 

Distributions on common units ($0.50 per common unit)
 

 
(93,870
)
 
(93,870
)
 
(17,379
)
 
(111,249
)
 
(5
)
 
(111,254
)
 

Distributions declared on preferred units
 
(7,016
)
 

 
(7,016
)
 

 
(7,016
)
 

 
(7,016
)
 
(120
)
Other comprehensive income
 

 
4,899

 
4,899

 
920

 
5,819

 

 
5,819

 

Net income
 
7,016

 
24,102

 
31,118

 
4,466

 
35,584

 

 
35,584

 
120

Balance, June 30, 2018
 
$
202,576

 
$
838,161

 
$
1,040,737

 
$
155,086

 
$
1,195,823

 
$
1,053

 
$
1,196,876

 
$
3,265


The accompanying notes are an integral part of this statement.


11

Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)


1.
Organization
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"). WPG Inc. will generally qualify as a REIT for U.S. federal income tax purposes as long as it continues to distribute at least 90% of its REIT taxable income and satisfy certain other requirements. WPG Inc. will generally be allowed a deduction against its U.S. federal income tax liability for dividends paid by it to REIT shareholders, thereby reducing or eliminating any corporate level taxation to WPG Inc. Washington Prime Group, L.P. (“WPG L.P.”) is WPG Inc.'s majority‑owned limited partnership subsidiary that owns, develops and manages, through its affiliates, all of WPG Inc.'s real estate properties and other assets. WPG Inc. is the sole general partner of WPG L.P. As of June 30, 2018, our assets consisted of material interests in 109 shopping centers in the United States, consisting of open air properties 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 costs such as property operating, real estate taxes, repair and maintenance, and advertising and promotional expenses.
We seek to enhance the performance of our properties and increase our revenues by, among other things, securing leases of anchor and inline tenant spaces, re‑developing or renovating existing properties to increase the leasable square footage, and increasing the productivity of occupied locations through aesthetic upgrades, re‑merchandising and/or changes to the retail use of the space.
Severance
On May 7, 2018, the Company's Executive Vice President, Property Management was terminated without cause from his position and received severance payments and other benefits pursuant to the terms and conditions of his employment agreement. In addition, the Company terminated without cause additional non-executive personnel. In connection with and as part of the aforementioned management changes, the Company recorded aggregate severance charges of $2.0 million, including $0.5 million of non-cash stock compensation in the form of accelerated vesting of equity incentive awards, which costs are included in general and administrative expense in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2018.
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 June 30, 2018 and December 31, 2017 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 June 30, 2018 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 2017 Annual Report on Form 10-K for WPG Inc. and WPG L.P. (the "2017 Form 10-K").

12

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)


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.
There have been no changes during the six months ended June 30, 2018 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 six months ended June 30, 2018, we did not provide financial or other support to a previously identified VIE that we were not previously contractually obligated to provide.
Investments in partnerships and joint ventures represent our noncontrolling ownership interests in properties. We account for these investments using the equity method of accounting. We initially record these investments at cost and we subsequently adjust for net equity in income or loss, which we allocate in accordance with the provisions of the applicable partnership or joint venture agreement and cash contributions and distributions, if applicable. The allocation provisions in the partnership or joint venture agreements are not always consistent with the legal ownership interests held by each general or limited partner or joint venture investee primarily due to partner preferences. We separately report investments in joint ventures for which accumulated distributions have exceeded investments in and our share of net income from the joint ventures within cash distributions and losses in unconsolidated entities, at equity in the consolidated balance sheets. The net equity of certain joint ventures is less than zero because of financing or operating distributions that are usually greater than net income, as net income includes non-cash charges for depreciation and amortization, and WPG has committed to or intends to fund the venture.
As of June 30, 2018, our assets consisted of material interests in 109 shopping centers. The consolidated financial statements as of that date reflect the consolidation of 92 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 13 properties, or the joint venture properties, using the equity method of accounting. While we manage the day-to-day operations of the joint venture properties, we do not control the operations as we have determined that our partner or partners have substantive participating rights with respect to the assets and operations of these joint venture properties.
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 84.4% and 84.2% for the six months ended June 30, 2018 and 2017, respectively. As of June 30, 2018 and December 31, 2017, WPG Inc.'s ownership interest in WPG L.P. was 84.4% and 84.3%, respectively. We adjust the noncontrolling limited partners' interests at the end of each period to reflect their interest in WPG L.P.
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.

13

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 asset or liability's fair value within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Under Topic 820, fair value measurements are determined based on the assumptions that market participants would use in pricing the asset or liability in an orderly transaction at the measurement date and under current market conditions.
Use of Estimates
We prepared the accompanying consolidated financial statements in accordance with GAAP. This requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reported period. Our actual results could differ from these estimates.
Segment Disclosure
Our primary business is the ownership, development and management of retail real estate. We have aggregated our operations, including enclosed retail properties and open air properties, into 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
Adoption of New Standards
On January 1, 2018, we adopted Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers (Topic 606)" using the modified retrospective approach. ASU 2014-09 revised 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. The impacted revenue streams primarily consist of fees earned from management, development and leasing services provided to joint ventures in which we own an interest and other ancillary income earned from our properties. Upon adoption, we recorded a cumulative-effect adjustment to increase equity of approximately $2.5 million related to changes in the revenue recognition pattern of lease commissions earned by the Company from our joint ventures. We do not expect the adoption of ASU 2014-09 to have a material impact to our net income on an ongoing basis.
Additionally, we adopted the clarified scope guidance of ASC 610-20, "Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets" in conjunction with ASU 2014-09, using the modified retrospective approach. ASC 610-20 applies to the sale, transfer and derecognition of nonfinancial assets and in substance nonfinancial assets to noncustomers, including partial sales, and eliminates the guidance specific to real estate in ASC 360-20. With respect to full disposals, the recognition will generally be consistent with our current measurement and pattern of recognition. With respect to partial sales of real estate to joint ventures, the new guidance requires us to recognize a full gain where an equity investment is retained. These transactions could result in a basis difference as we will be required to measure our retained equity interest at fair value, whereas the joint venture may continue to measure the assets received at carryover basis. No adjustments were required upon adoption of this standard.
On January 1, 2018, we adopted ASU 2017-12, "Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities." ASU 2017-12 aims to reduce complexity in cash value hedges of interest rate risk and eliminates the requirement to separately measure and report hedge ineffectiveness, generally requiring the entire change in the fair value of the hedging instrument to be presented in the same income statement line as the hedged item. Upon adoption, we recorded a cumulative-effect adjustment of $584 between accumulated other comprehensive income and retained earnings.

14

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 cumulative effect of the changes to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09 and ASU 2017-12 were as follows:
 
Balance at December 31, 2017
 
Adjustments Due to
ASU 2014-09
 
Adjustments Due to
ASU 2017-12
 
Balance at January 1, 2018
Balance Sheet
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Accounts payable, accrued expenses, intangibles, and deferred revenues
$
264,998

 
$
(2,474
)
 
$

 
$
262,524

 
 
 
 
 
 
 
 
Equity
 
 
 
 
 
 
 
Capital in excess of par value
$
1,240,483

 
$
(389
)
 
$

 
$
1,240,094

Accumulated deficit
$
(350,594
)
 
$
2,474

 
$
(584
)
 
$
(348,704
)
Accumulated other comprehensive income
$
6,920

 
$

 
$
584

 
$
7,504

Noncontrolling interests
$
167,718

 
$
389

 
$

 
$
168,107

In accordance with ASU 2014-09 requirements, the disclosure of the impact of adoption on our consolidated statements of operations for three and six months ended June 30, 2018 and consolidated balance sheet as of June 30, 2018 were as follows:
 
For the Three Months Ended June 30, 2018
 
For the Six Months Ended June 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Change Higher/(Lower)
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Change Higher/(Lower)
Consolidated Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
Other income
$
7,932

 
$
7,819

 
$
113

 
$
14,275

 
$
14,022

 
$
253

 
June 30, 2018
 
As Reported
 
Balances Without Adoption of ASU 2014-09
 
Effect of Change Higher/(Lower)
Balance Sheet
 
 
 
 
 
Liabilities
 
 
 
 
 
Accounts payable, accrued expenses, intangibles, and deferred revenues
$
251,422

 
$
254,149

 
$
(2,727
)
 
 
 
 
 
 
Equity
 
 
 
 
 
Capital in excess of par value
$
1,244,211

 
$
1,244,637

 
$
(426
)
Accumulated deficit
$
(418,472
)
 
$
(421,199
)
 
$
2,727

Noncontrolling interests
$
156,139

 
$
155,713

 
$
426


15

Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)


On January 1, 2018, we adopted ASU 2016-15, "Statement of Cash Flows (Topic 230)" and ASU 2016-18 "Restricted Cash" using a retrospective transition approach, which changed our statements of cash flows and related disclosures for all periods presented. ASU 2016-15 is intended to reduce diversity in practice with respect to how certain transactions are classified in the statement of cash flows and its adoption had no impact on our financial statements. ASU 2016-18 requires 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.
The following is a summary of our cash, cash equivalents and restricted cash total as presented in our statements of cash flows for the six months ended June 30, 2018 and 2017:
 
For the Six Months Ended June 30,
 
2018
 
2017
Cash and cash equivalents
$
53,987

 
$
76,759

Restricted cash
29,127

 
27,145

Total cash, cash equivalents and restricted cash
$
83,114

 
$
103,904

For the six months ended June 30, 2017, restricted cash related to cash flows provided by operating activities of $4.6 million, restricted cash related to cash flows used in investing activities of $3.5 million, and restricted cash related to cash flows used in financing activities of $3.0 million were reclassified. Restricted cash primarily relates to cash held in escrow for payment of real estate taxes and property reserves for maintenance, expansion or leasehold improvements as required by our mortgage loans and cash held in escrow under Section 1031 of the Code to fund potential acquisitions. Restricted cash is included in "Deferred costs and other assets" in the accompanying balance sheets as of June 30, 2018 and December 31, 2017.
New Standards Issued But Not Yet Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, "Leases (Topic 842)." ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. It is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. In March 2018, the FASB indicated it intended to approve an amendment that provides an entity the optional transition method to initially account for the impact of the adoption ASU 2016-02 with a cumulative adjustment to retained earnings on January 1, 2019 (the effective date of the ASU), rather than January 1, 2017, which would eliminate the need to restate amounts presented prior to January 1, 2019. From a lessee perspective, the Company currently has four material ground leases, two material office leases, and one material garage lease that, under the new guidance, will result in the recognition of a lease liability and corresponding right-of-use asset. Undiscounted future minimum lease payments due under these leases total approximately $32.1 million with termination dates which range from 2023 to 2076.
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. However, the FASB's intended amendment to ASU 2016-02 referred to above allows lessors to elect, as a practical expedient, not to allocate the total consideration to lease and non-lease components based on their relative standalone selling prices. This practical expedient will allow lessors to elect a combined single lease component presentation if (i) the timing and pattern of the revenue recognition of the combined single lease component is the same, and (ii) the combined single component would be classified as an operating lease. We believe we meet the criteria to use this practical expedient. 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. For the six months ended June 30, 2018 and 2017, the Company deferred $8.7 million and $8.0 million of internal leasing costs, respectively. We are currently evaluating the impact the adoption of this standard will have on our consolidated financial statements.

16

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)


Revenue
The following tables disaggregate our revenue by major source for the three and six months ended June 30, 2018:
 
 
For the Three Months Ended June 30, 2018
 
 
Minimum rent
 
Overage rent
 
Tenant reimbursements
 
Other income
 
Total
Lease related
 
$
121,787

 
$
1,415

 
$
47,594

 
$
258

 
$
171,054

Ancillary
 

 

 

 
2,054

 
2,054

Fee related
 

 

 

 
2,140

 
2,140

Other(1)
 

 

 

 
3,480

 
3,480

Total revenues
 
$
121,787

 
$
1,415

 
$
47,594

 
$
7,932

 
$
178,728

 
 
For the Six Months Ended June 30, 2018
 
 
Minimum rent
 
Overage rent
 
Tenant reimbursements
 
Other income
 
Total
Lease related
 
$
245,126

 
$
3,429

 
$
96,238

 
$
2,024

 
$
346,817

Ancillary
 

 

 

 
3,703

 
3,703

Fee related
 

 

 

 
4,482

 
4,482

Other(1)
 

 

 

 
4,066

 
4,066

Total revenues
 
$
245,126

 
$
3,429

 
$
96,238

 
$
14,275

 
$
359,068

(1) Primarily relates to insurance proceeds received from property insurance claims and excess franchise tax refunds for a previously-owned property.
Minimum Rent
Minimum rent is recognized on a straight-line basis over the terms of their respective leases. Minimum rent also includes accretion related to above-market and below-market lease intangibles related to the acquisition of operating properties. We amortize any tenant inducements as a reduction of revenue utilizing the straight-line method over the term of the related lease or occupancy term of the tenant, if shorter.
Overage Rent
A large number of our retail tenants are also required to pay overage rents based on sales over a stated base amount during the lease year. We recognize overage rents only when each tenant's sales exceed the applicable sales threshold as defined in their lease.
Tenant Reimbursements
A substantial portion of our leases require the tenant to reimburse us for a material portion of our property operating expenses, including CAM, real estate taxes and insurance. Such property operating expenses typically include utility, insurance, security, janitorial, landscaping, food court and other administrative expenses. Tenant reimbursements are established in the leases or computed based upon a formula related to real estate taxes, insurance and other property operating expenses and are recognized as revenues in the period they are earned. When not reimbursed by the fixed CAM component, CAM expense reimbursements are based on the tenant's proportionate share of the allocable operating expenses and CAM capital expenditures for the property. We accrue reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. We recognize differences between estimated recoveries and the final billed amounts in the subsequent year.
Other Income
Lease related: We collect lease termination income from tenants to allow for the tenant to vacate their space prior to their scheduled lease termination date. We recognize lease termination income in the period when a termination agreement is signed, collectability is assured, and we are no longer obligated to provide space to the tenant. In the event that a tenant is in bankruptcy when the termination agreement is signed, termination fee income is deferred and recognized when, and if, it is received.

17

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)


Ancillary: We seek to monetize our common areas through robust ancillary programs. These programs include destination holiday experiences, customer service programs, sponsored children's play areas and local events, and static and digital media initiatives. We enter into agreements with unrelated third parties under these programs and charge a negotiated fee in exchange for providing the unrelated third party access to the common area as defined under the respective agreements. We recognize the fee as revenue as we satisfy our performance obligation, which typically occurs over one year.
Fee related: We collect fee income primarily from our unconsolidated joint ventures in exchange for providing management, leasing, and development services. Management fees are charged as a percentage of revenues (as defined in the applicable management agreements) and are recognized as revenue as we render such services. Leasing fees are charged on a fixed amount per square foot signed or a percentage of net rent negotiated within the underlying lease and are recognized upon lease execution. Development fees are charged on a contractual percentage of hard costs to develop the respective asset and are recognized as we satisfy our obligation to provide the development services.
4.
Investment in Real Estate
2018 Acquisitions
On April 11, 2018, we acquired, through a sale-leaseback transaction, four Sears department stores and adjacent Sears Auto Centers at Longview Mall, located in Longview, Texas; Polaris Fashion Place®, located in Columbus, Ohio; Southern Hills Mall, located in Sioux City, Iowa; and Town Center at Aurora, located in Aurora, Colorado. The purchase price was approximately $28.5 million and was funded by a combination of $13.4 million from our Facility (as defined in Note 6 - "Indebtedness"), $9.7 million from the first tranche of the Four Corners transaction, as discussed below, and $5.4 million from O'Connor Mall Partners, L.P. related to their pro-rata share of the joint venture that owns Polaris Fashion Place® (see Note 5 - "Investment in Unconsolidated Entities, at Equity").
On April 24, 2018, the Company closed on the acquisition of Southgate Mall, located in Missoula, Montana, for $58.0 million, which was initially funded from our Facility (as defined in Note 6 - "Indebtedness"). From a tax perspective, the Company structured the purchase of Southgate Mall as a planned reverse Section 1031 exchange based on the disposition of certain outparcel sales to Four Corners that have closed or will close in several tranches as further discussed below.
The following table summarizes the fair value allocation for the acquisitions, which were finalized during the three months ended June 30, 2018:
Investment properties
 
$
72,647

Investment in and advances to unconsolidated entities, at equity
 
5,543

Deferred costs and other assets
 
10,311

Accounts payable, accrued expenses, intangibles, and deferred revenue
 
(8,393
)
Net cash paid for acquisitions
 
$
80,108

Intangibles of $10.3 million, which relate primarily to above-market leases and lease in place values, are included in “Deferred costs and other assets” as of the respective acquisition dates. The weighted average useful life of the intangible assets is 11.5 years. Intangibles of $4.9 million, which relate primarily to below-market leases, are included in “Accounts payable, accrued expense, intangibles, and deferred revenue” as of the respective acquisition dates. The weighted average useful life of the intangible liabilities is 9.6 years.
The transactions were accounted for as asset acquisitions and accordingly, $0.6 million of transaction costs were capitalized as part of the allocation of fair value.
2018 Dispositions
On January 12, 2018, we completed the sale of the first tranche of restaurant outparcels to FCPT Acquisitions, LLC ("Four Corners") pursuant to the purchase and sale agreement executed on September 20, 2017 between the Company and Four Corners. The first tranche consisted of 10 outparcels, with an allocated purchase price of approximately $13.7 million. The net proceeds of approximately $13.5 million were used to fund a portion of the acquisition of the Sears parcels on April 11, 2018, as discussed above, and for general corporate purposes. Additionally, on June 29, 2018, we completed the sale of the second tranche, which consisted of 5 outparcels, for an allocated purchase price of approximately $9.5 million. The Company received net proceeds of approximately $9.4 million, of which approximately $7.5 million has been restricted under Section 1031 of the Code to fund potential acquisitions. The Company expects to close on the remaining outparcels during the second half of 2018, subject to due diligence and closing conditions.

18

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)


In connection with the 2018 disposition activities, the Company recorded net gains of $8.1 million and $16.2 million for the three and six months ended June 30, 2018, respectively, which are included in gain on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive income.
2017 Dispositions
On June 13, 2017, we sold 49% of our interest in Malibu Lumber Yard, located in Malibu, California, as part of the O'Connor Joint Venture II transaction (as defined below and as discussed in in Note 5 - "Investment in Unconsolidated Entities, at Equity").
On June 7, 2017, we completed the sale of Morgantown Commons, located in Morgantown, West Virginia, to an unaffiliated private real estate investor for a purchase price of approximately $6.7 million. The net proceeds were used for general corporate purposes.
On May 16, 2017, we completed the sale of an 80,000 square foot vacant anchor parcel at Indian Mound Mall, located in Heath, Ohio, to an unaffiliated private real estate investor for a purchase price of approximately $0.8 million. The net proceeds were used for general corporate purposes.
On May 12, 2017, we completed the transaction with regard to the ownership and operation of six of the Company's retail properties and certain related outparcels (the "O'Connor Joint Venture II" as discussed in Note 5 - "Investment in Unconsolidated Entities, at Equity").
On February 21, 2017, we completed the sale of Gulf View Square, located in Port Richey, Florida, and River Oaks Center, located in Chicago, Illinois, to unaffiliated private real estate investors for an aggregate purchase price of $42.0 million. The net proceeds from the transaction were used to reduce corporate debt.
On January 10, 2017, we completed the sale of Virginia Center Commons, located in Glen Allen, Virginia, to an unaffiliated private real estate investor for a purchase price of $9.0 million. The net proceeds from the transaction were used to reduce corporate debt.
In connection with the 2017 disposition activities, the Company recorded net gains of $125.4 million for the three and six months ended June 30, 2017, which are included in gain on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive income.
Impairment
During the first quarter of 2017, the Company entered into a purchase and sale agreement to dispose of Morgantown Commons, which was sold in the second quarter of 2017. We shortened the hold period used in assessing impairment for the asset during the quarter ended March 31, 2017, which resulted in the carrying value not being recoverable from the expected cash flows. The purchase offer represented the best available evidence of fair value for this property. We compared the fair value to the carrying value, which resulted in the recording of a one-time non-cash impairment charge of approximately $8.5 million in the accompanying consolidated statements of operations and comprehensive income for the six months ended June 30, 2017.
5.
Investment in Unconsolidated Entities, at Equity
The Company's investment activity in unconsolidated real estate entities during the six months ended June 30, 2018 and June 30, 2017 consisted of investments in the following material joint ventures:
The O'Connor Joint Venture I
This investment consists of a 51% noncontrolling interest held by the Company in a portfolio of 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®; Scottsdale Quarter® located in Scottsdale, Arizona; and Town Center Plaza (which consists of Town Center Plaza and the adjacent Town Center Crossing) located in Leawood, Kansas. We retained management, leasing, and development responsibilities for the O'Connor Joint Venture I.
On April 11, 2018, the O'Connor Joint Venture I closed on the acquisition of the Sears department store located at Polaris Fashion Place® in connection with our acquisition of additional Sears department stores (see Note 4 - "Investment in Real Estate").
On March 2, 2017, the O'Connor Joint Venture I closed on the purchase of Pearlridge Uptown II, a 153,000 square foot wing of Pearlridge Center, for a gross purchase price of $70.0 million.

19

Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)


On March 30, 2017, the O'Connor Joint Venture I closed on a $43.2 million non-recourse mortgage note payable with an eight year term and a fixed interest rate of 4.071% secured by Pearlridge Uptown II. The mortgage note payable requires monthly interest only payments until April 1, 2019, at which time monthly interest and principal payments are due until maturity.
On March 29, 2017, the O'Connor Joint Venture I closed on a $55.0 million non-recourse mortgage note payable with a ten year term and a fixed interest rate of 4.36% secured by sections of Scottsdale Quarter® known as Block K and Block M. The mortgage note payable requires monthly interest only payments until May 1, 2022, at which time monthly interest and principal payments are due until maturity.
The O'Connor Joint Venture II
During the quarter ended June 30, 2017, we completed an additional joint venture transaction with O'Connor Mall Partners, L.P. ("O'Connor"), an unaffiliated third party and our partner in the O'Connor Joint Venture I, with respect to the ownership and operation of seven retail properties and certain related outparcels, consisting of the following: The Arboretum, located in Austin, Texas; Arbor Hills, located in Ann Arbor, Michigan; Classen Curve and The Triangle at Classen Curve, each located in Oklahoma City, Oklahoma and Nichols Hills Plaza, located in Nichols Hills, Oklahoma (the "Oklahoma City Properties"); Gateway Centers, located in Austin, Texas; Malibu Lumber Yard; Palms Crossing I and II, located in McAllen, Texas; and The Shops at Arbor Walk, located in Austin, Texas (the "O'Connor Joint Venture II"). The transaction valued the properties at $598.6 million before closing adjustments and debt assumptions. Under the terms of the agreement, we retained a 51% noncontrolling interest in the O'Connor Joint Venture II and sold the remaining 49% interest to O'Connor. The transaction generated net proceeds to the Company of approximately $138.9 million, after taking into consideration costs associated with the transaction and the assumption of debt, which we used to reduce the Company's debt as well as for general corporate purposes. At the time of closing, we deconsolidated the properties included in the O'Connor Joint Venture II and recorded a gain in connection with this partial sale of $126.1 million, which is included in gain on disposition of interests in properties, net in the accompanying consolidated statements of operations and comprehensive income for the three and six months ended June 30, 2017. The gain was recorded pursuant to ASC 360-20 and calculated based upon proceeds received, less 49% of the book value of the deconsolidated net assets. Our retained 51% noncontrolling equity method interest was valued at historical cost based upon the pro rata book value of the retained interest in the net assets. We retained management and leasing responsibilities for the properties included in the O'Connor Joint Venture II for which we collect a fee. Our partner's substantive participating rights over certain decisions most important to the operations of the O'Connor Joint Venture II preclude our control and consolidation of this venture.
In connection with the formation of this joint venture, we recorded transaction costs of approximately $6.4 million as part of our basis in this investment.
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 8% for 2018. We retain management and leasing responsibilities for the Seminole Joint Venture for which we collect a fee.
Advances to the O'Connor Joint Venture I and O'Connor Joint Venture II totaled $4.9 million and $4.3 million as of June 30, 2018 and December 31, 2017, 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.

20

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 presents the combined balance sheets for the O'Connor Joint Venture I, O'Connor Joint Venture II, the Seminole Joint Venture, and an indirect 12.5% ownership interest in certain real estate as of June 30, 2018 and December 31, 2017:
 
 
June 30, 2018
 
December 31, 2017
Assets:
 
 
 
 
Investment properties at cost, net
 
$
1,959,951

 
$
1,972,208

Construction in progress
 
52,947

 
44,817

Cash and cash equivalents
 
35,128

 
40,955

Tenant receivables and accrued revenue, net
 
30,647

 
30,866

Deferred costs and other assets (1)
 
158,571

 
174,665

Total assets
 
$
2,237,244

 
$
2,263,511

Liabilities and Members’ Equity:
 
 

 
 

Mortgage notes payable
 
$
1,297,494

 
$
1,302,143

Accounts payable, accrued expenses, intangibles, and deferred revenues(2)
 
146,123

 
148,273

Total liabilities
 
1,443,617

 
1,450,416

Members’ equity
 
793,627

 
813,095

Total liabilities and members’ equity
 
$
2,237,244

 
$
2,263,511

Our share of members’ equity, net
 
$
404,267

 
$
414,245

 
 
 
 
 
Our share of members’ equity, net
 
$
404,267

 
$
414,245

Advances and excess investment
 
24,275

 
22,173

Net investment in and advances to unconsolidated entities, at equity(3)
 
$
428,542

 
$
436,418


(1)
Includes value of acquired in-place leases and acquired above-market leases with a net book value of $98,666 and $107,869 as of June 30, 2018 and December 31, 2017, respectively.
(2)
Includes the net book value of below market leases of $62,569 and $69,269 as of June 30, 2018 and December 31, 2017, respectively.
(3)
Includes $443,963 and $451,839 of investment in and advances to unconsolidated entities, at equity as of June 30, 2018 and December 31, 2017, respectively, and $15,421 of cash distributions and losses in unconsolidated entities, at equity as of June 30, 2018 and December 31, 2017.
The following table presents the combined statements of operations for the O'Connor Joint Venture II for the three and six months ended June 30, 2018 and from May 12, 2017, and, in the case of Malibu Lumber Yard, for the period from June 13, 2017, through June 30, 2017 and the O'Connor Joint Venture I, the Seminole Joint Venture, and an indirect 12.5% ownership interest in certain real estate for all periods presented during which the Company accounted for these investments as unconsolidated entities for the three and six months ended June 30, 2018 and 2017:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total revenues
$
64,180

 
$
58,852

 
$
130,082

 
$
107,286

Operating expenses
27,377

 
24,404

 
53,245

 
44,995

Depreciation and amortization
24,364

 
22,225

 
47,825

 
41,259

Operating income
12,439

 
12,223

 
29,012

 
21,032

Interest expense, taxes, and other, net
(12,949
)
 
(11,574
)
 
(25,988
)
 
(20,033
)
Net (loss) income from the Company's unconsolidated real estate entities
$
(510
)
 
$
649

 
$
3,024

 
$
999

 
 
 
 
 
 
 
 
Our share of (loss) income from the Company's unconsolidated real estate entities
$
(895
)
 
$
(172
)
 
$
267

 
$
(616
)

21

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)


6.
Indebtedness
Mortgage Debt
Total mortgage indebtedness at June 30, 2018 and December 31, 2017 was as follows:
 
 
June 30,
2018
 
December 31,
2017
Face amount of mortgage loans
 
$
1,056,888

 
$
1,152,436

Fair value adjustments, net
 
7,024

 
8,338

Debt issuance cost, net
 
(3,225
)
 
(3,692
)
Carrying value of mortgage loans
 
$
1,060,687

 
$
1,157,082

A roll forward of mortgage indebtedness from December 31, 2017 to June 30, 2018 is summarized as follows:
Balance at December 31, 2017
$
1,157,082

Debt amortization payments
(9,048
)
Repayment of debt
(86,500
)
Amortization of fair value and other adjustments
(1,396
)
Amortization of debt issuance costs
549

Balance at June 30, 2018
$
1,060,687

On June 8, 2018, the Company exercised the first of three options to extend the maturity date of the $65.0 million term loan secured by Weberstown Mall, located in Stockton, California, for one year. The extended maturity date is June 8, 2019, subject to two one-year extensions available at our option subject to compliance with the terms of the underlying loan agreement and payment of customary extension fees.
On January 19, 2018, an affiliate of WPG Inc. repaid the $86.5 million mortgage loan on The Outlet Collection® | Seattle, located in Auburn, Washington. This repayment was funded by borrowings on the Revolver (as defined below).
Unsecured Debt
On January 22, 2018, WPG L.P. amended and restated $1.0 billion of the existing facility. The recast Facility (as defined below) can be increased to $1.5 billion through currently uncommitted Facility commitments. Excluding the accordion feature, the recast Facility includes a $650.0 million Revolver (as defined below) and $350.0 million Term Loan (as defined below). The $350.0 million Term Loan was fully funded at closing, and the Company used the proceeds to repay the $270.0 million outstanding on the June 2015 Term Loan (as defined below) and to pay down the Revolver.

22

Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)


The following table identifies our total unsecured debt outstanding at June 30, 2018 and December 31, 2017:
 
 
June 30,
2018
 
December 31,
2017
Notes payable:
 
 
 
 
Face amount - the Exchange Notes(1)
 
$
250,000

 
$
250,000

Face amount - 5.950% Notes due 2024(2)
 
750,000

 
750,000

Debt discount, net
 
(10,391
)
 
(11,086
)
Debt issuance costs, net
 
(8,583
)
 
(9,542
)
Total carrying value of notes payable
 
$
981,026

 
$
979,372

 
 
 
 
 
Unsecured term loans:(8)
 
 
 
 
Face amount - Term Loan(3)(4)
 
$
350,000

 
$

Face amount - December 2015 Term Loan(5)
 
340,000

 
340,000

Face amount - June 2015 Term Loan(6)
 

 
270,000

Debt issuance costs, net
 
(5,061
)
 
(3,305
)
Total carrying value of unsecured term loans
 
$
684,939

 
$
606,695

 
 
 
 
 
Revolving credit facility:(3)(7)
 
 
 
 
Face amount
 
$
280,000

 
$
155,000

Debt issuance costs, net
 
(4,560
)
 
(540
)
Total carrying value of revolving credit facility
 
$
275,440

 
$
154,460

(1) The Exchange Notes were issued at a 0.028% discount, bear interest at 3.850% per annum and mature on April 1, 2020.
(2) The 5.950% Notes due 2024 were issued at a 1.533% discount, bear interest at 5.950% per annum, and mature on August 15, 2024. The interest rate could vary in the future based upon changes to the Company's credit ratings.
(3) The unsecured revolving credit facility, or "Revolver" and unsecured term loan, or "Term Loan" are collectively known as the "Facility."
(4) The Term Loan bears interest at one-month LIBOR plus 1.45% per annum and will mature on December 30, 2022. We had interest rate swap agreements totaling $270.0 million, which effectively fixed the interest rate on a portion of the Term Loan at 2.56% per annum through June 30, 2018. On May 9, 2018, we executed swap agreements totaling $250.0 million to replace the matured swap agreements, which effectively fix the interest rate on a portion of the Term Loan at 4.21% through June 30, 2021. At June 30, 2018, the applicable interest rate on the unhedged portion of the Term Loan was one-month LIBOR plus 1.45% or 3.54%.
(5) The December 2015 Term Loan bears interest at one-month LIBOR plus 1.80% per annum and will mature on January 10, 2023. We have interest rate swap agreements totaling $340.0 million which effectively fix the interest rate at 3.51% per annum through maturity.
(6) The June 2015 Term Loan bore interest at one-month LIBOR plus 1.45% per annum. During the three months ended March 31, 2018, the Company repaid the June 2015 Term Loan and wrote off $0.5 million of debt issuance costs.
(7) As of December 31, 2017, the Revolver provided borrowings on a revolving basis up to $900.0 million, bore interest at one-month LIBOR plus 1.25%, and was initially scheduled to mature on May 30, 2018. During the three months ended March 31, 2018, we amended the terms of the Revolver to provide borrowings on a revolving basis up to $650.0 million at one-month LIBOR plus 1.25%. Under the amended terms, the Revolver will mature on December 30, 2021, subject to two six-month extensions available at our option subject to compliance with terms of the Facility and payment of a customary extension fee. Upon the amended terms, the Company wrote off $0.3 million of debt issuance costs. At June 30, 2018, we had an aggregate available borrowing capacity of $369.8 million under the Revolver, net of $0.2 million reserved for outstanding letters of credit. At June 30, 2018, the applicable interest rate on the Revolver was one-month LIBOR plus 1.25% or 3.34%.
(8) While we have interest rate swap agreements in place that fix the LIBOR portion of the rates as noted above, the spread over LIBOR could vary in the future based upon changes to the Company's credit ratings.

23

Washington Prime Group Inc. and Washington Prime Group, L.P.
Condensed Notes to Unaudited Consolidated Financial Statements (Continued)
(dollars in thousands, except share, unit and per share amounts and where indicated as in millions or billions)


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 June 30, 2018, management believes the Company is in compliance with all covenants of its unsecured debt.
The total balance of mortgages was approximately $1.1 billion as of June 30, 2018. At June 30, 2018, certain of our consolidated subsidiaries were the borrowers under 23 non-recourse loans and one full-recourse loan secured by mortgages encumbering 27 properties, including one separate pool of cross-defaulted and cross-collateralized mortgages encumbering a total of four properties. Under these cross-default provisions, a default under any mortgage included in the cross-defaulted pool may constitute a default under all mortgages within that pool and may lead to acceleration of the indebtedness due on each property within the pool. Certain of our secured debt instruments contain financial and other non-financial covenants which are specific to the properties which serve as collateral for that debt. If the borrower fails to comply with these covenants, the lender could accelerate the debt and enforce its right against their collateral. Our existing non-recourse mortgage loans generally prohibit our subsidiaries that are borrowers thereunder from incurring additional indebtedness, subject to certain customary and limited exceptions. In addition, certain of these instruments limit the ability of the applicable borrower's parent entity from incurring mezzanine indebtedness unless certain conditions are satisfied, including compliance with maximum loan to value ratio and minimum debt service coverage ratio tests. Further, under certain of these existing agreements, if certain cash flow levels in respect of the applicable mortgaged property (as described in the applicable agreement) are not maintained for at least two consecutive quarters, the lender could accelerate the debt and enforce its right against its collateral.
On May 29, 2018, we received a notice of default letter, dated May 25, 2018, from the special servicer to the borrower, a consolidated subsidiary of WPG L.P., concerning the $94.0 million mortgage loan secured by Rushmore Mall ("Rushmore"), located in Rapid City, South Dakota. The notice was issued by the special servicer because the borrower notified the lender that there were insufficient funds to ensure future compliance with the mortgage loan due to the loss of certain tenants at Rushmore. The borrower has initiated discussions with the special servicer regarding this non-recourse loan and is considering various options including restructuring the loan, extending the term of the loan, and transitioning Rushmore to the mortgage lender, among other options.
On April 11, 2018, we received a notice of default letter, dated April 6, 2018, from the special servicer to the borrower, a consolidated subsidiary of WPG L.P., concerning the $45.7 million mortgage loan secured by Towne West Square, located in Wichita, Kansas. The notice was issued by the special servicer because the borrower did not make certain reserve payments or deposits as required by the loan agreement for the aforementioned loan. The borrower initiated discussions with the special servicer regarding this non-recourse loan and considered various options which included restructuring the loan, extending the term of the loan, and transitioning the property to the mortgage lender, among other options. On April 20, 2018, the borrower received a notice from the special servicer to accelerate repayment of the loan's outstanding balance. In the event the property is transitioned to the mortgage lender, the borrower does not expect or anticipate that any cash expenditure will be necessary to pay the accelerated repayment amount and borrower's obligation under the mortgage loan will be fully satisfied following transition of the property.
At June 30, 2018, 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 the defaulted properties for impairment indicators and have concluded no impairment charges were warranted as of June 30, 2018.
Gain on Extinguishment of Debt, Net
On April 25, 2017, the Company completed a discounted payoff of the $87.3 million mortgage loan secured by Mesa Mall, located in Grand Junction, Colorado, for $63.0 million and retained ownership and management of the property. Upon the discounted payoff of the mortgage note payable, the Company recognized a gain of $21.2 million during the three and six months ended June 30, 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. We estimate the fair values of consolidated fixed-rate unsecured notes payable using quoted market prices, or, if no quoted market prices are available, we use quoted market prices for securities with similar terms and maturities.

24

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 June 30, 2018 and December 31, 2017 are summarized as follows:
 
 
June 30, 2018
 
December 31, 2017
Book value of fixed-rate mortgages(1)
 
$991,888
 
$1,000,936
Fair value of fixed-rate mortgages
 
$1,000,207
 
$1,024,890
Weighted average discount rates assumed in calculation of fair value for fixed-rate mortgages
 
4.65
%
 
4.19
%
 
 
 
 
 
Book value of fixed-rate unsecured debt(1)
 
$1,590,000
 
$1,610,000
Fair value of fixed-rate unsecured debt
 
$1,539,383
&