Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Simon Property Group Incorporated Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Tom Ward, Senior Vice President of Investor Relations. Please go ahead, sir.
Thank you, Sydney. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Rick Sokolov, Vice Chairman Brian McDade, Chief Financial Officer and Adam Muroy, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors.
We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8 ks filing. Both the press release and the supplemental information are available on our IR website at investors. Simon.com.
For our prepared remarks, I'm pleased to introduce David Simon.
All right. Good morning. We had a very busy and productive quarter and very pleased with our financial results. Our results of the quarter were highlighted by funds from operation of $1,081,000,000 or $3.05 per share. We achieved this consensus this quarter even with certain unanticipated retailer bankruptcies, reduced property level NOI from the acceleration of properties undergoing significant redevelopments such as Northgate compared to our budget, reduced overage rent from tourism spending, including the negative impact from the continued strong U.
S. Dollar and lower distribution income from a certain from certain international investments. We continue to grow our cash flow and report solid key operating metrics. Comp NOI increased 1.6% for the 3rd quarter and total portfolio increased 1.3% for the quarter. Portfolio NOI was negatively impacted by 50 basis points due to properties undergoing significant redevelopment and the unfavorable FX impact due to the continuing strong dollar.
Year to date, comp NOI has increased 1.7%. Retail bankruptcies negatively impacted our comp NOI by over 100 basis points in the 3rd quarter. As a reminder, Japan premium outlets and designer outlets in Europe produce over $1,000 in retail sales per square foot in all of our 26 international outlets, excluding Canada, which is in our basically North American portfolio, generated comp NOI growth of 6.3% on a constant currency basis, which as a reminder is not included in our comp NOI. And if you did that, we'd be well over 2%. Retail sales momentum accelerated in the Q3.
Reported retail sales per square foot for malls and outlets was $6.80 compared to $6.50 per foot, an increase of 4.5%. Leasing activity remains solid. Average base minimum rent was $54.55 The malls and premium outlets recorded leasing spreads of $12.10 an increase of 22.2%. Our malls and outlets occupancy ended the quarter 94.7%, an increase of 30 basis points compared to occupancy at the end of the second quarter. And again, tenant bankruptcies affected that by roughly 60 basis points.
On an NOI weighted basis, excluding our international outlets, which I discussed above, reported were as follows: reported retailer sales on an NOI weighted basis is $8.67 compared to $6.80 per foot. NOI weighted sales growth was 6.1% year over year compared to 4.5%. As mentioned, occupancy is 95.8% compared to 94. Average base minimum rent is $73.14 compared to the 50 $4.55 number and our weighted comp NOI growth would be 2.7%. We started construction on new premium outlet in Tulsa, Oklahoma, scheduled to open in the spring of 2021.
Construction continues on 4 other new international outlet developments Malaga, Spain Bangkok, Thailand, West Midlands, England and not to forget Normandy, France, which we expect to be a terrific new outlet center. We had a very busy quarter in terms of completion of redevelopment projects, in particular, expansions on several of our high performing international outlets. We opened 2 in South Korea and 1 in Vancouver our Vancouver Designer Outlet in Canada. During the quarter, we started construction on our significant redevelopment at Tacoma Mall. And at the end of the Q3, we have 30 properties across all of our platforms in the U.
S. And internationally with the share of a net cost of approximately $1,400,000,000 And as a reminder, this is being funded by our internally generated cash flow. We announced and as you are aware, we closed on our new venture with the Rue Guild Group to combine our shop premium outlets marketplace with RGG's highly successful Rue La La and Gilt, creating a new multi platform dedicated to digital value shopping. We're very excited to expand our omni channel capabilities in partnership with RGG, which is a very profitable company with significant sales. Our industry leading capabilities in the physical outlet space combined with RGG's exceptional e commerce success will give shoppers and enhance access to the world's best brands and most compelling deals, both online and in store.
You saw the announcement this week regarding strategic investments. I won't belabor that other than we're very excited about the transactions that we're investing in Lifetime, Fitness, Pinstripe, SoHo, Parm, Sports Illustrated, Allied Sports. You can now for those of you that really like gaming, please enter the Simon Cup. We encourage you to do so. You'll have a lot of fun, but I will not be funding the analyst if, in fact, one of you win.
Look for us to open Sports Illustrated Sports Gaming Restaurants in the future. So now balance sheet, we completed 3 tranche senior notes totaling $3,500,000,000 at a coupon rate of 2.61 percent, average weighted terms of 15.9 years. Our offering marked industry milestones. Prior to no prior to our issuance, no real estate company had ever issued $1,250,000,000 of 30 year bonds in a single issuance, and the interest rate for each of the tranches was the lowest achieved by any real estate company for similar notes. We, in October, completed our 4 early redemptions of our senior notes, totaling $2,600,000,000 And during the quarter, we repurchased 1,150,000 shares.
After the bond redemptions, our liquidity stands at 7,000,000,000 dollars Balance sheet is in great shape. We announced a dividend of $2.10 per share, a 5 percent increase year over year. We'll pay $8.30 per share in dividends in 2019. That's an increase of 5.1 percent compared to all of last year. We've grown the dividend more than 8% over the last few years.
And as a reminder, our annualized dividend yield is greater than 5%, which is more than 3.50 basis points higher than the 10 year treasury, which is basically at a record spread. We're more than 1.5x covered in terms of our dividend coverage for our FFO. And we've paid out, since we've been public, now well over $30,000,000,000 a lot of dough. Now just to update finally, guidance is $12 to $12.05 which is an increase of $0.03 from the bottom end of the range after giving effect to the $0.33 debt extinguishment charge as we outlined for you when we did our notes deal a month or so ago. So that's it.
We're ready for questions.
And our first question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Great. Thank you. I just wanted to touch a little bit. I mean, you've been very active in terms of developing your experiential tenants for your assets. And I just wonder how high could you be taking this penetration in the next, say, 2 or 3 years?
Well, I would say to you the level of interest and new retailers in this category continues to amaze us. They actually are very interested in our real estate. So despite the negative narrative that you see from the general media, they all want to locate in the mall and in our real estate. And I think we're just at the beginning of that. So I continue to expect us to redevelop our assets with those kind of retailers significantly over the next decade.
Yes. Just thinking about the Southdale where you're replacing pennies with the lifetime assets,
what kind of
lift could that give to that center?
Significant. I mean, they'll have 5,000 members. They're great for the community. They are without question the best operator of a lifetime resort in that whole industry. They blow everybody away.
They're great partners, good friends, and we expect continued growth there. They reinforce our real estate as a place for the community. And I couldn't be prouder working with them side by side and as partners. They also have a world class shareholder base. So that's as we create kind of the next generation of our company, We're associating ourselves with world class entrepreneurs, partners, investors.
We could sit here and talk about selling an outlot for $1,000,000 but I encourage you to think about our company differently.
Okay. And then just lastly, I know we've touched on this, you're saying human resources and permits are probably more of a generator than your access to capital. But are you thinking you might have to accelerate some your capital spend in the next few years just given the redevs and developments you're doing? And you seem to continue to be on pace for whether it's the new developments in the European outlets, etcetera?
I think it's going to be relatively within a margin of error, relatively consistent with what we've been doing the last couple of years, Craig. So we're spending $1,000,000,000 to $1,500,000,000 per year. That's not going to jump up to 2 $500,000,000 just because of what I would because of some of the constraints that we have, not financially, but just execution. So I would expect us to continue to be in that range over the next few years.
Okay. I appreciate it. Thanks.
Yes, sure.
Thank you. And our next question comes from Christy McElroy with Citi. Please proceed with your question.
Hey, it's Michael Bilerman here with Christy. David, Christy and I both picked up our gold cards, so I don't think we're going to win. Our kids probably have a better chance of doing that than we do.
Again, I would get one of your kids to enter it and then they may have a better shot than you, Michael.
Exactly. If you think about all these investments that you're making in a lot of the consumer facing brands and you talked a little bit about you went through the list on the call. I was reporting in the press that the Soho House 1 was about $100,000,000 How should we think about the totality of capital that you have out today across all of these different investments? If you look at the balance sheet, I'm not sure if it's in the other assets category, but if it is, that totality has gone from $1,200,000,000 up to 1.8 dollars over the course of the 9 months. So can you give us a little bit of a sense of the total money that you've put out across all of these different exciting adventures?
Yes. First of all, just to clarify, the increase in the other assets is basically because writing up the leases to value. I mean, that's the biggest because of the new accounting rules, that's the biggest change, okay? So you can't go from that number to what we've invested by any stretch of imagination. So that's number 1.
Number 2 is to the extent that we reach materiality, we're obviously going to have to disclose that with our in our financial statements in our Q and our K. We so the other assets is just so you know is the is basically the increase in those deferred what and it's writing up and that's $525,000,000 roughly when you have to write up your leases to market with the new accounting rules, okay? So we have not reached the I would say it this way. We certainly have not reached our investment our outside investments to the level of materiality. That's the first point.
2nd is, I look at it our embedded we're basically reinvesting our embedded gains that we have in Aero and ABG and some of the other venture group investments into some of these things. So right now, we're playing with the house's money. And it's not material. I don't think the Soho House number is right. So just I'm not going to go through each one at each level.
Again, I encourage everybody try to think about us a little differently. But what we're doing is, we're making these investments to learn so that we're going to be, number 1, a better company. 2 is creating investments with great partners, with great entrepreneurs, with great shareholders, I think is going to exponentially increase our opportunities in our both in our physical and ultimately in the online world. And the level of activity that we are seeing is just very encouraging is all I can tell you. I mean, I think we're at the epicenter of kind of physical online world entertainment, creating kind of the next generation destination center and it's we're all trying to put it together.
But we're not at this point, simple thing to think about is make sure you understand that on the deferred assets, number 1. Number 2 is make sure you understand we're not at the materiality level. And number 3 is, it's basically we're rolling the embedded gains. The way I think about it is, I'm rolling the embedded gains in our future investments, but we're also making these not as a learning experience because who cares about learning, we're doing it to make money and I expect all of these to pay off in the future.
David, you've obviously been critical to the company's success for well over 25 years. You signed your last retention employment agreement back in 2011 that expired back in July. Where do things stand in terms of are you going without an employment agreement at this point? Or is that still being worked on?
I have no employment agreement.
So you'll just be an employee at will with everybody else?
That's the way it's shaping up. Yes, that's the answer.
Yes. Christy has a question too.
Hey, David. Good morning. You mentioned 100 basis point impact, I think, to comp NOI from bankruptcies in Q3. Just to try to get a sense for the impacts that have already been incurred in Q3 versus what could be incremental in Q4. Just with regard to the Forever 21 bankruptcy filing, was there any reserve in the revenue line and impact to same store for non payment of pre petition rent?
And have you seen any impact thus far from Barneys or Kitchen Collection at this point?
Not at this point. I mean, we don't really go through each and every retailer. I don't think it's fair given the sizes of our company for us to talk about specific retailers. I want to defer on that. But the reality is we have these we've updated our guidance.
We've narrowed the range and all of that's kind of embedded in that. So I think the important point is a number of these were unanticipated from our budget. We told you what our budget was at the beginning of the year. We don't update our comp NOI, as you know. And we would have well outperformed it.
We still the biggest variable we've got right now is still the overage rent in the our tourist centers, and we'll see how the Q4 shakes out. To me, that's the bigger variable than anything else. But all of kind of all of the noise that is out there from certain retailers is kind of embedded in our guidance for the year.
Okay. Thank you.
Sure.
Thank you. And our next question comes from Steve Sakwa with Evercore ISI. Please proceed with your question.
Thanks. Good morning. I guess, David, maybe you or Rick could just talk about sort of the leasing pipeline and the momentum. And as you think about 2020 and kind of where you sit in terms of leasing for next year and just the tenant demand, how would you sort of describe the environment today versus say a year ago? And how do you sort of feel like you're shaping up on 2020 expirations?
Hi, Steve, it's Rick. In fact, Dave and I have
just logged through 12 hour days going property by property. And frankly, the environment is still strong. There are a lot of tenants that want to access our properties across all three platforms. We are doing a whole lot of leasing so far this year. We've got almost 10,500,000 square feet.
You see our rents are up, our spreads are up. And in a lot of instances, spaces that we're getting back, we're putting in more productive tenants at higher rents.
Okay. I would just say, look, next year, we're I think we'll we obviously it does take time. We did we are having a high bankruptcy year. I mean, there's no denying that. I mean, I but as we put together our plan for next year, but as we put together our plan for next year, I think we'll be okay.
And we're hustling. We're finding new tenants. The biggest setback that I see for next year is not so much replacing the bankruptcies, but really getting our redevelopment pipe open. We've got a we have taken a step back this year, a reasonable level of cash flow, forget whether it's comp or whatever else, however you want to describe it. But we've taken a reasonable step back this year because of taking down properties to redevelop.
And we are never a company that does I've seen so many companies throw away the year and say, well, we'll get back to 2021, we'll get back in 2022. We do not do that. So the reality is we're going to come in with comp NOI that's going to be not so bad. It's a little variable as I described repeatedly with our the tourism slowdown, which we pointed out 6 months 3, 6 months ago, and now you see it across the board for both retailers and companies that are have exposure to tourism in the strong dollar. But we are still going to deliver comp NOI growth.
It's not going to be that, as one of my heroes would say, not too shabby. Next year, we've got a lot of we don't give guidance until, as you know, end of January. I think it will be fine even with the bankruptcies that we've got to lease up and the fact that we're still in a massive redevelopment number. And that stuff, the redevelopment takes time. I mean, we are in that business.
We're not in that but we don't have throwaway years, Steve. You know that about us.
No, no. Look, I appreciate that. I guess, again, not I guess, trying to delve a little bit on to the redevelopment and just thinking about sort of next year and some of the headwinds you're taking down North Gate this year. I mean, as you sort of think about, I guess, those types of projects that have negatively impacted, do you expect those to continue? Number 1.
And then as you just sort of think about the list of bankruptcies this year and you sort of think about possibilities for next year, does the list of potential bankruptcies next year look a lot smaller than maybe it did a year ago?
No, I think listen, I think we're flushing through most of the dudes, okay? So I actually think now who knows, I mean, but I think we're kind of reaching bottom in 2018 on that stuff or 2019 on that stuff. It's rivaling what happened in 2017. So it's not like something that we haven't experienced before, but we know what we have to do. And again, I don't want to get ahead of our guidance, but I don't think you're not going to see a dramatic, oh my God from us, okay, when we present our plan.
Okay, thanks. Sure.
Thank you. And our next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, good morning. Your 3rd quarter same store NOI growth of up 1.6% seems like it's the best in the mall sector. So I was just wondering if you guys could go through any thoughts you have on how you're able to differentiate yourself, is scale helping the mix of property types or something else?
Well, I mean, I think it's not if you look over a long period of time, I mean, I think we've done that for a number of years. So I don't really I don't know. I mean, it's a function. We have good people, good assets. We're diversified, not tied in one particular regional place.
And again, I just want to the fact of the matter is that we put in our international business, which we really don't have. We thought we're thinking about it, but we don't want to confuse people. So I mean we'd be well over 2% comp NOI growth. And don't forget about 26 assets, again, excludes Canada because we have put Canada in our premium outlet business from the get go. So I don't know.
It's we're focused on the business and running it day to day the best that we can. So I don't really want to compare or contrast, but I think it's not this isn't like a Q1 this isn't the first time we've done that, I guess, is what I want to say, right, Rick? Exactly. Listen,
we grind every nickel. Everybody pays attention to every aspect of our business on the income side and the expense side, and we've been doing it for a very long time very consistently, and we intend to continue to do
Yes. I'll give you here's the culture. So we go through every asset while we're planning. We were here till 9 o'clock last night. We're not sitting here planning how we're going to communicate.
Maybe we should, because sometimes we garble the message, well, all the time maybe. But we're so we've been the last 2 days going through this is we're going through our mall portfolio today, then next week, we go through the international business in each category. I've offered Billerman to come here and see it, but Ward's telling me not to do that again. But the reality is we're doing that to 9. We did it all day Monday to 9.
We do it all day today. We're right after this call, we're doing it. There's no downtime. We're not planning how to communicate what we're doing. We're just doing.
And that's the culture.
Got it. Okay. And then I was wondering maybe if you guys could talk about the new outlet in Oklahoma that you're working on, just what pre leasing has been like and what other retail options kind of are in the area?
Well, we have a very good mall there. It is the I mean, not to dwell too much on demographics, but it's the largest trade area without an outlet center. And we've been working on it for a while. And based on our success in Denver and tenant demand, we feel extremely confident we're going to be able to deliver it for a good return in a very good market. I mean, Tulsa is a very good market with good income demographics.
And I think it's kind of a it's really our bread and butter. We don't honestly, if we have to pre lease, we're not the kind of company we need to be. So we don't really pre lease, so to speak. But we're very confident that we'll be able to deliver the product that we want to deliver.
Okay. Thanks.
Yes.
Thank you. And our next question comes from Jeremy Metz with BMO Capital Markets. Please proceed with your question.
Hey, good morning. David, just wanted to go back to Michael's question a little bit on the Simon Ventures and some of these other investments you made. I'm just hoping you can expand upon your last comment, but in response to his just in terms of how do you really think about and measure returns for some of these just given some of the clear tangential benefits that you're obviously looking to pull from doing these?
Well, just to be clear, we expect these returns to be similar to what private equity type returns and they must stand on their own. But we're making them because we think there's potential to do business with that partner. So there are 2 separate decisions. 1 is, for instance, in Lifetime, it's very simple. We looked at a multiple of EBITDA.
We looked at their growth. We looked at their future. And we're very confident that we're going to get a multiple of our invested capital. And by the way, they're wonderful partners, and we're going to do arm's length of business with them going forward. And it's a to me, that is a perfect scenario of a win win.
So the investments must stand on their own. They must
be
and we look at them through a private equity lens much like everything else we've done. At the same time, if we can do business with them on an arm's length basis, that's the gravy. And that's basically how we look at it. And again, and we expect that we by the way, we've yes, we've had some write offs in our venture group, which is a little these our venture group is a little more at the early days of investing, not an A round, not kind of either BC round, BC or even D round. But the ones that I've announced here this week are ones that are basically well established companies.
So that's this is, in many cases, growth capital or just solidifying our relationship, and we think it's a good investment. And again, these aren't at the point of materiality. Again, I want everybody to put the size of our company in perspective, but we are going to make money on those investments, 1. Number 2 is, we're going to we are going to learn a lot because a number of these companies are leaders in their industry. And we're not too old, Rick and I, we're close.
I'm old. We're close, but we're not too old to learn. And I mean, not to diverge, but the and we were up at the RGG Board meeting last Thursday or Friday, I can't remember. But I mean the amount that we are going to learn and in addition to the opportunities that we have as a partnership going forward, but the amount we're going to be a better real estate operator. And this is what I need everyone to try and appreciate.
We are going to be a better real estate operator, the more we know e commerce, okay, and the more we know how they integrate. And have been partners with 1 of the best entrepreneurs, frankly, ever in the e commerce space, one of the early pioneers, and that team, I mean, just separates, I think, ultimately what we're going to be able to do. And again, I can't say it's going to mean and it's a profitable company and they do several $100,000,000 of sales and all this other stuff, but and we wouldn't have done it had we not felt like the company was worth it. But the reality is we're going to and it's going to accelerate our marketplace efforts And we're going to be better in the realist we're going to be we're going to make money in that investment, but we're also going to be better real estate operators because of that investment. And we're going to know our retailers better, and we do already, but this is going to take us to another hopefully to another level.
And that's and technology and how you integrate it with physical properties and all and with our retailers, I think it's going to be very, very interesting to see how it all evolves.
Yes, great. Thank you for that. And just the follow-up I have is just on the densification projects. You removed the disclosure from the sub, but regardless you obviously have a number of projects going on that are going to deliver here in a bit in 2019, but really next year and beyond. I was just wondering if you could talk about the pipeline.
What's the total dollars at a gross cost basis today that you have underway? And I guess what's beyond what was last disclosed, I guess last quarter? How much additional opportunities are you working on currently given some of the other needs here for capital? And it's a bit of a different skill set. So I'm assuming there's a human capacity to how much you can really have going on at any one point along these lines.
Yes. Don't read anything into the fact that we took that out. So here's why we took it out, and we could put it back in. But number 1, we if they're under construction and we've approved it, it's in our it's in the detail, I. E, FIPS is already in the detail.
That's number 1. Number 2 is we are also outlining other stuff that's being done on the peripheral of our properties that we aren't doing that I thought was I didn't want to mislead the market somehow even though we asterisked that it wasn't our project. So we took that out. And 3 is the pipeline is so big, we weren't having we weren't doing the right discipline of what's in there because it is a big, big pipeline. So we just felt like it's probably better to communicate it when it's been approved.
So the pipeline is actually I didn't want to just lift like a BS schedule that says here's all the densification we're going to do. I'd rather just put it in the 8 ks when we actually are doing it. That's the nature of our company as opposed to outlining potential stuff. So the pipeline is continues to be very big. Northgate, if Northgate continues to evolve, it's a $1,000,000,000 project with office, residential, all sorts of mixed use stuff.
So we have the Houston Galleria development. Again, that could have been on a pipe, but we're not quite ready to start construction. So you'll continue to see what's the number over $2,000,000,000 to $3,000,000,000 if I had to have to put a number on it. But we'll I think we'll just it is so much ingrained in our business now. There's no reason to separate it.
It's just part of our 8 ks that you'll see as we approve deals. So I look at it as an evolution of our sophistication and our ability to execute. So it's just part of our portfolio as opposed to, boy, this is a separate distinct schedule. It doesn't need to be anymore because it's just part of our part of the nature of what we do.
Got it. Thanks for the time. Sure.
Thank you. And our next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed with your question.
Hey, good morning out there. So two questions. First
Alex, why do you say good morning out there all the time? Do you think we're that far out there?
Well, I it's just a standard hello greeting. So anyway, now you're asking me to think on my feet, which is tough.
That's right. I threw you off. Sorry about this. Two questions.
First on the debt side, obviously, you had strong demand on your unsecured bonds. You priced pretty tight to Apple. But maybe you can just talk about what's going on in the mortgage market. Some of the folks that we've spoken to have said the lenders are either pulling back or trying to pair exposure or tightening terms, lowering LTVs. I mean, we all saw the LTV and the underwriting for the Norwalk SoNo Mall.
So maybe you can just give a sense of what's going on in the mortgage side of the business and whether it's by asset type, is it across the board or is it certain productivity levels of malls, etcetera? Just a bit more color on there.
Good morning, Alex. It's Brian. So look, I think from the mortgage perspective, this year it's been a relatively light year from a maturity profile perspective, but we are much more active next year. We are already in the market on some of those assets and are receiving solid indications back in line with what our expectations are. Look, I think at the end of the day, we're not seeing any reduction in appetite, but certainly that's a function of our asset quality.
And so look, we expect that market is going to be there. I understand that there's a few deals that are out there now that will get priced here in the next 6 to 8 weeks, which will further provide price discovery in that marketplace.
Yes. Look, I think I would reaffirm Brian's points, but also just to add a couple of things. Number 1 is, sponsorship in and again, not that I'm not reflecting any other deals that are out there, but sponsorship is the case for everybody. Sponsorship is critically important. That's number 1.
And the balance sheet and that's what's great about where we stand is that we don't we can do all sorts of different financings. We're not tied to the secured market or the unsecured market. And that again is a material separator, which I mean we didn't harp on it again today because when Tom does this first thing, he usually puts that in. I'm like, I think people are tired of us talking about it. So, but I would think that and the proof is always in the pudding, which the pudding was pretty damn good a month ago, okay.
So the reality is we do have this separator in our real estate peer group because we have the ability to go in and out of the markets pretty effectively whether secured, unsecured, etcetera.
Okay. That's helpful. And then the second question is on all the new investing you're doing, The GIL, The Sports Illustrated, whether or not you do Forever 21, all these things, As you underwrite them, how is your tolerance for sort of the time to get to cash flow positive? Is it the same as you would underwrite for real estate? Meaning or do these projects take longer?
Or do you allow yourself more rope to let these things go before you decide ultimately to just kick the venture out and move on to the next? Just curious how your underwriting is different in the time it takes to profitability versus the nontraditional retail ventures versus traditional retail real estate?
Well, I think it really depends on the category and what the I mean, the reality is all these companies have comparables. So in some case, they're valued at 5 times cash flow. In some cases, they're valued at 20 times cash flow. And it's really a function of what we see in the future and where the market is. So we don't really get ahead of ourselves one way or another on that.
And like I said, I think we look at it similar to what with respect to Simon Venture Group, what kind of the venture people look at it. We look at it with the same lens. And in the private equity, I think we do the same thing. And again, we have this extra sauce in the sense that we're expecting to get other benefits out of it, which are not necessarily in our numbers, but which is important to us. I don't want to talk about retailers specifically, but we are not just so everyone is clear, we're not involved in the one retailer you mentioned about investing or doing anything on that front.
I mean, I think it got mischaracterized last call, so I just want to be clear on that. We're not involved in any retailer that is in BK in terms of us looking to invest. So just to be clear on that, Alex.
Okay. Thank you, David. Sure.
Thank you. And our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, David. So look, I think
the reason that you're differentiating yourself is you're playing a lot more offense than maybe some of your peers who are playing defense. So with that in mind, I have one question and a follow-up to that. Look, 7% to 8% development yields, to quote you, not too shabby in this world backdrop of slow growth and low rates. So are you seeing maybe even more demand from sovereign wealth funds, other foreign investors to maybe partner with you on your developments with an eye on the long term?
Well, look, I think it's a really good question, Rich. And it's funny. Most of those folks, I got to be careful here, so I don't need to I mean, right now, let's face it, we're a contrarian investment, okay? If you look at our multiple compared to kind of most of the other nonretailrealestate companies. And if you look at cash flow stability or multiples or however you want to slice it and dice it, we're in today's world, we're contrarian.
And there are not, frankly, a lot of contrarian investors. There's more herd mentality. There are some very sophisticated sovereign wells that would love to partner with us on new opportunities. And again, when I say new opportunities, existing real estates that they may have and they want someone like us to do that. We're starting those discussions very they're very early, early, early days just to get to know them.
But the reality is not a lot of contrarian investment and for whatever reason we are considered a contrarian, but you do make a good point. We're on the offense. And the fact of the matter is, we've been so busy and excited about both the redevelopment, the densification and some of the new ventures that we've had that that's perfectly fine for us and we're going to continue to run the business. So I do think at some point, there's a there'll be a swap back to reality. But those kind of investors would rather buy certain asset types at a 3.5 yield.
I won't name names as opposed to 6 plus in Class A regional malls. That's been historically a bad bet over time. And who am I to say I'm smarter than those other guys? But listen, I'm willing to play the game and see who's right in the long run.
Got it. And so one follow-up question to that. Look, you have a tremendous amount of free cash flow that you're spinning off, a super strong balance sheet. Why wouldn't you just ramp up CapEx as a percentage of your operating cash flow right now and spend even more money to redevelop your properties for the future? And how I guess the question I'm ultimately asking is, you had said CapEx is going to be relatively range bound.
Why wouldn't you play even more offense than what you're playing right now?
Well, it goes back to a little I mean, it is literally some of the big projects we have. We're still constrained by getting approval. So we have 2 or 3 big ones that are in the approval process, just to name 3 that jump out at me, Brea, Orange County Stoneridge, which is in the East Bay area of California, King of Prussia. So we don't have the approvals yet to start. That's the biggest limiter.
And I don't on the and we are building office and the reality is we don't that's the one area we're not going to build spec on. I mean, we're depending on the size, we're going to want some lead tenants. We're not foolish. So but we think we have really good product that's differentiated in the markets that we're contemplating it. But getting the lead tenant does take a little bit of time.
So I think we're pretty aggressive, but and Northgate's a great example. I think Northgate, we could have been a little more methodical. We had it just to give you it depresses me a little bit, but just to give you an order of magnitude, we had roughly, we had in that in our numbers this year to do about $15,000,000 of NOI. And it's going to do $5,000,000 roughly. Yes, come on, I know these numbers.
And that's because we accelerated. We basically decided, let's just get on with our lives and tear them all down, okay. Happen to be out there and the mall is coming down, believe it or not. So we are doing it. It's just I think we're moving pretty fast.
In some of these areas, we're not going to be if we are building office, we're not going to get over our I mean, it's 100,000 square foot Cutsi building, that's one thing. But we're not going to get over our skis too much on some of the stuff to make sure we're in good shape.
Got it. That's helpful, David. Thank you.
Sure. Sure.
Thank you. And our next question comes from Nick Yulico with Scotiabank. Please proceed with your question.
Good morning. Sorry if I missed this, but can we just get the bankruptcy impact on same store NOI growth this quarter? I think it was cited as about 1 100 basis points in the 1st two
quarters this year? It's 100 year to date and it was 60 roughly 60 in this quarter, correct or no?
100 for the quarter.
100 for the quarter. I'm sorry, 100 for the quarter.
Okay. Thanks. And then second question is just going back to Forever 21. When we looked at the bankruptcy filing for them, you only have one existing store on the store closure list at Roosevelt Field. This excludes all the stores in development, which will not be opening.
So I guess that store closure list, I mean, should that give us comfort that there's one store in there? Or should we be expecting that over your 98 stores with them, either you already gave rent relief or you're planning to over the next year?
Again, I don't we don't want to talk about specific retailers. I think there we'll have to see how that bankruptcy evolves. I mean, there are more stores that they rejected that or about to reject that they never opened. And again, I don't want to get into nitty gritty detail, but in that particular case, as you brought it up, it was Riley Rose. We had a handful of those that at least has executed that won't be opening.
So whether now they weren't in our initial numbers in any event. So you'll see some of those come out one way or another, but it's never been in our until they open. It's not in our document, I guess, or 8 ks. But we'll see how it goes. I mean, I can't I'm not and I want to be very careful here.
So I'm not involved in it. We're negotiating kind of the future like every other major landlord and we'll see how it all shakes out at the end of the day.
Okay. Now it's helpful. I guess I'm just trying to tie it back to the bankruptcy impact year to date. If it was 100 basis points, I'm assuming there was not much in that from Forever 2021 unless you've already renegotiated leases and it's almost 1.5% of your base rent. So as we look forward over the year, it kind of feels like that bankruptcy impacted Forever 21 by itself could be similar to your overall bankruptcy impact this year.
Is that fair?
Well, I think you'll see a bigger we'll know more in 2020. It's not going to be material in 2019. And I think the focus is going to be really 2020, what that group is able to do going forward, which is out of our hands. And we're going to have to wait and see. We'll have a again, I don't want to get into particular tenants, but we'll have that our view of what happens with that and other bankrupt tenants will ultimately be in our 2020 estimates.
And that's the way for us to look at it. At this point, the materiality of any of these guys in the next year end is not, in my opinion, going to be material. Okay?
All right. Thank you.
For you, it might be, dollars 0.01 might be what I don't okay. But it's we did update our guidance. And what we know today about the bankrupt tenants is in our guidance and that's the important thing. And then our view of some of these bankrupt tenants and what their plan is for 2020 will be in our 2020 guidance. And that's the best way I can answer that.
Thank you.
Sure.
Thank you. And our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Hi. Just following up on what you were just talking about. So with some of these bankruptcies having been unexpected in 2019, as you look out to 2020, do you think a base case of 2% SS NOI growth would still be achievable?
We give our guidance at the end of January. I don't do we have a date yet? Not yet. We get we're waiting to see if the Colts make the Super Bowl because we want to make we want to work it around that day. That was a joke, but no, no, I actually think they're a pretty good team.
But where we give that all of that will be reflected in we've never given 2020 guidance. And I mean, people have estimates all over the place. So I don't really opine on it one way or another.
Okay. And then, in terms of sp0.com, how are you and Michael Rubin thinking about its value proposition? How much crossover the product you provide online through sp0.com is available through other online distribution channels? And then do you have any sense of the price differential on sp0.com and how it might that's
a complicated that's a complicated question. And I think the important thing is we both think and not just us, but our SPO team and the existing RGG team couldn't be more excited about the future opportunities together that we have. I think their team is unquestionably excited. I would not I think it's going to be a great partnership for our company. And together, we're going to do a lot more, both in terms of growing their existing business and then the partnership taking the origins of our business and extrapolating that going forward.
But it is early days. We're very committed to making this exciting. And between all of our relationships with the brands and all of our physical attributes and their e commerce attributes, this could be a really, really significant opportunity for our partnership. So let's give it a little bit of time. Can't give you an exact roadmap because some of the stuff we like to keep to ourselves because we are still growing the business and there's a lot of competition out there on that front.
So but again, couldn't be more pleased with the potential opportunity in the future.
Thanks for that.
Sure.
Thank you. And our next question comes from Ki Bin Kim with SunTrust. Please proceed with your question.
Thanks, Don. Good morning. So you've been reporting improving sales per square foot for the past several years. But that formula, there's some noise to it because the denominator is always changing.
So I
was wondering if you had a sense of the total sales productivity at your centers over the past couple of years. I'm just trying to get a sense of if it's becoming more vibrant or somewhat static over time. And I realize like hotels and apartments, you can't give us some sales data for it, but just trying to get a bigger picture
Well, I will give you the benefit of the rule of large numbers. There is absolutely given our large portfolio, there's absolutely your comment about the denominator changing is irrelevant in terms of our results because one particular property going in or one particular property going out or 10 going in or 10 going out ain't going to move the number, my friend. So that's number 1. Number 2 is many cases in our new developments, they come in below our average. And with that said, if anything, it's understating it.
And then finally, I'll say, we continue to believe that we're reporting, and this is really important, and I've said it again, and I don't want to keep saying it, but we're giving to you what's reported to us. And in some cases, what's reported to us is not actually gross sales.
Okay. And just going back to the topic of your investments that you're making in places like RGG or Authentic Brands, it's easy to get the sense that you're focused on making your fleet better and adding on different types of opportunities like your private equity or venture capital. When does it start to become more interesting to actually increasing your fleet size? Or is it the case that the upside opportunity in redevelopment and private equity type of investment is still just far and greater and better opportunity than increasing the fleet size?
When you did you say fleet?
Yes. So mall count, retail center count, things like that.
Look, I think we've historically have been acquisitive over our career. We just haven't done anything in a while. But the fact of the matter is, if the we have so much going on and so many opportunities here, I feel pretty good. Again, I don't feel like we need to do that. But if there's something out there that's that makes sense, we would look
at it.
But I think it's business as usual for us and the focus being on I mean, this sounds like gobbledygook, but the focus is just making us a better company. We got plenty of assets and all of these things that we're doing and attempting to do is to make the real estate in our company better. But we are more than a real estate company and that we interface with brands and consumers to an unbelievable extent. So why not take advantage of that reach that we've done reasonably well, but we can certainly do it to much greater extent. And that continues to be a focus for us.
All right. Thank you. Sure.
Thank you. And our next question comes from Vince Tibone with Green Street Advisors. Please proceed with your question.
Hi, good morning.
Good morning.
Could you elaborate on the magnitude of the decline in international tourism and the impact that had on foot traffic and tenant sales, some of your key gateway market properties?
Well, we don't give out specifics on that. But I mean, put it this way, the business has been the tourist centers have been relatively flat in terms of sales. And we think had we had a normal if we had a normal, what I'd call a normal dollar in terms of the strength versus visavisheeuro and other currencies and all the other noise that's out there, we would have expected a 5%, 6% increase. So I don't know if that Vince, I don't know if that gives you kind of what you want, but it's that some of our bigger international property sales have been flat. And traffic has actually not been too much the problem.
It's been stable, but it's really we're seeing the flatness of the sales that we would expected when we did budget, we would have expected to have a 5% or so increase in sales.
Interesting. No, that's helpful color. And then just one more for me, maybe switching gears a little. Can you provide some color on the trends you're seeing in the private market for malls? I mean, do you think cap rates or the number of interested bidders has changed over the last 6 months or so?
I would say to you not I have not seen a change, but I would think that I have not really seen a tangible change. I still think investing is more or less a herd mentality. And we're I was going to give an animal analogy, but I better refrain. Last time I did cockroach, which I'm not going to do today, but I think people steal the guys that have the money, I think they've always been retail real estate has always been it's not a commodity, so the operator really matters, so to speak. So it's not like a warehouse that's like one commodity versus the next.
And so the operators matter and the money that kind of goes in and out of commodity real estate has it's always kind of ebbed and flowed for retail real estate because who the operator is, has always been materially important. So that's one aspect I'd say to you. The next is, I still think there surprisingly, I'm actually surprised about it, But the so called smart money has not played a bigger role in this. But I mean, they obviously have different points of view and they may be right, but we feel pretty good about what we're doing.
No, that's helpful. And just one follow-up on that. I mean, let's say, the herd mentality does push cap rates higher. Is there a point where you would potentially come in and be an acquirer of single assets on the market given to your point that the platform makes a big difference and you could probably increase NOI at some of these acquisitions?
Yes. I think if there was a good fit, we would certainly take a hard look at it.
Okay, great.
I think that's the other point. I mean, we're not really seeing I think that's a good point, Vince. We're not really seeing kind of that A assets show up on the market.
Okay. That's helpful. Thank you.
Sure. No worries.
Thank you. And our next question comes from Michael Mueller with JPMorgan. Please proceed with your question.
Yes. Hi, good morning. I guess following up on that, for the properties where you have JV partners, have you seen those investors want to exit more in recent years or are they fine with the exposures and it's more about where to park incremental dollars for them?
I would say a lot of them are following the herd mentality. Okay. Is that I'm not trying to be cute. Am I clear on that? If not, I'll restate what I the answer.
No, I think so. I think so.
What would that imply? I think a lot of the folks out there are a little nervous about our business. But I would just put it not our business, not Simon Property Group Business, but nervous about whatever retail generally. And so they do tend to follow the herd mentality. That's where somebody, maybe us, is going to make a lot of money.
I assure you. I've seen this movie before and our cash flows are very, very, very resilient. If you have good real estate and a good operator, they always evolve and always change. And if you look at the mall that was built in the 60s, you look at the malls that were built in the 70s 80s 90s 2000, look at the redevelopment. I mean, my goodness, they changed a lot.
And they're changing today. So I don't no one here I mean, no one here is overly concerned about it. But all of these guys they all get a lot of people suffer from group think, okay? Maybe we do too, but we don't. We're in good shape.
Got it. And I mean, would you think over the next 3 years, 5 years or so, maybe we see a pickup in you buying out some of these JV partners? Or is it a little bit more of a function of you've got a big redevelopment pipeline, a lot of capital going there and you're getting bigger returns on that. So it's I guess that's the trade off. How do we think about that?
Yes. I mean, we're focused. Listen, I'm going to if they're nervous, I'm going to buy them at a real big discount. So let them get really nervous. I want them nervous, okay?
Nervous is good for us, okay? So that's okay. Got it. The reality is there could be opportunities, but we'll see.
Okay. Thanks, David. Bye. Sure.
Thank you. And we have a follow-up question from Christy McElroy with Citi. Please proceed with your question.
Hello?
Christy, if your line is on mute, please unmute.
Hello. Hey, David. Hey, David. It's Christy here with Singhal. I know that just an accounting question for me.
I know that the new straight lining of CAM was addressed on the last call and so straight line rents have trended higher this year. But with the recent bankruptcies, given the new rules given the new rules around determination of uncollectibility? Just trying to get a good sense for what the normal run rate is for that line.
I mean, that all flows through. So I don't have that off the top of my head. I would say to you, it's not material. But I mean that we do that all the time, right? So that we have to make that decision all the time, whether it's collectible or not collectible.
Okay.
I just didn't know if there was a material impact on that line aside from that being elevated with the straight line you can?
Not material. David, it's Michael speaking. You talked a little bit about how your stocks are contrarian investment at this point given the multiple and you've used some of your significant balance sheet capacity to buy back your stock, right? You did about $300,000,000 in the last 6 months. You talked a little bit on this call about maybe partnering with Sovereign Wealth.
It sounds like either buying assets that or managing assets they may own or look at new opportunities. No.
I don't think I said that, Michael. So I said there are very few contrarian investors right now, And we're not really we're at the very early stages of seeing how they feel about our the market in general. So I just want to be clear on that, okay?
Right. I was listening to when you're talking about maybe working with them. And I didn't know if there's an opportunity to either liquefy some of the value in the assets and the value you've created because the debt markets provided you a substantial amount of capital at very attractive rates, right? Is your stock that is the one that's disassociated with the performance that you're putting up. And so I know in the past, you've been reluctant to sell JV stakes in your assets to buy back your stock.
I'm wondering if that's changed at all in some of these conversations that you're having, if you find that there's an opportunity to partner with Contrarian Capital that you want to
do that? Well, again, I have never been a fan to sell an A asset to make a mark because A assets grow historically over time. And most everybody that sold an A asset, if they're going to believe it's an A asset in the future, regrets that decision, okay? So and buying stock back is a temporary investment decision. And the reality is we're in this for the long haul as we've demonstrated over almost 26 years of being a public company.
So I think that's kind of the worst thing frankly we could do. And getting this mark, making that getting a mark on our portfolio is fool's gold. It's never worked, because the next question is, well, what about the rest of the portfolio? So and again, just to reemphasize, so the answer is, no interest in doing that, number 1. Number 2 is, there are some of these I mean, we're just I don't want to overemphasize and hopefully I did and I'll look back at the call.
But we're not out running around saying, do you want to go people come to us, we'll talk to them about interest partnership interest, but we're not out soliciting sovereign wealth funds. We're not out doing that. The reality is we don't need their capital. So they know my number, 1-eight hundred David call me if they want. If they don't, they don't have to, okay.
And I wasn't thinking about it from Mark.
I don't want to overemphasize, we've talked to a few here and there. I think they respect what we do, but I don't really know. Maybe that's a flaw on us that we haven't really solicited them just to have better relationships. But I mean, we've done okay without them being a major player for us to get to where we are today. We've never needed that in scale.
So that's that. So I don't want to overemphasize. We've had discussions here and there because sometimes they call, sometimes they don't. So we're not out trying to buy partnership interest of ourselves or others. We're not out talking to Sovereign Wealth other than we'll have a couple of conversations.
And look, the reality is a lot of the institutional investors, as we all know, have a certain queasiness over retail. We've seen that before. It doesn't affect us. It's not it doesn't it affects you. It affects others.
It does not affect me and my company and what we do. That's the important point, okay?
Yes. And I wasn't thinking about it from a positive mark. I was thinking about more so in being able to raise additional capital and invest in your stock at just basically bolster that program that you're doing right now using the free cash flow and capacity, doing something more meaningful if you're able to find an investor that's willing to partner with you. I understand the dynamics and I understand giving up the growth. I just didn't know if that was part of the psyche today, just given where things stand?
No, I mean the stuff that look, I think most of the and again, we're beating it we're spending more time on this than warrants it. But most people, most institutional investors would like to do something as we've talked to them off and on over several years, most of them like to do external stuff with us, but the reality is we haven't been doing that. So we haven't been talking to them, okay? So again, it's we're spending too much time on this. On the other front, look, we've got what why aren't we aggressively buying our stock back?
Listen, we love our balance sheet. We'll be I think it's an unbelievable advantage, unbelievable. It's underappreciated. Sorry, Tom, I took out your paragraph in the teleconference text.
To do
$3,500,000,000 in 4 hours, 30 year bonds, blah, blah, blah is all pretty powerful. We don't want to jeopardize that. We've seen when people had overstepped their numbers, overstepped their credit ratings, how it kind of can retard their opportunities going forward. We don't want to do that. And importantly, I mean, we're in the process of adding to our already successful retail real estate portfolio.
And what does that mean? We're doing all this densification stuff. We're building our consumer facing business. We're positioning the company for the future. And as we all know, any leading company out there invest in the future from Microsoft to Amazon to go down the list.
Every successful company understands the importance of investment. And so I want the balance sheet that allows us to invest. If I had a criticism of historical retailers, they did not invest in their and again, it's not for me to criticize, honestly. So I don't want this to sound like I know it all. But the reality is what we've seen, what Rick and I have seen because of strained balance sheets or overspending in one thing versus another thing is the inability to reinvest in your business is a major no no.
So that's we are not going to do the major no no.
All right. Thanks for your time, David. Sure.
Thank you. And I'm not showing any further questions at this time. I'd like to turn the call over to Mr. David Simon for any closing remarks.
Okay. Thank you. Everyone, have a great day.
Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.