Good day, ladies and gentlemen, welcome to the Q4 2018 Simon Property Group Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question- and- answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Tom Ward, Senior Vice President, Investor Relations. Sir, you may begin.
Thank you, Lauren. Good morning, everyone. Thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer, Brian McDade, Chief Financial Officer, and Adam Reuille, 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. 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-K 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.
Okay. Good morning. We're pleased to report another year of record results, which marked our 25th year as a public company. Our full 2018 FFO per diluted share was $12.13, an increase of 8.2% year-over-year, which will be at the high end of our peer group. We beat the top end of our initial 2018 guidance by an impressive $0.11. Over the last four years, we've grown our FFO per share on a compound annual basis of 8%. To provide perspective on our FFO generation, we produced approximately $165 million in our first full year as a public company, $165 million, and in 2018, we produced $4.3 billion. Through the commitment to our strategy, active portfolio management, disciplined investment, relentless focus on operations and cost structure, we have increased our annual FFO generation by more than 25 times since our IPO.
For the Q4, FFO was $1.15 billion or $0.0323 per share, an increase of 3.5% year-over-year. We continue to grow our cash flow and report solid key operating metrics. Total portfolio increased 3.7%, more than $230 million for the year. Our top-line NOI increased 2.3% for the year and 2.1% for the Q4. Leasing activity remained solid. Average base rent was $54.18. The malls and the premium outlets recorded leasing spreads of $7.75 per sq ft, an increase of 14.3%. We are pleased that retail sales momentum continued in the Q4. Reported retail sales per sq ft for the mall and outlet was a record $661 compared to $628 in the prior year period, an increase of 5.3%. Retail sales were strong across the portfolio, with growth in consecutive months throughout the year. Each platform ended the year at record retail sale levels.
Our mall and premium outlet occupancy ended the quarter at 95.9%, an increase of 40- basis points from the Q3, an increase of 30- basis points compared to the year prior. Leasing activity accelerated throughout the year with occupancy for the combined malls and premium outlets increasing 130- basis points from the end of the first quarter through the year-end. We opened two new outlets, in 2018, the premium outlet collection in Edmonton, Canada, Denver Premium Outlets. Construction continues on three new outlets in leading international markets, two of which will open this year. Querétaro, Mexico will open in the summer, and Malaga, Spain will open in the fall. We are also under construction on a new outlet in Cannock, U.K., which will open the spring of 2020.
We expect to break ground on a new outlet in Bangkok, Thailand in the next few weeks. Our new development and projects and extensive pipeline of development opportunities across all of our platforms reinforce our industry-leading position. Important to note, our diversified income generation by geography and product type with 48% of our NOI from domestic malls, 42% from our value platform, which is the premium outlets and mills, and 10% internationally distinguishes Simon from all other retail real estate companies that are trading publicly. We completed a number of redevelopment expansion opportunities across our portfolio during 2018. Again, expansions include Aventura, Toronto Premium Outlets, Sano, Japan, Johor Premium Outlets in Singapore. We are reclaiming department store spaces, continue to be a focus and significant opportunity for the company.
We currently have 10 anchor redevelopment projects under construction with a gross cost of approximately $725 million. We have an additional 25 opportunities we are actively working on that are in various stages of development. We continue to fund these redevelopment projects through our internally generated cash flow. Quickly turning to the balance sheet, continues to lead our industry. Our liquidity ended the year at $7.5 billion. We have the strongest credit profile metrics in the REIT industry. Net debt to EBITDA of 5.1x, lowest in our sector. Our interest coverage ratio was 5.1. Our long-term issue rating of A/A2 continues to be the highest in the REIT sector. Our balance sheet continues to be a distinct advantage that should not be overlooked. During the quarter, we repurchased approximately 287,000 shares of common for approximately $47 million. We also redeemed 405,000 limited partnership units for $74 million.
Going to the dividend, we paid a record dividend in 2018 of $7.90 per share and have achieved a compound annual dividend growth rate of more than 11% over the last four years. We have paid more than $28 billion in dividends over our 25-year history as a public company. Today, we announced a dividend of $2.05 per share for this quarter, a year-over-year increase of 5.1%. At this current rate, we will have paid more than $100 in dividends per share by the Q2 this year. Before I turn to our outlook for 2019, let me summarize our 2018 results. We posted another year of industry-leading record results, including revenues, cash flow, FFO per share, and dividends. Our reported FFO diluted per share for 2018 was $12.13, which beat the midpoint of our initial guidance for the year by $0.17.
Moving on to 2019, our FFO guidance is $12.30 - $12.40 per share. When analyzing our 2019 range in context of our 2018 results, it is important to note the following. We expect the impact from FASB's ASU 2016-02, the new lease accounting standard, to reduce FFO per share by approximately $0.13. There were some items included in our 2018 FFO per share that are not expected to recur in 2019, including our gain of $0.10 per share related to the contribution of our investment in the Aéropostale licensing business for an increased ownership interest in ABG, higher income related to distributions from international investments of approximately $0.05 per share. These non-recurring items are approximately $0.15 per share in FFO for 2018. When you then adjust 2018 for those factors, you get to $11.85.
With our new guidance for 2019, we will have approximately 4%-4.5% growth compared to this adjusted number for 2018. We expect our 2019 growth rate will be at the high end of our peer group. Also keep in mind when we are looking at our 2019 number, we are expecting lower lease settlement income in 2019 compared to the prior year. We will have lost rents in 2019 due to closed department store spaces and the downtime related to redevelopment of those spaces. This impact to our NOI this year is temporary, as these investments will yield healthy returns and accelerate our NOI growth in 2020 and 2021. We expect the impact of rising interest rates and a stronger dollar to affect our results for 2019 compared to 2018.
We also had the loss of our share of the FFO from the German operations of our HBS joint venture, which was sold at the end of 2018 for a gain of $91 million. Therefore, a lot there. Hope you're a fast study like I am. Additional assumptions supporting our 2019 outlook include the following. Comparable NOI growth for combined mall Premium Outlets and mills platform of 2%. No planned acquisition activity or retail disposition activity, assuming no launch of our consumer-oriented platform and a diluted share count of approximately 356 million shares. To conclude, we had another excellent year, capping a solid first quarter century as a public company. We have consistently posted industry-leading returns along the way through hard work, innovation, great people, and great assets.
As in any industry, it's more important than ever that we drive change, focus on delivering exceptional experience for our tenants and consumers. We are now ready for questions. Thank you for listening.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star, then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from Craig Schmidt with Bank of America. Your line is now open.
Thank you. First, just wanted to congratulate Rick, given the changes that are going to come later in 2019.
Thank you.
My question is, I guess, you touched on it in your opening comments, but maybe you could talk about some of the other possible impacts from the repurposing of the Sears anchors, like sales disruption or any kind of compensation you might have to give tenants while you're working on the Sears spaces, especially with the densification efforts.
Well, Craig, again, I think I'd implore you and other people that cover us, you got to look at us differently. Some of the numbers that I gave you need to be factored in. We started our enterprise at $165 million of funds from operation. Today, we have $4.3 billion. We have 48% of our business in the mall business, and when we started, it was 90% or 95%. There's always disruption in our industry. Department store spaces that we reclaim, either through lease termination or acquisition, we think will be beneficial in the long run. There are downtimes associated with that, and like I said, that's all kind of manageable for a company like ours, and we give you the best sense of our guidance, and it's kind of all factored in there within this range that we hope to produce.
We have, obviously, a history, unrivaled, frankly, I think, about beating expectations. We'll see this year. We've got a lot going on. We're not going to zero in on one particular property, one particular tenant, one particular issue, because you've got to look at us on a broader basis. We're a little bit different.
Okay. Thanks. I just wondered if you've been having any discussions with JCPenney about potential store closings.
No.
Okay. Thank you.
Thank you. Our next question comes from Christy McElroy with Citi. Your line is now open.
Hey, good morning. It's Michael Bilerman here with Christy. David.
If I'm hip, I'm happy, because I don't know. I think Rick is square and I'm hip. What do you think?
I just hope that Rick is still going to be on these calls to go through the laundry list of retailers that are coming into your malls. David, you were pretty quick to deny the speculation of Simon trying to buy Macerich, which I can understand if you weren't buying them. I guess if I step back, why wouldn't you buy them? Because every deal that you've done the past 25 years has worked out pretty well for shareholders. You have a great cost of capital. You talked about your under-leveraged balance sheet being a distinct advantage that shouldn't be overlooked. You have an unbelievable platform that can produce synergies. You've proven out your redevelopment and densification efforts. You can probably access as much third-party capital as you wanted.
You've consistently raised your cash flow and your earnings, which has led to dividend growth, which is pretty much contrary to every one of your peers, by the way. With those set of facts and the performance, why wouldn't you be more aggressive on the acquisition front?
Well, first of all, Michael, thank you for recognizing some of our achievements over the last 25 years. We try to explain the company, maybe we're not very good at it, to best of our abilities. We're a little bit different because of some of those factors. Obviously, Michael, I'm not going to comment on any specific company. We tried to do a deal with Macerich a long time ago. That's, as I've said before, yesterday's news, we're glad to partner with them in Carson, which is moving forward. I'm not going to comment on any deal we may or may not do, or any particular company. We have no plans currently to do kind of M&A activity. We're very focused on what we've got in front of us.
We're excited about the continuation of the evolution of the mall industry, the way it's been evolving for 60 plus years. We are excited about our outlet business, and the international breadth and depth that it has. As I mentioned in my calls, we had leading sales per square foot in every platform. We've got plenty to do and we have no plans at all to think about anything, and we're focused on executing the vast amount of activity that we have.
Hi, David, it's Christy. Good morning.
Good morning.
You're coming off of a year of positive sales growth from a tenant perspective. You've been able to gain occupancy and maintain pricing power. Just from where you sit today and what you're seeing in terms of the health and store performance among your shop tenants, would you expect that 2019 would be a little bit of a tougher year from a tenant fallout and leasing perspective? Just sort of related to that, as you've been building your fifth platform and announcing more consumer-focused initiatives, maybe you can talk about what you see coming down the pike in 2019.
Well, I'll just talk, Rick can chime in. Look, I do think on the retail front, the stronger getting stronger. As you've seen by numbers throughout the retail community, the days of a rising economic tide don't lift all retail boats. You've had a lot of outperformances and a lot of underperformances. The underperformance, I can talk offline on a theory of why that is, I don't want to bore you. There are some retailers out there that we're nervous about. Far in the first quarter, bankruptcies are trending lower than they were in 2017 and 2018. However, there's some rumore d names out there that could ultimately end up being a similar 2017 and 2018. 2018, as we said, and as we looked and anticipated 2018, we thought it would be less than 2017.
We ended up being right there. I do think there'll be more bankruptcies to come in 2019. That's why we are relatively conservative as we look at our comp NOI because, look, it takes time to It's a little bit out of our control when we get the space and then to do a lease takes time, and even though as much as we anticipate it, we just take time to lease the space. We have our work cut out. We are concerned about a few retailers that should shake out in Q1. I think the retailers that are investing in their product, in their store experience, in their branding, we are having decent results. Physical retail can produce good results, but it can't be distracted with a lot of other activities.
Obviously, as you know, we've had a number of retailers, the list is long, the landscape is littered of leverage buyouts in our industry that we continue to sort through. That, I hope, answers the first question. On the second one, look, we're very close to launching this platform and these things always, it's a little bit like building something, but it's not quite as certain. It's more like building internationally where you think you're going to open in Q3, it goes to Q4, it goes to Q1. We've had a couple of those in maybe Spain and Mexico where it happens to delay a quarter there. I would expect this to launch. It will affect. Again, you see our numbers, the earnings impact to it will be, I think, completely on the margin. I hope the market appreciates that.
Because we don't have a set date yet on when that might happen, we're not going to put it in our numbers. If we launch it, we'll show it to you. You'll say, "Oh boy, that's worth a shot." It's not a big deal. It's a couple cents here and there. It's an unbelievable investment in our future, and we'll see where it goes. We expect that to happen, but a little bit. We just don't know exactly when we'll launch, so we've been hesitant to say it's a Q1 or Q2 or Q3 debut. Again, in summary, if the retailer's focused on product, brand, service, they're doing better. If they're leveraged, they haven't invested in their business, overinvested in e-commerce, struggling. Leverage buyouts were not ultimately beneficial by and large to our business. That's kind of working its way out of the system.
We are excited about our fifth platform. We expect it to debut, but when and how is a little bit up in the air, so we'll just keep it at that. We'll keep it off the table for now, but when we do, we'll share with you. Again, I think we're pretty transparent. I guess when you take a step back and think about our company, we've got all these assets, we've got all this business, it's all international, it's outlets. If we got as granular as you wanted, it would waste your time and waste our time. Again, just you got to kind of think of us a little bit differently that we're not these handful of assets here and there.
That's why we try to give you a broader, bigger picture of what we're all about and what we expect to earn next year or this year.
Great. Thank you, David.
Sure.
Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.
Thanks. Good morning. David, I don't know, you or Rick, maybe just talk about some of the newer tenants and some of the more online tenants, kind of your experience and success bringing some of these folks into the mall, and sort of your outlook for their growth into 2019 and 2020.
Hi, it's Rick. Just to step back, in all of these discussions, the single best thing we have going for us are incredibly strong properties across all three of our platforms. In any dynamic any of you talk about, the key is, do we have places where retailers want to be, and happily we do, and they're getting better by the day as we invest our capital and enhance them. In terms of the retailers, e-tailers are certainly one aspect of it, and there we're working with probably 40 different ones. We've rolled out UNTUCKit. You've heard out all the names, and they want to be, not unlike any other retailer, in the best properties. We are doing deals with Warby Parker and Fabletics and Shinola and UNTUCKit, and I could go on, and they are finding success.
You don't have to take our word for it. You can take what they're saying. A lot of them are expressly raising money to roll out more stores. That has been an interesting and important part of diversifying our tenant mix and keeping our properties current.
David, I just wanted to circle back. You talked sort of about the anchor redevelopments, and you said you're actively working on another 25. Just in terms of sort of the mix between retail and hotels and office and multi-family, how are those sort of projects sort of breaking out in terms of the alternative uses?
Actually, I think we've never been busier on the alternative uses. We've got a list in the 8-K that shows you what's been approved, but I think essentially that pales in comparison to the future activity. I'll just three off the top of my head, Steve, that our massive mixed-use projects include Northgate, which we have made a deal with the NHL franchise in Seattle to do their corporate office as well as their practice facility and ice facilities for the general public. We have Brea, which we have a reclaimed department store space that is in the process of permitting to do a massive amount of residential. Same thing with Stonebridge in California. Those aren't even on our list. We obviously have a significant redevelopment in King of Prussia, which we're going through in our portfolio.
I would say by and large, when we're looking at these spaces, they're much more focused on changing the mix, adding additional elements, and then adding the wellness, fitness, restaurants, resi, hotels to kind of make it kind of the standard statement of live, work, play, et cetera. Rarely is it just small shops. I would say by and large, the vast majority has all those elements that I just mentioned.
The one other thing I would say to echo David's point, this trend is accelerating.
This time last year in our K, we listed 11 projects for 2018 and beyond. This year, we have 19, and as David said, we have many more that are in the pipeline that are going to be coming in there. We have a dedicated team. We have demand because our properties are located in great places, and that is going to be an accelerating portion of our development activity.
Maybe just to follow up, just on the cost and kind of yield, when you sort of look at these future projects, just given what we've seen in construction cost increases, how would you sort of, I guess, estimate the returns on the future projects versus the ones that are either recently completed or currently underway?
Well, look, I think it's not new development returns, but I think our redevelopment efforts will be consistent in terms of return that we have over the last several years. It's certainly accretive to the value of the asset. Otherwise, we wouldn't do it. 6- 10 is kind of the range. A lot goes into that, Steve, but accretive to the value of the asset, otherwise we're just not going to invest. Because of the size and scope of the portfolio, we don't feel like we have to invest in an asset just to maintain it. That's not to say that we don't do appropriate maintenance investments like a typical renovation and that kind of stuff. We don't feel compelled to do it.
We do it with the lens of what the consumer expects, what the retailer wants, and what the value of that asset is in our minds, and then that's when we pull the trigger. Our investment returns, we haven't batted 1,000, but as my favorite I won't attribute because you may get mad at me, but I think our returns on investment have not been too shabby over our career.
Okay, thanks. That's it for me.
Sure. Thank you, Steve.
Our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is open.
Good morning. Morning out there.
Good morning.
First, Rick-
Out there is right. I want people to know it's cold and it's snowy, but we're here.
Well, at least the malls are heated, so they have somewhere to warm up.
Exactly.
Rick, congratulations. David, I think you said $25 billion in dividends over the time, which is pretty remarkable.
Alex, you've never been great at math, not as good as we are, but it's 28.
28, okay. I was a little off.
I'm just kidding. It was a joke, okay? You're very good at math, actually.
You're kind. Just following up on Christy's question on the consumer platform that you're talking about. Is this something like Simon Brand Ventures that will interplay with throughout the company, or this truly is something totally separate and apart from your existing malls, outlets, et cetera?
Well, put it this way, we would not be doing what we're doing if we didn't own the assets that we owned and had the branding that we do and have the consumer touch point as well as the retailer touch point. It is absolutely unequivocally related. We hope it will be synergistic between what we do today and what we want to do in the future. We would not be doing it if we didn't have the business that we're currently obviously involved in day to day. It is complementary, and where it goes will be a function of our commitment to invest, our courage to invest, conviction, and our ability to execute what we think might be of real interest.
this is something that would add, like whereas SPV adds NOI or adds income to the overall company, this would be something commensurate, correct?
Well, there will be an investment period, but yet the reality is, yes, we think it will have a financial return associated with it. there is a serious investment period before we get to that point.
Okay. then the next question is on retailers. You said you're expecting more shakeout. Clearly, minimum wage increases and just strong economy, low unemployment is pressuring on the wage front. Across your tenants, are you seeing all of them absorbing the higher wage, or are the rising incomes allowing them to offset by raising their prices because their consumers are having more income? Just sort of curious how the wage and operating expense dynamic is occurring with your retailers, and if you think that that's going to be a growing pressure point among your tenants.
Well, I do think the category that seems to be most sensitive to that today is clearly in the restaurant category. I do think those pressures are affecting decision making. I think it's interesting because those folks are very sensitive to location. to the extent that states have enacted minimum wage laws that are higher than Federal mandated numbers, it's got to be a really unique opportunity for the restaurateur to do it. thankfully, we have most of those, but is it affecting the marginal deal in some of those states? I would have to say yes. I don't necessarily see it on the, what I'd call the soft goods apparel side. I haven't seen it in the wellness other side.
I think it's something to pay attention to, and where we see it initially is in certain states and in primarily when it comes to restaurants.
Okay. Thank you.
Sure.
Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good morning.
Good morning.
I was just wondering if you could go through the decision to do buybacks during the quarter, generally how that compares to your other uses of capital.
Well, on the units, we have the right by and large, we believe in the growth of our business. Units, we have the ability, when they want to convert, to buy it in cash. It's a pretty easy, simple trade, and we'll continue to do that as that happens. There was a period of time in December, obviously, where the world was changing. Obviously, equities were being whipsawed around, and we took advantage slightly, but we took advantage of that whipsawing.
Okay. On the balance sheet side also, which obviously is a great differentiator for Simon, you previously had $600 million of debt that was actually maturing today. I guess I was just wondering, what were the sources there, and especially considering the development spend this year, do you plan to issue new unsecured debt?
Hi, Caitlin, it's Brian. You're absolutely right. We had $600 million maturing today. As David mentioned in his remarks, we ended the year with $7.5 billion of liquidity. We used existing liquidity to retire those notes this morning.
The good news is we paid it off.
By the way, that's not always the case in the real estate industry. Okay, they've been paid off.
Maybe one more, if I could. Could you discuss maybe market rent trends and where they're stronger versus less so, for example, by U.S. quality or outlet versus malls, or open air versus enclosed?
It's Rick. Frankly, we're having pricing power across our portfolios. Again, that is the function of the quality of the properties. It all starts there, as we continue to improve them, we're able to drive our rents, I think that's demonstrated in the spreads that we've reported.
Look, I would only add to that. Look, the reality of how leasing works is that it does take time to lease space, right? It's not like you make a deal, you negotiate the lease, the retailer builds the store, blah, blah. If you look at our NOI growth, the comp NOI growth, it's being affected by some of these retailers that are going through this significant change. We tend to work with them because at the end of the day, now we tend to do it on a shorter term basis because we know ultimately we have to re-lease the space to someone. There is a little bit of supply and demand that we're working our way through. I think it's been manifesting itself in the numbers over the last year or so. We expect it to manifest itself in 2019 as well.
When it comes to a good property and a good space with a good retailer, we're making strides. We're working with some of the ones that are going through their various restructurings, that ultimately has some impact, certainly in the short run.
Okay. Thank you.
Sure.
Our next question comes from Jeremy Metz with BMO Capital Markets. Your line is open.
Hey, good morning.
Good morning.
Morning. You mentioned the 10 anchor repositions you have underway, the additional 25 you're working on. Just given some of the other development and the redevelopment opportunities you obviously have on your plate as well, are you comfortable taking leverage up some from here as you kick off more of these projects? Is there anything kind of holding you back from starting more of these other than just getting those right plans in place? Basically, would you be comfortable taking the pipeline up another $1 billion when they're ready to go?
Well, look, unfortunately, in a lot of these areas that I mentioned earlier when Steve asked the question, there is real process about permitting. We could show you our permitting file. You wonder whether it's I'll refrain, but it is a process where you scratch your head sometimes because all you're doing is making the asset better for the community and for everybody that lives there. Municipalities are, in a lot of areas, you got to go through a real process. We see it all the time, and we still see it in Long Island as an example on our project that we have the land in Syosset. We see it everywhere to go through. It's just a process. I would say to you, Jeremy, that holds us back more than anything.
If I had approvals in Brea, we would start, and in King of Prussia, we would start. If we had approvals in Oyster Bay, we would start. We don't. Stonebridge, we would start. That to us is a governor more than the balance sheet, though I will say we respect our balance sheet, and we're very focused on it. I'd say that the permitting is the biggest constraint. The second is, human resource constraint is not to be underappreciated because everybody here is really hustling, very active, and pressure is intense here. Probably comes as no surprise to most. That's more of a constraint as opposed to, boy, we can't make this investment because we're too levered, or we're worried about our cash flow generation or our maturities that are coming up.
We don't do that, but I say that with all due respect because the fact of the matter is if we didn't take that into account, we wouldn't be in the spot that we're in today. We do take it into account. It's just ingrained in the culture that we do it by osmosis.
No, that's helpful. Appreciate that color. You did mention in your outlook for 2019, your expectations for comp NOI of 2%. You've been more focused on portfolio NOI growth, though, in most of your commentary. I know that's what matters more to you. Any color on where your expectations are for that to trend?
I don't think we're giving guidance there. We don't have a big portfolio NOI because a lot of the new developments that generate that are acquisitions we're not planning on. We had some delays in a couple of our international deals that I mentioned earlier. We have a reduction in that because of the German sale of HBS. It won't be the growth that we had, obviously, in 2018, where we had more external activity. It'll add incrementally, but it's not going to be like the spread between what we had in 2018, primarily because our developments, as I mentioned to you, have been delayed. Our new developments have been delayed, and again, we sold our HBS German business.
Got it. That makes sense. Last one from me. You've had some really solid tenant sales results here. Obviously, the past few quarters, your lease spreads have been solidly in that double-digit range. I assume you're still obviously pushing your standard kind of 3% rent escalators through. I guess I'm just wondering, some of that has been translated into higher ABR growth necessarily. Is there anything we're missing there, or should the ABR growth really start to follow suit here?
Well, look, I think the pressure, I mentioned it earlier. The pressure that we have is that we are still dealing with a handful of retailers that, for whatever reason, have to go through their various restructurings. Because we can't lease every space every minute, we tend to work with them, and that does put pressure on our ABR. It's moving in the right direction. I do think the cycle of the levered retailers is working its way through the system, and I think, Jeremy, at the end of the day, we need to just cleanse. We're suffering the pain. 2% comp NOI is not, we're not ecstatic about it, but the primary factor in that is the retailers that are going through the various restructurings that we have. I think as that's cleansed, we'll get to that number.
Look, retailers are very focused on their cost and their operating model. Stores continue to be their best investment and their best return. Obviously, there's a lot of talk about how profitable the internet is and e-commerce, and who's bearing the brunt of the investment and all of that, and I don't want to get into the psychobabble talk about that. The reality is, because of a lot of investments they're making, they're looking at every expense category, and we're having those discussions. They're not easy.
Thanks for the time, David.
Sure.
Our next question comes from Haendel St. Juste with Mizuho. Your line is now open.
Hey, good morning.
Good morning.
David, as has been discussed, you have one of the best balance sheet platforms, track records in the REIT sector, and yet you trade an implied cap rate about mid-5, which seems to be in line with the overall REIT sector. Curious why you think that's the case, if it's fair, and what levers you would consider pulling to address that.
Well, I'm not worried. Look, I think what we focus on is trying to make our product better, as opposed to what levers we can pull to where we think we ought to trade at a better number than the next guy. If I took that philosophy, we'd be more levered, we'd be this, we'd be that. I don't look at it like that. I look at it, how do we make this company better day in and day out? That's the focus. Why do I personally think that? I have no idea. You guys know better than I do. I always think, why aren't we, given our cash flow generation and our ability to make appropriate strategic investments, and our ability to withstand the restructuring that's been going on in the retail industry better than most. I don't know.
If I had to tell you one thing, it's probably because people think we're going to buy something. Then when we tell people we're not, they ask, "Why aren't you going to buy something?" I don't know. I don't sit here and obsess over it. We are focused on making this product better. People that get obsessed with where their stock price is, I think end up making blunders. That's not a REIT statement. That's a corporate America statement, that's the philosophy. I hope shareholders appreciate it. Maybe they don't. That's how we operate the business. That's how I think our board thinks about it. How do we make our product better and our business better? When you do that, it tends to manifest itself in the earnings, then we go from there. I don't know.
I probably didn't answer your question, I'm happy to hear what you have any ideas? You tell me.
Well, look, I think perhaps the sector is one variable to consider. It is a tougher business these days, I think what you guys have built certainly merits value and should be acknowledged. I'll just leave it there.
Thanks.
Hey, my second question is on the rising cost of labor, which has been well documented. Maybe you could talk a little bit about the labor cost inflation built into your 2019 guide, maybe from a R&M and corporate G&A perspective. The corporate G&A has been trending down the past couple of years. I'm curious if you think that can continue as well.
I think we're budgeting pretty consistent numbers for our G&A next year. We don't see any major changes in that. The area that we are going to end up beefing up is in the area of mixed-use development. We're going to be adding some bodies over time. Again, that's the other nice thing about the company. We still have the lowest overhead ratio by a large margin. I can't remember the numbers. It's two and a half, right? To 10 and 11 to other companies. Basically, your G&A to NOI, roughly, right?
Yep.
It's a staggering difference, okay? It's not like 100- basis points. It's like 700, 800- basis points. That's not going to be anything out of the ordinary for us that I see. We are going to add some people in certain areas that we need to execute our vision on some of these redevelopments.
Last one. Was there any reason that you could perhaps share with us on the sale of the German outlet, I think the Designer Outlet at Ochtrup?
I'm sorry, I don't think that's accurate. What was your question again?
I was just curious on the rationale for the sale of the German thing you're selling, the outlet.
No, we did not sell the outlet. Actually, Ochtrup, we actually bought a few years ago. What we sold was our, we're partners with Hudson Bay, among other in addition to other institutional investors. We had the Kaufhof real estate investment that, because of the merger with Kaufhof and Karstadt, they wanted to also own the real estate. They bought out the real estate interest in the department stores that Karstadt leased, and that's what triggered our $91 million gain.
Got it.
We didn't sell an outlet.
Got it. Okay, thank you for that.
Yeah, no worries.
Our next question comes from Linda Tsai with Barclays. Your line is open.
Hi. Good morning.
Good morning.
In 2018, you guided SSNOI to above 2% and came in at 2.3%. Now you're looking for 2% growth in 2019, implying slight deceleration. Understanding that this also reflects what's happening with more closures and the Sears redevelopments. Do you view 2% as a trough, or is this sort of a steady state long-term growth rate for high-quality outlets and malls?
We do not think it's our steady state, but because of the redevelopment, there is a significant amount of reduction in 2019 due to income that we received from certain department stores. Then it takes a year or two to build, and we're suffering from that in 2019. That's certainly part of it. The other part is just what I mentioned earlier, just dealing with some of the retailers that have been continuing to go through a more difficult time. No, I don't view 2%, not 2%. We try to give you a sense of where we're at. We hope to do better. I do not, under any circumstance, think 2% is our steady state.
Thanks. Through your Simon Ventures fund, when you look at some of these nascent brands you're nurturing through this platform, what are some of the business models or concepts you're seeing that make them more successful versus what's happening with some of the struggling legacy retailers? Are these concepts more niche-like in nature, or could they be grown, scaled, and replicated across a larger physical base?
Well, I don't think you can go from that point to the next point. I think the retailers that have struggled, by and large, have had. Put it this way. We have a long list of retailers that have struggled. 80%-90% of that list have been over-levered, so they couldn't turn left or right, and you just can't have too much leverage in any industry, in any business when you run into an economic difficulty or you need to make investments. You have nowhere to go. If I read you the list, it comforts me in one sense because we've withstood this pretty successfully. On the other hand, it might scare you, so I prefer not to scare you this morning, okay? It's something that we've been able to withstand.
The retailers that have a vision, whether they're started from the internet or just been around, but they've invested in their business and their product, we're seeing pretty good results. Let's look at the higher-end luxury category. They don't have a lot of internet sales. They invest unbelievably in the store experience and in the product. Oops, guess what? They had great results. It's not overly complicated. The technology and some of the new concepts that we've seen out there that have been successful, usually it's a visionary leader, it's a visionary group that's dedicated to the business. They may have a little different angle on something that exists today, and they just execute it better than the next person.
As an example, we're an investor in FabFitFun, which just raised $80 million from Kleiner Perkins, and it's basically a subscription business, which has been done before, but they just know how to do it better and more creatively and with better focus than maybe the next person. That's always been the case in industries, right? There may be another idea, but the group takes that idea and then just does it a little bit better than the next person. I think the power of our industry is that we can withstand the ups and downs of a retailer or retailers. There are points and times where it's painful as we go through that with them. Ultimately, whether they turn it around or not, if we get the space back, historically, we've been able to lease it to a better person. That's what we've done.
I will give you a number that I probably shouldn't, but we tend to be on most retailers' unsecured creditors' committees. We have somebody internally, he's been around as long as me and Rick, so he's been through his time. I think this is actually a great positive statement about our industry and our business, but he is currently on his 200th unsecured creditors committee. Okay, yeah, that might say, holy cow, that makes you a little nervous. On the other hand, we did earn $4.3 billion, and my colleague that's been on this recent committee is on his 200th. I think more importantly that it speaks to the resilience of our industry, our product, and what the consumer really wants.
Thanks.
Sure.
Our next question comes from Michael Mueller with JPMorgan. Your line is open.
Thanks. Just have a quick one. For the 2019 outlook, are there any significant one-time either expenses or benefits that we should be aware of? I guess, for example, like a Puerto Rico insurance recovery, anything like that?
Well, actually, Puerto Rico came in lower than we thought in 2018. As a company of this size, we're always going to have some of that stuff. We don't really get into that level of detail. I mentioned some of the other items that we think will be lower this year, lease settlement income. We do think rates rising will have some impact negatively, as well as the stronger dollar. Now, some of that stuff's moving around. Who knows how it all shakes out. I think that's another interesting thing about this company, is that we're able to create other income opportunities. We have some, but we don't really get into that level of detail. It's all kind of factored into our numbers.
Got it. Okay. Last thing, the sales of 661, do you have that number on a NOI weighted basis?
We do, the number is 832. I asked Tom, "Do people care about that NOI weighted number?" He said, "No, no one's ever called me or asked me," we took it out. The number is $832 a foot.
Yeah, it just seems like if you're doing an NAV build up, you should apply a weighted average, CAP rate.
We don't disagree. If people really like it, we're happy to put it back in, and they can call Tom.
Got it. Okay. That was it. Thank you.
Our next question is from Nick Yulico with Scotiabank. Your line is open.
Thanks. Good morning. Just a question on your tenant reimbursements. You had an unusual situation last year where the reimbursements declined about 1% for the year, same impact in the Q4. What's driving that?
That's usually just the quarterly spread of how things go. Nothing's driving it. Again, you need to look at the totality of the year, not quarter by quarter.
Yeah, that's what I'm saying. If you look at the year, your reimbursements declined 1%.
Yeah.
That's what I'm trying to figure out. What was unusual? Your occupancy is going up, your expenses are going up. How come your tenant reimbursements are going down?
Those are the numbers.
Is that something, Dave, when you were talking about earlier, when you're working with some retailers, is low reimbursements one of the tools you're offering to challenge retailers?
I think you had a significant rise in utility costs, and other items. You had some disposals that factored in there. I don't think it's anything material.
Okay. Thank you.
Our next question comes from Ki Bin Kim with SunTrust. Your line is open.
Thanks. Good morning out there. When you think about the capital you're allocating to redevelopment deals. What do you think about the risk profile of the newer deals you're doing, like the Sears repositioning or densification deals? Is the risk profile for those deals similar to what you've done in the past in terms of redevelopment, or it's a little bit different?
No. That's what we do. I'd say the risk is, we don't feel like we're on the higher risk plank than redeveloping a department store space than anything else.
We're applying the same discipline to decide whether we're going to build a multi-family or an office or a hotel that we apply when we're doing a retail redevelopment. We do our market studies, we assess market rents, and we make sure that we're doing a good capital allocation decision as we decide to put in these incremental elements to our property. The risk is, frankly, the same because we're doing the same underwriting.
Okay. Just going back to that same sort of Y. Can you provide a little more detail around what type of cushion that you're building in and specifically the temporary retailer that you're having to kind of reposition? How much of an impact is that making to that 2% same store NOI growth?
Look, we don't do that. I encourage you to think about our company a little bit differently. Look at our history and realize that, we're a very large company. We don't get into that granular level of detail. We would encourage you just to look at our history and the fact that this is the number that we roll up and we don't really get into that kind of detail.
All right. Thank you.
Sure.
Our next question comes from Wes Golladay with RBC Capital Markets. Your line is open.
Hey, good morning, everyone.
Good morning.
You mentioned there's some tenants that may be a little less relevant these days. Some of them don't have balance sheet issues. Are you seeing any changes in tenant retention at lease expiration? How much of a headwind is this for same store NOI? Is it a 10- basis point headwind each year, 50- basis points? Any context around that would be great.
We have had pretty much the same percentage of renewals that we've had historically. That has not been manifesting itself as an issue.
Okay. Then maybe for a given year, is it typically about a 20- basis point impact? Does that seem about right?
In what context? We're renewing about the same percentage of the tenants. We have tenants that we are intentionally not renewing because we want to bring in more productive tenants that are better operators. We have tenants, as David has referenced, that through their own issues, have to be falling out. That hasn't changed overall the years we've been operating. It's just the same constant dynamic.
Okay, thanks a lot.
Sure.
Our next question is a follow-up from Christy McElroy with Citi. Your line is reopened.
Hey, it's Mike McElroy. I just have two quick follow-ups. David, at the end of your opening comments, you talked about all the changes 2018 relative to 2019. You rattled off the FASB change, the Aéropostale gain, the loss of FFO from the sale of the German operations, lower lease term fees, the impact of rising rates and the rising dollar on your international operations.
Yeah.
Another thing that you talked about, and you mentioned it a couple of times, was this impact of the lower department store NOI as you take those boxes back and you redevelop them. Are you able to at least, and I recognize you're a large company and we should think about you differently, but are you able just to identify the impact of that item? You produce $5.7 billion of same store NOI. I'm just trying to get a sense of how big that piece is
Well, I guess it's material enough to mention it, okay? Again, we don't get into the granularity of these debates. We ask that you look at our track record and our ability to generate cash flow.
I do that, David.
I answered it exactly how I would answer it. In other words, we wouldn't mention it if it was $12, okay? We would mention it if it's material. We don't give that number. It all goes into our buildup. The purpose of not disclosing it is because we don't want to make excuses. A lot of companies say, "Next year is a throwaway year because I'm investing this, that, and the other." We don't do that here.
Right.
The reality is, yeah, we're going have the best growth, I think, in the retail real estate industry. I don't know if anybody's going to be better, but if there is, it's maybe one or two. We're going have the best dividend growth probably in the industry. We have the best balance sheet in the industry. Yeah, we've got some setbacks, and you know what? We're not going have a throwaway year. We're just going keep doing what we do.
Look, I hate.
We don't want to use that as an excuse. That's the facts.
Listen, I always hate when companies say, "Well, if you exclude this and from this, we produce 10%." It's like, well, shareholders don't have that choice. Shareholders own the whole damn thing, right? I was just trying to focus in on, you brought it up, and I was just trying to figure out what sort of headwind it was creating on that 2% number.
It is, again, I'll answer it exactly how I said it, which is.
You don't need to answer it the same way.
Yeah. Okay.
All right.
Again, I just think we all want to let me micromanage. I will micromanage with my team. You guys look big picture, okay? When you look big picture, you're going to say, "Hey, they paid $28 billion in 25 years. That's not too shabby." Again, tenant reimbursements, okay, well, look, let's talk about tenant reimbursements. Real estate taxes go up because the municipalities want to tax the golden goose. They don't want to tax the internet sales, yet they're figuring it out. Let's just see how it all evolves. We know how to deal with this stuff, and we'll continue to produce, I think, industry-leading results. If we don't do it in one year, call us what you want to call us.
just a clarification on this whole consumer initiative, I know you and I spoke about this a bunch after you put it out in your shareholders' letter last year. You sort of said there's a few cents potentially as a cost. I'm just trying to understand, is that a cost, a capital cost? Let's say you go out and you put $500 million, or it's a billion-dollar investment, the impact is the cost to carry before the initiative starts to produce results?
We point it out because it's an investment. Let's assume we earn $12.35. We're not going to be at $12 because of it, okay? I would appreciate just the understanding that we're thoughtful folks, but yet we do need to make investments for the future. We have the track record that allows us to think about that a little bit, that warrants our thoughtfulness. It's going to be a number, it's not going to be a big deal, and we'll figure it out going forward.
Right. I have no qualms with a company making investments. It was just more so I was just trying to understand if the cost was making the dollar investment, which is very small, right? A few pennies are $10 million, $12 million, $13 million bucks. Or does that represent the cost to carry on a much larger investment and thinking about it off, look, I'll go out and I'll put $500 million to something, and the effective opportunity cost of that capital is
All right. You are dealing with a guy that knows accounting, the reality, it's both, right? Because you have to depreciate this stuff. You don't add it back for FFO. Some's investment, some's in operating expenses, it's actually, it would be both, okay? You don't add the FFO back for depreciation because it's not real property. It's a little bit of both. You amortize certain costs. Its IT spend, some are expense, some's amortized. We can sit down and go through the P&L if you're really interested.
It'll be scintillating.
It will be scintillating.
All right. I appreciate it, David. Thank you. Have a good evening.
Yeah, no worries. No worries.
The next question comes from Derek Johnston with Deutsche Bank. Your line is open.
Good morning.
Good morning.
Can you help us understand the retail leasing environment today versus 6 or 12 months ago? Any categories stand out from a lease term or store closure versus store opening perspective? Has rising sales per square foot over the past year plus translated into higher demand for space?
Well, I would say, as we've discussed, that by and large, demand is better. Better sales produce, for the retailer, produce more interest in opening up. There is new and more retailers coming into the market all the time. The only offsetting of this is certain retailers that are in the process of dealing with not recent problems, but legacy financial issues that have never been properly addressed.
Okay. Just to continue on the 10 anchor redev projects and the pipeline of 25 others. Beyond the large-scale, mixed-use, transformative redevelopment, which trust me, we think is the future. However, it is likely not justified for most reclaimed Sears or other returned large boxes. Where is that demand coming from to re-lease this space? We have seen Life Time Athletic and some co-working facilities. Can you share any other demand you are seeing?
What do you mean? I am not sure I understand, not justified. Could you restate that, please?
Well, I mean, for all 25 projects, it is a large densification effort maybe not justified for all markets, right? You might be looking at a box where maybe you just want to bring in another tenant to fill it, I am wondering where that demand is coming from. I've seen Life Time and some co-working. Just wondering who else is kind of out there.
There is a great deal of retail demand. Frankly, we are dealing with, I call them fitness centers, but they're frankly enclosed country clubs, theaters, entertainment uses, a number of the larger format retailers. In many of these instances, we are adding small shop specialty store space because, as I said prior, if we have a great property, there is demand for that property, and the spaces we're getting back are spaces that are in great properties that have demand. There is substantial retail demand in addition to just the densification efforts that we've talked about previously.
Okay, thanks.
Sure. All right. Well, thanks for your questions, and we're available if you'd like to talk further. Thank you.
Ladies and gentlemen, this concludes today's question- and- answer session and thank you for participating in today's conference. This does conclude today's program, and you may all disconnect.