Good day, ladies and gentlemen, and welcome to the third quarter 2018 Simon Property Group Incorporated earnings conference call. At this time, all participants are in 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 turn the call over to Mr. Tom Ward, Senior Vice President of Investor Relations. Sir, you may begin.
Thank you, Joelle. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer, Brian McDade, Chief Financial Officer, and Adam Roy, 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-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 am pleased to introduce David Simon.
Good morning. We're pleased to report another record quarter with continued strong operating and financial results. Our investment in our product remains unabated, with a long-term view of creating compelling integrated environments with critical mass that serve as the hub of retail, dining, entertainment, and socializing within their communities. We completed several significant new developments and redevelopments in the quarter, are under construction on others, and announced more transformational mixed-use activity that will further enhance the value of our real estate and grow our cash flow. Turning to the results, highlighted FFO by $1.09 billion or $3.05 per share, an increase of 5.5% per share compared to the prior year. We continue to grow our cash flow and report solid key operating metrics. Total portfolio NOI increased 4.1% or approximately $188 million to date. Comp NOI increased 2.3% for the year-to-date period. Leasing activity remained solid.
Average base rent was $53.88, up 2.8% compared to last year. The mall and premium outlet recorded leasing spreads of $7.59 per square foot, an increase of 13.9%. We're pleased that retailer sales momentum continued in the third quarter. Our mall and premium outlets was $650 compared to $622 in the prior year period per foot, an increase of 4.5%, and sales were strong across the portfolio in the third quarter. Retail sales productivity has increased each month over the last 12 consecutive months. Occupancy at the end of the quarter was 95.5%, an increase of 80 basis points for the second quarter and an increase of 20 basis points compared to prior years.
On an NOI-weighted basis, our operating metrics were as follows: retail sales would be $817 per foot compared to $650, occupancy would be 96.3% compared to 95.5%, and average base minimum rent would be $71.21 compared to $53.88. At the end of September, we opened Denver Premium Outlet Center. It's fully leased, it's off to a great start. The center's another terrific asset within a great portfolio in a great location in a strong and growing market. Construction continues on two international outlets expected to open in 2019, Querétaro, Mexico and Málaga, Spain. We announced a 50/50 joint venture with Macerich to create Los Angeles Premium Outlets. This will be an exciting project on fantastic real estate and obviously one of the country's most attractive markets. At the end of the third quarter, redevelopment and expansion projects were ongoing across all of our platforms in the U.S. and internationally.
We started construction on significant expansions of Paju Premium Outlets in Seoul and Tosu Premium Outlets in Japan. Last week, we held the groundbreaking of our landmark mixed-use transformation at Phipps Plaza that will include Atlanta's first Nobu Hotel and Restaurant, a class A office building, a Life Time Athletic resort, food hall, and outdoor community gathering space, all in the area of one department store that we reclaimed. We also announced our transformational vision for Northgate in Seattle. We're thrilled to collaborate with NHL Seattle, to make their training center and corporate headquarters an integral element of the reimagined Northgate community. This project is a prime example of our unique ability to repurpose our well-located real estate, create compelling ways for consumers to live, work, play, stay, shop, and now skate at our destination. Sears.
Over the last several years, as you know, including what we just recently did at Phipps, we have reclaimed a number of our unproductive department stores in our portfolio. The reclamation of unproductive space, specifically some department stores, is an unprecedented opportunity for us to dramatically enhance the productivity of the space, our centers overall, and we will continue to proactively recapture additional stores to further enhance our centers. The SPG portfolio currently has 33 Sears stores that Sears has closed or announced they will be closed. Of those 33 stores, we have, through proactive action, control 22 of those 33, five of which are in our joint venture with Seritage. Of those 17 that we control, Sears will no longer exist in 2019. They will be demolished, replaced, and redeveloped.
Turning back to the 33 that Sears owns and controls, five that will be closing and Seritage controls six, for the total of 33, not including the ones in our joint venture. Seritage is in the process of redeveloping those and are in construction, under construction with six of those former Sears stores. The remaining, we have 29 that are currently operating. Eight are owned by us and leased to Sears, four are owned by Seritage and leased to Sears, and 17 are owned by Sears. Turning to capital markets. During the first nine months, we closed on 13 mortgages totaling approximately $3 billion, of which our share is approximately $1.3 billion, with a weighted average interest rate of 3.83%, term of 8.4. We have the highest investment-grade credit rating in the industry. Our net-to-EBITDA was 5.4 times.
Our interest coverage is five, which is well in excess of our peers, well in excess on both fronts. Our current liquidity is $7 billion. We continue to have excess cash flow, which we can reinvest in our business. Today, we announced our dividend of $2 per share for the fourth quarter, a year-over-year increase of 8.1%, we're approaching the $100 per share dollar dividend since we've been public, which we will celebrate in December. $100 have been paid to the shareholders, roughly, in dividends through our public company existence. Our total dividend payment will be $7.90 in 2018, which is an increase of 10.5% compared to last year. Turning to guidance. We once again raised our full year guidance to $12.09-$12.13. Just to keep in mind, this is an updated range compared to our original guidance of $11.90-$12.02.
This new range is a growth of approximately 7.9%-8.2% compared to our reported FFO of last year. We're ready for questions, but before I turn that over, we had a very strong quarter, we continue to grow our cash flow.
Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touchtone 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 Steve Sakwa with Evercore ISI. Your line is now open.
Thanks. Good morning, David.
Good morning.
I just wonder if you or Rick could just talk maybe a little bit about the leasing environment, and as you sit here today, looking forward, maybe just reflect on the last year and how you felt maybe a year ago, and just sort of give us a flavor for the leasing environment.
Well, we tend to take a longer-term view. We can talk about quarter to quarter or even year to year, but as you know, we take a longer-term view. I would say, certainly, our long-term view has not changed. The activity has increased from 2017 to 2018. I think there's clearly, for the retailers that are investing in their product, there's increased sales. As you know, we showed you that. I'd say it's certainly generally better than last year. Again, you got to take a longer-term view. We have more activity going on. There's more new concepts on the restaurant, entertainment, overall retail. You've got the folks that start out on the internet that want to own physical stores. I'd say generally, the environment is better.
As you know, we're overly concerned about maybe a less robust leasing environment in 2017 because we tend to take longer-term views of this. Happy for Rick to add anything he would like to this.
The only thing that I would add is that there is, I sense, an acceleration. In the last year at this time, I think people were talking, but there was less aggressive approach to opening new stores. I think, as David said, the people that are well positioned are now more encouraged to open stores. Obviously, sales are better, the profitability is better, and we are very well positioned. We don't talk about it a lot, but every day, every one of our properties is getting better because of the capital we're spending.
David, secondly, I just noticed on the leasing spreads information you provide on page 22 of the supplemental, there was a pretty big jump in the square footage of openings and a pretty sharp decline in the average rent per foot. I realize these are trailing 12-month figures, but it almost appears like maybe a different set of assets is being compared now. Do you have any comments on that?
Sure. Again, what's the most important thing that I focus on, just so we're clear? You got it. The operating metrics, it's funny. Just to take a step back. It's always like, okay, what's the operating metrics du jour? The reality is, our business is changing in that we're going to be recapturing these boxes that pay very low rent, and we're carving them up, and we're now showing to you that new metrics, okay, the importance of the embedded growth in our business by recapturing these leases that pay very low rent. We put all of our openings and all of our closings in that number so that you can see the embedded market rent growth that we have in our business.
Okay, thanks. Lastly, just in the other income, I know there were different components. Last year you had some securities gains and this year you didn't. There was a big jump in the other income. I just know there's a lot of different things that run through that. Are there any comments or things you can say?
Yeah. Last year, as you know, we sold the Seritage stock at 48.49, which I think if I look today, it was a pretty good trade, to sell it at that rate. In other income, we did get our business interruption, not all of it, but some of it from Puerto Rico. That's what's in other income. It doesn't flow through the operating numbers. We always had planned to get that. It's always been in our numbers. You can't book that until you actually get the cash from that, according to GAAP. We got some of that BI in the third quarter.
Okay. Is there a number you could share with us that's kind of embedded in that other income or?
Well, it's the big jump in that, the vast majority of it.
Okay.
Yeah.
It's the vast majority of the $20 million increase.
Yeah.
Okay.
That's correct. You know, we always planned on getting the BI. You just can't show it in your normal minimum rent or CAM recoveries or any of that information. It's got to be in other income.
Okay. That's it for me. Thank you.
Yeah, no worries. Thank you.
Thank you. Our next question comes from Christy McElroy with Citi. Your line is now open.
Hey, it's Michael Bilerman here with Christy. David, can you just elaborate a little bit on Sears and your name to the creditors committee yesterday? Maybe talk a little bit about the role that you plan to play there. You went through a lot of different numbers in terms of the Sears boxes. If you just look sequentially, you went from 59 effectively down to 46, which includes the 17 which are closing. There's 13 stores during the quarter that fell out. I wasn't sure whether those were recaptured during the quarter and form part of some redevelopment plan. Just looking sequentially, suck this up, 59 to 46 inclusive of the 17 that are closing, just to try to get some color there.
Yeah, look, I think the thing to focus on, we're putting Sears in our rear view mirror, okay? What we're trying to explain, there are a lot of moving boxes and obviously, the whole situation is a tragic, frankly. Put aside how it affects us. We think this is a unique opportunity. We're going to redevelop this. We're going to generate positive momentum with the properties due to this. We're going to reinvest in the communities. We're going to be able to drive traffic now from this box. Put all of that aside. We're going to be able to make money on this. Put that all aside, if I may, just, it's a tragic set of events that a company that's been around for so long is in this state of affairs. That's what I think about.
It wasn't that long ago, 10, 12 years ago, that 300,000 people worked at Sears. Okay. I think we should put that in perspective. Let's focus on the task at hand. What I'm trying to do, there are a lot of moving parts, but basically, what I explained, I'm sure I garbled some, because you know I have a hard time spitting out words. The reality is we have 33 stores that are closed or in the process of closed at the end of this year. We control 22 of those. Five of those are in our joint venture with Seritage. Of the 17 that we have unmitigated control, Sears will no longer exist in 2019. They will either be torn down, redeveloped, re-leased, but they'll be in our rear view mirror. We are effectively down to 29 operating stores.
We own eight, Seritage owns four, the 17 are owned by Sears. We'll have to wait and see what happens in terms of whether they'll continue to operate those or not. Obviously, we're planning for the ultimate unfortunate demise of Sears. We're ready for it. We have the balance sheet and the capital and the intellectual and human resources to deal with these set of events. That's what I would focus on. The other thing to keep in mind is that there's also Seritage that owns some in that, and they've done a reasonable job of re-leasing some of their space. Those are the numbers that I would focus on, and it's still moving around because some are closed, some aren't. Those are the numbers. At the end of the day, next year, we'll report 29 Sears stores. That's it.
Right. It sounds like there was at least 11 that are controlled by others, other than you and Seritage, that closed during the quarter.
Uh-
Which went from that 33 to 22, right?
That's correct. Sears owns the balance of those. That's correct.
Okay. How about the Creditors Committee and sort of your role there, I recognize you're not a big creditor.
There is no comment that I can have on that, where for better or worse, we tend to be on creditors committees with large, unfortunate bankruptcies of retailers. We have a certain expertise in that. We'll see how it all plays out. Beyond that, I really can't comment.
Can you talk a little bit about international in terms of what's happening there? Obviously, Klépierre, its shares have come down meaningfully alongside a lot of other real estate stocks in Europe. There's obviously been consolidation activity going on there. Klépierre tried to make the bid for Hammerson went after Intu, now Intu has its own consortia bid from their main shareholder alongside capital sources. How are you thinking about Europe overall, both of your investment in Klépierre, then also consolidation opportunities in that region, whether that would be Simon-led or Klépierre-led?
I would classify that as an add-on sentence. Let's put that aside. I'm very comfortable with our investment in Klépierre. I have to look at the long-term prospects of that company, measure it against kind of the short-term volatility. From a long-term perspective, I don't really see any real change. There's very little new development. They have a lot of redevelopment activity. They're good operators getting better. Our investment is solid, stocks go up, stocks go down. We take a long-term view. We have exposure in Europe, not only through Klépierre, but obviously through McArthurGlen and through our interest in Value Retail. I would tell you that the market generally ignores and underestimates the value that we have outside of the U.S., whether that's Mexico, Europe, Asia. There is no appreciation of the value that we've created in that. That's fine.
We continue to do what we do. I think we mentioned briefly what Klépierre did on Hammerson. That's in their rear-view mirror. I think that's better coming from them. I think the CEO has made that clear to investors. Not much I can add to that. There's nothing I can add to what's going on with Intu. As they say, we don't have a dog in that hunt. Here in Indiana, that is. I continue to think Europe is fine. I think the trends there are similar to ours in that the better assets will get better, and the ones that are smaller, unless they're uniquely positioned, will be put under pressure. But even the better ones will grow, will offset whatever diminution might have happened on the little ones. I generally feel pretty good.
There are parts in Europe that you might want to avoid, i.e., Turkey and other places like that, given the currency and the lira and what happens on that front. Generally, I think it's okay. Look, I'm sure the Klépierre team has a focus on Italy, what's going on there. You have Brexit. You could certainly take a contrarian view at the right time. We did that in 2012, when we invested in Klépierre. Could we be coming into another contrarian point of view? Perhaps. We're really not overly active other than making sure our investments grow in value. Good. Thank you. Sure.
Thank you. Our next question comes from Jeremy Metz with BMO Capital Markets. Your line is now open.
Thanks. Good morning.
Good morning.
Just going back to the Sears boxes, in terms of the 17 that you're expected to close by year-end, the 22, including the Seritage JV. I know it's a little early here still, but can you sort of frame it out from a timing and capital allocation perspective in terms of how much of this you really think will fall into redevelopment, potentially kick off some larger redevelopments, and what sort of rough capital investment this could possibly represent?
Well, remember, the vast majority of the 17, of the 22, we actually transacted to get back When was that? November. November. Okay. Remember that, just to put that in perspective. Those plans are already moving. Just to name a few, North Shore, Cape Cod- Brea. Brea, Stoneridge. Broadway. Broadway. Midland. Midland. Just to name a few. All of those are coming online, and that's why I made the comment that the 17 that we control, Sears is going to be gone. There will not be a Sears. It will be either gone, under construction, or we will take the box and there will be a new retailer, hopefully open by then, but obviously, it does take time. The 22 of the 33 are basically all under redevelopment. The capital of that is over $1 billion. That's always been in our plan. There's no surprise there.
We are moving at a high level to redevelop those boxes as quickly and as smartly as we can. Then there is 11 that Sears and Seritage own that we are not involved in. I think Seritage, of those six, and again, there is a lot of numbers here, that is why I am repeating myself, and I appreciate the question. Of those six, Seritage has already redeveloped over half of those. Those are moving. They are doing those independently, in conjunction with us, but independently. That is fine. Then there is five that Sears owns, and then we will see what happens with that real estate. I think it is a blanket statement that we would love to own, at the right price, any of the real estate that we do not control. Patience, seeing how this plays out is important.
I hope that answers it will be well over $1 billion. You will start to see in the 8-K this stuff as we approve it. I do not know, I am asking Tom. I do not know. We just approved Cape Cod, North Shore. There are some in there. There are some in there. You are going to see it. We have a busy capital appropriations committee. We approved three or four Monday. You will see those in the fourth quarter numbers. It is all moving. It is all moving quickly. I would tell you generally, other than obviously to see a retailer like Sears end up where it is, this will be fine for us. We will add value to the real estate.
We wish it would have been done in a different manner. We have to confront what we have to confront, I think we will make this. It will be an opportunity for us just like everything else we have dealt with over the last 25 years as a public company.
No, I appreciate that, Colin. As we see that start to come onto the development pipeline, is it fair to assume the same kind of yield you have been achieving, that 7%-8% on redevelopments, or would it be higher than that?
Yeah. No. Look, as you know, every deal is different. That would be our goal. That would be our goal for sure.
Great. Second one from me. Just going back to the leasing commentary about the environment being a little better here today. Are you starting to see this translating to your leases as well in terms of timing to get deals done, terms, leasing capital, or is it more just on the activity front at this point? In terms of rent, we've talked about this before, but you're not necessarily getting the benefit of sales in an area move online, but you do feel the returns at the store level. To that end, are you starting to push occupancy costs to account for that leakage? Are you looking at other metrics to understand tenant profitability, and therefore, what a tenant can pay?
Are tenants accepting that this old model maybe needs to change, or is it just more of an educational process on both sides still at this point?
This is Rick. Obviously, you covered a lot of ground. Let me take it apart. One, our terms, our TA, are certainly within the norms that we've established over the years. Our tempo of leasing is accelerating in that we now have more tenants coming in saying, "All right, let me look at 5, 10, 15 openings for 2019." That is an acceleration from what we had this time last year. That's encouraging. Our occupancy costs today are the lowest they have been in the last two and a half years. That's encouraging, and that's taking into account the fact that there is an understatement of sales productivity. All of our leasing agents are totally aware of not that potential, but that fact. As we are pricing our real estate, we are prosecuting that to the extent we can to drive rents.
You've seen our average base rent go up, and our spreads are going up.
I would just add, though, retailers are smart and savvy. They are doing what they need to do on their cost structure. It's not easy, but like I said, we have a unique position in this industry. We have really quality properties, a lot of scale. We have the ability to think, we have the ability to be patient. We have the ability to say no. We take gambles. We win, we lose, we draw. We do okay, but they're still very thoughtful negotiations. Everybody's focused on increasing their profitability. They're no different with us, and we try as hard as we can to create a decent win-win scenario. When we do that, the math spits out. It's better than it was last year.
The long run, we have no worries about where we're going to be, I think as we continue to redevelop, we're going to make these properties fantastic. In the meantime, we're going to be in this spot where it's going to be a thoughtful, diligent, but appropriately focused negotiation between us and our best clients.
Thanks for the time.
Sure.
Thank you. Our next question comes from Craig Mailman with Bank of America. Your line is now open.
Thank you.
Hi, Craig.
Hey, I've noticed on your redevelopment activity, the yields for the premium outlet redevs went from 10 to 11, and The Mills went from 11 to 13. I just wondered what was pushing those returns, and is it perhaps that leasing is going better at these redevelopment efforts?
Those are hard to extrapolate trends. I think it's just a function of mix. Nothing that really jumps out. I'm sure we'll look at it, and Tom could answer, but I just think it's probably just mix, off the top of my head. Nothing major. We do have the ability, I think, to continue to add value through our redevelopment, new development efforts, and it goes up, and it'll go down, but that gives you the directional idea of kind of where things are.
Okay. It's clear that although the construction costs are going up, that it really isn't impacting your returns on these.
Well, that's a good question, and let me just say this. It's a good point, and let me address this way. We have no risk at this point, and things always change, but at this point, we have absolutely no risk in what we're building today. You always have contingency in there, but nothing what I would say beyond our contingency, and obviously our contingency is in our 8-K. We are seeing a general increase in construction costs. It's really a market by market scenario. The potential rise of those costs are not in any way at the point where we're saying we can't make the numbers work. I don't anticipate that happening, but obviously we're paying attention to it.
Okay, thanks. We keep hearing about new technology in both retail and just the retail center. I wonder if there's anything new that might surprise consumers this holiday season, whether it's unmanned checkouts or mobile apps making things more personalized or virtual or augmented reality.
Well, I think we and all sorts of retailers and technology companies are focused on a couple of things. Payment, obviously, driving traffic, which could be through a lot of individual personalized promotion. The checkout process, and improving that is really important. The ease of parking as well. Lots of experiments, lots of things happening by us and others, by retailers and by technology companies. I think there is clearly a bounce back on the physical world compared to the pure online e-com, internet, just because I do think payment and ease and convenience can be enhanced by technology in the store environment. We're looking forward to those introductions into the physical world, I think that will make physical shopping a lot more easier and convenient.
Obviously there's so much benefits to physical shopping compared to looking on your phone and trying to buy stuff. What's fascinating to us, fascinating, and we see it because remember, we have audit rights, and we can see the high level of returns. The high level of returns that we see from online sales to the physical stores is never talked about, okay? If you wanted to go write a research report, Craig, that would be the big focus because everybody wants to say, "Here's the gross internet sale," but they don't want to tell you the net. They want to hit the physical world. The returns are staggering, okay? Especially in the product that I'm discussing. No one wants to talk about that.
I understand your frustration, but thank you for your answers.
Sure. I'm not frustrated, by the way. Just so it's clear, I'm just saying it's very interesting that no one talks about it. It's just a fact.
Understood. Thanks.
Thank you.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is now open.
Hey, good morning. Good morning out there, David. Two questions from us. First, you mentioned the international and you think that it's underappreciated, but just curious, I mean, obviously in the U.S. you guys have a very efficient platform. Globally, you're definitely spread out. Just sort of curious how you would compare your overseas platform's efficiency to the U.S. Then as you expand into Thailand or the Middle East, how those markets are initially versus once you get a concentration of assets. Do you really see a material improvement in operations or the Premium Outlets work very well as a standalone or in clusters?
Well, I'd say both. I mean, the reality is, our joint ventures with the Premium Outlets business has its own group of personnel. They can add, as they add product to their platform, they get scale. It's safe to say none of our investments overseas has anywhere near the scale and the overhead metrics that we have. Our overhead metrics are underappreciated. Tom can give you the numbers, but many of our peers are at 10% of NOI, and we're at 3%. What, give me the numbers.
We're three.
We're at three, and they're at eight, nine, 10. All of our places don't have quite that scale. I could certainly, if I wanted to or could, I could certainly probably find a way to scale, but they're doing fine, and so it is what it is. They all benefit from adding good product to their platforms. I would say none of them have the scale that we do, and we don't impose our scale to them at all. I don't think that we will, but you can't rule it out. If we did, I'm sure we could do it. We could have better results. At the moment, everything's good, so we let it go.
Okay. The second question is, you guys, on the last call, you talked about converting retail to other uses, and obviously, you had the deal out in Northgate where it looks to be sort of cutting the mall in half. As you guys increasingly go through, is there basically, not exact percentage, but a view of how much existing retail you could do without to replace with things like apartments or hotels or office, versus how much you would increase the overall square footage of your properties to add incremental uses? Trying to get a sense of how much of your existing retail would you scale back to increase uses versus how much of the new mixed uses would be incremental to the existing retail that's already there.
Well, it's hard to give you a number, but let me look at it this way, okay? I think the greatest opportunity that we have, I think we're in good shape with small shop. There's always going to be a mall here or there that has too much small shops, but I think we're in decent shape there. What we have the opportunity to do, and we are doing, is we probably the mall of the future doesn't need five, six, three. It depends on the mall, but it doesn't need the department stores. The ability to reclaim that allows us to densify the properties, and I think we have that opportunity in a rather large scale. Again, this is where we suffer maybe from the scope of what we do and all the activity that we have. Take Phipps as an example.
Was that put in the 8-K or not?
Yes.
Okay. It's in the 8-K now. All right. Take Phipps. We had one department store, Belk, that was 140,000?
160,000.
160,000. Thank you, Rick. We are adding essentially 300 plus. We have the hotel. The office is 324, right?
Alone.
The hotel is
150 rooms.
All right. How big is that? Whatever. Okay. Let's say we're adding 500,000 square feet in something that was doing 160,000, that was taking up 160,000 square feet. I encourage you to look at the renderings. Do we have the renderings on our website?
We can get them out.
Okay. We should. Let's get them. Do you have the video with me and Mr. De Niro and Chef Nobu on our website? Rick.
That's right.
It's out there. Okay. We won't, but we'll do that. Northgate, you say the mall cut in half. I got to tell you, Northgate is so much bigger than that. Again, we have up to 800 plus apartments.
1,200 apartments.
1200.
Frankly, we're going to have 1,200 apartments, 600,000 feet of retail. We're going to have probably 600,000 feet of office and the NHL Seattle training facility.
Yeah. The scope of some of these things are really large, but if you're looking for, "Here's the number," I can't give it to you other than, we do feel like there's a lot of fun stuff to do. It's aggravating in the sense that you have to herd all the cats in terms of accomplishment. Once we build something. Phipps will be open, hopefully in, I'm pushing for two years, but maybe two and a half years. I think we're going to be really proud of that, and our shareholders will be happy, and Rick and I will have great sushi. What else could you want?
Sounds pretty good. Okay. The perspective was helpful. Thank you, David.
Sure.
Thank you. Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is now open.
Hi. Good morning. Your dividend is going to be up 10 and a half% this year, which is great. I guess I was just wondering, considering your growing cash flow, how are you thinking about prioritizing on development and redevelopment, where you're obviously very active, versus increasing the dividend and potential acquisition opportunities right now?
I'd say to you that I would expect, obviously board decision, blah, blah, we would expect to continue to increase our dividend next year. Clearly, our redevelopment is really active, that could be increased. Again, the reality is, Caitlin, that it takes time. Take Brea, which we control that Sears store. It's going to be unbelievable, we have another 6 months of permitting. I'd love to just stuff it all into the box and do it all at once. The reality is we can't because we have external constraints. I wouldn't say necessarily capital constraints at all, I'm looking at Brian, he's saying we don't have any. I tend to be a little conservative on that front.
Anyway, we just have constraints on doing the redevelopment only because we've got the permitting and so on and so forth. That continues to be a big priority. Obviously, new development in the U.S. is not wildly active, though I will tell you that the deal with Macerich, I think is going to be a really good project, that's a 3-year project, essentially, okay? That takes time we think that's going to be really a good deal. We got another one in the works in another area of the country probably 2 more outlets that we're going to build. Again, those are over, one could be a little quicker, two years or so. That continues to be a focus. Internationally, it's basically, we take our cash flow there reinvest it. It's not what I'd call Simon capital.
We're actually not writing. Yeah, we may not get repatriation back to us, we're basically doing what many thoughtful companies do, is they take profits they reinvest it have more profits and keep doing it until they can't do it anymore. We don't see that. The next thing is, look, if the market doesn't like our business or doesn't like what we're doing, we still have a focus on buying stock back. We're not all that active in the acquisition area. We could do a deal here or there. We certainly are interested in reclaiming at the right price, certain department stores, that's kind of how we're thinking about the world right now. I hope that's helpful.
It is, just in terms of that time it takes, I think there's some concern out there with the amount of department store reclaims that you have and everyone else does, that finding those new uses is taking longer. Is that part of it or is it not?
Not with us. No, siree. No way. That's not our issue. Our issue is execution, permitting. It has nothing to do with demand, supply and demand, and it has nothing to do with capital. That's not us. Sorry.
Great to hear. Then maybe just last quickly, looks like you guys have $600 million of 2.2% debt maturing in early 2019.
Yep.
Just wondering the plans to address that, and if it were a 10-year unsecured deal, what you think the rate could be.
Well, we'll either use our cash or certainly We have $7 billion available, that's just basically standard operating procedure. No big deal there. We could go to the unsecured market. Obviously, there's a lot of rate volatility today. We wouldn't probably do it today. We'll have to wait and see kind of where the world shakes out. Brian, I don't know if you want to add anything.
Look, I think our cost of money today on a 10-year basis would be about four and an eighth. As David said, we've got over $7 billion in liquidity, we have plenty of options to address the upcoming maturity. It is our only maturity we have in 2019.
I would say to you what's fascinating, we have very, very little debt coming due in 2019 or 2020, both on the unsecured and secured basis. We're in a very good spot to do that. I would also, again, it's overlooked, if you look at our peers internationally, north of the border, domestic, Far East, nobody has our balance sheet. Nobody's five times debt. Nobody. People are 2x of us. Not seven, 10 plus. Please appreciate that.
Okay. You broke up there, anyway, we're in good shape there and we'll see what happens on that front.
Great. Thank you.
Thank you.
Thank you. Our next question comes from Jeff Donnelly with Wells Fargo. Your line is now open.
Thank you. David, I can't wait for you to co-star in De Niro's next film. I guess a question for both of you, Rick and David. I'm just curious, in situations where you guys have redeveloped anchor boxes, do you have any statistics you can share on the change in foot traffic sales or asking rents of the property since the new anchor opened?
God, I'm sure we could put something together. Here's what's interesting. That we're seeing, again, this is anecdotal. Don't go, "I don't know if this means anything." It's too early. We've had department store closings in the portfolio. There's no hiding that, right? We have seen, and again, nothing drives our business. This does not drive our business one way or another because the size of the portfolio. What we've seen, which is actually encouraging, is that the inline sales are actually getting the benefit of the department store closures. We're also seeing some of the other department stores pick that business up. At the end of the day, like I said, maybe our industry got just too carried away with having all these big department store boxes.
We transition to the smaller, more appropriately sized group, there'll be centers that lose in that. Look, we may have one or two that we're nervous about. The reality is the rest of that center, we will get a better and bigger benefit, I think we'll get healthier. We're starting to see that. Again, I'd say that's anecdotal and nothing to quantify, but we are seeing that in some of these cases, which I think is encouraging. That's what we want. We don't need all of those. We don't really get much of an economic benefit from those boxes. We've taken over driving the traffic to the center from those boxes, as that would have been the historical reason to have them. This could be healthy other than Rick and I pull our hair out. We want every box leased.
We want everything redeveloped. The team's moving really hard, everybody's like we're playing very hard here to make this stuff happen quick. That's the downside, is that Not that we ever have, but we are not coasting, okay? We're not coasting. Not that you should feel sorry for us, but I'm not asking you to, but that's the reality. We're humping and pumping, I really think this will be other than, yeah, there'll be a couple of losses on the scoreboard for us. At the end of the day, this will be a good thing for us and likely our entire industry.
The one unambiguous result of replacing these anchors is there's no doubt that our total sales and total footfall at our properties is increasing. Just think about David's example at Phipps. When we're done, we're probably going to have tripled the retail sales, plus have all the hotel traffic, plus the office traffic. In every instance, what we're adding is going to be more productive and more dynamic than what we're replacing.
Thanks. I guess on Sears, I'm curious, were they current on the rent before they filed? Because typically, retailers build up a pre-petition receivable before they file, but it's sounding like some other landlords that they were largely current, which frankly makes it seem like the bankruptcy started as a bluff that they got called out on.
Yeah. We're not going to have a bad debt reserve. I think that's correct.
Just one last one on Sears. You mentioned about $1 billion of investment for the 22 boxes you're redeveloping. Should people think of that as like a rule of thumb as $40 million-$50 million a box, or does that include investment beyond the Sears? I think people are looking for a number there, and I'm curious how your return on investment you see on that $1 billion compares to what it's been on prior anchor redevelopments.
The best way to do this is really say to you, Jeff, that we're going to have a $1 billion plus of spend. We've been at this, Tom, $1 billion for how many years? Six years of $1 billion spend. I think, Jeff, if you look at what we've been doing, we've been spending $1 billion. If you look at 2015, 2016, some of that may have been tilted toward new development more than redevelopment. It's now going to tilt more toward redevelopment. I think it'll go up. That $1 billion of spend is not just those 22 boxes. That's a lot of stuff in there, okay? Like Phipps is a $300 million-plus spend. It'll be over two years, two and a half probably, but two years, and that's not Sears. That was an old Belk store.
Northgate, the Northgate numbers could be much bigger than that. Again, that'll be over three years. Again, that's not a Sears box. When I say that $1 billion-plus spend, it's the vision of what we see on redeveloping our business, and it will tilt more toward that. On the other hand, when you add Carson with Macerich and you add a couple more, I think our spend on average is averaged about $1 billion. It could go up, as we add these things. It's not going to go to $2 billion a year, but it could go to $1.3 billion, $1.4 billion. We're doing our plan for 2019. Tom told me not to invite anybody to our planning process. Correct?
Correct.
I'm officially not inviting anybody. Right now, we're looking at a little over $1.3 billion. I think it's just more than just Sears, okay?
Got it. Thanks, guys.
Sure.
Thank you. Our next question comes from Michael Mueller with JPMorgan. Your line is now open.
Hi. It looks like sales growth at The Mills has been similar to the rest of the portfolio. I'm curious, what's enabling you to drive the spreads that are significantly higher there?
The Mills, they're very well positioned in virtually every market where they operate. They are a unique mix of full price, value, outlet, entertainment, food. They're all a million and a half to 2 million sq ft, and they just are able to attract a very broad segment of shoppers, and they're performing well. There's no real magic, but we have a very broad use of potential users there, and we've been able to keep those things very well leased, and they're very productive.
Is the occupancy cost notably different than the other part of the portfolio?
No.
Okay. That was it. Thanks.
Sure.
Thank you. Our next question comes from Rich Hill with Morgan Stanley. Your line is now open.
Hey, good morning, David. I wanted to go back to a comment you made, I think at the outset, talking about how maybe your international portfolio has been, I'm going to put words in your mouth, undervalued or underappreciated. When I look at your development pipeline, it looks like there is a tremendous amount of focus on international. How are you thinking about that? I think it's just a little bit above 10% right now as a percentage of NOI. As you think forward over the next five years, do you have a bright line test as to where you want to get it? Or is it just, you're going to do good deals when you can find them?
I think, Rich, we don't have a, oh boy, we need to be at 12, 13, 14, 15, 20%. That's not how we look at it. The reality is, and most of that, as you know, is through development, though we've made some strategic investments, i.e., Klépierre and McArthurGlen that come to mind. Remember, we own a decent chunk of Value Retail. We don't really book any of their earnings. We've had this discussion. We only book when we get cash, which is cash distributions, which is basically cost accounting for those of you who remember cost accounting, which I do. Long story short, I don't have any desire to do more. I don't have any desire to do less. I only have desire to make money. We do think we add value.
We do think maybe some of our international partners don't think so, but I think we do. I think it's more deal driven. It's an important part of our business, and we will continue to invest in our platforms, whether it's Japan, Korea. We announced a development in Thailand, which I think will be fantastic. That opens up that whole country. The tourism there is remarkable. I just happened to do a retail tour in Europe, and the interest in that is the Far East. Our premium outlet business in the Far East has a high level of interest from our retailers. I just think it's going to be, how do we continue to drive and make money from our investments there? No desire one way or another.
Got it. Just one quick follow-up question then. Maybe this is just in light of some global consolidation that we've seen. Do you think landlords have to have global footprints to make money?
I think it can help, but I don't think it's the. I've evolved on this. I don't think you need it. I think it can help. I wouldn't do a deal because that was a really important component of that transaction, i.e., exporting retailers from one level to another. However, it's not inconsequential. Take an example. I met, and I won't name a name, but I was just in Spain with a large retailer, and the fact that we have a terrific relationship with them in the U.S. and Klépierre has a terrific relationship in Europe, doesn't hurt. But if I had overpaid for the Klépierre stake, that relationship wouldn't make it up. Okay, I think it is helpful, but it's not a reason to do a deal.
Got it. Thank you for that clarity. I appreciate it.
Sure.
Thank you. Our next question comes from Omotayo Okusanya with Jefferies. Your line is now open.
Hi. Yeah. My question is more numbers focused. I'm just trying to understand the nature of the guidance change. Again, just kind of given the $0.05 beat in 3Q. How come the low end of guidance that was raised rather than the high end as well?
Well, look, I don't know. There's lots of numbers. We're a big company. One deal, one event, it's not going to change this, that, and the other. Obviously, the currency in Europe is a little softer than it was. We tend to be conservative. There's nothing really to really study or read into that. It was just the number. Okay?
Okay. Fair enough, David. All right.
I mean, right. That's just a number. Okay?
All right. Fair enough. Any update in regards to just lease accounting charges we should be expecting for 2019? I know earlier in the year you kind of given us some guidance as to that.
That's the same general number. No change in that. We'll make that clear when we give our guidance in February. We'll absolutely make it clear. The number that we've told the market more or less is the same number. There's not going to be much change there. We'll debate whether we might go a year just saying, here's what it would've been before and after, just so people do it, but we might not. You'll see the number. That's really the only thing. With these other new pronouncements, that's the only thing that's really going to be different. Again, it's not a huge number yet. Basically 1%. It's pretty much over the it's 25 basis points per quarter. You can do the math to get to the number.
Great. Then last one from me. Although it's a couple of years out, any other information you can just share about the JV with Macerich?
No, it's a development JV. I think a lot of people from discussions with Macerich are probably familiar with the site. We take the site over in about a year, then we build. We're happy to be part of it. We think it'll be a very good L.A. premium outlet center. We don't get the site back until Carson does what they need to do, and the timing on that is roughly a year from now.
Okay, great. Thank you.
Yeah, thank you.
Thank you. Our next question comes from Haendel St. Juste with Mizuho. Your line is now open.
Hey, good morning out there. David, I guess a question for you on the lease termination environment. Are you guys still receiving early termination buy-out offers from retailers? What's your appetite or sentiment regarding these early buy-out offers?
We have some. It was lower this quarter, much lower this quarter than a year ago quarter, right? Actually, you can see it in our 8-K. I don't remember the number off the top of my head.
It was $9.8 million for the quarter versus $13.2 million.
It's down. I'm not a big fan of them, frankly. We'll do them. I would say we'll do them occasionally. You know, it's not in our comp NOI, because there is a lot of volatility associated with it. I would say generally the buy-out requests are down pretty reasonably. Rick, do you agree?
I agree. There's been less activity this period than we had last year.
It's down. Occasionally we get it. I'm not a big fan of it. Look, we'll do it for strategic reasons. One is maybe we're helping the retailer, two is we want the space back. It's not what I would prefer not to do a lot of it. We will do it strategically, and it's basically a function of whether the offer's fair and whether it helps the retailer, and what are our prospects for renewing the space quickly. All that goes into the blender, and then we make a decision one way or another. We don't run around trying to look for it. It basically comes to us.
Got it. All right. That's helpful. Thanks. I missed it earlier. I think you mentioned that you did receive business interruption income in the third quarter, and you put it in the other income, but I didn't catch a figure. Did you provide one?
No, we didn't. It's the vast majority of the other income number.
Got it. Okay. Capital allocation, I guess a follow-up to an earlier question. You guys did not buy back any stock after being active, it looks like second quarter. Stock is pretty much at the same level. Anything precluding you there from buying back stock or just maybe storing up dry powder for incremental redev? Just curious on your thoughts on capital allocation regarding stock buyback.
Yeah. I just think we're conservative. I would tell you that I want to hug Brian and Andy every day. Maybe I should get a little credit too. I just love our balance sheet where it is. I just love it. I just think it's so cool to have a balance sheet like that. We're going to be really conservative, thoughtful, and then, as you mentioned, obviously, we got a very active redevelopment pipeline. I just love our balance sheet, and I just think that's something that it's got to be a unique set of circumstances to really do anything material to it.
Okay. Last one. I guess, same-store expense growth in the third quarter, can you provide what that was?
I don't know. I have no idea. Tom will follow up. We don't really do that. It's just our NOI, our comp NOI, it is what it is.
All right. I'll follow up with Tom. Thank you.
Yeah. No worries.
Thank you. Our next question comes from Ki Bin Kim with SunTrust. Your line is now open.
Thanks. Just to clarify something you guys mentioned earlier. The definition for leasing spreads and the volume, I think the pool changed. Now you're including anchor boxes. If that's correct, do you have any of those stats under the previous language available, just for the sake of comparability?
Well, it's not just anchor, it's everything. It's whatever boxes come in and come out, whatever theaters we renew, whatever amendments we take. We sat back and said, "Look, this is our business," and it's important to focus on that because, I think the market wants to know, great, you're getting these boxes back, but is there value in that real estate? Why are you paying for it if there's not value on the re-leasing of that? That's what we're trying to express. I will say this. If you looked at the earlier definition, we had positive spreads that we think the market would be fine with. I think the more important thing is to focus on what the future of our opportunity set is, and that's what we're trying to do.
All right. If I think about Simon and the size and the scale you guys have well above your peers, it's still interesting that on simon.com you can't buy anything. Have you guys thought about that? Are there any initiatives underway? I could imagine having something like that could probably help a lot of your data collection initiatives.
Have you been studying what we're up to?
No.
A very good question, and an appropriate question. The best answer, I have a really thoughtful answer, and that is to stay tuned.
Sounds good. All right. Thank you.
Thank you.
Thank you. Our next question comes from Derek Johnson with Deutsche Bank. Your line is now open.
Good morning. You can go ahead.
Good morning.
How is the mixed-use redevelopment at Phipps Plaza reshaping your vision of the portfolio's potentiality? In your thinking, how many additional large-scale repositionings exist within the malls portfolio, and what's your appetite for accelerating these investments?
It's interesting. The words KOP and King of Prussia haven't come up yet. Our portfolio has a number of those activities. We emphasized before, when we get back one of these department store boxes, it's more than just the 150,000 to 200,000 feet. It's anywhere from 10 to 18 acres adjacent to some of the best real estate in the United States. We are very focused on what we can do with those 18 acres. You are going to see an accelerating amount of activity
In a number of our properties where we have back 22 boxes, David said we'd like to get back others. We've taken back Penneys, we've taken back Belks. You're going to keep seeing that. We have the capital, we have the expertise, we have the opportunity. It's going to be accelerating throughout the portfolio. Frankly, we've been doing this for a decade. The difference is we now have access to these 10 to 18 acres adjacent to our properties that can accelerate all of these activities. They're more top of mind for the investment community. It's a great opportunity. We're well positioned to doing it, and it is in fact happening as we sit here talking to you.
Excellent. Thank you. Just a last one, if you could share any updates on digitally native or e-tailer initiatives, I know you have some experience there now. You've been doing it for a while. Any early customer or maybe brand retailer feedback that you think is worth sharing?
I would simply say that the store experience, we warble on a little bit. Let me be really concise. The best way I can say that is the store experience and the store requirement is back. That shouldn't be underappreciated. They all want stores. Period, end of story.
They're opening stores. We have a very active program right now where we've got probably 25 retailers that started on the internet that have opened stores with us and are opening more because, as David said, they work and they make money.
Excellent. Thank you.
Thank you.
Thank you. Our next question comes from Linda Tsai with Barclays. Your line is now open.
Hi. In terms of the business interruption insurance from another income from Puerto Rico this quarter, do you expect anything material in 4Q as well?
Yeah, we expect to have some more because it comes in over a period of time. Again, all of that was planned in our guidance at the beginning of the year. Remember, we had Puerto Rico down, so we've been reporting our numbers with basically, on average, around $35 million of EBITDA adios, okay? Between those two assets. Now we're starting to play catch up, and it happened a year ago. That's been out of our numbers fourth quarter of last year all the way up now, and we're starting to come back a little bit as we collect the cash.
Would that continue into 2019 as well?
Well, at that point, the property will be back online. We'll report it, just our normal NOI that we would get from that property.
I understand that Sears going away is a long-term positive for you and the rest of the industry. As this is playing out, though, short-term, medium-term, do you see store closures or liquidation sales as having a dampening effect on retailers for the holiday season, and to the extent that the liquidations continue post-holiday?
Well, look, let me restate what I said about Sears. I am disappointed. We didn't want Sears to basically file Chapter 11 or go out of business. Given that at least the Chapter 11 process is happening, and given the fact that we could buy some of the real estate back, we're going to make the best of it. At the end of the day, that could be a positive for us. In terms of diversifying the mix of our properties and so on, and all the stuff that we already talked about. There's always a little bit of disruption when you have a liquidation. Just so you know, when you liquidate a store, you got to follow a lot of rules.
We will certainly enforce our legal rights there, and hopefully, it will not be disruptive to the other patrons of our shopping environments and/or have any impact on our retailers. There is a process there that they've got to run by, and we intend to make sure they operate accordingly.
Thanks. Finally, you said you just completed a tour of Europe, and I'm sure you visit regularly, but are there any novel retail models or concepts you felt inspired by or seen making its way to the U.S.?
Well, listen, there are a lot of great retailers in Europe, Spain obviously, Sweden, Italy, France. I think what you don't see a lot of is kind of the internet folks. We're seeing most of that here. Beyond that, in terms of entertainment, restaurants, and obviously fashion and apparel, they're fantastic, and they're very good people, and we do a lot of good stuff with them throughout the world, Asia, Europe, and the U.S. It's important for us, and I think one of the benefits we've gotten over the years is that they recognize who we are and what we do, which may not have been the case a decade ago.
Thanks.
Sure.
Thank you.
Okay.
I'm not showing any further
Go ahead, ma'am.
I'm not showing any further questions at this time. I would now like to turn the call back over to David Simon for any further remarks.
All right. Thank you. We appreciate your questions, and we'll talk to you soon.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.