Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Simon Property Group Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. As a reminder, this call is being recorded.
I would now like to introduce your host for today's conference, Mr. Tom Ward, Senior Vice President, Investor Relations. Please go ahead,
sir. Thank you, Krissy. Good morning, everyone. 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 Andy Juster, Chief Financial Officer and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8 ks filing.
Both the press release and the supplemental information are available on our IR website at investors. Simon.com. For our prepared remarks, I'm pleased to introduce David Simon.
Good morning, everybody. We're pleased to report a strong start to the year. Retailers performing better following a strong holiday season and decent start to the year. Demand is picking up for our space and traffic and sales are up. We continue to invest in our product with a long term view of creating compelling integrated environments for consumers to live, work, stay, play and of course shop.
We completed several significant redevelopment projects are under construction on others and announced more activity that will further enhance the value of our real estate and grow our cash flow. And we continue to identify unique strategic new development opportunities globally that will extend our reach and create world class destinations. Before I turn to the results of the quarter, I'd like to provide some perspective. First, we expect to generate in excess of $4,000,000,000 in earnings this year, that's FFO. There are only 40 companies in the S and P 100 that are projected to generate over $4,000,000,000 in earnings this year and have an A rated balance sheet.
Simon is one of them. 2nd, we expect to distribute approximately $3,000,000,000 in dividends this year, which would make us one of the top 40 dividend paying companies in the entire world and country and obviously in the S and P 100. Finally, our stock is trading at a 12 times multiple, which is a 30% discount to our historical average multiple of approximately 18 times. This is the lowest multiple SPG has traded at over the last 8 years despite compound annual growth rate of more than 11% in earnings and 14% in dividends over that period of time. And as you know, our numbers speak for themselves.
Results in the quarter were highlighted by FFO of $2.87 per share, an increase of 4.7% compared to the prior year and exceeding the first call consensus estimates by $0.04 per share. This marks the first time we generated in excess of $1,000,000,000 of FFO in the quarter. We continue to grow our cash flow and report solid key operating metrics. Total portfolio NOI increased 4.8 percent or more than $70,000,000 in the quarter, and our comp NOI increased 2.3% for the quarter. And as you remember and I want to reiterate, they do not include lease settlement income.
Leasing activity remains solid, continues to improve. Average base minimum rent was $53.54 up 3 point 3% compared to last year. The mall and the outlets recorded leasing spreads of $8.45 per foot, an increase of 12.6 percent. And we are pleased that retail sales momentum continued to pick up in the Q1. In fact, each of our platforms posted record sales productivity for the period.
Reported retailer sales per square foot for our malls and premium outlets was $6.41 compared to $6.15 in the prior year period, an increase of 4.2%. As a reminder, this sales metric is based on information reported by the retailers. As a point of reference, while reported retail sales grew a strong 4%, we know there are significant number of retailers who are under reporting their sales number because they are deducting returns of online sales that were not previously recorded as store sales. This is not allowed under our leases. Although we plan to continue to provide reported retailer sales, it is important for the investment community to understand we believe this metric is understated.
Our malls and outlets ended the quarter at 94.6 percent and occupancy is down compared to last year due to the timing of bankruptcies processed last year and the Q1 of this year as well as the addition of new space brought online last year that is slightly lower than the overall average for the quarter. On an NOI weighted basis for our operating metrics were as follows. Reported retail sales on an NOI weighted basis is $804 per foot compared to $6.41 And again, this number we believe is still understated. Occupancy is 95.6% compared to 94.6 percent and average base minimum rent is $70.34 compared to 53
$0.54
Just to turn to new development in Edmonton, Canada, the premium outlet collection will open next Wednesday, May 2, marking our 4th outlet center in Canada. Construction continues on 4 additional new outlets, Denver, Colorado opening in December Quatero, Mexico, which will open in December Malaga, Spain will open in the spring of 2019 and Canac, United Kingdom, which will open in the spring of 2020. We have redevelopment expansion projects underway at nearly 30 of our properties across all of our platforms in the U. S. And internationally, and we continuously evaluate our portfolio for additional opportunities.
During the quarter, a 175,000 square foot expansion opened at Aventura Mall, one of the most productive retail centers in the U. S. During the quarter, we started construction on a significant redevelopment at Southdale. We're replacing a former JCPenney box with a lifetime athletic, lifetime sport and work specialty shops, restaurants, 146 Room Homewood Suites as well as a Restoration Hardware and Shake Shack restaurant. We're also working through the entitlement process for our transformative redevelopment projects of the former department store spaces at Phipps Plaza and at King of Prussia.
Phipps has started construction and KOP will start we hope by the end of the year. Lastly, we announced our plans to redevelop in 5 locations 5 Sears locations Brea, Burlington, Midland, Ocean and Ross Park Mall. Each of these projects has unique plans dependent upon the needs of the communities in which they are located, including entertainment, fitness, dining halls, restaurants, residential, hotel, office and of course new to market retailers. These are all go projects. Our industry leading balance sheet continues to differentiate us.
During the quarter, our AA2 unsecured credit ratings We're a firm with a stable outlook by S and P and by Moody's respectively. And by the way, similar A and A2 rated companies in our sector do not come close to our financial characteristics. However, it is what it is. We amended and extended our $3,500,000,000 revolving credit facility with a lower pricing grid for 5 years, and we closed and are committed on 6 mortgages totaling 513 for roughly 5 years at 3.4 percent interest. Keep in mind, we have no unsecured senior notes or consolidated secured debt maturing for the remainder of this year and little for 2019.
Net debt to NOI was 5.5 times. Our coverage was 5 times. Only 6% of our total variable of our debt is variable. Our liquidity is more than $7,000,000,000 And during the quarter, we repurchased 1,500,000 shares for $228,000,000 We announced our dividend of $1.95 per share for the quarter, a year over year increase of 11.4%. We're increasing our FFO guidance from $11.95 per share to $12.05 per share.
This represents approximately 6.5% to 7.5% growth compared to our reported FFO of $11.21 per share for 2017. To conclude strong start to the year, we expect to generate $1,500,000,000 in excess cash flow, which will allow us to fund our new development, redevelopment, execute on our share repurchase authorization or decrease our leverage, which is already significantly below our peer group, we welcome and encourage your questions.
Our first question comes from the line of Steve Sakwa of Evercore ISI. Your line is open.
Thanks. Good morning.
Good morning.
Just a couple of quick things here. So it looks like a lot of the operating metrics have kind of pointed up in the right direction, leasing spreads improving, sales improving. I know occupancy can bounce around and there's been some store closures and a few bankruptcies, But I also know that some of the new developments that are brought online tend to kind of pull that number down. So I was wondering if you or Rick could just for a share, how much of the 100 basis point occupancy decline was maybe development related? And then how much of it was natural store closings or maybe bankruptcies?
Well, I would say over the majority is related to bankruptcies. And remember, Steve, we are very focused on putting the right tenant in the right space. And when a we're at the mercy of the bankruptcy court. So the reality is, you file Chapter 11, you can reject the lease at any time. And as you know, the build out and getting the space leased takes some time.
We do expect that we will get back to where we were last year, maybe a little bit better. But again, that will depend upon if there are a little bit more bankruptcies or not. So it's pretty much what we expected. Remember as we gave guidance, we thought we would get back to where we were. We're processing the bankruptcies.
And then I'd say, I don't know, 20, 30 basis points are probably just the new space that we've added on. So in that range of seventythirty, somewhere in that range.
Okay, great. That's helpful. Secondly, it's a little more of a housekeeping item. But on we noticed on the other income that you had a large jump in interest dividend and distribution income. I think the lease settlement income sort of speaks for itself, but can you just provide any color on what the large jump was in the quarter?
And is that recurring or is that just a one time?
It is recurring. It's just we don't know when it recurs. So that is basically the distribution we get from our interest in value retail. And so it does manifest itself week a week. Just so you know, I know a little bit about accounting.
So we cost account for that. We do not equity account. And so when you cost account, you basically only record cash. That happens to be a cash distribution. And it does happen.
It's happened lumpy. And that's what it was from. We put that in that line item because it's technically a distribution as now that's a function of its cash flow refinancing activity. I mean it all goes into a pot there, but we cast account for that and then we only book it when we receive the actual cash.
Okay, thanks. And then just last for me, just share repurchase, I know you didn't do anything in the Q4, but you obviously took advantage in the Q1. How should we just think about your buyback activity over the course of the year?
I think it's going to continue with these levels. I mean, we are if you look at our balance sheet, you look at very little exposure to potential rising rates, the underperformance of our stock price, the kind of the mood is getting better, retail demand increasing, markets not recognizing it, why not buy stock back. So I think we'll continue that. I think just like anything else, we'll like we typically do, we'll be cautious about it. But it's certainly in our plans.
Okay. That's it for me. Thanks.
Thank you, Steve.
Thank you. Our next question is from Christy McElroy of Citi. Your line is open.
Hey, David. It's Michael Bilerman here with Christy. Two questions. The first, in your shareholders' letter, you talked about the 5th
platform being focused on the consumer.
And I was wondering if you could do that, how you're going to measure success, how much capital you want to put towards it. I'm not sure if you're thinking grander of like what Westfield did with Westfield Labs in 1 market. And I know there's a lot of different things that you've done, whether it's a Snapchat, the Family app, Facebook, Happy Returns, all these things that you're trying to get together with the consumer. But maybe you can delve a little bit deeper into how you envision that going forward?
Well, it's not at this point, given what's going on, I really don't have a lot to share other than we're dedicating resources and efforts to it. I hope to have something to talk to the market about later in the year. I don't I wouldn't compare it to whatever it's called 1 Labs, Westfield Labs. I'm not sure what that's all about. We're actually working on this right now.
We think about it all the time. We are a retail real estate company, but we have the flexibility to investments and other ways that technology can improve our consumer experience without jeopardizing basically the core business. And that's a huge focus for the company. As you know, our I even though Tom wanted me to take it out of my letter, I did hint to the market kind of what our marketing connection to the consumer brings every year. It's in the letter.
Thank you for reading the letter, first of all. And I mean, it's real money. You capitalize it. 2,000,000,000 visits 2,000,000,000 visits a year. So a lot's going on there, but I'm not really ready to get granular with you, but I hope to do it by the end of this year.
But is that something that you feel like you're you want to go out and acquire something or is it all being built and investing in house?
Right now, we're building, but I wouldn't rule out a strategic investment at all. And we just right now it's tough for us to make any investment, right? So you look at how those values are compared to our values, but there are we have a tremendous amount of optionality on how to continue to grow our business because of the position that we're in. So we'll continue to look at everything under the hood. As you know, we make investments through our venture group.
There could be larger investments. We've tended to make those kind of relatively small investments, but there could be larger investments. We're building something right now that I think will be very interesting. And that's the thing I'm referring to that I hope to debut by the by at least by the end of this year. But as you know, when you're building something, it's always a little it's not quite like building a mall, but there are a lot of analogies to it.
Hey, David. It's Christy here. Just quick one for me. It seems like the property expense recovery rate was down in the quarter from recent trends. Just wondering if there was anything one time in there and how we should be thinking about the property level expenses going forward?
Not really. Q1 had snow, had utility expenses that were it was a little bit we had a little bit of a spike up in those. We're also adding some properties to it so that those numbers tend to go. But basically our utility expenses and snow expenses, as you know, we've had a the spring has not sprung yet, maybe it has. Maybe it's springing right now as we speak.
So it's really more of that. I wouldn't read anything else into that.
Our next question is from Rich Hill of Morgan Stanley. Your line is open.
Hey, good morning, David. Just maybe a quick question for you. One of the things that we are looking at was maybe a little bit of an increase in the month to month leases. It looks like they increased to around 3,500,000 square feet versus around 1,600,000 square feet. I recognize that's still small overall, but I'd be curious if you could give us any color as to whether that's timing related, the change in strategy, how are you thinking about that?
Well, it's when you get bankrupt space back, you wait for the right tenant. It's really just typically part of our strategy here that we are looking at the regional local markets a little bit more in detail. So we tend to do those a little bit shorter term sometimes. But it's really just a function of us recycling our portfolio through. Now remember, in our occupancy, we only include leases that are over a year.
So the 94.6 just includes that doesn't include like short term leasing to us is 3, 6 months. But so that all of that's about a year. A year.
The only thing I would add is that we're maximizing our revenue. So we go out of our way to try and make sure that we have as much space occupied for as long as we can and we're also able to incubate tenants out of that program. We get a number of tenants that have started with us, temporary tenants, which in fact end up going longer term leases because they find they can make money and like the experience.
Got it. Helpful. And can you remind me, maybe going back to Christy's comment here a little bit, do those month to month leases pay reimbursements? Or is it just like a typical lease?
And remember, a lot of those month to months are leases that we haven't finalized the negotiation with. So we tend take a big retailer, okay. Maybe they're headquartered in San Francisco and I won't name names. Believe it or not, just because of the 2 organizations back and forth, We may not have those leases negotiated completely. So they're not going to leave and then come back.
So those tend to go month to month. And what you're looking at in the 8 ks is essentially that backlogs, okay. So it's you need to differentiate between short term leasing and month to month. Month to month is basically our total book of business that we have many national retailers in 2018 that aren't done. So we're and those tend to be done throughout 2018, even though we try to get them all done, we may have a strategy not to get them all done for all sorts of reasons.
So I think you need to separate those 2 out. Those month to month are primarily national retailers that have just not been finalized and they go and remember at a lot of our leases expire at January 31. So a lot of those leases don't get believe it or not, don't get done until May June and don't ask me, but that's been year after year after year. So I hope you understand the difference. Yes.
Let me repeat. So what you're seeing in the 8 ks is mostly vast majority of national tenants that we have finalized our deal, so they automatically go to month to month. In our 94.6, only leases that are a year older in that number, okay?
Got it. Helpful. Thank you, David. Thank you, guys.
Sure. No problem.
Thank you. Our next question is from Craig Schmidt of Bank of America. Your line is open.
Thank you. We see that you're continuing to ramp up your densification pipeline. I was just wondering, as you looked out your portfolio, how many projects do you think you could be pursuing a densification effort on? And it seems primarily hotels have been your densification effort of choice. Do you see more office and resi efforts as you densify?
Yes. I would say to you that just off the top of my head, we have at least 20 major projects, one of which is under construction now. We have to move the fire station at Phipps. But Phipps is a great example where we're building a hotel with Nobu and a restaurant and an office building. There is no residential there, but as you know, we already built residential in our development there.
But we have a lot of residential. So like and Craig, you know the portfolio. So Stoneridge and the East Bay, significant amount of resi will be part of the Sears redevelopment. Same thing with Brea and Orange County. So I wouldn't say it's mostly hotel.
The reality is I think you'll see more and more resi build and just a gross number of at least 20, but we're building a hotel in Sawgrass. So I mean it's all over the board. It's something that we're excited about and it's something we're dedicating more obviously capital, but also human resources for.
Great. And then regarding Bon Ton's, maybe you could share some of your future plans for the repurposing efforts of those department stores?
Yes. I'll let Rick speak other than Bon Ton is a non material event for us. We've already got users identified. Again, we don't own all of the real estate, so some of it will be out of our hands at least for some period of time. But Rick, you can add to that.
We basically have already identified users for virtually every one of the stores. And as David said, there are some that we own that we're moving They They have said, yes, let's make finalized economics and we would hope to have information about that later in the year. The stores aren't going to come back till Q3 while they finish their process.
Great. Thank you.
Thanks, Craig.
Thank you. Our next question is from Alexander Goldfarb of Sandler O'Neill. Your line is open.
Hey, good morning. Good morning, Matt. Good morning.
How are
you doing? Good morning. Just two questions from us. First, David, in your opening comments, you referenced Internet returns and how you make sure that the tenants aren't understating their sales. Can you just expand on that?
As far as it sounds like you guys get a full detailed P and L and somehow you're able to double check and make sure that the retailers, the tenants aren't leaving off anything to further understate. But maybe you could just elaborate a little bit more on that?
Well, there's not much to elaborate other than we actually don't get P and Ls, we get we have audit rights. And in our normal procedure, we saw some anomalies about sales. And as we've gone through our audit rights, just like the retailer has audit rights on us, in some cases. Now, if you go back historically, it used to be all these CAM audits. But since we all went to fix CAM, that's less of an issue.
We found out that there it's what's fascinating to me about the Internet and that it's never really discussed is everyone talks about the Internet's gross sales, they never talk about the net sales. And I think by and large bricks and mortar are because as you know apparel could be 30%, 40% returns. And I think most of those returns are occurring in a lot of cases in the physical world, which is good for the retailer because maybe they give them a credit or maybe they exchange it. But we've just found that we're getting dinged by the Internet return when in fact they're not allowed to because the reality is the only thing they're allowed to offset in terms of sales is returns from the store. And in many cases, we limit the total returns if they're allowed to net against us.
So this is an issue. I mean, I don't want to make a big deal about it, but when the market is fascinated by our sales per square foot, We just think we need to tell you the other side of the story. What happens here and how it gets dealt with is anybody's guess. It's certainly part of our lease negotiation, but we just want to tell the market. We are giving you our reported sales and they're less than what's going on at that market because of the Internet sales returns.
And that's I can't quantify it, but I do think I wouldn't tell you if there weren't material. How's that?
That's what I figured. The second question is, part of your redevelopments that you guys have been doing has also been upgrading the food courts, which I don't think usually get much attention. So whether it's like Woodbury or Westchester, certainly, it's pretty dramatic from what it was. But as far as measuring returns, like it's easy to say, hey, you add a restaurant, we drive this much more NOI, this much traffic, you add new retailers, new hotel, you can judge that. How do you are the food courts really dramatically increasing sales in NOI?
Or these are more just, hey, you got to upgrade it, make it look good. It's probably got the same sales that it was doing before, but if we're going to do the center, we have. So is this more defensive spend or are you actually getting a good return when you're doing those?
Look, I think it's all it's offense, it's defense. The reality is those numbers are all in our numbers. So, however you want to look at it, I don't think it's that critical to say it's offense or defense. When we do make an investment in our food hall operations, we it's all it's that cost and that income that we get is all in the numbers that Tom provides in his 8 ks. And just to remember, and we don't talk about this, we've been thinking about it, I've been thinking about it.
The 8 ks we have here is just approved projects ready to go that we've our own capital committees approved. It does not include our soon to be approved deals like a FITs or all of the Sears redevelopment that we had to deal with at the end of the year. And that's basically it's more than a shadow pipeline, but it is significant amount of investment that we think will get accretive returns on. But I would just say that it's simply, it's yes, it's both. It's offense and defense.
The cost and the income from that is certainly in our numbers. And
the world
wants newness, healthy food, community place to hang out, all of the stuff that's really good. There's a lot of great operators. We need to do more and more of it. We're excited about it. Our peers have done it.
They've done a nice job with it. And I think it will continue to move forward. Now, on some cases, we may take it out because the reality is there's a better use for it. And each the thing about real estate is, yes, there are these trends, but the reality is it's got to it boils down to the location, the demographics and all that stuff that makes real estate unique.
Okay, thanks.
Yes, no worries.
Thank you. Our next question is from Ki Bin Kim of SunTrust. Your line is open.
Hey, this is Ki Bin. Good morning out there. So David for a couple of quarters you've mentioned that you think the retail demand or environment is getting better. So what is it that you see in your seat every day that that's not apparent in the supplemental snapshot every quarter?
Well, we talked to our sales folks and they tell us demand is picking up and the leases take time. Bankruptcies don't take any time. Okay. So they take out they have a lease, they reject it and then we don't know if they're going to reject it or not. There's a lots of gains of chicken, but we've got one of the best leasing groups in the country, in the world.
I look them in the eye, they tell me their demand is picking up. So I talk to retailers, Rick talks to retailers. It's I mean, obviously, results are historical. They're not future expectations. We feel better about the business than in 2017.
We gave you our judgment that bankruptcies would be less than 2018. So far we're right. We're not perfect in our estimates and our judgments, but we've been doing this a long time. And the guy that oversees leasing John Ruhle tells me green shoots. I don't know, sometimes I wonder whether but John and I have been working together a long time.
I tend to believe his judgment. Rick, Rick, you can comment on this. What do you think?
Interestingly, we have meetings every week with tenants where we're in their offices and they're coming into Indianapolis and we're going over the portfolio and that optimism is being generated out of those meetings where we're exposing opportunities to them and where last year they would have said we exposed 20 and they were interested in 3, now they're interested in 12. So there is definitely a more optimistic view. They have more capital spend and they're more focused on new opportunities than they were last year and that's the cause of our optimism.
That's helpful. And is that just broad based? Or is there a certain segment? Is it new type of tenants? Is it the old guard?
Just curious how does that look like?
Well, it's a combination. I mean, look at I mean, each company is different, but look at just from the gap, look at Old Navy, they're growing the Old Navy business right? Now maybe they weren't 2 or 3 years ago. Obviously, the great thing about what's been going on in our industry is there are more and more entrepreneurs in the food and obviously in the retail front. I mean, I don't have to get I know Rick, this is usually where Rick updates his list.
Let's move the call along and we'll avoid it, but he's happy to give it to you. There are more folks. I mean, our new business group is doing new and new deals, new ideas. Our business always recycles itself. It's done it for so long.
Our product has been around for 70 years. And despite and I don't want to blame, I don't want to like be negative on the media, but the media wants this one narrative, but it's just not reality and look at our numbers, okay. We're going to make $4,000,000,000 this year, okay. And that's yes, I mean, it's not perfect. I'd love for everybody.
I'd like not to have a slight decrease in occupancy and this, that and the other, but it's we're in good shape and I think the business generally is getting a little bit firmer. But and again, I go back and Tom might know it, but I wrote an article or article, my shareholder letter in 2015 and I told you my concern about the leverage going into the system on retailers. And the 2 big bankruptcies this year had basically, Claire's had nothing to do with its operation. It's all about too much leverage. And Toys R Us, it was about the fact that it was so levered to begin with that they could never invest in the product, whether that's online or in the stores or anything.
And the natural media narrative is, well, it's the mall. Well, it's not. Look at peel the onion, figure it out. And I agree with Tom, when did I write that in my letter, 2015? 2015.
2015. What year is
it? 2018.
2018. Nobody reads my letter, but the reality is I told you about it in 'fifteen. So that's where we try to explain it to you methodically. We show it, we back it up with our numbers and every retailer is different. But the reality is we just feel a little bit better than now easier to feel better when you don't have all these bankruptcies, but we're going to have some more.
And no, I'm not going
to tell you which ones.
And yes, some of it are because their operations are not that life has passed them by. But that's been going on in our business forever. Traffic's up, sales up, demand's up and our numbers are catching up.
All right. Well, thank you.
Sure.
Thank you. Our next question is from Jeremy Metz of BMO Capital Markets. Your line is open.
Thanks. Good morning. Good morning. David, Rick, I just wanted to continue on your comments about the move getting better in retailer demand increasing. I'm wondering what you're seeing from your tenants in terms of reinvesting in their existing stores.
Are you seeing encouraging activity here relative to maybe a year ago?
I think there are tenants that are now recognizing that they are only going to be able to increase their share by giving the consumer a better environment. And Dave has been talking about that for the last quarters asking our retailers to invest in the store and we are seeing that more now and that is in fact encouraging. One of the things that we're very focused on is rightsizing our tenants. So where we have a tenant that we believe has got too much space, we will work with them and reallocate that space, get them to a smaller store, it's more productive, we make money and we get back more space than we can lease to another productive tenant. And that's just like manufacturing new space without having to build it.
And so we're very focused on that and the tenants are now more inclined to work with us than they were in the last year or so.
Great. Appreciate that. And then just switching gears. In terms of those Sears boxes, the 5 redevelopments you recently announced the plans for, you mentioned earlier that those construction spend numbers aren't in the pipeline yet. But given it sounds like those can be some pretty significant projects here adding additional uses the hotels, office, resi.
I just wonder if you can give us any sort of sense of how much capital those 5 could total here?
Well, let me answer it this way. We've made a deal with Sears to control 12 boxes. And when I say Sears, I should also mention Seritage. Our total investment in that, now some of these are not this year, the fiber this year, because we're getting those back this year. But the $12,000,000 in total is about $1,200,000,000 and that will flex a little bit up and down.
So I think you should look at the total amount as opposed to the 5, but you'll see the 5 start coming into our 8 ks. But I would say to you that you look at the $12,000,000,000 and it's about $1,200,000,000 altogether. Thanks guys.
Sure.
Thank you. Our next question is from Caitlin Burrows of Goldman Sachs. Your line is open.
Hi, good morning. I guess also just on those densification projects in the supplement and I know another example is Northgate Mall outside of Seattle, which was in the news. That one mentioned it could have housing and offices, but reduced square footage of retail. So I was just wondering to what extent the projects you're doing could involve a reduction of retail square footage, so that even though the end result might be or should be an increase in NOI, that there could be some decline in between?
Yes. There is no question that that will have a reduction in retail space because remember we have Penny, Macy's, Nordstrom and it's a tight site, but it's a great piece of real estate. And ultimately, it'll be a residential office and still retail. But I'd say roughly the retail be cut in half more or less in that range. Obviously, this is a process over time.
We got to go through the approval process, but the retail there will be dramatically reduced.
I guess when you think about the densification projects overall, is that retail portion?
Well, look, I think a lot of this is happening with our Sears stuff. So if you consider Sears a retailer, in theory it's taking that out. I mean all the 12 now in a lot of cases we're just changing the mix, but it will still be retail. So I would say to you a lot of it is reducing the department store, not so much the small shops, but really reducing the department store square footage and not the small shops. So the income opportunity is really enhanced because as you know, either they pay very little rent or we'll able to buy the box at on an accretive basis because we're getting small shop kind of rents or we're having a mixed use development.
So in a lot of cases, the retail will be reduced in total, but it will be mostly department store reduction as opposed to what you and I would consider small shops.
I would say to you that a great example of that focusing not just on the boxes, the land at King of Prussia, the penny store is going to be demolished. That gives us 17 acres of land adjacent to King of Prussia Mall and that is going to be a significant mixed use project with hotel, residential, restaurants, retail and amenities. And so that's a major opportunity for us to substantially upgrade what is already one of the best properties in the United States.
Got it. And then just last one using Northgate or on this because the decision making process is pretty early stage?
It's early. Listen, the critical path there is approvals. And then once the approvals come, we'll start to build. So it's Seattle is obviously a great market and a great city and this is a great piece of real estate. The new metro line is it basically dumps off in our parking lot.
But it's a multiyear process. I think that the most exciting thing that we've got that the market could focus on if they want to say, okay, what are you doing now would be FIPS. I mean, FIPS is Belk sleeves at August of this year. We demolished the store. It's a little complicated because we got to demolish the parking and then go up.
But that's going to happen. That's basically we have this odd process here. I mean, it's basically they're finalizing all the numbers, but that'll show up in either next quarter closely thereafter. But it's for all intents and purposes a go deal and it's roughly, if I remember right around $350,000,000 and it will be accretive and it's going to make that real estate just tremendous, fantastic. The only thing that could flex there is the office, But we think a brand new building there in that area with that parking and those amenities will be exciting.
And we will be doing a new food hall there as long with the lifetime work and fitness and sport, Nobu Hotel restaurant. That's going to be the one you can say, while this is great, you got to talk about this all, but this is actually happening. Northgate is a year or so process. But the other big ones to look for Brea, Stoneridge and obviously KOP. I mean, those are the big what I'd say to you are the big 4 that are all going to be programmed in here in the next year or so.
Got it. Okay. And then just switching topics, the income and other taxes line item was historically an expense. Last year in Q1, it was positive, I think, due to a loss from Aero this year back to an expense. So I was just wondering if you could go through the impact Aeropostale had to your earnings this quarter and the outlook for that investment?
Well, last year, I mean, this is the good news and the bad news. So last year, as you know, the Q1 of retail operation usually loses. Yes, we had the tax benefit of that this year because of the lower tax and the operations are better, we had less of a tax benefit. And that's really what it manifests itself. I think aero business generally is they're doing what they're supposed to do.
So, I mean, that's a business that with a little elbow grease, less worry about comp sales and all this other stuff. I mean, I think we're going to our operating business will should have an EBITDA. And again, we only own 49%, but should have an EBITDA, I don't know, dollars 35,000,000 and we bought it at basically one times EBITDA. So I don't know, people criticize me for it, but somehow it's working out. And as they're going to take on the Nautica operations.
We think that's another unique thing that can be done that led to the profitability of the aero operating company. And then our partner besides general growth, Authentic Brands Group continues to do an excellent job in the brand development of both Aero and then ultimately all their brands as well as Nautica, which we expect to close here in the next 30 days. It's okay. I mean, we have a decent story to tell in our retail investments so far. So it's okay.
It's good.
Thanks for that. Glad to hear it.
Sure. Happy to.
Thank you. Our next question is from Nick Yulico of UBS. Your line is open.
Good morning, everyone. Looking at the increase in tenant sales per square foot, trying to figure out how much is attributed to churning out weaker tenants from the portfolio versus sales growth. And so could we get some perspective on what is the average sales per square foot for tenants that have fallen out of the portfolio through bankruptcy in the quarter and in the last year?
We don't have those numbers there, but we have such a huge portfolio. We lost 1,000,000 square feet in bankruptcies. Our small shops were $65,000,000 So no matter how you want to do that, Nick, it's not going to be material. Okay? You can do make up a number and do it yourself and you'll see that it's not material.
65,000,000 square feet is still 65,000,000
square feet.
Okay. And then on the development page, recognizing these numbers can fluctuate, but the expected return is now 8%. It was 9% last quarter. What's driving that? Is it tougher construction costs or some change in product mix location?
Things come in, things go out, we round it. So there's some rounding up and rounding down, but nothing out of the ordinary mix change. That's it.
Thanks.
Sure.
Thank you. Our next question is from Vincent Chao of Deutsche Bank. Your line is open.
Hey, good morning, everyone. Good morning. I just want to go back to the Aeropostale conversation a little bit. Obviously, you've done a good job stabilizing it, bought
it at a big basis.
But I'm just curious, there were some special circumstances when you bought that. I guess, what's the longer term plan there? Is this it seems like not something you would necessarily keep long term, but just curious how you're thinking about the long term for that investment?
Well, again, it's a small investment.
We have
basically less than $30,000,000 in it. So honestly, it's a very good investment. It does we bought it really, really fortunately, the team has done a very good job. And but again, our investment in this is basically $30,000,000 So it's not like I obsessed with it. I do obsess with making sure the operations continue to move forward in a positive manner, which they have been.
But it's not for $30,000,000 I'm not going to it's not like, oh, God, we got to do something with Arrow. But I'm open to any of your ideas, if you'd like.
Leverage the buyout.
That's the one thing we will not do, okay.
I guess just another question maybe something that you obsess a little bit more. Just the big projects that you mentioned that are going to come into the pipeline, we saw the share of your net cost there, the reported number go up for the first time in a little while. I guess after these are all in there, I guess or maybe by the end of the year, what do you think the pipeline will be? Is it going to be over $1,500,000,000 at that point, just given some of the things that are being brought on? And then from a delivery perspective, is that more of a 2020 kind of NOI uplift?
Well, what I would say to you is the stuff that we're working on now, again, part of the timing is the great thing about us is we're not long development. So we can turn it on and turn it off just like our balance sheet. But I would say to you the stuff that's in the pipeline now is over $4,000,000 And I would call that more than a shadow pipeline. I call it the real pipeline. The difficulty in answering your question, which is not that it's not an appropriate question, it's just that it's hard to tell you exactly when that will come online.
But I would say to you, as Tom has described, it's going to be about $1,000,000,000 plus a year. I still feel like that's the right number because we've got this $4,000,000,000 pipe that I see and I can identify clearly whether it's $2,000,000,000 1 year, dollars 1,000,000,000 another year, it kind of that's harder to because a lot of these are a little bit out of our control and that you just have to go through the approval process. But the real stuff is $4,000,000,000 and all that's like in works now. And so that's why I still think that $1,000,000,000 plus a year is probably a pretty good number because it will take 3, 4 years to get all basically done. And then we'll add to that as well because obviously, even though we have 12 Sears stores, that's not there's going to be more.
That's not the
Okay. Thank you.
Sure.
Thank you. Our next question is from Michael Mueller of JPMorgan. Your line is open.
Hello?
Michael, please check the
mute button.
Yes, yes, all good. Appreciate the color of the development pipeline. I guess the one question I have left is, the Q1 lease term, how much of that was contemplated in guidance? And is there anything else material that you expect in the balance of the year?
Yes. It was all pretty much in our initial guidance because there was a unique situation that was that we had anticipated that was going to be resolved.
Okay. And for the balance of the year, anything else material in there?
On lease term, not really. Not really. And again, I just it's always been part of our business. It's an okay part of our business because if you get the present value of a lease obligation and then you get the space back, it's not too shabby as my hero would say. But I don't sense that there's anything really that's going to be that extraordinary.
And again, remember, Michael, it does not it's not in our comp NOI.
Yes. Okay.
That's it. Thank you.
Yes. No worries. Thanks.
Thank you. Our next question is from florist Van Dijk of Boenning. Your line is open.
Good morning. Thanks guys for taking my question. Question on David, I mean you've built a reputation as being a pretty astute capital allocator. And as you look at the various platforms that you're allocating capital to, whether it's your U. S.
Mall business, your outlet business or your international business or for that matter buying back your own stock, Can you maybe talk about the attractiveness as you sit right now for each of those uses of capital? Clearly, you continue to invest and plow money back into your U. S. Mall portfolio. But maybe if you can talk about the relative attractiveness, particularly regarding your stock as well.
Well, I mean, right now, it's basically 12 times. It's highly attractive. And the only hypothetical constraint in that is that we just think having though it's never really manifest itself in our multiple. The optionality of having this powerful balance sheet is something that I never want to get rid of. So we could buy a ton of stock back, but we always are going to be conservative on that front only because we want this powerful balance sheet for optionality reasons, optionality to do something external, optionality to weather any storm, make additional investments, make our properties better.
And so we're never going remember, Rick and I are workout dudes, okay. Rick, I mean, when I got back to the real estate business in 1990, I spent from 'ninety to 'ninety three doing workouts. Rick did it as well, right, Rick? Yes. So Andy is here.
He is conservative. So that's we will never jeopardize the balance sheet. Now I don't think we get rewarded for it as much as we probably should, but that's fine. It is what it is. I don't think the rating agencies appreciated it as much as they should, but that's fine.
It is what it is. And so, of course, I just think we're never going to be wildly aggressive on buying our stock back just because we want that ultimate flexibility. But the priorities are we'll continue to buy stock back. The biggest priority we have obviously is we're really excited about all this mixed use stuff that we're doing in some of these big projects. That's going to be the future of a lot of investment and growth.
And then we may take the company in a different direction. Michael Bilerman mentioned the consumer. I mean, I wouldn't rule out some interesting thing from us down the road because I think I just think we have the ability to do stuff like that, that we should rule out. So I hope that answers your question. But I will and thankfully, we have $1,500,000,000 cash flow after dividend that we can put back into the business.
And we're not over our skis. So if we end up in a really tough recessionary environment, we're not going to be we're not going to go we and I wrote this in my letter. We are not again, we are not going to the development community historically leverage, leverage, increased rates of return, blah, blah, blah. We are never going to push that to the limit even though it makes your return on investment that much better in all the other metrics associated with it. It's just not who we are.
So I mean, it's a long winded answer, but I mean so we'll continue to kind of what we're doing, I think, right now is what we'll continue to do. But I want the option that if obviously, if it gets different, I'm going to step one thing up or decrease one thing up. That allows us we have the optionality to do that.
Great. One other question, David. I'd love to get your color on what you think the unibuy entry into the U. S. Via Westfield means for the global retail dynamics and also for the U.
S. Mall dynamics?
Well, first of all, I would say 1 or 2 points. One is, people that are looking for a mark on values, it's a very, very healthy mark. And 2 is operationally, I don't see we'll wait and see. I mean, I'll reserve judgment there. But I don't see a big significant change.
I mean, Westfield did a good job before. I'm sure they'll do a good job after. But I think the most important thing is that there is a very healthy mark out there if you are interested in those marks. I think from our standpoint, we'll have little to no impact.
Great. Thanks.
Sure.
Thank you. Our next question is from Linda Tsai of Barclays. Your line is open.
Hi. Do you have any comments on 1Q traffic across the different property types? What kind of uptick are you seeing given improved trends coming out of a better holiday season?
I think generally it was I mean it wasn't like up 5%. It was up around 1 percent across the board and it didn't really matter if it were outlets or malls. It was kind of across the board. The outlets tend to get a little bit more hit because of the weather, but even though even they were up.
Are you seeing tourism come back to the outlets?
Yes. Yes, we are even though it's not as robust as it has been, it continues to move up. Outlet sales were really, really nice in the Q1. So a lot more retailers doing better. So we were very pleased with generally with the outlet results.
Great. And then can you offer some insights on Clay Pier walking away from its bit of Hammerson? What might have been the thinking behind that?
Well, it's really even though lots of discussion on this. Clay Pier, there's a supervisory board and executive board. We are on the supervisory board, but the executive board really runs the company and makes those decisions. So it's really more important to hear from them. That was a Klepierre led effort and transaction.
Obviously, they didn't do it without the supervisory board giving them the green light to do yes or no. But it's really that question is really much better directed toward them.
Thanks.
Sure.
Thank you. Our next question is from Christy McElroy of Citi. Your line is open.
Hey, David. It's Michael Bilerman with 2 quick follow ups. Is there anything with all the things going on with all of your competitors, whether it is the Westfield Unibail merger, the GGP Brookfield deal? Clearly, you've had management changes at Macerich and financial activism. You've activism at Taubman.
Does this allow Simon at all to take advantage of all those things going on for shareholders at all in terms of just operations and dealing with things when there's just more uncertainty at all your competitors, not from an M and A perspective?
I don't think so. I mean, I think they're all running their business, I think, very effectively. I don't see that at all. I mean, they're all they all have good the ones you mentioned all have good properties, good management teams. I would imagine all of that's business as usual regardless of whatever corporate activity is going on.
So I don't think so.
And you're not hearing that from retailers that just may like loves drama going on in C suite or corporate at all?
Not at all. Not at all.
And then just going back to this whole thing about returns and the leases and your comment about the CAM audits and the movement towards fixed CAM and how that changed. Is there any change in the way you're doing new lease agreements to address this for you to make sure that you're getting your fair share, percentage rents and the right rent at the end of the day for the space?
Well, I mean, that's a really good question and it's a big question and every retailer is different. It's just I mean, believe it or not, Rick, me, John Ruhle and his team, I mean, we're every retailer is different. We're very focused on it. There's not a standard response yet, but it's it needs to be addressed in the future leases. Because look, we all we don't mind Internet sales, I mean, because we do think there's a lot of returns associated with it.
We obviously want those returns in the store because that facilitates a trip and it helps the retailer and it's all just a function of making sure it's appropriately dealt with. So it's not like it's not an adversarial scenario, but it just needs to be appropriately addressed. And we're in the midst of trying to figure out what's the right approach. And unfortunately, it's not a cookie cutter answer because every retailer does a little bit different. But it's not we want the returns in the store.
We want the trip in the store. But it as you know, I've been like, don't worry too much about sales and I've been poo pooed on that. And I understand why the market doesn't like my view of that, but the reality is it's becoming even there's even a bigger gap on the focus on this because there is more certainly more business being done online, but that also means more returns and the consumer likes to do the returns in the store. And the reality is this whole green effort, we wrote a white paper 3, 4 years ago about the fact that we all want higher levels of sustainability from an energy point of view. And the reality is the Internet and the constant packaging and the constant state of returns is really a lot less green than doing your trip in total, okay.
So there are
a lot of facts on this,
but I won't bore you. But point is, I don't have a good answer for you yet other than we're working cooperatively with our clients to find out what the right answer is. And it's not a fair share thing. It's just as long as we have to report that number, I want we need that somehow the market needs to understand there is this issue that's out there.
Right. And then look, I wanted to congratulate Andy on his retirement. It's nice to go out with a $30,000,000,000 balance sheet at under 3.5 percent rate with a 7 year average maturity, certainly calling it probably at the peak from that perspective. But is there any comment in terms of CFO process, what you're going through internal versus external and how you think that's going to
be timing wise? Well, yes, good question. So first of all, Andy, will say goodbye to Andy not to the end of this year. But Andy has done a fantastic job as we all know. And when I wrote the comments about his retirement, I really, really met him.
And not that I don't mean what I write, but the fact of the matter is that I felt in my heart how I felt about Andy. He's done a tremendous job. He's done such a good job that there is no financing that we need to do. Okay. So that's kind of ironic, right.
So this is a CFO that's done such a great job. The reality is there's nothing to do. I'm kidding. There's always something to do. But currently, the simple answer is we're looking more internally.
We have some really good internal candidates. And I'm thinking more of that as opposed to external. But I haven't put a pin in it yet. And but Andy has done an unbelievable job with the balance sheet. He and I have worked together 25 years.
He's got the best relationships in the industry, banking industry and we'll certainly miss them, but the reality has done such a good job, there's nothing to do. We've done a 16,000,000,000
in the last 3 years plus 2 revolvers, but you've got a great internal group that can step up in a New York minute. We've always had a great infrastructure here with very, very strong candidates and it's a team environment in the finance department.
So the answer is I'm thinking about it. I'm getting closer and closer. But it's Andy is right. It's a team effort. And but it will develop this year.
Hey, David, it's Christy. Just one more quick one for me. You suggested buybacks are likely to continue. To what extent are assumptions for additional buybacks from here contemplated in the current FFO guidance range?
They really aren't other than what we've already done.
Okay. Thank you. Sure.
Thank you. And that concludes our Q and A session for today. I'd like to turn the call back over to Mr. David Simon for any further remarks.
All right. Thank you, everyone. Appreciate your questions and your comments.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude