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. If anyone should require operator assistance, please press star then the zero key on your telephone keypad. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Mr. Thomas Ward, Senior Vice President, Investor Relations. Please go ahead, sir.
Thank you, Christy. 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 Steven 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. Actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I'm pleased to introduce David Simon.
Good morning, everybody. We're pleased to report a strong start to the year. Retailers are performing better following a strong holiday season and decent start to the year. Demand is picking up for our space, 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. 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 billion in earnings this year. That's FFO.
There are only 40 companies in the S&P 100 that are projected to generate over $4 billion in earnings this year and have an A-rated balance sheet. Simon is one of them. Second, we expect to distribute approximately $3 billion 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&P 100. Finally, our stock is trading at a 12x multiple, which is a 30% discount to our historical average multiple of approximately 18x. 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. 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 billion of FFO in the quarter. We continue to grow our cash flow and report solid key operating metrics. Total portfolio NOI increased 4.8%, or more than $70 million in the quarter, and our comp NOI increased 2.3% for the quarter. 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 3.3% compared to last year.
The mall and the outlets recorded leasing spreads of $8.45 per foot, an increase of 12.6%. We are pleased that retail sales momentum continued to pick up in the first quarter. 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 $641, compared to $615 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 a significant number of retailers who are underreporting 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%. Occupancy is down compared to last year due to the timing of bankruptcies processed last year in the first quarter 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 $641. Again, this number, we believe, is still understated. Occupancy is 95.6% compared to 94.6%. Average base minimum rent is $70.34 compared to $53.54.
Just to turn to new development in Edmonton, Canada, the Premium Outlet Collection will open next Wednesday, May 2nd, marking our fourth outlet center in Canada. Construction continues on four additional new outlets. Denver, Colorado, opening in December. Queretaro, Mexico, which will open in December. Malaga, Spain, which will open in the spring of 2019, and Cannock, U.K., 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 sq ft 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 Life Time Athletic, Life Time 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, KOP will start, we hope, by the end of the year. Lastly, we announced our plans to redevelop five 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 A/A2 unsecured credit ratings were affirmed with a stable outlook by S&P and by Moody's, respectively. 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 $3.5 billion revolving credit facility with a lower pricing grid for five years, and we closed and are committed on six mortgages totaling $513 for roughly five years at 3.4% 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 five and a half times. Our coverage was five times. Only 6% of our debt is variable. Our liquidity is more than $7 billion. During the quarter, we repurchased 1.5 million shares for $228 million.
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%-7.5% growth compared to a reported FFO of $11.21 per share for 2017. To conclude, strong start to the year. We expect to generate $1.5 billion 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.
Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, to ask a question, that's star one. Our first question comes from the line of Steve Sakwa of Evercore ISI. Your line is open.
Thanks. Good morning.
Good morning.
Hi. Just a couple of quick things here. 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. I also know that some of the new developments that are brought online tend to kind of pull that number down. I was wondering if you or Rick could just first share how much of the 100 basis point occupancy decline was maybe development related, and then how much of it was kind of natural store closings or maybe bankruptcies?
I would say over the majority is related to bankruptcies. Remember, Steve, we are very focused on putting the right tenant in the right space. We're at the mercy of the bankruptcy court. The reality is, you file Chapter 11, you can reject a lease at any time. 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. Again, that'll depend upon if there are a little bit more bankruptcies or not. 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. I'd say, I don't know, 20, 30 basis points are probably just the new space that we've added on.
In that range of 70/30, somewhere in that range.
Great. That's helpful.
Sure.
Secondly, it's a little more of a housekeeping item, 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, can you just provide any color on what the large jump was in the quarter? Is that recurring, or is that just a one-time event?
It is recurring. It's just we don't know when it recurs. That is basically the distribution we get from our interest in Value Retail. It does manifest itself week to week. Just you know, I know a little bit about accounting, we cost account for that. We do not equity account. When you cost account, you basically only record cash. That happens to be a cash distribution. It does happen. It's happened every year for the last several years. It is lumpy. That's what it was from. We put that in that line item because it's technically a distribution. That's a function of its cash flow, refinancing activity. I mean, it all goes into a pot there. We cost account for that, and then we only book it when we receive the actual cash.
Okay, thanks. Just last from me, just share repurchase. I know you didn't do anything in the fourth quarter, you obviously took advantage in the first quarter. 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. If you look at our balance sheet, you look at very little exposure to potential rising rates, the underperformance of our stock price, kind of the mood is getting better, retail demand increasing, market's not recognizing it. Why not buy stock back? I think we'll continue that. I think, just like anything else, like we typically do, we'll be cautious about it. 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 fifth platform being focused on the consumer. I was wondering if you can delve a little bit deeper into the resources that you're committing to 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 what Westfield did with Westfield Labs and OneMarket. I know there's a lot of different things that you've done, whether it's the Snapchat, the Family app, the Facebook, Happy Returns, all these things that you're trying to get together with the consumer. Maybe you can delve a little bit deeper into how you envision that going forward.
Well, 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 wouldn't compare it to whatever it's called, OneMarket, 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 think about other investments and other ways that technology can improve our consumer experience without jeopardizing basically the core business. That's a huge focus for the company. As you know, 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. I mean, it's real money. You capitalize it. It's a real business, depending on how you want to capitalize that. I think we have this huge connection to the consumer, 100 million consumers. 2 billion visits a year. 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.
Is that something that you feel like you'd 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. Right now it's tough for us to make any investment, right? You look at how those values are compared to our values. We have a tremendous amount of optionality on how to continue to grow our business because of the position that we're in. 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 at least by the end of this year.
As you know, when you're building something, it's not quite like building a mall, but there are a lot of analogies to it.
Hey, David, it's Christy here. Just a quick one from 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. First quarter had snow, had utility expenses. We had a little bit of a spike up in those. We're also adding some properties to it, those numbers tend to go. Basically, our utility expenses and snow expenses, as you know, the spring has not sprung yet, maybe it's springing right now as we speak. It's really more of that. I wouldn't read anything else into that.
Thank you.
Sure.
Thank you. Our next question is from Richard Hill of Morgan Stanley. Your line is open.
Good morning, David. Just maybe a quick question for you. One of the things that we were looking at was maybe a little bit of increase in the month-to-month leases. It looks like they increased to around 3.5 million sq ft versus around 1.6 million sq ft. 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, a change in strategy. How are you thinking about that?
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. We tend to do those a little bit shorter term sometimes. It's really just a function of us recycling our portfolio through. Remember, in our occupancy, we only include leases that are over a year. The 94.6% just includes that. It doesn't include short-term leasing. To us, it's three, six months. All of that's about a year.
The only thing I would add is that we're maximizing our revenue. 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 as 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. 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?
Yeah.
Okay.
Remember, a lot of those month-to-months are leases that we haven't finalized the negotiation with. Take a big retailer, Okay. Maybe they're headquartered in San Francisco, I won't name names. Believe it or not, just because of the two organizations back and forth, we may not have those leases negotiated completely. They're not going to leave and then come back, those tend to go month to month. What you're looking at in the 8-K is essentially that backlog. Okay. 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. 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.
I think you need to separate those two out. Those month-to-month are primarily national retailers that have just not been finalized, they go. Remember, a lot of our leases expire at January 31. A lot of those leases, believe it or not, don't get done until May and June. Don't ask me, that's been year-after-year-after-year. I hope you understand the difference.
No, I-
Let me repeat. What you're seeing in the 8-K is mostly vast majority of national tenants that we have finalized our deal, they automatically go to month-to-month. In our 94.6, only leases that are a year old are 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.
Oh, thank you. We see that you're continuing to ramp up your densification pipeline. I was just wondering, as you looked at 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?
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. Phipps is a great example where we're building a hotel with Nobu and a restaurant and an office building. There's no residential there, but as you know, we already built residential in our development there. We have a lot of residential. Craig, you know the portfolio. Stoneridge in the East Bay, a significant amount of resi will be part of this year's redevelopment. Same thing with Brea in Orange County. 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. We're building a hotel in Sawgrass.
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. Regarding Bon-Ton, maybe you could share some of your future plans for the repurposing efforts of those department stores.
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. Rick, you can add to that.
We basically have already identified users for virtually every one of the stores. As David said, there's some that we own that we're moving aggressively on right now. There's some that Bon-Ton owns, some that are third-party owned. We have users. 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 even come back till third quarter while they finish their processes.
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, there.
Good morning. How are you doing?
Hey, how are you?
Good.
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? It sounds like you guys get a full detailed P&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. 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&Ls. We have audit rights and in our normal procedure, we saw some anomalies about sales. 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. Since we all went to fixed CAM, that's less of an issue. What's fascinating to me about the internet, it's never really discussed, everyone talks about the internet's gross sales. They never talk about the net sales. I think by and large, bricks and mortar are. Because as you know, apparel could be 30%-40% returns. 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. 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. In many cases, we limit the total returns that they're allowed to net against us. This is an issue. I don't want to make a big deal about it. 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, we just want to tell the market.
We are giving you our reported sales, they're less than what's going on at that market because of the internet sales returns. 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. Whether it's like Woodbury or Westchester, certainly it's pretty dramatic from what it was. As far as measuring returns, 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. 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." Is this more defensive spend or are you actually getting a good return when you're doing those?
Look, I think it's offense, it's defense. The reality is those numbers are all in our numbers. 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, that cost and that income that we get is all in the numbers that Tom provides in his 8-K. Just to remember, and we don't talk about this, we've been thinking about it. I've been thinking about it. The 8-K we have here is just approved projects ready to go that our own capital committees approved. It does not include our soon-to-be-approved deals like a Phipps or all of the Sears redevelopment that we cut the deal with at the end of the year.
That's basically, it's more than a shadow pipeline, but it is significant amount of investment that we think we'll get accretive returns on. I would just say that it's simply, yes, it's both. It's offense, it's defense. The cost and the income from that is certainly in our numbers. The world wants newness, healthy food, a 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. I think it will continue to move forward. Now, in some cases, we may take it out because the reality is there's a better use for it.
The thing about real estate is, yeah, there are these trends, but the reality is it boils down to the location, the demographics, and all that stuff that makes real estate unique.
Okay. Thanks.
Yeah, no worries.
Thank you. Our next question is from Kevin of SunTrust. Your line is open.
Hey, this is Kevin. Good morning out there. David, for a couple of quarters, you've mentioned that you think the retail demand or environment is getting better. What is it that you see in your feed every day that's not apparent in a supplemental snapshot every quarter?
Well, we talk to our sales folks, and they tell us demand's picking up. Now leases take time. Bankruptcies don't take any time. Okay? They have a lease, they reject it, and then we don't know if they're going to reject it or not. There's lots of games 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. I talk to retailers, Rick talks to retailers. Obviously, results are historical. They're not future expectations. We feel better about the business than in 2017. We gave you a judgment that bankruptcies would be less than 2018. So far, we're right.
We're not perfect in our estimates and our judgments. We've been doing this a long time, and the guy that oversees leasing, John Rulli, tells me green shoots. I don't know. Sometimes I wonder whether John and I have been working together a long time. I tend to believe his judgment. 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've said we exposed 20 and they were interested in three. Now they're interested in 12. There is definitely a more optimistic view.
They have more capital to spend, and they're more focused on new opportunities than they were last year, and that's the cause of our optimism.
Oh, that's helpful. Is that just broad-based, or is there a certain segment? Is it new type of tenants? Is it the old guard? Just curious to know, how does that look like?
Well, it's a combination. Each company is different, but just from the Gap, look at Old Navy. They're growing the Old Navy business. Right now, maybe they weren't two or three 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 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. 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. I don't want to be negative on the media, the media wants this one narrative, it's just not reality. Look at our numbers, okay? We're gonna make $4 billion this year, okay? Yeah, it's not perfect. I'd like not to have a slight decrease in occupancy and this, that, and the other. We're in good shape. I think the business generally is getting a little bit firmer. Again, I go back. Tom might know it, I wrote my shareholder letter in 2015. I told you my concern about the leverage going into the system on retailers. The two big bankruptcies this year had basically Claire's had nothing to do with its operation. It's all about too much leverage.
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. The natural media narrative is, well, it's the mall. Well, it's not. Peel the onion, figure it out. Tom, when did I write that in my letter, 2015?
'18.
2018. Nobody reads my letter, the reality is I told you about it in 2015. That's where we try to explain it to you methodically. We back it up with our numbers. Every retailer is different. The reality is we just feel a little bit better than Now, it's easier to feel better when you don't have all these bankruptcies, we're gonna have some more. No, I'm not gonna tell you which ones. Yes, some of it are because their operations are not, that life has passed them by. That's been going on in our business forever. Traffic's up, sales's up, demand's up. 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 Simon. I just wanted to continue on your comments about the mood getting better in retail or 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. David's been talking about that for the last quarters, asking our retailers to invest in the store, and we are seeing that more now. That is, in fact, encouraging. One of the things that we're very focused on is right-sizing our tenants. 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 that we can lease to another productive tenant. That's just like manufacturing new space without having to build it.
We're very focused on that. The tenants are now more inclined to work with us than they were in the last year or so.
Great. Appreciate that. Just switching gears, in terms of those Sears boxes, the five redevelopments you recently announced the plans for, you mentioned earlier that those construction spend numbers aren't in the pipeline yet. 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 five could total here.
Well, let me answer it this way. We've made a deal with Sears to control 12 boxes. When I say Sears, I should also mention Seritage. Our total investment in that, now some of these are not this year, the five are this year, because we're getting those back this year. The 12 in total is about $1.2 billion. That'll flex a little bit up and down. I think you should look at the total amount as opposed to the five. You'll see the five start coming into our 8-K. I would say to you that you look at the 12, and it's about $1.2 billion 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. 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. 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.
Yeah, there's no question that that will have a reduction in retail space, because remember, we have Penney, Macy's, Nordstrom, and it's a tight site, but it's a great piece of real estate. Ultimately, it'll be a residential office and still retail, but I'd say roughly the retail will be cut in half, more or less, in that range. Now obviously, this is a process over time. We got to go through the approval process. The retail there will be dramatically reduced.
I guess when you think about the densification projects overall, is that normally the case? Or more often, is it like on a parking lot on the side that wouldn't end up impacting the retail portion?
Well, look, I think a lot of this is happening with our Sears stuff. If you consider Sears a retailer, in theory, it's taking that out. All the 12 now, in a lot of cases, we're just changing the mix. It'll still be retail. 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. The income opportunity is really enhanced because, as you know, either they pay very little rent or we're able to buy the box on an accretive basis because we're getting small shop kind of rents or we're having a mixed-use development.
In a lot of cases, the retail will be reduced in total, but it'll 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 box, is the land at King of Prussia. The Penney 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, office, residential, restaurants, retail, and amenities. That's a major opportunity for us to substantially upgrade what is already one of the best properties in the United States.
Got it. Just last one on this topic, but just using Northgate as an example, is the reason that's not listed yet just because the decision-making process is pretty early stage?
It's early. Listen, the critical path there is approvals. Once the approvals come, we'll start the build. Seattle's obviously a great market and a great city, and this is a great piece of real estate. The new metro line basically dumps off in our parking lot. It's a multi-year 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 Phipps. Phipps is Belk leaves 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. That's going to happen. We have this odd process here. It's basically, they're finalizing all the numbers, but that'll show up in either next quarter or closely thereafter.
It's for all intents and purposes a go deal, and it's roughly, if I remember right, around $350 million, and it'll be accretive, and it's going to make that real estate just tremendous, fantastic. The only thing that could flex there is the office. We think a brand new building there in that area with that parking and those amenities will be exciting. We will be doing a new food hall there, along with the Life Time Work and fitness and sport, Nobu Hotel & Restaurant. That's going to be the one you're going to say, "Wow, this is great. You guys talk about this all, but this is actually happening." Northgate's a year or so process, the other big ones to look for are Brea, Stoneridge, and obviously KOP.
Those are what I'd say to you are the big four that are all going to be programmed in here in the next year or so.
Got it. Okay. Just switching topics. The income and other taxes line item was historically an expense. Last year in the first quarter, it was positive, I think, due to a loss from Aéropostale this year back to an expense. I was just wondering if you could go through the impact Aéropostale had to your earnings this quarter, and the outlook for that investment.
Well, last year. This is the good news and the bad news. Last year, as you know, the first quarter of retail operation usually loses. Yet 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. That's really what it manifests itself. I think Aero business generally, they're doing what they're supposed to do. That's a business that with a little elbow grease, a less worry about comp sales and all this other stuff. I think our operating business should have an EBITDA. Again, we only own 49%, but should have an EBITDA, I don't know, $35 million. We bought it at basically 1x EBITDA. I don't know. People criticize me for it, but somehow, it's working out.
As you know, they're going to take on the Nautica operations. We think that's another unique thing that can be done that'll add to the profitability of the Aero operating company. Our partner, besides General Growth, the Authentic Brands Group, continues to do an excellent job in the brand development of both Aero and ultimately all their brands as well as Nautica, which we expect to close here in the next 30 days. It's okay. We have a decent story to tell in our retail investments so far. 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. 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. We have such a huge portfolio. We lost 1 million square feet in bankruptcies. Our small shops are 65 million. No matter how you want to do that, Nick, it's not going to be material. Okay? You can make up a number and do it yourself, and you'll see that it's not material. 65 million square feet is still 65 million square feet.
Okay. 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. There's some rounding up and rounding down. 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.
Just want to go back to the Aéropostale conversation a little bit. Obviously, you've done a good job stabilizing it, bought at a good basis. I'm just curious, there were some special circumstances when you bought that. I guess what's the longer term plan there? It seems like not something you would necessarily keep long term, 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 million in it. Honestly, it's a very good investment. We bought it really fortunately. The team has done a very good job. Again, our investment in this is basically $30 million, so it's not like I obsess with it. I do obsess with making sure the operations continue to move forward in a positive manner, which they have been For $30 million, I'm not going to It's not like, "Oh, God, we got to do something with Aéropostale." I'm open to any of your ideas if you'd like.
Leverage the buyout. Yeah.
That's the one thing we will not do. Okay?
Just another question, maybe something you do obsess over 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. After these are all in there, or maybe by the end of the year, what do you think the pipeline will be? Is it going to be over $1.5 billion at that point, just given some of the things that are being brought on? Then, from a delivery perspective, is that more of a 2020 kind of NOI uplift?
What I would say to you is the stuff that we're working on now. 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. I would say to you, the stuff that's in the pipeline now is over $4 billion. I would call that more than a shadow pipeline. I'd 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. I would say to you, as Tom has described, it's going to be about a billion plus a year.
I still feel like that's the right number, because we've got this $4 billion pipe that I see and I can identify clearly, whether it's $2 billion one year or a billion another year. Because a lot of these are a little bit out of our control in that you just have to go through the approval process. The real stuff is $4 billion, and all that's in works now. That's why I still think that billion plus a year is probably a pretty good number, because it'll take three, four years to get all basically done. Then we'll add to that as well, because obviously, even though we have 12 Sears stores, there's going to be more. That's not the end.
Okay. Thank you.
Sure.
Thank you. Our next question is from Michael Mueller of J.P. Morgan. Your line is open.
Hello?
Oh, sorry about that.
Michael, please push your mute button.
Yep, all good. Appreciate the color of the development pipeline. I guess the one question I have left is the first quarter lease term, how much of that was contemplated in guidance, and is there anything else material that you expected in the balance of the year?
Yeah, it was all pretty much in our initial guidance because there was a unique situation that we had anticipated that was going to be resolved.
Okay. For the balance of the year, anything else material in there?
On lease term? Not really.
Okay.
Again, 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. I don't sense that there's anything really that's going to be that extraordinary. Again, remember, Michael, it's not in our comp NOI.
Yep. Okay.
Okay.
Thank you.
Yeah, no worries. Thanks.
Thank you. Our next question is from Floris van Dijkum of Bank of America. Your line is open.
Good morning. Thanks, guys, for taking my question.
Sure.
Question on, David, you've built a reputation as being a pretty astute capital allocator. 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. Maybe if you can talk about the relative attractiveness, particularly regarding your stock as well.
Well, right now, it's at basically 12 times. It's highly attractive. The only hypothetical constraint in that is that we just think having It's never really manifested itself in our multiple. The optionality of having this powerful balance sheet, is something that I never want to get rid of. 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. We're never going Remember, Rick and I are workout dudes, okay? Rick, when I got back to the real estate business in 1990, I spent from 1990 to 1993 doing workouts. Rick did it as well, right, Rick?
Yep. Tomorrow.
Andy's here. He's conservative. 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 appreciate it as much as they should, but that's fine. It is what it is. Floris, I just think we're never going to be wildly aggressive on buying our stock back just because we want that ultimate flexibility. 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. We may take the company in a different direction. Michael Bilerman mentioned the consumer.
I wouldn't rule out some interesting thing from us down the road, because I just think we have the ability to do stuff like that we shouldn't rule out. I hope that answers your question. Thankfully, we have $1.5 billion cash flow after dividend that we can put back into the business. We're not over our skis. If we end up in a really tough recessionary environment, we're not going to be. I wrote this in my letter. Again, we are not going to. The development community historically, leverage, increase rates of return, blah, blah. We are never going to push that to the limit, even though, it makes your return on investment that much better and all the other metrics associated with it. It's just not who we are.
It's a long-winded answer, but we'll continue to kind of what we're doing, I think right now is what we'll continue to do. I want the option that if obviously 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 Unibail entry into the U.S. via Westfield means for the global retail dynamics and also for the U.S. mall dynamics.
First of all, I would say one or two points. One is, people that are looking for a mark on values, it's a very, very healthy mark. Two is operationally, We'll wait and see. I'll reserve judgment there. I don't see a big significant change. Westfield did a good job before. I'm sure they'll do a good job after. 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, it'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 wasn't like up 5%, it was up around one across the board. 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. 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 first quarter. A lot more retailers doing better. We were very pleased generally with the outlet results.
Can you offer some insights on Klépierre walking away from its bid of Hammerson? What might have been the thinking behind that?
Well, even though lots of discussion on this, Klépierre, there's a supervisory board, an executive board. We are on the supervisory board, but the executive board really runs the company and makes those decisions. It's really more important to hear from them. That was a Klépierre-led effort and transaction. Obviously, they didn't do it without the supervisory board giving them the green light to do yes or no. That question's 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, just with two quick follow-ups. Is there anything with all the things going on with all of your competitors, whether it is the Westfield Unibail-Rodamco merger, the GGP Brookfield deal, clearly you've had management changes at Macerich and potential activism. You have 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&A perspective?
I don't think so. I think they're all running their business, I think very effectively. I don't see that at all. 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. I don't think so.
You're not hearing that from retailers that just may, like love drama going on in C-suite or corporate at all?
Not at all.
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 of percentage rents and the right rent at the end of the day for a space?
Well, that's a really good question, and it's a big question. Every retailer is different. Believe it or not, Rick, me, John Rulli, and his team, every retailer is different. We're very focused on it. There's not a standard response yet, but it needs to be addressed in the future leases. Look, we don't mind Internet sales, 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. It's not an adversarial scenario, but it just needs to be appropriately addressed. We're in the midst of trying to figure out what's the right approach. Unfortunately, there's not a cookie-cutter answer because every retailer does a little bit different.
We want the returns in the store. We want the trip in the store. As you know, I've been like, "Don't worry too much about sales," and I've been pooh-poohed on that. I understand why the market doesn't like my view of that. The reality, there's even a bigger gap on the focus on this because there is certainly more business being done online, but that also means more returns, and the consumer likes to do the returns in the store. The reality is, this whole green effort, we wrote a white paper three, four years ago, about the fact that we all want higher levels of sustainability from an energy point of view. 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, there are a lot of aspects on this, but I won't bore you. The 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. It's not a fair share thing. As long as we have to report that number, somehow the market needs to understand there is this issue that's out there.
Right. Look, I wanted to congratulate Andy on his retirement. It's nice to go out with a $30 billion balance sheet at a under 3.5% rate with a seven-year average maturity. Certainly calling it probably at the peak from that perspective. Is there any comment in terms of CFO process, what you're going through internal versus external?
How you think that's going to be timing-wise?
Well, yeah. Good question. First of all, Andy, we'll say goodbye to Andy, not to the end of this year. Andy's done a fantastic job, as we all know. When I wrote the comments about his retirement, I really meant them. Not that I don't mean what I write, 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's no financing that we need to do. Okay? That's kind of ironic, right? 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. 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.
I haven't put a pin in it yet. Andy's done an unbelievable job with the balance sheet. He and I have worked together 25 years.
Right.
He's got the best relationships in the industry, banking industry. We'll certainly miss him, the reality, he's done such a good job, there's nothing to do.
We've done over $16 billion in the last three years, plus two revolvers. 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 strong candidates, and it's a team environment in the finance department.
The answer is, I'm thinking about it. I'm getting closer and closer. Andy is right. It's a team effort. It'll develop this year.
Hey, David, it's Christy. Just one more quick one from 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. That concludes our Q&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 today's program. You may all disconnect. Everyone, have a great day.