Good day, ladies and gentlemen, and welcome to the Simon Property Group Q4 2017 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Mr. Tom Ward, Senior Vice President, Investor Relations. Mr.
Ward, you may begin.
Thank you, Takiya. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer 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.
Okay. Good morning. We had a strong results to wrap up a very good year. Our FFO for 2017 was $11.21 per share, which includes a $0.36 charge for the early redemption of our senior notes. On a comparable basis, full year FFO per share was $11.57 an increase of 6.4% year over year, which without question will be at the high end of our peer group.
To put our FFO per share in perspective, the $11.21 is more than $4,000,000,000 in total funds from operation, which is the highest amount we've ever reported and the highest in the industry. Through active portfolio management, disciplined investments, relentless focus on leasing and property management operations, our annual FFO has increased almost $1,000,000,000 since we completed the spin off of Washington Prime Group less than 4 years ago. Yes, dollars 1,000,000,000 We have achieved a compound annual FFO grade of 8% over the last 3 years and more than 12% over the last 7 years. Our growth rate has outpaced the growth rate of all equity REITs by more than 400 basis points over the last 7 years and has been more than double the rate of earnings per share growth for the S and P 500 over the same time period. For the Q4, FFO per diluted share was $3.12 an increase of 7.2% year over year on a comparable basis.
And as a reminder, our 4th quarter results were impacted by the closure of our 2 Puerto Rican centers due to continuing restoration efforts of those centers. We continue to report solid operating metrics and growth of cash flow. Our malls and premium outlet occupancy at the quarter ended at 95.6 percent, an increase of 30 basis points compared to the occupancy at the end of the 3rd quarter. Our ending occupancy was impacted by the bankruptcies processed during the year as well as some of the new space we added the portfolio from our new development and expansion openings. Leasing activity remains solid and improving.
Average base rent was $53.11 up approximately 3% compared to last year And the mall and outlet recorded leasing spreads of $7.42 an increase of 11.4%. Reported retail sales per square foot for our portfolio was $6.28 compared to $6.14 an increase of 2.3%. Total portfolio NOI increased 4.5% percent for the Q4. On an NOI weighted basis, our operating metrics were as follows. Retail sales reported retail sales on an NOI weighted basis would be 7 $79 occupancy would be 96.3 percent and our average base minimum rent would be $68.97 We opened 5 new developments in 2017 totaling 1,900,000 Square Feet, which all promise to be really good additions to our portfolio.
In the U. S, we opened Norfolk Premium Outlets, The shops at Clear Fork in Fort Worth, Texas. Internationally, we opened Saihung Premium Outlets in South Korea, Gentine Highlands Premium Outlets in Kuala Lumpur and Provence Designer Outlets in obviously Provence, France. Construction continues on 2 new outlets in Edmonton, Canada and Denver, Colorado. Used to be called the Intermountain region, if I recall.
And they'll open in the spring and fall of this year, respectively. We've also started construction on 2 international outlet projects in Mexico and Malaga in Spain and both of these are expected to open in the Q4 this year. Transformational redevelopments and expansions at our Marquis properties continuing continue adding a total of 635,000 square feet including the Plaza Mall in place of a former Sears store. Other expansions include the Galleria in Houston, the 2nd phase of the shops at Riverside, Woodbury Commons, Allen Premium Outlets and Roarman Designer Outlet in Netherlands. We will also complete major redevelopment expansion projects this year at some of our most productive properties including Aventura Mall, the redevelopment of Town Center at Boca and the Toronto Premium Outlets expansion.
In addition, we expect to begin construction this year on a number of transformational projects where we will replace department stores with significantly more productive uses at Phipps Plaza, King Oppression, Southdale Center. As a reminder, we expect to fund these redevelopments and expansions and densification projects with our internally generated cash flow after our ever increasing dividend. Now let me talk about the Q4 we acquired and gained control of 12 Sears stores in our portfolio. We acquired the 50% interest from Seritage in our JV of 5 Sears stores. They are included Brahe Mall, Burlington Mall, Midland Park Mall, Ocean County Mall and Ross Park.
As part of the transaction, Sears announced these 5 stores will be closing in the next few months and we will begin redevelopment shortly thereafter. We have now acquired the right to terminate 5 leases, existing leases of Sears stores at the following locations Broadway Square, Cape Cod Mall, North Shore Mall, South Hills Village and Tacoma Mall. And we also bought 2 Sears stores at Stoneridge Shopping Center and West Town Mall. Turning to the capital markets, of course, we were active continuing to lower our borrowing cost. We issued $2,700,000,000 in new senior notes with an average term of just under 8 years, 7.9 to be accurate, at a weighted average coupon of 3.07 percent and retired $2,600,000,000 senior notes saving 60 basis points.
We amended and extended our $4,000,000,000 revolving credit facility and lowering our pricing grid at the same time. It now matures in 2022. We completed 20 mortgages totaling $2,900,000,000 which our share is 1 point 8 at an average interest rate of 3.37 percent and the term of 6.7 years. Our liquidity ended the year at approximately $8,000,000,000 We continue without question having the strongest credit profile in the REIT industry in the entire world. We ended 2017 with a net debt to EBITDA of 5.5 times.
Our interest coverage ratio was 5 times And we continue to have an A and A2 rating, which we actually think is undervaluing our credit. Our balance sheet is as strong as ever. We are providing us with superior operating financial flexibility to continue to create long term value for our shareholders. And I reiterate, this is a distinct advantage that continues to be overlooked by the market. Dividend, we paid a record dividend of in 2017 of $17 or 7.15 dollars per share and achieved a compound annual dividend growth rate of more than 11.5% over the 3 years and more than 15% over the last 7 years.
And today we announced our first quarter dividend of 1.95 dollars per share for this quarter and a year over year increase 11.4%. Now turning to guidance and we're ready for your questions. Our guidance range is $11.90 to 12 $0.02 per share. This represents 6% to 7% growth rate compared to our 11.21 we reported. Our range is based on the following assumptions.
Portfolio NOI growth above 3%, no planned acquisition or disposition activity, interest rate and foreign exchange rates based on current consensus and a continued share count, diluted share count of approximately 350,000,000 shares. We're now ready for your questions.
Thank And our first question comes from Caitlin Burrows of Goldman Sachs. Your line is now open.
Hi, good morning. Good morning. Good morning. Since 3Q earnings, we all know that M and A has been in the headlines for the industry and you didn't touch on it in the prepared remarks. So I was just wondering, well, first, as far as we know, you didn't put in a counter bid for Westfield and GGP.
So thanks, because your stock might be lower based on conversations we've had. But second, you say in the past that you're out of the big deal business and my question is more just around why, what's different now versus in the past when acquisitions like Mills, De Bertolo and Prime made sense. Is it that the math doesn't work out at current share price? Could it work with more leverage, but you don't want to go there? Is it operationally you get less out of it than in the past?
Just wondering what's different now versus in the past?
Well, I mean, that's I think I need a written I need that listed in a written way to answer all of them. Look, I think here's what's ironic and funny about all this M and A activity. The market was dying to have a mark on a portfolio, okay, dying. Oh my God, we don't know what the value of regional malls are. Unibail, as you know, has agreed to acquire Westfield.
And they did it at a very healthy valuation and yet the market beyond on it. So I just find the whole thing ironic. We continue to be out of the big deal business. We're not involved in any of the activity there. And you're best asking those participants how they feel about it.
We've got a lot to do to continue to grow our company. Nobody has our growth. I mean, I to sit back and think about we grew our FFO. We spun off by the way with WPG, I think if I remember right about $200,000,000 of FFO more or less. We made $1,200,000,000 back and not with a lot of M and A activity frankly.
So we've got a lot to do. We don't need to do anything. I think all of this activity reinforces the strategy that we've had that I think scale in any and all industries is important. Our balance sheet is underappreciated. I think if you look at the Unibail, Westfield transaction and compare their debt to EBITDA debt to EBITDA compared to ours at 11.5 to 5.5 yet with the same ratings.
You will see the amount of firepower that we have. But right now that firepower is on the sidelines and we're not involved in any of the including including buying, remember when the market puked all over Aeropostale, I am happy to tell you it had a record year, IFCO and OpCo did over $40,000,000 of EBITDA. We bought it for one times cash flow and it's alive and kicking. So whatever we do, we're hoping to add value to and we wouldn't do a transaction including any redevelopment or development that wouldn't add value to. But the market got its mark and I think the market should be pleased that it's got its mark.
Thanks for that. And I guess just on that topic of staying on the sidelines, I just want to hear your thoughts on, does that mean though that Simon as a company is still in touch with discussions that are going on deals that are occurring and it's a deliberate decision to stay in the headlines. I've heard some concerns from others that by staying on the sidelines, Simon might be missing out on some rare opportunities. So just want to hear your take on how I'm assuming that's not actually the case.
Well, again, I said we're not active, but I can in that activity, but I would venture to say we typically be we're typically buyers when no one else is and we're typically not buyers when everybody else is. And that's just the way it's been and that's why we have $12 projected this year of earnings, which is way ahead of everybody. That's why we have the balance sheet that we have that's way ahead of everybody. And we're a little bit different than most. I hope you accept it and appreciate it.
Got it. And then just one on a different topic, if I could. You mentioned the firepower that you guys have, in terms of your balance sheet. Just looking at your development pipeline, the portion that's in process now, it is down from last year and the year before. So I was just wondering what the outlook is to getting this up again.
I know you mentioned a few upcoming transformational projects. So is it just that they weren't yet in process as of the end of the year? Or is it that the amounts that have been completed just haven't been able to be replenished?
Well, look, we for whatever reason, we don't put a we don't I don't know the word fabricate is a bad word, but we don't put our shadow pipeline in numbers. What Tom does is show you what deals we've approved and basically are under construction. So as an example, the Sears transaction that I spoke about, none of that redevelopment activity is in that number nor is Phipps, nor is King of Prussia, and I'll go down the list. So what we do is we tell you the truth. When we approve it and we're about to spend money on it and it's been approved by our Appropriations Committee, it goes into the 8 ks and we spit it out to the market.
We don't think we need to do a shadow pipeline because I don't know, it's a waste of energy to try and do it. We have plenty to do and we'll be as aggressive as ever. But on the other hand, one of the hallmarks of our company is our return on investment or return on equity because without that you can't grow your earnings. And we are about growing our cash flow. Cash flow growth leads to dividend growth which ultimately or discounted cash flow model leads to more value in the company.
Operating metrics do not. Okay. Operating metrics do not. What leads to valuation growth in my opinion and certainly in the real estate community may not maybe not in the technology area, but is cash flow growth, return on investment. And so the long answer to your question is, we have a lot to do and a lot of these projects are in the process of being finalized in terms of scope, scale, pricing and once we formally approve it, it feeds into our 8 ks and you'll see that number go up.
Got it. Thanks for that. And yes, I do want to note that I noticed that the rate of return did increase to 9%. So that's great to see. Thank you.
Thank you.
Thank you. Our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open.
Good morning. It's Jeff Spector here with Craig.
Hi, guys.
Good morning. Just a clarification on the guidance. I believe, David, you said that portfolio NOI growth over 3%. Can you provide a little bit more detail on that? Is that that's not same store, correct, that you're just talking about
the entire That is not same store, same store the way we define it will be slightly less than that. We're trying not that I want to like name companies, I've already named 1. It's probably not a good idea to keep doing it. But we want we see what others do like federal where you focus on the NOI growth. We're trying to get as our company gets bigger, the impact of an expansion and a new project becomes less and it's easier for us to describe it just in terms of our total portfolio NOI.
So we're trying to get folks to start thinking about like that like they do with federal. And again, I'm not criticizing great company. I'm jealous much higher multiple. And it seems to like the way they do it. And so we're focused on that, but it will be slightly less than the 3% based on our numbers today.
And can you provide any of the details behind that in terms of let's say occupancy expectation or?
We're doing it exactly the way we did it last year and the year after. We do not provide leasing spread forecast. We do not provide occupancy forecast. We've never done that Jeff and I have no real desire to do it. Again, we can just be obsessed with metrics.
I'm obsessed with continuing to grow our company, make our company better. I'm not obsessed with metrics. And I think unfortunately, we can get into that rabbit hole. But the reality is, I'd encourage you to look at $12 compared to the peer group, look at our multiple, look at our dividend yield and then come up with your investment recommendations.
Okay. Thanks. I think Craig has a follow-up.
Sure. Great. I just wondered, are the projects changing in some degree that let you go 7% to 9% in the stabilized returns for the mall?
There's always a mix change. We are excited. And again, Craig, we are excited about the redevelopment efforts that we've got on the drawing board from Phipps to King of Prussia to the Sears transaction. So there's going to be I can't tell you how excited we are to get these spaces back where the media likes to make it as the beginning of the end, we think it's the reverse, okay. And I can't tell you how excited we are to continue to do our varied redevelopments.
The biggest issue for us is just managing all the activity. It's not from an investment point of view. Again, if you look at our business, people can grow their company if they increase their leverage, right. Now technology companies, if you look at their quarter to quarter increase in debt, you'd be really surprised by how much maybe they're buying growth. We're actually trying to keep our balance sheet relatively flat because we know that there's a lot to do.
So in that sense, if you look at our net debt, it's relatively flat year over year, which is still kind of remarkable given that we've had all this activity.
And Craig, I would just say, you just follow our NOI has been increasing every quarter, projects roll off and new ones roll on. The beauty of our redevelopment positioning is that we are able to manufacture new redevelopment projects that continue to enable us to grow our cash flow. Great. And then just of the 12 Sears stores that you gain control, how many will be under construction in 2018?
Well, that's hard to say. I mean, we still have permitting to go through. So I let's put it this way. All of these are well advanced in terms of plans. And we're all through we're going through the permitting process, but I would hope to begin a handful this year.
Okay, great. Thanks.
Sure.
Thank you. Our next question comes from the line of Michael Mueller of JPMorgan. Your line is now open.
Yes. Hi. Good morning. I have three questions here. I guess, first, what was the NOI weighted leasing spread compared to the 11.4% you reported?
2nd, can you kind of talk about 2018 store closure expectations versus what we saw last year? And then 3rd, it's a little bit more of a technical question. Curious why the Edmonton outlets considered a mills project on the supplemental as opposed to an outlet project?
Well, I'll try to take them in the reverse order. So it's basically if you know Caisse de Peau, they basically own the mills up in Toronto, Vaughan Mills. They built 1 in Vancouver, South Vancouver. And if you look at Edmonton, it's really enclosed. It's got a lot of the big boxes.
And it's really more of a mills type of physical product than it is in outlet center, where outlet centers tend to be open air and village setting. So it's got I don't know off the top of my head, but 12 to 13 boxes, similar to what we would have here in our mills and what they would have there up in their Canadian mills. So really it's really a mills project. 2nd is you look if I remember the numbers 90 in 20 15 we lost 900 some odd 1000. 2016 we lost 300,000 200 to $250,000 to $300,000 2017, we lost $1,200,000 right.
Good numbers, Steve? Yes. Okay. So my memory is still with me. And we look, it's hard to predict, but I would think that it's going to be significantly less than 70.
And that's the good news. And the opportunity is, look, we it is much as you and I want it more than you want it, okay. So let's just be clear. I want it more than you want it for that lease up to occur when you lose $1,200,000 It does take time and if you miss a season, it's a process. So that's why to some extent our occupancy dropped in addition to some of our adding some new space that basically the over 2,500,000 square feet in new space between the new centers and the expansion.
So the reality is we got work to do to get our occupancy up. I expect that number to be down. And then on your final, the rent spread on the weighted is slightly less than that number. I don't have it at the top of my head, which is I know surprises you, surprises me as well, but we can certainly work on that and get that to you.
Okay. Thank you. Sure.
Thank you. Our next question comes from the line of Alexander Goldfarb of Sandler O'Neill. Your line is now open.
Good morning.
Good morning.
How are you? Good. You sound fired up. So, two questions for me.
Do you want me to be depressed? What do you want me to be, Alex? Talk to me. Tell me how you want me to be.
You're always in a good upbeat mood. So I'll leave it there. And I assume you're going to Minneapolis in a few days.
Actually, I'm not. I'm going to be watching my no, I am not going to be going to the Super Bowl.
Okay. Two questions, David. The first one is on the tax cuts, the retailers themselves corporately are among the biggest beneficiaries on tax rate. They were north of 30% effective. So obviously, they stand to benefit big time.
We've seen wage increase bonuses. What are you seeing from the retailers themselves as far as reinvestment in their stores, in their brands, in their platforms? And how do you think it plays out at your centers?
Well, I'll let Rick answer. I'll just be very less wordy. In my prepared remarks, I said improving. So I think the 4th quarter sales were improving, not every retailer, I mean, some retailers, yes, no, I mean, but generally improving, the mood is improving. And obviously, the tax given where retail started with the border adjustment tax to where it ended up, I think is good for the general retailers.
And I think they've all concluded, thankfully, some are in a better position to do it than others that reinvesting in their store is not such a bad idea.
Rick, you can add to that. And we would obviously like to see them invest more because the physical atmosphere that we can provide in our stores is going to be very important. All three of our platforms were up year over year in sales. Happily, we also found some firming in the tourism markets, where several of the markets that had been down are now showing some strength. So that's helping as well.
And we are encouraged about the trends there.
Okay. And then the second question is, David, between the impact on Puerto Rico and I'm not sure what you guys are now recovering on business interruption insurance.
Yes. Alex, let me interrupt you there. We don't recover anything on that because I won't go through the arcane, which I could, but I'll leave the accounting arcane treatment to the side. The reality is we cannot book business interruption insurance until we get it. So there is no income whatsoever when it comes to Puerto Rican assets, okay.
And we explained that to you last time. Even with that said, when we started our guidance in put the redemption cost aside. When we started our guidance, I left some of these headlines about guidance short, guidance this, guidance that. Yet no one I never see the headline that says highest growth in the industry. I'm waiting for that.
Alex, you could probably start that trend. But even with losing Puerto Rico and the bankruptcies that in a lot of cases were unforeseen, we did beat our guidance that we laid out for you in this time last year, okay. And not like our normal crush beat, but we beat it by $0.03 or $0.04 something like that, Tom. I'm looking at Tom. So again, I just hope you appreciate that.
I mean, it's not it just doesn't we don't roll off the log here. We grind it out. We did beat our earnings when you take out the redemption charge, despite Puerto Rico not being in the numbers and then obviously the decrease in the NOI loss from Puerto Rico, which is not a crazy number, but it's a few cents.
Okay. Well, just to finish the question, David, just curious how the rise in interest rates, but the benefit on FX, how those 2 netted out as you guys laid out your 2018? Is that in that wash? Or is it a favorable or unfavorable one way or the other?
It's basically a wash. Okay. We're not that levered with that much floating rate debt for that to really hurt us that much. And then obviously, our international business about 10%. So when you put it all together, it's not going to it's on the margin.
Thank you. Sure.
Thank you. Our next question comes from the line of Tayo Okusanya of Jefferies. Your line is now open.
Yes. Good morning, everyone. Just following up on Alex's question about FX. Could you talk about the impact of FX on same store NOI in 2017 where I believe there was a bit of a drag versus in 2018 when you take a look at consensus estimates and FX should actually be a positive to same store NOI growth?
It's basically flat. And again, the good thing about it, it may help tourism in the U. S, which we get a benefit of. So we'll see. But so it's not material in a sense.
And I And again, remember that international, there is in our that's why we try to guide you toward portfolio NOI, but international is not in our comp NOI. You know that, right?
Yes.
Okay.
Got it. Okay. That's helpful.
Okay. So the only benefit that we will see from the domestic, which is what we do for same store NOI is what impact the weaker dollar will have on the tourism spend, okay. Not the foreign exchange number. You're with me, right?
Yes, correct.
Okay. Just want to make sure.
Yes. That makes a lot of sense. Second question, you have kind of an expansive list of densification projects here that's kind of good to see. Just curious with your partners in the densification projects, are you participating in any of the upside associated with these upcoming hotels or office buildings or anything of that nature? I'm just trying to understand and I'm trying to understand the relationships and how it works?
Well, of course, we're partner if we don't do it ourselves and we're partners, of course, we participate as a joint venture. Lot of these deals that we've done are fifty-fifty straight up deals. We get the value of the land, which in some cases is higher than what our book basis is. It's never been lower. And then we share in the upside.
Absolutely. And then I think with time, there'll be a trend for us to do more and more of these on our own. As an example, at Phipps, we plan on doing the hotel, the Nobu Hotel on our own, The office building that's programmed in that at this point is on our own. We may or may not bring a partner in. But all of those, if we do bring a partner, we'll certainly have upside.
If we don't just sell the opportunity at a premium and then let them develop it.
And I would point out that this densification is not new for us. We've been doing this for a decade and we've been reaping the benefits as we decide when we want to asset manage and we've sold a number of these densification projects and made a lot of money doing it. So we've been doing this for a long time and we're just continuing to come up with incremental opportunities.
Okay. So I guess the expectation is that in 2018, we should see a decent increase in the income from unconsolidated entities from all these JVs?
Well, it's a lot of these are under construction. So I don't think 2018 is a big year for that. But there'll be some.
I think you will continue to see more and more projects being added in our portfolio. We had a substantial increase quarter over quarter in the number that we included in the KEG.
Got you. Okay. Just one more from me. I appreciate the patience. There's been press releases about the Tiovanna situation has been resolved between the two parties.
Is there any colors or commentary you can just kind of provide about lessons learned through that process? From us? Actually from both sides. I'm just kind of curious how was it settled? What's the ultimate decision?
Does it give you confidence about the system supporting your lease structures? I'm just kind of curious.
I don't think it's fair to ask us. The last thing we want to do is get into an argument with one of our clients. However, we if we feel like it's not and this is a generic statement. If we feel like it's not being appropriately dealt with, we have no choice but to do what we did. It's not what we want to do.
We're not in that business. But if we feel like we have to protect our position, we will. And it but it took a lot of took generically, when you have these situations, it takes a lot of judgment what to do and not something I'm excited about doing. But if we have to, we will.
Thank you. Our next question comes from the line of Steve Sakwa of Evercore ISI. Your line is now open.
Thanks. Good morning.
Good morning.
I guess, David, on the buyback, I noticed that the volume was much, much lower in Q4 than in Q3. And I'm just wondering, was there anything that maybe precluded you from doing buybacks? Or was there something about the share price? Or just your liquidity obviously is in very good shape. So I just thought maybe some comments on the buyback and how you're thinking about that in 2018.
Well, we I guess, look, I think as I look at 2018 and I look at and I really study other credits that are like ours or that are at least rated the same as us, I shouldn't say like ours, but rated the same as us, I see a lot more firepower than they do. And that's that it's important for us to maintain that rating. But I think we're underappreciated by how they evaluate things. So it is a long story short, it gives me more a stronger position to continue to be more aggressive than we were in the Q4. The Q4 was just kind of an anomaly and that it wasn't anything legally precluding.
There was a period of time when the stock really got hit. And we went in and then it jumped back up. So we and then before, you know it, we're in the blackout period and then we can't do much more. So it's really more on that front, nothing other than that. But when I look at ratings of companies that are the same of us, same as ours, we have a lot more firepower and that gives me more confidence to be more, perhaps more aggressive here.
And just to be clear, you're not assuming within the earnings for next year that there's any buyback activity. So there's no benefit from buyback?
That is 100% accurate.
Okay. And then just this is a
little bit more of a
minutiae question. But when we look at kind of the income statement, home and regional costs as well as G and A were down substantially 2017 over 2016. And I'm just trying to figure out, are the 2017 numbers you think sort of good starting points and run rates to think about 2018? Or was there something abnormal in 2017 that brought those down versus 2016?
No, I think they're pretty consistent. That's a new run rate. Look, the executives here did not have and again, you can get me going philosophically, but we decided not to take any long term incentive for 'seventeen and take and express to the market that we're going to do what it takes to continue to run our business as we've also retired a couple of people that were that we haven't replaced at those kind of levels. But I think those are pretty close to the run rates, more or less. If it's up, it's more inflationary up than anything else.
But I would look for that to be more of the new norm, maybe slightly up just from an inflationary point of view. Okay.
And then maybe just to touch back on leasing. I know you sort of circled this a couple of times and your commentary about good and improving and maybe just get Rick's commentary. But as you sort of sit here today and kind of survey the landscape in the leasing environment versus say a year ago, I mean, it must feel better. But how many if you could just help us kind of quantify or think about kind of the environment today and the discussions with tenants versus say 6 months or 12 months ago?
It's Rick, Steve. It is clearly a firmer environment. The tenants are more constructive in their view of their store platforms. If you looked at all of the comments that the tenants had coming out of ICR, I think all of them basically were saying that we have made progress getting our portfolios right side. David has already commented, we view 2018 is hopefully going to be a less debilitating year in terms of reorgs and bankruptcies.
And we're doing a lot of leasing. We have made substantial progress on the bankruptcy space we got back. We're leasing it at rent that for the most part are higher than the rents that the bankrupt tenants had. And we are encouraged. And frankly, it doesn't hurt that we have a great portfolio of properties that tenants want to
be in. And there seems to be just one other small point on that is there seems to be a lot of the and without naming names, a lot of the folks that are that were a little sketchy last year seemed to have stabilized their business a little bit more. So again, that doesn't mean there's not a shoe to drop with one retailer versus the next. But it does seem there does seem to be a sense that some of the folks that were could have gone left or right are kind of stabilizing their business.
Okay, great. Thanks. That's all for me.
Thank you, Steve.
Thank you. Our next question comes from the line of Christy McElroy of Citi. Your line is now open.
Hey, it's Michael Bilerman here with Christy. Maybe Rick or David, just sticking on the leasing theme, as you think about the pace of your openings this year in the subpage 23, you're at 6,700,000 square feet. You had been a little bit over 8,000,000 the year before and consistently in that $7,500,000 to $8,000,000 type of range. You have almost $8,000,000 square feet expiring in 2018. Can you talk sort of about that actual pace?
And if you feel like there's going to be an increase in the opening pace or what may have held back some of the openings in terms of backfilling the higher amount of bankruptcies this year?
Well, let me first address in terms of our renewals. We are right on pace on our 2018 renewals today as where we were in 2017 with our renewals. And we as David indicated, we're still seeing a relatively strong volume coming in. We have a large portfolio and as we work through, we have to a degree a clumpier process because we deal with our tenants on all their expirations. So it's a little lumpier, but we do not expect that we're going to have any significant diminution in activity this year as compared to last year.
And as you saw, our average rents are up and our spreads are up.
Going back to the same store NOI, David, on Page 19, you lay out pretty clearly the components of that growth. And so are you going to not provide that information now that you're not providing the guidance from a comparable and a total
perspective? No,
no, no. That number will be the same. I mean that page will be the same. And I provided somebody asked me the question, I provided the same guidance we provided last year. So we've given you the guidance.
And that page will continue to be the same and we'll continue to report both same store and portfolio NOI. We just are trying to explain to you, we think one's better than the other, but you'll get both numbers and you'll be able to decide what's relevant.
Right. Well, I guess the question is just trying to define slightly and people different people may have different views. The spread this year between comparable and total was 130 basis points. I don't know if 130 that seems
more than Well,
it seems more than
All right. Well, okay. I mean, we don't have to get into semantics too much, but it will So I just give them? It's fine. Mike, well, our we expect it to be above 2% in same store.
But again, our business is it's a little bit more difficult to and again, we thought we'd be at 3% last year and we beat it. We like to beat our numbers. As you know, we have a again another unrivaled history on that. An unrivaled earnings growth, unrivaled dividend growth, unrivaled balance sheet, also unrivaled beating earnings expectations. And obviously, as you and Tom and I spent a lot of time looking at comp NOI over a long short periods of times, long period of time.
And it's safe to say we've outperformed that both from a complete real estate point of view as well as within the retail sector. So put all that aside, we would hope to continue to do that. But it's a little our business is not as it's a little bit more of an art and science. There's more levers, a little bit like the hotel business as opposed to say the office build office business or even the apartment business. So that's why we always try to guide you toward this kind of range as opposed to that kind of range because there's a lot more moving pieces than some of those others.
But it's expected to be above 2% and our portfolio NOI is expected to be above 3%. And that's exactly what we told you last year. And we'll provide the same. I think you find Page 19 helpful. Is it Michael?
It is. We will continue to provide Page 19.
And then just a strategic question, as you think about running a company, a lot of times status quo has more risk in it and pursuing some sort of transaction derisks the company in some ways. And you think about your history in terms of going into the outlet business, buying mills, expanding internationally, spinning off WPG, in each of those you know, the resulting entity was stronger relative to the status quo. And I'm just curious how you think about the status quo today in terms of your 3 divisions and your geographical exposure. And you contrast that a little bit of what Unibail is doing with Westfield, right? Their status quo of being a predominantly European French focused company may have had more risk and diversifying their entity into the U.
S. Mall business to them was the attractiveness relative to status quo. So how do you think about the go forward as Simon sits here today in terms of having those 3 divisions in your geographical exposure?
Well, I would say, we are without question in my opinion, perfectly positioned to continue the success that we've had over the last 20 plus years. So there is absolutely nothing that I think we are not appropriately positioned for future opportunities. We don't I don't feel the only thing I feel compelled to do is to make our existing real estate better. That I feel with a complete, unmitigated, unrestrained passion. I also think we need to, without question, work our tails off to figure out how to connect with the consumer in lots of different ways.
But I certainly don't feel that we need to be better positioned or that I'm losing out on the M and A activity. I just don't beat to that drum and I don't think we need to. And in fact, I think most people are catching up with what we've already done. So I don't that I don't worry about. I worry about absolutely making our existing real estate better.
And I worry about how we continue to want to connect with the consumer. And we'll always find interesting things to do. I mean, the market, Michael, we gloss over what we do, but we did open an outlet in Kuala Lumpur, okay. We do have a great presence and I don't think anybody other than Taubman, I guess, has a presence in China. We do have an international business.
We do have diversity in product type. We do have a great balance sheet. Our people are good at what they do. I'm not that shabby. So I don't know, I think we're okay.
But the passion here is how do we make our existing real estate better and if there is external deal to do that we think is opportunistic for our shareholders then we'll take advantage of it. But I don't I really, really don't feel compelled that we have to do that to continue our leadership position. That's I don't feel that at all. Now, I will say this. I mean, I think these folks are catching up with us.
We'll see if they're successful. I've lived it and breathed it. It ain't that easy. It's not it doesn't happen. What you're going from a piece of paper to cash flow is a different leaf of faith.
And so we'll see.
And how do you feel just about Europe? You obviously have the stake in Klepierre and you used Clapier to consolidate Corio a number of years ago. There's been some M and A activity in that marketplace. How do you sort of feel about owning a 20% stake in a public security? You're obviously Chairman of the Supervisory Board with a lot of control.
But just how do you sort of think about Europe in that context with activity going on there as well and what you could do?
Well, listen, I think we bought opportunistically, as you know, that it's interesting Europe. They're all excited about the growth there that's finally catching up with the U. S. I am very comfortable with our investment there and what job they're doing. We've done a lot with that company.
We'll continue to make it better. But again, I don't feel from that standpoint that they are missing out some of these M and A activities, the shareholders of the acquirer have pretty much yawned, if not puked. There's someone somewhere in between, right? So we at Klepierre have a lot, I think a lot to continue to do to improve the company and they're doing a very good job of it and I feel very comfortable with that investment. And I'm pleased to see that there's grain shoots in France and they're starting the growth and the entrepreneurial spirit is coming back to an area that truly needs and deserves it.
Great. Well, I appreciate all the color and keep growing cash flow.
Yes, that's what we do.
Thank you. Our next question comes from the line of Haendel St. Juste with Mizuho. Your line is now open.
Hey, good morning. Good morning. So I wanted to follow-up on an earlier question about sales. Curious about actually the 2% sales growth for the 4th quarter, certainly a positive and I think the 4th consecutive quarter of sales per square foot growth. But I'm also a bit surprised that sales per square foot were up a little bit higher.
After all, you had pretty easy comps given 2016's weak holiday season. Last year in Q4, I think you did minus 1%. So adding that plus all the hype around how great this holiday season was from the media, maybe you can help me reconcile that and add a bit more color on which categories maybe weighed down your growth and maybe some of the out performers?
Well, this is I mean, the number is the number that the retailers report to us. They're in the retail business, there's always winners and losers every quarter. There's nothing extraordinarily there's no extraordinary insight that I have that will help me answer that question. I don't know Rick, if you the number is the number as well as all I could tell you. But Rick, if you have some insight.
The only thing I can tell you is that just in terms of categories, the entertainment women's better and moderate and kids shoes were better. Regions, the Mountain, Mid Atlantic, Pacific and Florida were stronger. I think again, Our sales number is a derivative number from our retailers. We are certainly doing everything in our power to draw more people to our properties. But ultimately, the retailers have to convert them once we get them there.
Okay, fair enough. Appreciate that color, Rick. And so perhaps do you guys also have a NOI weighted sales per square foot growth figure year over year? I'm trying to get a sense of
how Whatever that number that we had last time. I don't know. Tom can follow-up.
In fact, it's up a little higher than it was. It was up almost 2.4%.
Okay. Thank you for that. And one more, I guess, on the transaction market. I'm curious if you're maybe seeing a few more assets in the marketplace. Have you noticed the change in perhaps stellar sentiment for the quality assets that you want, given the recent transaction Mark's provided?
And I guess understanding you're not that you're watching, but not necessarily interested in participating in the M and A going on around you. Is it fair to assume that you are interested in high quality assets should they become available? I guess we're all trying to figure out you have, as you outlined, dollars 8,000,000,000 ish of liquidity, dollars 2,000,000,000 of cash. What you're planning to do with it? Thanks.
Well, I mean, I kind of we work kind of hard to build that up. So I mean, it's I view it as an opportunity, not that look, I think at the end of the day, we're going to be focused on good real estate in terms of our external activity. We're going to be focused on good real estate that we could add value to priced right. And if we can't find that, we won't buy it. And if you look at our track record, we've done that.
So let me repeat, good real estate, 1. 2 is where we can add value. And 3 is appropriately priced for us. And somebody may have pricing view that's different than ours and we may be right or we may be wrong. The only thing I can point you to is our track record on and I will assure you that every time that we did an M and A deal, we were wildly criticized from CPI to I don't when the Bartlow was so long ago, I don't even people remember it.
I barely remember it. I mean, suddenly Rick showed up at the office one day and I go, how did you get here? But CPI to buying Chelsea, to buying the mills, I mean, there was not one deal that the market said, boy, you guys did a good job. So now the concern is we're not buying anything. It is what it is.
We find those 3 metrics. We'll do something. If we don't, we won't.
Okay. Appreciate the thoughts. But disconnecting the dots, sounds like there isn't anything more incremental in the marketplace that perhaps you're noticing a shift in sentiment or perhaps a change in the quantity of quality assets available?
Well, look, I think the good news from you're a market participant and the good news for you is that you've had a couple of companies that are obviously very thoughtful, smart companies from Brookfield to Unibail that have given you a mark. Unibail has given you a great mark in terms of you want to value U. S. Real estate. And I know the market really was dying for that.
And there it shows up, yet it's not enough. Okay. But I would say to you that's a pretty healthy mark. If you're looking at wanting to understand what existing pricing is today. Okay.
Next question.
Our next
question comes from Vincent Zhou from Deutsche Bank. Your line is now open.
Hey, good morning, everyone. Maybe just a follow-up question on this liquidity. You've talked about firepower quite a bit and the strength of the balance sheet. But regardless of what the investment is, whether it's share buybacks or M and A at some point in the future or developments. I guess, how comfortable are you in taking up your leverage?
It sounds like you think you're not getting the credit for your leverage that some of your similarly rated peers are. So I mean, I guess, would you be comfortable going to 6.5%, 7%?
Well, I don't want to pick a number on, but I would encourage you to look at who's rated the same as us in the retail space and look at to me the most and I'm an old line guy. I'm so old that I still call private equity leverage buyouts. Okay. That's the pure definition of how old you are, right? Whether you say private equity or leverage buyouts.
I'd encourage you Vincent to look at this in retail real estate really look at debt to EBITDA, ours versus the peers rated in our category and you can see there's a wide really shockingly big spread. So we're trying to assess that. What does that mean for us? Why is it that way? We don't have really good answers.
And so it's a work in progress. But we're paying attention to it. There shouldn't be that big a spread.
Okay. Thanks. And then I think we've touched on this in the past, but of the 1,200,000 square feet you referenced from 2017 bankruptcies, how much of that is expected to come back online in 2018?
We have already brought back online almost 50% of it and we're making really good progress on the balance. And the tenants that are coming in are frankly great productive growing tenants that are going to be more productive than the tenants that close and they're paying higher rents. So it is a very productive process, but it certainly does have an impact while we're going through it.
Got it. And just one last one. Just in terms of your contractual rent bumps, what is that currently average for the portfolio?
In terms of what we're including in our leases? Right. Typically, they are 3%. 3%.
Okay.
Thank you. Our next question comes from the line of Rich Hill from Morgan Stanley. Your line is now open.
Hey, good morning. I think this is a question for David and Rick maybe together. From our perspective and I think probably yours as well, the retail narrative was really strong in 4Q with sales improving. So I was a little bit surprised to see overage rents look to be down maybe around 13% year over year. And I was wondering if there was anything that maybe drove that.
You had mentioned Puerto Rico being closed in the Q4. Yes.
So the simple answer is, yes, Puerto Rico, we did have overage rent from Puerto Rico that we have to take out. But also remember that and you see this in our average base rent going up. So it's our job to take that overage rent each and every year when leases roll over to put that in the minimum rent, right. So as a lease rolls over, let's say, they're paying $10 of base rent, dollars 10 of overage rent, it's our job to get that to $20 of base rent, right. So we can take out the volatility.
So part of our job is to always eat into that. And in a robust sales environment, historically you've had folks that even though we've eaten into their overage with increases in base rent, there's a whole slew of others. But since sales have been kind of flattish over the last couple of years, you're seeing the impact more of us converting the overage into the base rent and you're seeing that in the average base rent increase.
Got it. That ties with our numbers. That's all I have. Thank you very much.
No worries.
Thank you. Our next question comes from the line of Nick Yulico with UBS. Your line is now open.
Hi, everyone. A couple of questions on occupancy. In the Q3, you mentioned you had a 30 basis point negative drag on total occupancy from new centers. What was that impact in the Q4?
Similar.
Okay. So I'm just trying to understand why the year over year occupancy dropped more in the Q4 than Q4?
We had We processed a lot of bankruptcies in the 4th quarter. Again, remember, they tell you when they're going to close and just a function of the bankruptcy processing.
In terms of your occupancy, I guess, in the Q4 and over the past year, hoping to get a breakdown of long term versus short term tenants and how that trend has changed in the past year?
It's our definition is that it hasn't changed, so the numbers are the numbers. Okay. We only included if it's a year in and if it's less and it's not in our numbers. So it's all in it's a year over year comparison is appropriate. The number hasn't changed or the definition hasn't changed.
Okay, thanks.
Sure.
Thank you. Our next question comes from Floris Van Duch from Caffoni. Your line is now open.
Good morning. Thanks for taking my question.
Good morning.
Sure. David, quick question for you on sort of touching upon follow-up on other questions you've had as well. But with the Westfield comp out there at a relatively low cap rate compared to where consensus consensus is for AMOL guys. There seems to be 75 basis points certainly relative to where you're trading at today. Why aren't you more aggressive or will you become does that make you become more aggressive about share buybacks heading into 2018?
Well, first of all, you can't buy stock back in a blackout period unless you have a what's the word I'm looking for? It's a 10b5. 10b5, okay. So and you said guidelines on the 10b5. So unless those guidelines are met, you can't buy it.
But the reality is, I think I intimated that, yes, it's something we're thinking more and more about.
Okay. Another question I had regarding your 12 Sears boxes that you now control. Presumably they're not in your redevelopment pipeline as you mentioned earlier.
Well, presumably they're not. They're not. You can take out the word presumably.
Right. They're not. No, but I was going to say, but presumably the returns on those 12 boxes would be in excess of your overall portfolio. And based on what certainly what Seritage has been able to achieve on their space right now, any ideas of or any advanced thoughts on any of them that you can share in terms of maybe turning some of this space into small shop space or is it mostly going to be junior anchors?
Yes. No, it's a legitimate question. It's all over the board. As these transactions are permitted and approved internally then you'll see exactly. And it will be some are just box for box.
A lot of them are tear down and redo like what we did in McAllen, Texas. And like what we're going to do with King of Prussia with Penny or unlike what we're going to do with the Belk department store at Phipps. So it's really all over the board. And we'll obviously, for us, as we get all of that done, permitted, priced out, approved, that will flow into our 8 ks and you'll see exactly specifically what we're going to do there.
Okay, great. Thanks. Last question, I guess, is maybe if you can make a comment broadly on TIs. One of the concerns that people have is TI packages, certainly in some of the strip companies, but also in some of the other mall companies had been rising a little bit. Are you seeing any sort of trends there in terms of what you're having to offer your tenants?
If you go back over our TI over the last 5 or 6 years, they've been in a very tight range. And I think it's important, we very rarely give any TIs on renewals. It's only for new leasing activities when we have a slightly elevated TIs because we've been able to do more restaurants or designer tenants. But it's been in a very tight range and we're not seeing any material increase in what we need to give tenants in that area.
Great. Thanks. That's it for me.
Thank you.
Thank you. Our next question comes from Linda Tsai with Barclays. Your line is now open.
Thanks. Good morning. Following up on On the future Sears redevelopments, are you thinking about these spaces any differently? As in, would you be less interested in letting apparel tenants fill the boxes just given how competitive the space remains even if some brands had a better holiday?
We are focused on making our properties better. And as David said, we've got very defined plans for all twelve of these. We are far down the road in our approval and leasing process. We have apparel tenants. We have restaurants.
We have mixed use elements. We've got boxes, health clubs, theaters, all over the board. But in every instance, there's one thing each of these projects has in common and that is when we're done, our project is going to be substantially stronger, higher NOI, higher total sales at a more attractive marketplace serving its trade area.
Thanks. This probably sounds minor, but the occupancy cost ratio increased to 13.2%, whereas it's been in the 13% to 13.1% range for the past several quarters. Is there anything to highlight here?
No.
Okay.
No. It's immaterial really.
All right. And then what was traffic like in the quarter at the mills versus the malls versus the premium outlets?
All generally positive and up. And I think traffic and sales are painting a more robust picture than the narrative out there is suggesting.
Have you seen some of that traffic follow through in January?
Yes, I think January has been a very well, it's anecdotal. We don't have January sales yet. It's we get from the retailers 20 days after the month. But anecdotally, we hear January is very strong across the board. So again, I mean, I wouldn't bank on that, but that's at least from an anecdotal point of view, we're hearing that.
Thanks.
Sure. Thank you. Our next question comes from Jeremy Metz with BMO Capital Markets. Your line is now open.
Hey, guys. Question for Rick. I just wonder if you could talk about the pace of activity or momentum kind of in the junior box space, some of the fast fashion retailers that have been a huge focus here in recent years seem to be losing a little bit of steam. So just wondering what the pipeline looks like on that front relative to maybe a year ago?
It's in fact very strong. Ironically, if you look at twelvethirty onetwenty 16, we indicated we were going to have 34 boxes that could open in 2017 and beyond. And in fact, in 2017, we opened 34 and we now have 40 additional ones on the schedule for 2018 and beyond. So there's still a very robust market out there for our properties. And as we have said in the past, you're seeing us add in our portfolio tenants that are operating in the mall context and that have operated in the power center context, because we can provide better sales, better traffic.
So robust pipeline that is continuing to grow.
All right. Appreciate that. And then just one quick point of clarity here in Puerto Rico. I know it's not hugely material impact to nearly $12 of earnings. It sounds like guidance includes no insurance recovery, but the continuation of that call it $0.03 quarterly hit from loss income.
So is that the right way to look at it, so a $0.12 drag in 2018 more or less?
Well, it's I don't want to really point to that because we've got to actually collect it. So we're still projecting kind of a tough environment in Puerto Rico. So not completely the end of the world there, but we've got the properties are slowly opening. So it's I would say the drag is in the $0.03, $0.04 range, somewhere in that range. But there's still a drag, but we're in fact Puerto Rico outlets just opened.
That's further along. And then the mall is getting closer to getting up to where it was. I mean, it's open as well, but there's still a number of tenants lagging. So we still have some drag there and then we can't really book the BI until we get it. So it's dilutive to where we would be if we didn't have the hurricane.
But that's kind of the number in that range that's hurting us absent
that. Our next question comes from the line of Ki Bin Kim with SunTrust.
So you guys talked about better traffic, sales and maybe overall better mood across the industry. When you think about your guidance for next year, are the better malls in your portfolio improving versus last year? Or is the bottom picking back up? I was wondering if you can provide a little more color on that.
It is across the board, but obviously our stronger properties are getting incrementally stronger and growing a little better. And that hasn't changed in 50 years.
Okay. And what is the average vintage of leases that are coming due in 2018? And how would you describe what happens after the value of vintage starts to wear off going forward? What is that kind of your leasing spreads or
I don't know the reference to vintage. I mean, we provide you the expiring rents and I think that gives you a pretty good roadmap when you compare our average base rent of leases that are expiring with our opening rents that we use in our spread. So it shows you we still have for the next 7 or 8 years considerable runway to be able to roll our rents based on what we're doing today.
Yes. I mean, there's
a little bit of discrepancy in understanding that because the I believe the expiring rents are exclusive of CAM. So it's not exactly comparable, but versus what you're signing.
But if you compare the average base rent expiring and our average base rent today that has all of the lower rents, we're still our average base rent today is still in excess of our expiring rents.
All right. Thank you.
Sure.
Thank you. This concludes today's question and answer
session. Okay. Thank you. And again, we apologize for the length of our calls, but we want to have everybody given the opportunity to ask whatever questions that they do. So I do apologize.
I know it's a little later than people want, but that's why we're here. Happy to answer questions. So thank you. Have a good day.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's program. You may now disconnect. Everyone have a great day.