Good morning, ladies and gentlemen. Welcome to the Simon Property Group third quarter 2017 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 follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host for today's conference, Mr. Thomas Ward, Senior Vice President, Investor Relations. Sir, you may begin.
Thank you, Bridget. Good morning, everyone. Thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer. Also on the call are Rick Sokolov, President, Chief Operating Officer, Andrew 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 a 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 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 please introduce David Simon.
Good morning. The last couple of months obviously have been challenging as the country has endured the devastating impacts of natural disasters and tragedies which have impacted millions of people across the country, including many of our Simon employees and their families. Our thoughts and prayers go out to all affected. There has been significant disruption from Texas to Florida, Puerto Rico, and California. Due to the dedication and heroic efforts of our field team members, thankfully, all of our personnel got through these events. Across all of our platforms, we closed 45 of our centers for a combined 412 days due to natural disasters, including the one that occurred in May in Colorado Mills due to a hailstorm. All of our centers in Texas and Florida have been back to normal.
Our centers in Northern California are now back to normal operations as well after the horrific wildfires there. We expect Colorado Mills, which has been closed since May, to open in time for the holidays. Our 2 centers in Puerto Rico are currently not open. We are in the process of making repairs where possible. We expect full restoration of these centers to take some time, given the damage to Puerto Rico's infrastructure and availability of building materials. We are fully insured for this event, including business interruption insurance. We currently expect the closure of Puerto Rico centers to impact our FFO by approximately $0.03 in the fourth quarter of 2017. This reduction is currently included in our guidance. I couldn't be more proud of the Simon team, who have demonstrated courage, resilience, perseverance in how they professionally responded to these unprecedented events.
Let's talk about the third quarter. We had another very productive quarter. We are very pleased with our financial results. Results in the quarter were highlighted by funds from operation of $2.89 per share, an increase of 7% compared to the prior year. For the 9 months ended, our comparable FFO per share growth is 6%, which without question will be at the high end of our peer group. We continue to report solid operating metrics and cash flow growth. Our malls and outlets occupancy ended the quarter at 95.3%, an increase of 10 basis points compared to the occupancy at the end of the second quarter. Leasing activity remained solid. Average base rent was $52.42, up 3.3% compared to last year, reflecting strong retailer demand and pricing power for our locations. The malls and outlets re-leasing spreads of $7.21 per sq ft, an increase of 11.2%.
Reported retailer sales per sq ft for the malls and outlets was $622 compared to $604 in the prior year period, which is an increase of 3%. Total portfolio increased 4.8% year to date, or $212 million, 3.9% for the third quarter. Comp NOI has increased 3.6% year to date 2.5% for the third quarter. I remind everybody once again, we do not include lease settlement income in our Comp NOI disclosure. As a point of reference, our third quarter growth is typically less than the growth rate we achieve for the first half of the year, if you are interested in that have a desire to look historically. On an NOI-weighted basis, our operating metrics were as follows. Reported retailer sales on NOI-weighted basis would be $776 per foot compared to $622. Average base rent would be $68.54 compared to $52.42.
Leasing spreads would increase 17% compared to 11.2%. These weighted metrics, again, reinforce the quality of our assets. They're not to be ignored. At the end of the third quarter, redevelop and expansion were ongoing at 31 properties across all 3 of our platforms. During the quarter, we opened a significant expansion in Allen Premium Outlets in North Texas. We have a significant opportunity to continue to improve our portfolio through the densification of our centers with the addition of mixed-use components, hotels, multi-family, office, and others. Included in our supplement this quarter, you'll begin to see that list of activity. We have a number of projects underway. We'll continue to add different uses to our centers, where we see the opportunity to generate accretive returns.
Construction continues on several major redevelopments and expansions, including The Shops at Riverside, Aventura Mall, Toronto Premium Outlets, just to name a few. We expect these, again, to open over the next 12 months. We recently opened the Shops at Clearfork, a great new center. This open-air center is an excellent example of the type of vibrant mixed-use, community-centric environment we create. Along with our partners, we have carefully curated a mix of shopping, dining, entertainment, office, and the Shops at Clearfork will be the dynamic hub of a timeless asset in the terrific city of Fort Worth, Texas. Construction continues on two new outlet centers, both in really good markets, Edmonton, Canada, and north side of Denver, Colorado, which will open in the spring and fall of 2018 respectively. Our share of development, redevelopment activities continues to approximate $1 billion. A simple update on capital markets.
During the first nine months of this year, we closed on 12 mortgage loans totaling $2 billion. Our share of that is $1.4 billion, weighted average interest of 3.12%, term of 6.8 years. Our current liquidity is $6.5 billion. Our balance sheet is as strong as ever. We have the highest investment-grade credit rating in the industry, more than five times interest coverage. I, again, reinforce our financial flexibility is a real advantage that continues to be overlooked. Today, we announced the dividend of $1.85 per share for the quarter. That's a year-over-year increase of 12.1%. We will pay $7.15 per share in 2017, which is an increase of 10%, and look out for 2018, which will be higher. We are updating our guidance range to $11.17-$11.22 of FFO per share. That is the highest in the REIT industry.
This is an increase of $0.03 on the low end of the range compared to our prior guidance, even with the $0.03 reduction for the quarter I mentioned previously due to the closure of our two Puerto Rican assets. Finally, as you can see from our results this morning, we produced yet another quarter of impressive results and metrics. We continue to invest our product and generate the kinds of returns that will continue to grow our earnings, cash flow, and dividends. We're now ready for your questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star and the number one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill. Your line is open.
Good morning out there.
It's not that far out there. We're in the Midwest. It's not like we're way out there, okay?
Well, that would-
There is activity for all of those investors west of the Hudson. I want you to point that out. Alex, what can I answer for you?
Well, thank you for that. Two questions. First, just in Puerto Rico, can you just tell us sort of a breakout number of tenants who are paying, or said differently, the number of tenants who aren't paying? On the business interruption insurance, maybe for there or elsewhere, what the impact is and if we should expect anything into next year, or if the $0.03 is really just in the fourth quarter this year, and next year we shouldn't expect any impact.
Yeah. I'll give it to you really very high level. We've taken a deductible. We had a deductible expense that went through the P&L in the third quarter for Florida and Puerto Rico. After that deductible, we're fully insured. In the fourth quarter, there is nobody paying rent at this point. We don't collect business insurance until all of that is resolved. They won't begin to pay rent until we restore the building. I wish I could give you a sense of that, but it's really going to depend on the next couple of months, because there is a lot going on down there, and power needs to be restored permanently. As I said, we're doing our repairs and restoration work concurrently, but it's going to take some time to get it all going.
That $0.03 is what we expect that would've been essentially our net operating income for those two properties in the fourth quarter. It could drag into 2018. However, if it does, we would expect some of that eventually to be recouped through the BI, but we can't book the BI until it's actually cash collected. When we do our earnings in 2018 guidance, we'll have a better idea of exactly the impact. Again, I'm more focused on the tragedy of Puerto Rico. At the end of the day, if you extrapolated the $0.03, that's less than 1% of our business, so it's obviously immaterial. We're more interested in what's going on there. If you take out our redemption here, you know that we earn well over $11.50. If we're at $0.11 or so, that's basically less than 1%.
Even you, Alex, could do that math, right?
Yes. Although I do have a colleague for backup if need be. The second question is, in the other income breakout, lease settlement income jumped, and marketable securities gains. If you could just provide a bit more color. And on that lease settlement, was any of that from Tivona, or is that still outstanding?
Well, none of that's from Tivona. There's been a little bit more lease settlement income this year. Again, that's not in our Comp NOI, as you know. We did own Seritage stock. We did sell that. I would only point out for those of you that I would hope most people would study our P&L without making statements, is that we also had more than offsetting what I'd call unusual expense on the expense line. All of that you can see in our 8-K and our P&L. I kind of think this is all washes. If anything, it's a little bit more negative, but that's up for you guys to determine. We outperformed even with the deductibles, even with the extraordinary expenses that we incurred that were higher than what I'd call higher than normal lease settlement income, obviously the Seritage marketable securities gain.
It's a gain, by the way, not a loss. Let's keep that in mind, too.
Okay. Thanks, David.
Our next question is from Christy McElroy with Citi. Your line is open.
Hey, good morning. It's Michael Bilerman here with Christy. David or Rick, can you just talk about sort of occupancy in terms of the trajectory as we move into the fourth quarter and into next year? Right now in the third quarter, you're sitting about 100 basis points below last year, which was a record high. You got to 96.8 by the fourth quarter. You were at 96.3 in the third quarter. How should we think about the trajectory into the fourth quarter relative to that spread, and how does that line up as we move into next year from an occupancy perspective?
Well, we should have improvement in the fourth quarter. That's number 1. We're not going to give you a number. Number 2 is we give you guidance in 2018 in February. The reality is, the only reason why it's down is we've had some extra bankruptcies this year. We had a bunch in 2015. We had less in 2016. We had a bunch in 2017. The portfolio's in excellent shape, we'll continue to improve upon that. We've done more leasing this year. I don't have the exact number. Rick might have the total number, but we've leased a lot of space this year. What?
Seven million.
No, more than that. The point is, the issue with bankruptcies is you're at the whim of the court. You have a lease, they can cancel it at a moment's notice, and it does take time to lease. We've leased over 10 million square feet this year. That's a lot of leasing. We'll continue to improve, and like I said, I think we'll have an uptick in the fourth quarter.
Right. I was wondering whether that year-over-year spread is going to continue to widen, right? You've gone from 40, 70 to 100 basis points relative to last year, given some of the bankruptcies. How we should think about how the fourth quarter is shaping up, whether that spread stays flat or whether it narrows as people start to take the step.
Well, we had a lot of bankruptcies go through the third quarter. You can't lease space in a month or two. It's certainly harder to lease space to open up for the fourth quarter once you get that space back in the third quarter because you have build-out and so on. Like I said, we have an uptick, and it's essentially all on the margin the way I look at it.
Just second question in terms of capital, and you talked about how strong the balance sheet is and how much liquidity. Noticed that you didn't buy back any shares in the third quarter. Can you sort of just elaborate a little bit about why that was the case? How that differed relative to what you did in the first half?
The simple answer to that is we're very close to some significant redevelopments that we're excited about. We are very conservative, so we're creating a pile of financial power that we want to take advantage of. We've got a little bit more redevelopment that you'll see in the next, I don't know, month or two that's really exciting for the portfolio, and we figured we might as well hold some cash. Actually, we also love raising this dividend. I mean, I love raising the dividend 10% a year. I really like that. Between the redevelopment, raising the dividend, having a balance sheet that cannot be compromised with significant firepower. I know it's all ignored right now, but I don't ignore it, and I'm going to rely on my judgment that that's stuff that I shouldn't ignore.
I know no one wants to pay attention to it. I know nobody cares. Raising that dividend 8, 10, 12% a year, having a hoard of cash to put back in the portfolio, the accretive returns is really exciting. Having a balance sheet tried, tested, ready to go to work is really a competitive advantage that I really like, and that's what we're going to do. This dividend's going up, the earnings are going up, the balance sheet's going to get stronger. That's the model we got. That's what we're doing.
Okay. All right. Thanks, David.
Sure.
Our next question is from Craig Schmidt with Bank of America. Your line is open.
Thank you. I noticed on the development activity report that the Edmonton project is listed under Mills. I wondered if this indicates a different sort of leasing approach that maybe is broader in value scope than just outlets.
It will be. It's always been designed as a Mills. Our partner there actually owns the Mills in Toronto and in Vancouver. This has always been organized as a Mills. It's enclosed. It's what I'd say bigger in size. It's always been We consider it more Mills-like with the boxes and the outlet and the entertainment uses.
Okay.
Our partner is the owner of Vaughan Mills and the one that they just opened in Vancouver as well.
Great. That's encouraging.
Yeah.
It seems like you may be taking the change in direction on the new redevelopments, maybe more densification. Is that something I just need to wait the next couple of months for?
Well, I think we've got a terrific portfolio set to do, so the answer is yes, Craig. I think you'll see more and more stuff from us along those lines. Obviously, we're not going to do it just to do it. The idea is to increase the value of the portfolio. Rick and I went over plans yesterday at King of Prussia. King of Prussia is basically a $2 billion asset. We had a penny that just didn't fit there with the Neiman and the Nordstrom and the Lord & Taylor and the Bloomingdale's at all. You know the center very well. It's very big. We didn't need another department store. They've closed their store there.
We could've done traditional, the fact of the matter is the pivot of kind of the what's the front and what's the back of that center has evolved over time, and we have the ability for hotel, apartments, office, and complementary retail with outdoor work and play space. That's going to be unbelievable for that community. Listen, we've got to do it. We've got to get it done. We've got to open it. I think that a lot of folks are missing those kind of opportunities and are. One thing you cannot do is replicate the real estate that we have. That's a unique, unbelievable opportunity. It's going to be a significant investment. It'll be our Hudson Yards version for suburban but wealthy King of Prussia. It's a great market. It's a growing market.
That's what having good real estate's all about. It's underappreciated. I get it. We got to do it. We got to prove it. If you've seen some of the mixed-use stuff that we've done over the past few years, you've seen that our core competency is increasing in this area. Again, we will devote capital to those kind of projects that are very exciting. We'll take that $2 billion asset to, I don't know, $3 billion plus. Why not, right?
Sounds good.
Thank you.
Thank you.
Sure.
Our next question is from Steve Sakwa with Evercore ISI. Your line is open.
Hi, good morning.
Hi.
Hi. Just a couple quick things, David. One, I think you mentioned that you did have a deductible hit in the third quarter. I don't think you quantified it. Could you give us that number?
$2 million.
Okay. Thank you.
It's $1 million per occurrence. The flood in Hurricane Harvey and all the flooding did not reach the deductible expense. We had other expenses, not up to that number.
Okay, thanks. I also noticed on that other income page and expense page, professional service fees were up quite significantly, and I also noticed that the regional and home costs were down. I just don't know if you can provide any commentary around the large jump from professional fees in the quarter.
Well, mostly associated with legal expenses. As you know, we had this situation with Woodbury. You know our point of view in terms of how we felt about that, they were significant expenses. That, to me, is a one-time expense. Obviously, we're running our business as efficiently. We have the highest margins in the business. We've got the best overhead percent of revenue in the business. We take pride in that we have the highest margins. We take pride that we have the lowest overhead. Again, something that's underappreciated, and we'll continue to do that. That we did not have an LTIP for the senior dudes, because we knew this year would be a little bit tough. It's actually coming out better than we thought. We're hitting every number. We've got best growth in the industry. We've got the best balance sheet.
Our operating metrics, our sales were up. All of that's pretty good, you know what? We thought it might be a little tough, we tightened the screws. That's what I like about my team. They're willing to tighten with me, we tightened.
Okay, that's good. I guess just lastly, on that 10 million feet that you talked about leasing, I don't know if you or Rick could maybe provide a little detail, just broadly by category. Presumably, a lot of that was other things besides apparel, can you just kind of help us give a breakdown of maybe how much was traditional apparel, how much was home, food, and just some of the broad categories to show the diversity of leasing?
This is Rick. In our new leases that we have been signing, the percentage devoted to apparel is down about 20%. The percentage devoted to food and entertainment is up about 20%, the number is over 11 million square feet this year over our three portfolios, which is malls, The Mills, and premium outlets.
Okay, thanks. That's it for me.
Thank you.
Our next question is from Jeremy Metz with BMO Capital Markets. Your line is open.
Thanks. Hey, guys. I just wanted to say, being from the Midwest, I agree it's actually not that far out there.
Right.
I had a question for Rick. I was just wondering if you can give us some high-level color here on the sales and traffic trends at the premium outlets versus the malls. Then maybe just as a follow-up, can you comment on your watch list and any changes there, maybe digging in a little bit? Are you worried that we could get another bankruptcy or adverse retailer event here late in the year, whether it's a Charlotte Russe or anyone else that's of the troubled retailers out there?
We're not going to comment on individual retailers. That's not our place. Our premium outlet traffic is up. The mall traffic is stable. We're not seeing the kinds of trends that have been publicly reported by all these algorithms and black box things that have been out there and talked about in the trades. It's very stable, and frankly yes, there was a lot of bankruptcies, but frankly, we're also having many of our tenants get reorganized or merged with very good balance sheets. In the last several months, you've had Gymboree, Payless, rue21, all come out with restructurings with very stable balance sheets and growth strategies.
On the occupancy that Michael Bilerman asked, which I probably should've mentioned, part of the dip in occupancy that we have is also we've added new product to the portfolio. They obviously, both in the redevelopments expansion space as well as new developments. They are never up to our 95%, and I don't know what that number is.
About a 30 basis points impact.
It's about a 30 basis points impact, and I probably should've answered that when Michael asked. In any event, part of that is just the portfolio is expanding, and you tend not to be initially at 100% occupancy when you open. Yet, once the space comes in, the space comes in our number, and it is what it is.
Okay. Appreciate that.
Yeah.
I guess, David, I was just wondering if you could just kind of talk about your appetite here for dispositions, specifically kind of the lower end of the portfolio. You've talked about NOI weighted results. That makes you further highlight how much of the revenue and value is really driven by the top. As I think about the 13, I think you have about 13 assets in the other bucket, and maybe just more broadly, some assets where, for whatever reason, the market or maybe demographics are moving against it. Does it make sense to sell those sooner versus later? Just how you're thinking about pruning the bottom from here?
Look, I think it's a question of there are assets that don't fit with our portfolio. We generally have been a seller or spin-off of assets. The market's not great. On the other hand, I think we'll have at least a sale potentially by year end or early next year. It's a very simple. There's no asset here that we lose sleep over or that we have consternation over. It's a function of, if we get the right price, we'll sell. If we don't, and the present value of those cash flows greater than the price, to me, cash flow is still. There's nothing to be embarrassed about. I know this world doesn't want to focus on cash flow, but there's nothing to be embarrassed about cash flow. I can take that cash flow and invest in something that's higher growth, and that's okay.
That's kind of what I think people like me should think about. We'll continue to prune the portfolio. We're in pretty good shape if the value's right. We're not going to do anything that's a fire sale because we really have no need to. We can operate effectively. The thing about us is we can operate effectively from luxury centers to terrific suburban malls west of the Hudson, to outlet centers, to The Mills product, to Europe, to Asia, to mixed-use properties. We have the ability. If you had only seen how this company dealt with these devastations, our multiple would go up. Okay. You don't see it, but I see it. We chartered a plane. We had crews of people go down to Puerto Rico. We had people in the field that put their own personal situation on the back burner to deal with our physical assets.
Crazy stuff. We can operate. People forget that we lost a mall in Nashville because of a flood that was shut down for, I cannot remember, a year and a half, two years. We built it back better than ever. We will build Puerto Rico back better than ever. Those assets are important to that community. We will deliver. That is what people lose sight of. They want to focus on a metric here and there. I do not know. Sometimes it is interesting, but I do not know what you are asking. I forgot. The point is, thanks for your question. If I did not answer it, ask it again. Something about asset sales. The point is, we operate in any kind of environment. We do extraordinary stuff. We give back to the community. Simon Youth Foundation is important. Check into it.
Look at what we have done for the Komen Foundation with breast cancer research. Look at the fact that our operating income, somebody reported sales that had operating income of $347. We had $1 billion, $35 billion of operating income. Three times what somebody else had. Focus on that. Focus on those kind of things I think would be helpful in your analysis. You should tell us what you want us to focus on. On the other hand, it is a two-way street, my friend. Thanks for your question.
Thanks for your time.
Thank you. Our next question is from Vincent Chao with Deutsche Bank. Your line is open.
I think he called uncle. Next.
Our next question is from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good morning. I was just wondering if you could talk about on the sales side, you guys did have a nice 3% increase this year-over-year, which is the strongest since 2013. Just wondering if you could comment where in the portfolio that was, if it was more the international tourist high volume centers coming back, or if it was across the board.
Simply put, it's basically across the board. You got to remember, September, we dealt with a lot of crap. I was really pleased with that number. It's across the board. I think that there's definitely been a pause with all these natural disasters. Unfortunately, they hit us hard from Texas to Florida. Don't underestimate the Las Vegas impact. Thankfully, we had nobody involved. It's a tragedy that changes the psyche of the consumer for a period of time. I think I heard from Southwest Airlines that their flights down to Vegas are down. It'll come back, but we had to deal with that. Unbelievably, we've never had malls where we had to shut because fires. The untold natural disasters, what's happened in Northern California, it's been unbelievable. We had our partner in a mall there whose own home burned down. Just tragic stuff.
Obviously the Puerto Rico situation is at another level. Even with all that said, our sales came in pleasantly surprised. I think the consumer mood is better. Look, we can talk online or not online. The reality is, I saw something interesting, how physical books outperformed electronic books. Who knows? Maybe that's a trend. I think that you'll see that as well. People get bored. Despite all of the rhetoric out there, you would expect me to say that, but generally, sales and traffic are not bad, pretty good. Absent, obviously these things going on in the tragedies of this unfortunate set of circumstances that we've had to deal with. Again, I wrote a letter to the company.
I don't know how many people listen from the company on the call, but I can't tell you how people have stepped up in this company dealing with these crazy events. Proud of the organization.
Thanks for that response. I was wondering on recent outlet development projects. Denver is under construction. It opens about a year from now. I'm wondering how the pre-leasing is going there and how that trajectory kind of a year from opening looks at this point versus, I know Norfolk opened earlier this year and others of the past.
Great. I think that's going to be great. Denver is a great city. The growth there is phenomenal. It's a great site right on I-25. Our head of outlets took a bunch of retailers there last month. I think we've got a great design. I think it'll be a great addition to the community there.
I would say to you that there's still considerable demand in the outlet sector. Those tenants are growing and are actively looking for new opportunities. Norfolk now is performing very well and has got everyone open, and it's a lovely physical plant right on the water. We incorporated outdoor dining there. I would hope you'd go visit our product, Clarksburg, because the level of design and customer amenities is substantially elevated along with the tenant mix in these properties.
That's great to hear. Thanks.
Thank you.
Our next question is from Michael Mueller with JPMorgan. Your line is open.
Thanks. Hi. David, I think you said your NOI weighted spreads were 17% in the quarter. When I look at my notes from last quarter, you talked about 14% spreads. Is that an apples to apples methodology, so they actually increased in the third quarter?
Yes, sir.
Okay. I guess on the development pipeline, about $1 billion right now, where do you see that number trending over the next two or three years?
Well, I think it's got the potential to go up, frankly, because as you know, we're going to have some opportunities like the King of Prussias of the world that are going to be really dramatic and change the face of some of these great pieces of real estate. I think you'll see more from us in this area, even this year, that would tend to suggest that that number could be higher. Look, we are very focused on the redevelopment part of our business, investing in our product. We're actually in very good shape there. Done a lot, as you know, since 2010. We're still very optimistic. We'll announce at least one more expansion of a material asset this year yet, Rick, probably, right?
Yeah, it should be.
With really good tenant demand. We'll announce another major mixed-use development at some point, along the lines of King of Prussia that I talked about. I think we've got good stuff working.
Got it. I guess maybe for a second, going back to the first question in those spreads again, going from 14% to 17%, does anything jump out over the last three months in terms of what would've caused that increase?
No. We have such a large portfolio that they would have to jump really high to change a number.
Got it. Okay. That was it. Thank you.
Yeah, no worries. Thank you.
Our next question is from Vincent Chao with Deutsche Bank. Your line is open.
Hey, good morning, everyone. I think I had a little headset technical issue there before. David, you talked a lot about the dividend and the importance of the dividend, and obviously, you increased it this quarter and alluded to increases in 2018. I know a lot of this has to do with taxable income and REIT rules and things like that, but I was just curious, as the markets continue to sort of not really pay attention to the discount between the private market values versus your own stock, would you consider increasing the dividend more than you otherwise would in 2018 to continue to give back some of that return to shareholders?
I think the simple answer to that is yes. If you look at where we are versus what we paid, obviously, if you keep increasing that level off a bigger base, that's a pretty big number. I think the simple answer is yes. We have the ability to continue to grow our cash flow. Like I mentioned, I just encourage people to look at our operating income for the third quarter. There's a $1 billion Operating income essentially being FFO, right? Net income plus depreciation, more or less, right? It's $1,000,035. Nobody gets excited about that number, but guess who does? Guess who does? I do. You put it in comparison to other companies and some of their multiples. We are, I think, truly undervalued. Mr. Market is Mr. Market.
I think a good way to demonstrate that is by raising our dividend on a consistent basis. We'll continue to do that.
Okay, thanks. Then just maybe going back to your comments about the psyche of the consumer. Obviously, there's been a lot of unusual things going on in the country here and with the natural disasters in Las Vegas, as you mentioned. Overall traffic sounds like trends are stable, but I'm just curious if the traffic trends in Florida, Houston, in Vegas as well, sounds like maybe not in Vegas. Florida and Houston, have they returned to the-
Well, it's interesting. Unfortunately, we've seen this before. I will say this to you. Prior to this string of natural disasters, the business was actually, sales and traffic were up. They were good. What happens generally is you lose the week before because there's the preparation, and then you lose two, three, four weeks after, because obviously, people are not yet back to normal. Houston, having just visited Houston recently, we didn't really have that much property damage, but there was unbelievable amount of damage to that city. Now, give it to Houstonians and Texans, they come back fast and hard. Florida, probably, it's wild because it was East Coast, West Coast. That hurricane couldn't make up its mind where it was gonna hit. The reality, it does slow traffic and sales. Florida is back to a little bit more normal.
I think Houston took a little bit longer to get back to normal given the amount of devastation there. Vegas, we were having a great September in Las Vegas. Great. I think that's going to take some time, what happened there is horrific. We'll see. It's so hard to predict. These things, they don't just snap back day one. It does take time for people to get in their normal pattern. I don't blame them, frankly. They got other things to worry about.
Yep, agree. Okay, thank you.
Sure.
Our next question comes from the line of Nick Yulico with UBS. Your line is open.
Thanks. David or Rick, going back to your watch list and some questions about that. I was hoping to get your early read on whether 2018 will be a better or worse year for store closures and bankruptcies, based on what you've seen now with tenants dropping off the watch list and refilling this year.
Look, I know we all wanna talk about 2018. As you know, we don't talk about 2018 till our year is done. You're more than welcome if you would like, next week, you can come to Indianapolis Spend. We go through space by space, 200 properties, so it's kind of mind-numbing. We're doing our business plan for next year. If you want to burn a day or two or three or four, or a weekend, come on in, we'll show you how we run the business. We'll tell you about 2018 when we tell you about 2018. All I can tell you is that we've got a great real estate operating model that has historically worked over many years and many cycles. We've weathered lots of storms, one way or another. We'd certainly love a better natural retail environment. It's not quite there. It was headed there.
We'd like a more stable retailer environment. We're diversifying away from the have-nots to the haves. That takes time. You can't duplicate our real estate, can't duplicate our balance sheet, can't duplicate the fact that this company can operate across this country as well as in many parts of the world. We put it all together, we put it in a blender, we pull the right triggers, and lo and behold, we grow our earnings. That's what we're all about. I don't expect 2018 to be any different than the history, I've got the next two, three weeks of planning for the execution of 2018. Like I said, we planned for 2017. We're doing a good job in 2017. We're overcoming a lot, whether it's retailer bankruptcies, natural disasters, changing market conditions.
We did the same thing in 2016, 2015, 2014, 2013, 2012, 2011, 2010, even in 2009. I mean, it is what it is.
Okay. Appreciate that.
You're welcome.
Just going back to that second question, going back to re-leasing spreads, which I know is one of your favorite topics. You talked about the NOI spreads getting better, the weight spreads getting better this quarter, yet the ones on page 23 of the supplemental, that spread got a bit worse this quarter versus the last year.
I think the simple thing is that we put everything in there, we had more box deals. That tends to damper down the spread for the entire portfolio as opposed to the ones that don't have as much box activity in the NOI weight. It's simple as that.
Okay.
That's all I said, right? Yeah.
Yeah, no, just to be clear here, though, if we're thinking about the impact to your cash same-store NOI, are the numbers, the spreads that are on page 23 more important, or the ones that you're citing on the NOI-weighted spreads?
Well, look, the reality is there's so much that goes into NOI. Spreads is just one element of it. I think you put it all in a blender and Look, we've been operating with our NOI, with the strong dollar, with our overage rent down significantly, yet we've produced pretty damn good Comp NOI number growth. There's so much that goes into it that it's hard. If I had to look at it's probably more important to look across the board, they're both metrics for you to chew on. Honestly, I've never run my business for metrics other than one. Guess what that is?
Dividend growth.
Well, no. Cash flow growth. Okay?
Thanks.
That's the only metric I worry about, okay? It is what it is. Thank you.
Our next question is from Linda Tsai with Barclays. Your line is open.
Hi. On Puerto Rico, sorry if I missed this. What's the basis point impact of Puerto Rico on SSNOI in the fourth quarter?
It's $0.03 FFO all-in. We don't anticipate any BI and/or those centers right now to be open by the end of the fourth quarter. They might be, but we don't anticipate it.
You wouldn't quantify it from a basis point impact on SSNOI?
It's less than one. It's out of NOI. It's completely out. There is no NOI that we're going to be booking in the fourth quarter. Is that your question?
Yes. Okay. I guess maybe from an NOI impact, what would it have been, or how much does it take away?
Less than 1%, essentially.
Okay. Then in your lease negotiations with some of the retailers that have been challenged, if you look at how you've handled them this year, I realize it's retailer by retailer and location by location, are there any takeaways you can share from this process and how you might approach the leases that are coming up for renewal next year?
I think you answered it best. It really is space by space, retailer by retailer. We do across the board Account client-oriented leasing, as you might imagine, it is space by space, lease by lease.
I would also tell you that we're already working very significantly on next year's activity, we can evaluate now where we think market rents are going to be for the spaces coming up, we're doing everything that we can to have alternative users, we'll have incremental bargaining power in that renewal process. If we don't get a rent we like, that tenant's going to be gone, we're going to bring in a new, more productive tenant that's going to pay us more rent.
Thanks.
Thank you.
Our next question is from Haendel St. Juste with Mizuho. Your line is open.
Good morning. Thank you for taking my questions. A couple. First, I guess, David, the percentage of NOI from U.S. malls has continued to drift down over the last couple of years. The spin of WPG a few years back certainly accelerated a piece of that. But now you're at below 50% for the first time in your corporate history. I'm curious what you think the right balance of U.S. mall exposure is going forward in light of the new retail paradigm. Then also as part of that, curious if you're seeing any interesting acquisition opportunities out there, anything that might fit your quality spectrum, and are you sensing any change in the psyche of any of the owners of those quality assets?
Well, on the last question, not really. We're really not looking externally. If we get approached, we'll certainly consider something, but we're actually not looking that much externally. As you know, the big focus has been on the redevelopment, new development, and that continues to take up most of our time. Look, we're not running away from. Just simply, the math is the math, the opportunities are the opportunities. The fact that we've always considered ourself as a retail real estate company. I think as things have changed, we now consider ourself. We're going to have more mixed-use opportunities. That's going to change the mix a little bit on the margin. But we're not running away from the mall business or running away from the U.S. business because literally we look at opportunities so granular. Like the previous question about how you look at leasing.
It's space by space, mall by mall. That's how we look at the opportunity set that we have here. Because of that, the U.S. may go down, U.S. malls may go down, but it's really because we saw opportunities elsewhere, not because we're running from the mall business. We went in the outlet business in 1998. It's a funny story, if you got a minute. We built a mall for $4 million of equity in Orlando. Shows you how stupid I am. Okay. We made some mistakes. I think we had a $30 million write-off back around that period of time. We built the outlet mall in Orlando.
I had $4 million of equity. I think of my, what's our return on equity? David Bloom at Chelsea at that time came to me and said he wanted to own 100% of Orlando. I go, "Well, not really." He said, "I'll give you $40 million bucks for it." That was a 10X in about a year, which even the smartest private equity or venture capital guys like 10X in a year. I said, "Okay." Little did I know in 2004, I'd buy it back at a number even greater than that. The point is, we like to go where the opportunities are. We bought Klépierre in 2010 when the euro was going to be disbanded. We bought it at under NAV, blah.
That's more our philosophy than, boy, I want to reduce the percentage of our mall business in the U.S. to get to this number. If that helps at all and answers your question.
It certainly does. Certainly appreciate the perspective. Also, I guess, speaking of opportunities, I'm curious on your thoughts on JCPenney this morning. Not asking for you to comment on them specifically as a retailer. I know you don't do that. Was more curious about how you might be thinking about potentially buying back some of those boxes, maybe re-tenanting opportunities. Are there any natural expirations or store closures on the horizon that you might be concerned about?
Well, I haven't really studied the Penney numbers. Obviously, I know they weren't that good. We had confidence in JCPenney. Obviously, they're still recovering from the activity that occurred when they had a different shareholder base. I think Marvin Ellison's done a very good job. We think they serve a real need to the consumer. I do think they're still, unfortunately, dealing with some of the traumatic events of their different shareholder base. That's taking time. It's a cash flow generating company. We'll study the numbers, see what they all mean. I think they definitely have a loyal consumer base and have a business that generates operating cash flow. I don't expect anything too radical there.
I think over time, we are going to want to get some space back from the department stores. We may get some space back, but it's all going to be on the margin. They don't pay any rent, even at places where they pay rent. The opportunity to re-tenant those buildings on an accretive basis is pretty significant for us. To the extent that they're not investing in their store, and we are investing in the mall, there's a disconnect to the consumer, that we hope to potentially modify that disconnect by having a better or different use. We're poised, we're focused on it. We spend a tremendous amount of time assessing what we want back, what we might give back. I think the opportunities are a lot more significant in what we want back than what we might give back.
Just with respect to your question on their leases, in 2015 and 2016, they had 14 options, all were exercised. In 2017, they had seven, all were exercised. In 2018, they have six, four have already been exercised, and we expect the other two to be exercised. We've not been experiencing any closures through lease actions with Penny.
Got it. Thank you for that. One last more, if I could squeeze one in. I'm not sure if I missed it or if you didn't specifically mention what drove the year-over-year decline in that home and regional office costs. Is it just that you're right-sizing the organization given the smaller asset base, and does that flow through same store NOI? Thank you.
No. Primarily, the reduction in our incentive comp and LTIP, primarily.
Got it. Is it? Thank you.
We're really not reducing any kind of overhead on that kind of basis. You get us for a cheaper price. Some may think that's good, some may think that's bad, but it is what it is. As I said, we're on sale. We're on sale. It's a very good point.
I agree. Thank you.
Good point.
Our next question is from Richard Hill with Morgan Stanley. Your line is open.
Hey, good morning, guys. Given that my family's from Kentucky, I can assure you Indiana's not that far out there.
Good.
Hey, I wanted to talk a little bit about your same-store NOI. I'll preface this, I know you focus on cash flow, and look, we do as well. How much do you think that same-store NOI might be being helped or might be helped by the development pipeline? The development pipeline obviously looks like it's a really big growth engine for you now, and you still have $1 billion in there.
It's not in the Comp NOI number, so until it's open for a year.
Right. Yeah. David, what I was trying to think about was last year, you put up 2.2% and 3.2% 2016 prior to-
Let me just reinforce this. I've made this statement, Rich. Historically, we do not look at our Comp NOI on a quarterly basis. We do not look at that. Never have, never will. We look at it over a year. We told you, told the market that we hope to do 3%. I think that's without lease settlement income or that new development kind of a pure number. We're on our way to do at least that. For that, given all the complexity in the world today, that's pretty good. That's what I focus on. I do not focus on third quarter number. I don't focus on the second quarter number. We give you the facts, we tell you, we look at it on a holistic year basis because, when overage rent comes in and out, it's variable. It's when they hit it.
They could hit it in the third quarter, they could hit it in the fourth quarter. Third quarter tends to be the lower end of our comp, if you're interested in that. I don't really look at that. I don't know what else I can tell you other than how I think about it. That's how I think about it, okay?
All right. Let me ask the question maybe a little bit different away. 3% same store NOI guide for the year, I think at midpoint. How much do you think your development pipeline is influencing that versus your core portfolio? Is that just not something that-
I answered that. That's not in the number.
Okay.
Thank you.
All right.
It's all in the 8K. You can see the components of Comp NOI, and you can see the other new development, which is not in the Comp NOI. We've made that clear for a long period of time. Okay?
Got it. Thank you, David.
Thank you.
Our next question is from Jeffrey Donnelly with Wells Fargo. Your line is open.
Good morning.
Good morning.
I'm curious, you guys produce obviously a lot of cash. You've been talking about that today. You didn't repurchase shares in this quarter. Can you speak more broadly about how you're thinking about capital allocation in the next 12-24 months? Do you think you'll be using a greater share of your capital for redevelopment and expansions, and where do repurchases factor into that?
You probably were bored, which I don't blame you. We answered that question earlier, which is basically, because of some of these mixed-use opportunities, like King of Prussia that I'd mentioned before, we think our redevelopment pipeline is going to be potentially increased. We're being very judicious on that. In addition, the more I think about it, I just love raising this dividend 10% per year because the cost to carry on that is increasing. I think that's more meaningful to long-term investors than episodic buybacks here and there. It's in our arsenal, it's in our capital tool box. We'll take it a step at a time, but we've got some really big mixed-use opportunities, and I just love having a powerful balance sheet. I just can't tell you how it excites me every morning.
I should have asked it differently. I guess the question is, it's not off the table then.
It's never off the table, no. We have authorization, and it's ready to go to work, if in fact we're ready to go. I would take that authorization seriously. Otherwise, we wouldn't have it.
Maybe this is a joint one for you and Rick, I'm curious how are lease terms evolving in this environment, and specifically around percentage rents? Because, frankly, I'm wondering if you think landlords get a fair shake on the accounting for retail sales, because it strikes me that given the way consumers shop today, buying online, maybe returning in store, the reporting optics maybe favor the online channel of a retailer versus the bricks and mortar, I'm just curious if you think leases need to adapt for that.
Well, our leases are very well positioned to cover that point, we are very focused on making sure that all those sales that are required to be reported under our leases are being reported.
Jeff, I will tell you this, I think you point out a really important point, okay? Is that we are absolutely, unequivocally under-reporting sales. We can only give you what we get from the retailers. We've done enough work to know that there is an issue there, I think our sales that we report to you would be higher. We have very interesting leases that deal with the point that Rick's making. I am absolutely convinced that our productivity is much higher than what's being reported, even though the lease requires them to do so. I don't want to get into that. It's a complicated matter. What you point out is very interesting. Let's face it, the market rewards an online sale more importantly than it does a brick and mortar.
The retailers would rather prefer an online sale to bricks and mortar, regardless of the possibility. It's a very interesting point, and I will tell you today, in my humble opinion, there is absolutely an under-reporting going on. I don't want to say anything other than that, okay?
Understood. Do you think they have the systems, do you think most retailers have the systems to be able to handle whatever the new form of reporting would be? Like you said, they don't really have an incentive to adapt, but I'm just curious what these sort of new leases you talk about, if you think that's going to be more broad-based in the future.
Yeah. Generally, they know what they should be reporting. I would say so. Again, I want to leave it at that. Let's leave it at that. It's a good point. I will tell, I do think it's safe to say that the numbers we have are under-reported. Absolutely under-reported. It's a very astute point. By the way, we're not giving that up on future leases. It's all melding. You bring up a very interesting point. I'd prefer not to talk about it after this.
Okay. Just one last question. I'm just curious, I'm sure in this environment you've been contacted by private capital sources, maybe to look at JV-ing properties and whatnot. What sort of returns do you think they're looking for when they approach you guys? Are you able to speak to that?
I'm not sure. To do something new or to buy I'm not sure.
To buy interest in your existing properties.
We've had this discussion. That doesn't do much for us, so it's not something we really are pursuing.
Okay. Thank you.
Sure.
Our next question is from Jeffrey Spector with Bank of America. Your line is open.
Good morning. Thanks. Sorry for keep you longer today, just a couple follow-up questions. On the department stores, just given the overhang on the stocks, on the mall stocks, are you seeing any initiatives that you're more positive on or anything you could share from what you're hearing from your mall managers and some of the things we're reading about or seeing. I would have thought, given your dominant properties, that a lot of these initiatives would be occurring in your properties at those department stores.
Well, that's a big question. Look, I don't want to really get in too much about having a discussion with our clients. Look, I think ambiance, service, speed of execution is really important in today's consumer-oriented focus. I do think there's things that can be done at the store level that will improve that. I think as simple as a fast checkout at a store would improve sales and productivity dramatically. There's been a huge focus on technology investment toward their online activities. I'd love for that to shift toward the store environment. That's a real advantage. I think if they did that in a more comprehensive way, whether through checkout service, styling, there's so many things you can do today, much like Apple does when you go to their store in town squares.
If the focus were to shift a little bit there, I think they would see a pickup in their in-store sales environment. It's all over the board, Jeff, frankly, I do think it could improve. Just like what we need to do, we need to improve our in-store experience and the in-mall experience on the stuff that we can control. I think it needs to be a greater focus. It's around the edges. I'd like a little shift in that, we'll see if that happens.
Okay. Then another follow-up. Just listening to the comments on mixed use. Earlier in the week, we received a lot of questions on the WeWork and LNT purchase, upper levels.
Right
Peg and I were thinking, okay, that's just a unique situation. Maybe there's a few other properties like that in the country. When I'm listening to your mixed use comments, do you think that a WeWork type of format or do you see that entering suburban malls or your malls, or that's not what you're talking about?
No. That's included in what we're talking about. Just so you know, we did a WeWork deal in Clearfork, in Fort Worth, Texas. No, I do think that environment will absolutely accelerate. And again, I don't know that I would call these suburban. It's where the good demographic people live outside of urban area, right? There's still 330 million people, okay?
They're urban suburban.
Okay. I know New York City and San Francisco is urban environment. There are lots of places outside of those where people live and work and play and be entertained. The answer is, yeah, I expect us to do more and more with WeWork, both directly, like we did at Clearfork, and through our relationship with Lord & Taylor. We know those guys. We like them. I've spent time with them. They're very creative. Both companies are very creative. L&T or HBC in that case, as well as WeWork. Good people, too. Like them.
My last question, I'm just curious, with the Amazon Whole Foods merger, are you more or less interested in adding grocers to your malls?
No real change. I think we've always liked it where it made sense for both parties. The Amazon acquisition of Whole Foods doesn't change our thinking. I don't know if it's changed their thinking, Whole Foods' thinking, but it certainly hasn't changed our thinking. We'd love to have them in the properties where it makes sense for them and for us.
Great. Thanks so much.
Thank you.
Our next question is from Christy McElroy with Citi. Your line is open.
Hi, good morning.
Good morning.
Just regarding The Edit at Roosevelt Field, how are you connecting with and choosing these digitally born concepts to participate in this effort? How are you leveraging your venture capital business in this, and is there a plan to roll this out further to more of your centers as you think about this as an incubator for new retailers?
The answer is absolutely. Assuming this has legs, this will be rolled out throughout our network. We have to look at our platform as a network, and this will absolutely roll out. The great news is we've got a team dedicated to up-and-coming new retailers that may start digitally and then go online like MeUndies is a good example of that, where we're opening a pop-up store in Stanford. We have a team wholly dedicated to that. We also Appear Here, which is a network, where we're both an investor and a player. They're actually started in London and have a number of, basically, a platform that connects real estate owners with brands that want access to a portfolio in a very seamless way. They've also been instrumental in identifying up-and-coming retailers or concepts. It's a big effort on us to do that.
Not only that, but also lease, not just through what we're doing at The Edit, but also through just normal deals like the UNTUCKit of the world. There's a lot of that new business out there that is exciting for us because we are bringing in the up-and-coming retailers or food operators that know how to connect directly through the consumer, but also have a little different spin on how they connect with the consumer in the in-store environment. I think they're very smart, digitally savvy, speak to the millennials. We love them as part of our platform and our properties.
Just given the natural seasonality of retailer income, how should we be thinking about the impact of Aéropostale, the Aéropostale investment in Q4? What's in your guidance?
Well, we don't break out that. It's in our guidance. We're pleased with the business. We're weighing the money. They're performing according to plan. I don't give out quarterly numbers, there's a little more volatility in the fourth quarter, like a lot of retailers, even tech companies, have a lot of volatility in the fourth quarter. There's a little bit more of that than what we have. Since it's our first fourth quarter, let's see what goes on. We're weighing the money. We basically bought it at one times cash flow. I kind of like those deals. If you have a few more of those, send them my way.
Hey, David, it's Michael. If we can just come back to the professional fees and other, it's like a $34 million-$35 million increase in the quarter. I thought the APG settlement on Woodbury was just under $1 million, so that would be a hell of a lot of legal hours, even at $1,000 an hour. Can you just break out just the big chunks of that $35 million? It's not an inconsequential number, and I don't know if it's.
Well, I think it's actually almost irrelevant because it's a one-time number, and it is what it is. Okay. I'd actually argue that there's no reason to focus on it because it's out of the ordinary, and it's not going to repeat. Unfortunately, this is a very expensive scenario that we had to deal with. The fee was nominal, which reinforces the fact that we again made an announcement how we felt about it. I don't need to relive that. It's behind us. I'd actually argue the opposite of that, just like the Seritage sale. It goes through the numbers, but I wouldn't count. We're not going to replicate that gain either.
Well, I just didn't know where it was coming from, if that was just all legal expenses, effectively.
Well, we have other things that run through that. We actually had a write-off, and again, not to get in minutia, but we actually also took a write-off in one of our European outlet development projects that also flowed through that. That's a one-time number, but the delta is one time, including that write-off. Okay. That's the important message to send to you. Okay. I wouldn't worry about it too much. I mean, I don't like it. Believe me, I don't like it. I'm not happy with it.
It's a big number, right. It's a big number.
I'm not happy with it, we also have that, like I said, we had a European development deal with McArthurGlen that flows through that other number as well.
Okay.
It's non-repeating, and I appreciate your question. It's non-repeating. It's out of the ordinary, and that's all I can really add to it.
Okay, thanks.
Yeah, no worries. Okay, we've exhausted everyone, including myself. For that, please join us next week as we go through space by space. Richard Sokolov will set up the appointments. Have a great weekend.
Ladies and gentlemen, this does complete the program. You may now disconnect.