Morning, ladies and gentlemen, and 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 and instructions will follow at that time. 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. Tom Ward, Senior Vice President, Investor Relations. Sir, you may begin.
Thank you, Bridget. 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 on 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 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. And 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 and 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 wild fires there. And 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 and 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 Q4 of 2017, and this reduction is currently included in our guidance. I couldn't be more proud of the Simon team who have demonstrated courage, resilience, perseverance and how they professionally responded to these unprecedented events. Now let's talk about the Q3.
We had another very productive quarter and 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 percent, 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 percent, an increase of 10 points compared to the occupancy at the end of the second quarter.
Leasing activity remained solid. Average base rent was 52.42 dollars up 3.3% compared to last year, reflecting strong retailer demand and pricing, power for our locations, the malls and outlets releasing spreads of $7.22 0.21 dollars per square foot, an increase of 11.2%. Reported retailer sales per square foot for the malls and outlets were $6.22 compared to $6.04 in the prior year period, which is an increase of 3%. Total portfolio increased 4.8% year to date or $212,000,000 and 3.9% for the 3rd quarter. Comp NOI has increased 3.6% year to date and 2.5% for the Q3.
I remind everybody once again, we do not include lease settlement income in our comp NOI disclosure. Also as a point of reference, our 3rd quarter growth is typically less than the growth rate we achieved for the first half of the year if you are interested in that and have a desire to look historically. Now on an NOI weighted basis, our operating metrics were as follows. Reported retailer sales on NOI weighted basis would be 7.76 dollars per foot compared to $6.22 Average base rent would be $68.54 compared to $52.42 Leasing spreads would increase 17% compared to 11.2%. And these weighted metrics again reinforce the quality of our assets and they're not to be ignored.
At the end of the Q3, redevelopment expansion were ongoing at 31 properties across all three 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, multifamily office and others. And 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. And we expect these again to open over the next 12 months. We recently opened the shops at Clear Fork, 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 Clear Fork will be the dynamic hub of a timeless asset in the terrific city of Fort Worth, Texas. Construction continues on 2 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 $1,000,000,000 Simple update on capital markets. During the 1st 9 months of this year, we closed on 12 mortgage loans totaling $2,000,000,000 Our share of that is 1.4, weighted average interest of 3.12%, term of 6.8 years.
Our current liquidity is 6,500,000,000 dollars Our balance sheet is as strong as ever. We have the highest investment grade credit rating in the industry, more than 5 times interest coverage. And I again reinforce our financial flexibility is a real advantage that cannot be, but 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're on we will pay $7.15 per share in 'seventeen, which is an increase of 10% and look out for 20 18, so which will be higher. We are updating our guidance range to $11.17 to $11.22 of FFO per share. That is the highest in the REIT industry. This is an increase of 3% $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 2 Puerto Rican assets.
So finally, as you can see from our results this morning, we produced yet another quarter of impressive results and metrics. We continue to invest in 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.
Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill.
It's not that far out there. We're in the Midwest. It's not like we're way out there, okay?
Well, that was
There is activity for all of those investors west of the Hudson. I just want to point people I want you to point that out. Alex, what can I answer for you?
Well, thank you for that. So 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? And then 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 3rd just in the Q4 this year and next year we shouldn't expect any impact?
Yes. I'll give to you really very high level. So we've taken the deductible. We had a deductible expense that went through the P and L in the Q3 for Florida and Puerto Rico. After that deductible, we're fully insured.
In the Q4, there is nobody paying rent at this point. We don't collect business insurance until all of that is resolved. That and it really they won't begin to pay rent until we restore the building. And I wish I could give you a sense of that, but it's really going to depend on the next couple of months because it is there is a lot going on down there and power needs to be restored permanently. And as I said, we're doing our repairs and restoration work concurrently, but it's going to take some time to get it all to get it going.
So that $0.03 is what we expect that would have been essentially our net operating income for those two properties in the 4th 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. And so we'll have a when we do our earnings in 2018 guidance, we'll have a better idea of exactly the impact. Again, it's 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. But we're more
interested in what's going on there.
If you take out our earn well over to you know that we earned well over $11.50 So if we're at $0.11 or so, that's basically less than 1 percent. Even you, Alex, could do that math, right?
Yes. Although I do have a colleague for backup, need be. Then the second question is, in the other income breakout, lease settlement income jumped and then marketable securities gains. If you could just provide a bit more color? And then on that lease settlement, was any of that from Teavana or is that still outstanding?
Well, none of that's from Teavana and 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. And I would only point out for those of you that I would hope most people would study our P and 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 ks and our P and L. So I kind of think like this is all washes. If anything, it's a little bit more negative, but that's up for you guys to determine. But and we outperformed even with the deductibles, even with the extraordinary expenses that we incurred that were higher than what I call the higher than normal lease settlement income and obviously the Seritage marketable securities gain. It's a gain by the way, not a loss.
Let's that in mind too.
Okay. Thanks, David.
And 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 Q4 and into next year? And right now in the Q3, you're sitting about 100 bps below last year, which was a record high. You got to 96 0.8% by the Q4, you were at 96.3% in the Q3.
How should we think about the trajectory into the Q4 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 Q4. That's one. We're not going to give you a number. Number 2 is we give you guidance in 2018 in February. But the reality is the only reason why it's down is we've had some extra bankruptcies this year.
And I mean we had a bunch in 2015, we had less than 2016, we had a bunch in 2017. The portfolio is in excellent shape. So we'll continue to improve upon that. And 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 over 7,000,000. No, more than that. But point is and we're dealing the issue with bankruptcies is you're at the whim of the court. So you have a lease, they can cancel it at a moment's notice and it does take time to lease.
But we've leased over 10,000,000 square feet this year. That's a lot of leasing and we'll continue to improve. And like I said, I think we'll have an uptick
in the Q4.
Right. I was just wondering what year over year spread is going to continue to widen, right? So 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 Q4 is shaping up, whether it either stays flat or whether it narrows as people start to take
the Well, when you get we had a lot of bankruptcies go through the Q3. It's you can't lease space in a month or 2. It's certainly harder to lease space to open up for the Q4 once you get that space back in the Q3 because you have build out and so on. But like I said, we have an uptick and it's essentially all on the margin the way I look at it.
And then just second question in terms of capital and you talked about how strong the balance sheet is and how much liquidity. I noticed that you didn't buy back any shares in the Q3. 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?
Well, the simple answer to that is we've got we're very close to some significant redevelopments that we're excited about. And we are very conservative. So we're creating a pile of financial power that we want to take advantage of. And we've got a little bit more redevelopment that you'll see in the next, I don't know, month or we've got a
little bit more redevelopment
that you'll see in the next, I don't know, month or 2. That's really exciting for the portfolio and we figured we might as well hoard some cash. And we love actually, we also love raising this dividend. I mean, I love raising the dividend 10% a year. I mean, I really like that.
So 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. So I know no one wants to pay attention to it. I know nobody cares.
But raising that dividend 8%, 10%, 12% a year, having a hoard of cash to put back in the portfolio of accretive returns is really exciting. And 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. So this dividend is going up, the earnings are going up, the balance sheet is going to get stronger. That's the model we got. That's what we're doing.
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. And this has always been organized as a mills. It's enclosed.
It's what I'd say bigger in size. So it's always been kind of we consider it more mills like with the boxes and the outlet and the entertainment uses. So our partner is the owner of Vaughan Mills and the one that they just opened in Vancouver as well.
Great. That's encouraging. And then the it seems like you may be taking the change in direction on the new redevelopments, maybe more densification. Is that or is that something that you
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 we'll you'll see more and more stuff from us along those lines. I mean, obviously, we're not going to do it just to do it. The idea is to increase the value of the portfolio.
But Rick and I went over plans yesterday at King of Prussia. King of Prussia is basically a $2,000,000,000 asset. We had a penny that just didn't fit there with the Neiman and the Nordstrom and the Lord and Taylor and the Bloomingdale's at all. It's as 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 have done traditional, but 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 retailer retail with outdoor work and play space, that's going to be unbelievable for that community. And listen, we've got to do it.
We've got to get it done. We've got to open it. But I think that's a lot of folks are missing those kind of opportunities and are kind of you cannot the one thing you cannot do is replicate the real estate that we have. And that's a unique, unbelievable opportunity. It's going to be a significant investment.
It will 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 is all about and it's underappreciated. But I get it.
We got to do it. We got to prove it. But if you've seen some of the mixed use stuff that we've done over the past few years, you've seen that we're our core competency is increasing in this area. So again, we will devote capital to those kind of projects that are very exciting. And we'll take that $2,000,000,000 asset to, I don't know, dollars 3,000,000,000 plus.
Why not, right?
Sounds good. Thank you.
Sure.
Our next question is from Steve Sakwa with Evercore ISI. Your line is open.
Just a
couple of quick things, David. One, I think you mentioned that you did have a deductible hit in the 3rd quarter, but I don't you quantified it. Could you give us that number?
$2,000,000 Okay.
Thank
you. It's $1,000,000 per occurrence. The flood in Harvey and all the flooding did not reach
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 Woodberry. You know our point of view in terms of how we felt about that, but there were significant expenses. That to me is a one time expense. And then obviously, we're going to be 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, 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.
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 are sales were up. All of that's pretty good. But you know what? We thought it might be a little tough. And so we tightened the screws and that's what I like about my team.
They're willing to tighten with me and we tighten.
Okay. That's good. And then I guess just lastly on that 10,000,000 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. But Presumably a lot of that was other things besides apparel, but 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? Yes, now our the broad categories to show the diversity of leasing?
And now 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%. And the number is over 11,000,000 square feet this year over our three portfolios, which is malls, mills and preeminent.
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. And I just wanted to say being from the Midwest, I agree it's actually not that far out there.
And 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. And 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 in 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?
Well, 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, emerge with very, very good balance sheets. And in the last several months, you've had Gymboree, Payless, Route 21, all come out with restructurings with very stable balance sheets and growth strategies.
Yes. On the occupancy that Mike Bilerman asked, which I probably was should have mentioned. I mean, part of the dip in occupancy that we have is also we've added new product to the portfolio. So they obviously both in the redevelopments expansion space as well as new developments. They are never up to our 95%.
I don't know what that number is, but About a 30 bps impact. Okay. So it's about a 30 basis point impact. And I probably should have answered that when Michael asked. So but in any event.
So part of that is just the portfolio is expanding and you tend not to be initially at 100% occupancy when you open. But yet, once the space comes in, the space comes in our number and it is what it is.
Okay. Appreciate that. And 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. So obviously further highlights how much of the revenue and value is really driven by the top. So as I think about the 13 I think you have about 13 assets in the other bucket, maybe just more broadly some assets where for whatever reason the market and maybe demographics are moving against it. Does it make sense to sell those sooner versus later or just how you're thinking about pruning the bottom from here?
Yes. 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 spinner offer of assets. The market is not great. On the other hand, I think we'll have at least a sale potentially by year end or early next year.
But it's very it's a very simple there's no asset here that we lose sleep over or that we have consternation over. And 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. I mean 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.
And I can take that cash flow and invest in something that's higher growth. And that's okay. I mean, that's kind of what I think people like me should think about. But we'll continue to prune the portfolio. We're in pretty good shape, if the value is right, but we're not going to do anything that's a fire sell 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 how this company dealt with these devastations, you would our multiple would go up, okay? You don't see it, but I see it. We had crews of people. We chartered 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, crazy stuff. So we can operate. I mean people forget that we lost them all in Nashville because of a flood that was shut down for, I can't remember, a year and a half, 2 years.
And we built it back better than ever. We'll build Puerto Rico back better than ever. Those assets are important to that community. We will deliver. And Sometimes it's interesting, but I don't know what you're asking.
I forgot. But the point is, Sometimes it's interesting, but I don't know what you're asking. I forgot. But the point is, thanks for your question. If I didn't 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've 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 $347,000,000,000 we had a 1,000,000,000 dollars of operating income, 3 times what somebody else said. And focus on that. Focus on those kind of things.
I think it would be helpful in your analysis. You should tell us what you want us to focus on. On the other hand, it's a two way street my friend. Thanks for your question.
Thanks for your time.
Thank you. And our next question is from Vincent Zhou with Deutsche Bank. Your line is open.
Thank you, 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 year over year, which is the strongest since 2013. So I was just wondering if you could comment where in the portfolio that was, if it was more the international tourists high volume centers coming back or if it was across the board?
Simply put, it's basically across the board. And you got to remember, September, we dealt with a lot of crap. So, I mean, I was really pleased with that number. It's across the board. And I think that there's definitely been a pause with all these natural disasters.
But I mean, unfortunately, us hard from Texas to Florida. Don't underestimate the Thankfully, we had nobody involved. But 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 will come back, but we had to deal with that.
And unbelievably, I mean, 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. I mean just tragic, tragic stuff. And then obviously, the Puerto Rico situation is at another level.
So it's 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, but maybe that's a trend. I think it will I think 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 can't tell and I don can't tell and 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, crazy events. Proud of the organization.
Thanks for that response. And then I was wondering on recent outlook 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. Growth there is phenomenal. It's a great site right on I-twenty five.
We our Head of Outlets took a bunch of retailers there last month. I think we've got a great design. I think it will be a great addition to the community there. And 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. So 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 mean, I would hope you'd go visit our product Clarksburg because the level of design and customer amenities is substantially elevated along with potential 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 3rd quarter?
Yes, sir.
Okay. And I guess on the development pipeline, about $1,000,000,000 right now, where do you see that number trending over the next 2 or 3 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 Pressures of the world that are going to be really dramatic and change the face of some of these great pieces of real estate. So I think you'll see more from us in this area even this year that would tend to suggest that number could be higher. Look, the so it is, 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 20 10. And we're still very optimistic on we'll announce at least one more expansion of a material asset this year yet, Rick, probably, right?
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. So I think we've got good stuff working.
Got it. And I guess maybe for a second going back to the first question and those spreads again, going from 14% to 17%, does anything jump out over the last 3 months in terms of what would have caused that increase?
No. I mean, we have such a large portfolio that it would they would have to jump really high to change a number.
Got it. Okay. That was it. Thank you.
Yes. No worries. Thank you.
And 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. But 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 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. I mean, if we're if we 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. And I think the simple answer is yes. We have the ability to continue to grow our cash flow. And like I mentioned, I mean, I just encourage people look at our operating income for the Q3.
I mean, there's a $1,000,000,000 operating income essentially being FFO, right? Net income plus depreciation more or less, right? I mean, it's $1,035,000,000 Nobody gets excited about that number, but guess who does? Guess who does? I do.
So and you put it in comparison to other companies and some of their multiples, we are, I think, truly undervalued. But I'm not going to Mr. Market is Mr. Market. We can only 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. And 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 and Vegas as well, sounds like maybe not in Vegas, but Florida and Houston, have they returned?
Well, it's interesting. It's interesting. What happens unfortunately, we've seen this before. What happens, it does and I will say this to you. I mean, prior to this like string of natural disasters, the business was actually sales and traffic were up.
They were good. I mean, and what happens generally is you lose the week before because there's the preparation and then you lose 2, 3, 4 weeks after because obviously people are not yet back to normal. Houston, having just visited Houston recently was, I mean, they 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 is wild because it was East Coast, West Coast, East Coast, West Coast.
I mean that hurricane couldn't make up its mind where it was going to hit. But the reality, it does slow traffic and fails. Florida is back 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 time. I mean, what happened there is horrific. But we'll see. I mean, it's so hard to predict.
But these things, they don't just snap back day 1. It does take time for people to get in their normal pattern. And I don't blame them, frankly. I mean, they got other things to worry about.
Yes. I agree. Okay. Thank you.
Sure.
Our next question comes from the line of Nick Yulico with UBS.
David or Rick, going back to your watch list and some questions about that. I was hoping your early read on whether 2018 will be a better or worse year for store closures and bankruptcies
Look, I know we all want to talk about 2018. As you know, we don't talk about 2018 till our year is done. We actually you're more than welcome if you would like next week. You could come to Indianapolis spend. We go through space by space 200 properties.
So it's kind of like mind numbing, but we're doing our business plan for next year. If you want to burn a day or 2 or 3 or 4 or a weekend, come on in, we'll show you how we run the business. But 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 our we'd like a more stable retailer environment. We're diversifying away from the have nots to the haves.
That takes time, but 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. And we put it all together, we put it in a blender, we pull the right triggers and lo and behold, we grow our earnings. And that's what we're all about. I don't expect 2018 to be any different than the history, but I've got the next 2, 3 weeks of planning for the execution of 2018. But like I said, we planned for 'seventeen.
We're doing a good job in 'seventeen. We're overcoming a lot, whether it's retailer bankruptcies, natural disasters, changing market conditions, we did the same thing in 'sixteen, 'fifteen, 'fourteen, 'thirteen, 'twelve, 'eleven, 'ten, even in 'nine. I mean, it is what it is.
Okay. Appreciate that. And then just going back to that second question, going back to re leasing spreads, which I know is one of your favorite topics. You did you talked about the NOI spreads getting better the weighted spreads getting better this quarter, yet the ones on Page 20 3 of the supplemental, that spread got a bit worse this quarter versus the last year.
I think that's a simple the simple thing is that we had more we put everything in there, so we had more box deals and we don't have so 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 weighted. It's simple as that.
Okay. 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 are just one element of it. So I think you put it all in the 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 NOI, comp NOI number growth. So there's so much that goes into it that it's hard. I would tend to look at if I had to look at it, it's probably more important to look across the board, but they're both metrics for you to chew on.
I don't honestly, I've never run my business for metrics other than 1. And guess what that is?
Cividend growth.
Well, no, no, no, no, cash flow growth. Okay. Thanks. That's the only metric I worry about. Okay.
So 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 SS NOI in the 4th quarter?
Well, it's $0.03 FFO all in because we don't anticipate any BI and or those centers right now to be opened by the end of Q4. But they might be, but we don't anticipate it.
So you wouldn't quantify it from a basis point impact on SS NOI?
Well, it's less than 1 it's out of NOI. It's completely out. There is no NOI that we're going to be booking in the 4th quarter. Is that your question?
Yes. Well, okay. I guess maybe from an NOI impact, what would it have been? Or how much does it take away?
Well, less than 1% essentially. Okay.
And then in your lease negotiations 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 retail and location by location. But 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?
It really I think you answered the best It really is space by space, retailer by retailer. I mean, I think we really don't we do across the board account client oriented leasing as you might imagine. But it is space by space, lease by lease.
And I would also tell you that we're already working very significantly on next year's activity and we can evaluate now where we think market rents are going to be for the spaces coming up and we're doing everything that we can to have alternative users. So 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 and 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. Jusset with Mizuho. Your line is open.
Good morning. Thank you for taking my questions. So 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 corporate history. So I'm curious what you think the right balance of U. S. Mall exposure is going forward in light of the new retail paradigm?
And then also as part of that, just do you see any interesting acquisition opportunities out there? Anything that might be 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 to if we get approached, we'll certainly consider something, but we're actually not looking at 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, I don't we're not running away from I just simply the math is the math. The opportunities are the opportunities.
The fact that we've always considered ourselves as a retail real estate company. I think as things change, we now consider ourselves as a we're going to have more mixed use opportunities. So 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. I mean that's how we look at the opportunity set that we have here. And because of that, we may 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. And I made it we built it's a funny story if you got a minute. We built a mall for $4,000,000 of equity in Orlando.
Shows you how stupid I am, but we at the same time we spent this money on the Internet and we lost remember, by the way, we're ahead of our time. Some of this stuff today probably be worth $100,000,000,000 but okay. But we made some mistakes. I think we had a $30,000,000 write off back in around that period of time. And I we built the outlet mall in Orlando.
I had $4,000,000 of equity outlook. I think it might what's our return on equity. David Blum at Chelsea at that time came to me and said he wanted to own 100 percent of Orlando. And I go, well, not really, but he said, I'll give you $40,000,000 for it. And so 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 2,004, I'd buy it back at a number even greater than that. But the point is we like to go where the opportunities are. We bought Klepierre in 'ten when the euro was going to be disbanded. We bought it at under NAB, blah, blah.
So that it's more 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.
Certainly does, certainly. Appreciate the perspective. And also, I guess, speaking of opportunities, I'm curious on your thoughts on J. C. Penney this morning.
Not asking if you could comment on them specifically as a retailer.
I know you don't do
that, but I was more curious about how you might be thinking about potentially buying back some of those boxes, maybe re tenanting opportunities? And are there any natural expirations or store closures on the horizon that you might be concerned about?
Well, we really I haven't really studied the penny numbers. I know they weren't that good. We had confidence in JCPenney. I mean, obviously, they had a they're still recovering from the activity that occurred when they had a different shareholder base. And I have I think Marvin Ellison has 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 shareholder base. That's taking time, but it's cash flow generating company. We'll study the numbers, see what they all mean. But I think they definitely have a loyal consumer base and have a business that generates operating cash flow.
And I don't expect anything too radical there. But I think over time, we are going to want to get some space back from the department stores and we may get some space back because it's all going to be on the margin. They don't pay any rent even at places where they pay rent. So the opportunity to re tenant those buildings on an accretive basis is pretty significant for us. And
to the
extent that they're not investing in their store and we are investing in the mall, there is a disconnect to the consumer that we hope to potentially we can 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 get back. And I think the opportunities are a lot more significant than what
we want back than
what we might get back. And 14 options,
all were exercised in 2016, they had 14 options all were exercised. In 2016, they had 7 all were exercised. In 2018, they had 6, 4 have already been were exercised. In 'eighteen, they have 6, 4 have already been exercised and we expect the other 2 to be exercised. So we've not got
it.
Got it. Thank you for that. And 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 rightsizing
the organization given smaller asset base? And does that flow through same store NOI? Thank you.
No. Primarily the reduction in our incentive comp and output primarily.
Got it. And then is it thank you.
I mean we're really not reducing I mean we're really not reducing any kind of overhead on that kind of basis. We're just 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 too. Good point.
I agree. Thank you.
Good point.
Our next question is from Rich Hill with Morgan Stanley. Your line is open.
Hey, good morning guys. And given that my family is from Kentucky, I can assure you in the end of not that far out there. 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 we do as well.
But 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 $30,000,000 in there.
It's not in the comp NOI number, so until it's open for a year.
Right. So what I yes, and David, what I was trying to think about was last year you put up 2.2 and 3Q 2016 prior
to Let me just reinforce this and I've made the statement, Rich. Historically, we do not look at our top 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 it. That's without lease settlement income, without new development kind of a pure number and we're on our way to do at least that. And for that given the all the complexity in the 3rd quarter number. I don't focus on the 2nd quarter number.
We give you the facts. We tell you and 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 3rd quarter, they could hit in the 4th quarter. 3rd 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. And that's how I think about it, Okay?
All right. So 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 pre core portfolio? Or is that something that
I answered that. That's not in the number. Okay. Okay. Thank you.
All right. It's all in the 8 ks. 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 Jeff 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. But 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 to 24 months? And do you think you'll be using a greater share of your capital for redevelopment and expansions or and where to repurchase?
You probably were bored, which I don't blame you, right? We answered that question earlier, which is basically we've been because of some of these mixed use opportunities that like King of Prussia that I've mentioned before, We think our development our redevelopment pipeline is going to be potentially increase. So 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. And I think that's more meaningful to long term investors than episodic buybacks here and there.
But it's in our arsenal. It's in our capital tool box. It's we'll take it a step at a time, but we are 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 guess 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. And I would take that authorization seriously. Otherwise, we wouldn't have it.
And maybe this is a joint one for you and Rick, but 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 fair 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 a bricks and mortar? And I'm just curious if you think leases need to adapt for that.
Well, our leases are very well positioned to cover that point. And 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 think you I will tell you this. And 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, but we've done enough work to know that there is an issue there. And I think our sales that we report to you would be higher even and we have very interesting leases that deal with the point that Rick's making. But I am absolutely convinced that our productivity is much higher than what's being reported, even though the lease requires them to do so.
So that's a I don't want to get into that. It's a complicated matter. But what you point out is very, very interesting. Now the market rewards let's face it, the market rewards in online sales more importantly than it does a brick and mortar. So the market's trying to get retailers the retailers would rather prefer an online sale than bricks and mortar regardless of the possibility.
But it's a very interesting point. And I will tell you today, in my humble opinion, there is absolutely an under reporting going on. But I don't want to say anything other than that, okay?
Understood. Do you think they have the systems? Most retailers have the systems to be able to handle whatever the new form of reporting
would be?
I mean, like you said, they don't really have an incentives to adapt. But again, I'm just curious what these sort of new leases you talk about, if you think they could be more broad based in the future?
Yes. Generally, they know what they should be reporting. I would say so. And again, I want to leave it at that. Let's leave it at that.
It's a good point. But I will tell I do think it's safe to say that the numbers we have are underreported, absolutely underreported. It's a very astute point. And by the way, we're not giving that up on future leases. So because it's all melding, but you bring up a very interesting point.
And I prefer not to talk it after this. Okay. And 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. I'm not really I don't that doesn't do much for us. So it's not something we really are pursuing.
Our next question is from Jeff Spector with Bank of America. Your line is open.
Good morning. Thanks. And sorry if I keep you longer today, but just a couple of 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 managers and some of the things we're reading about or seeing any because I would have thought given your dominant properties that a lot of these
question. And they look, it's 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 today's consumer oriented focus. I do think there's things that can be done at the store level that will improve that. I mean, I think as simple as a fast checkout at a store would improve sales and productivity dramatically.
And there's all sort I mean, there's been a huge focus on technology investment toward the online activities. I'd love for that to shift towards the store environment because that's a real advantage. And I think if they did that in a more comprehensive way, whether through checkout service, styling. I mean, there's so many things you can do today in the much like Apple does when you go to their store in Town Squares. But if the focus were to shift a little bit there, I think they would see a pickup in their in store sales environment.
And it's all over the board, Jeff, frankly. I do think it could improve. And just like what we need to do, we need to improve our in store experience and the stuff that we can the in mall experience on the stuff that we can control. So I think it needs to be a greater focus. It's around the edges.
I'd like a little shift in that, but we'll see if that happens.
Okay. And then another follow-up. Just listening to the comments on mix use. Earlier in the week, we received a lot of questions on the WeWork and L and P purchase, upper levels. And Peg and I were thinking, okay, that's just a unique situation.
Maybe there's a few other properties like that in the country. But when we I'm listening to your mixed use comments. I mean, do you think that a WeWork type of format or I mean, do you see that entering suburban malls or your malls? Or that's not what you're talking about?
No. Well, we're talking I mean, that's included in what we're talking about. I mean, just so you know we did a WeWork Steel in Clear Fork in Fort Worth, Texas. So no, I do think that environment will absolutely accelerate in the and again, I don't know that I would call these suburban. They're like it's where the good demographic people live outside of urban area, right?
I mean there's still 330,000,000 people, okay?
Urban, suburban.
Okay. I know New York City and San Francisco's urban environment, but there are lots of places outside of those that where people live and work and play and be entertained. So the answer is yes, I expect us to do more and more with WeWork's both directly like we did at Clear Fork and through our relationship with Ward and Taylor. We know those guys. We like them.
I've spent time with them. They're very creative. Both companies are very creative, L and T or HPC in that case as well as WeWork. Good people too, like them.
Okay. And then my last question, I was just curious with the Amazon Whole Foods merger, are you more or less interested in adding groceries to your
malls? No, no, no real chain. I think we've always liked it where it made sense for both parties. And the Amazon acquisition of Whole Foods doesn't change our thinking. I don't know if it's changed their thinking and 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.
And 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?
Well, the answer is absolutely. Assuming we this has legs, This will be rolled out throughout our network of we have to look at our platform as a network and up and coming new retailers that may start 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. So 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 that 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.
And so it's a big effort on us to do that. And not only that, but also lease not just through what we're doing at the Edit, but also through just normal deals like the Ontalkix of the world. I mean, 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 in our properties.
And then just given Aeropostale, the Aeropostale investment in Q4? So what's in your guidance?
Well, we don't break out that. It's in our guidance. We're pleased with the business. We bought it very we're weighing the money. We're performing according to plan.
I don't give out quarterly numbers, but they're kind of they should there's a little more volatility in the Q4 like a lot of retailers, even tech companies have a lot of see what goes on. But we're weighing the money. We see what goes on. But 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 $34,000,000 $35,000,000 increase in the quarter. I thought the AG settlement on Woodbury was just under $1,000,000 So that would be a hell of a lot of legal hours even at $1,000 an hour. So can you just break out just big chunks of that $35,000,000 because it's not an intra sequential number and I don't think Well,
I think it's actually almost irrelevant because it's a one time number and it is what it Okay? So 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. And these unfortunately, this is a very expensive scenario that we had to deal with. The fee was nominal, which reinforces what we the fact that we again, we made an announcement how we felt about it. I don't need to relive that.
It's behind us. And so I'd actually argue that 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. Right.
So you know if there was just where it was coming from, if that was just all legal expenses effectively out of the settlement?
Well, we have other things that run through that. We actually had a write off. And again not to get in minutiae, but we actually also took a write off in a one of our European outlet development projects that also flowed through that. That's a one time number. But that the delta is one time including that write off, okay?
So 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?
I'm not happy with it. But we also have that like I said, we had a European development deal with MacArthur Glen 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 Yes. No worries. Okay. We've exhausted everyone, including myself.
And for that, please join us next week as we go through space by space. Rick Sokolov will set up the appointments and have a great weekend.
Ladies and gentlemen, this does conclude the program. You may now disconnect.