Good day, ladies and gentlemen, welcome to the Simon Property Group third quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions following at that time. If anyone requires assistance, please press star and zero on your touch-tone phone. As a reminder, this conference call is being recorded. Now, I'll turn the conference over to your host, Tom Ward, Senior Vice President, Investor Relations. Please begin.
Thank you, Tyrone. Good morning, welcome to Simon Property Group's third quarter 2016 earnings conference call. 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. 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 forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I'm pleased to introduce David Simon.
Okay, good morning. We had a very productive quarter. We started, completed, opened several significant redevelopment and transformation projects that will further enhance the value of our portfolio. We continue to achieve strong financial results. Before I get to some of the highlights of the quarter, I would like to quickly highlight our outlook for the remainder of the year. Based on our performance year-to-date and our current view of the quarter, we are once again increasing our full year 2016 FFO per share guidance range to $10.85-$10.87, which was higher than our original guidance of $10.70-$10.80. Our increased range also reflects a potential charge of $0.08 per share with respect to our likely decision to postpone the construction of the Copley residential tower due to the rapidly rising construction cost and our beginning concerns around supply and demand in the Boston residential market.
Work will continue on redeveloping and modernizing the existing retail space at the center, as well as the development of the southwest corridor, which will create a new entrance to Copley. We expect this work will enhance the shopping experience for our guests and retailers, and further strengthen our position in the heart of Boston and will be completed by summer of 2017. Assuming we make the decision to postpone, it does not foreclose the opportunity to build the tower in the future as market conditions warrant. Let me turn to the quarter. FFO per share was $2.70, an increase of 6.3% compared to the prior year. For the first nine months, our comparable FFO per diluted share is up 10.1% compared to the prior year period. We continue to see strong demand for space across our portfolio.
Combined occupancy for our malls and premium outlets ended the quarter at 96.3%, an increase of 20 basis points compared to the prior year. Leasing activity remained solid. The mall and premium outlets recorded re-leasing spreads of $6.71 per foot, an increase of 10.9%. Given our high occupancy level of above 96%, the remaining space we are leasing, while not as well located, continues to produce healthy re-leasing spreads. As a reminder, we include lease amendments for the restructuring of leases where we choose to work with retailers in certain situations, pre or post-bankruptcy, such as PacSun. Base minimum rent was $50.76, up 4.5% compared to last year, reflecting growth in our rents. Our occupancy cost is 13% as well. Just as everyone knows, my focus is on cash flow growth, and I believe this is the most important metric for the investment community to focus on.
Our total portfolio NOI increased 7.3% year to date and 6.6% for the third quarter. To put our growth rate in perspective, the 7.3% year-to-date growth is more than $300 million. Our results to date keep us on track for our full-year guidance of total NOI growth of more than 6% for our portfolio. On the NOI overview schedule included in our supplemental file this morning, you can see the various platforms of growth that contribute to our portfolio NOI. The diversity of sources fueling our NOI growth is unique to Simon. Comp NOI increased 3.5% year to date and 2.2% for the quarter.
Our comp NOI results are affected by declines in overage rent due solely to the impact of the strong dollar on our tourist spending at our centers, our active and extensive redevelopment pipeline across all our property platforms as we relocate and reconfigure a significant number of tenants in order to enhance the future retail and dining experiences at our properties, and our decision to strategically moderate the marketing and specialty income in the common areas of our very high-end portfolio. Total retail sales per square foot at our malls and premium outlets were $604 compared to $616 in the prior year period. Reported retailer sales continue to be impacted by the strong dollar at some of our tourist-oriented malls and premium outlets. Reported retailer sales at our centers outside of our tourist-oriented centers are stable. Reported sales also include initial dilution from newly opened space.
Importantly, we're beginning to anniversary some of this decline. As you can see, our recent sequential quarters, Q2 to Q3, of our sales productivity is basically flat. The end of the third quarter redevelopment and expansion projects were ongoing at 32 properties across all of our platforms. Our share, approximately 1.1. We opened, as you know, King of Prussia, which connected the plaza and the court. We finished a fashion center at Pentagon City. We started the expansion of Allen Premium Outlets of 120,000 sq ft in North Texas. In the next several weeks, we open 60,000 sq ft expansion at the Outlets at Orange. We also are opening our expansion in Venice, Italy with our partner, McArthurGlen, of 67,000 sq ft. We continue to add value across the portfolio. Now, on new developments, just so happens tomorrow, we're opening Clarksburg Premium Outlets.
The center will offer a great retail lineup. We expect it to cater to the whole Washington, D.C., metro area. We currently have five, that's right, five outlets under construction, one in Norfolk, Virginia, four in the international markets, including France, South Korea, Malaysia, and Canada. All of these will open in 2017. Even though we're opening a new outlet next week, the week after, we're actually opening Brickell City Centre in Miami. It's anchored by Saks. It's got a great retail lineup with great partners in Swire and the Whitman family, and is part of a landmark mixed-use development. We look forward to managing the retail, and as a reminder, we're only investing in the retail. Construction continues on the full-price development of Fort Worth, The Shops at Clearfork, anchored by Neiman Marcus, opening in the fall of 2017.
These eight new projects represent around $765 million of spend our share. Now let me turn to Aéropostale. We're pleased to have partnered with GGP, Authentic Brands Group, Hilco, and Gordon Brothers to acquire Aéropostale. In addition to the existing management team, the ABG group will add significant operating experience to Aero. We have a long track record of making smart capital allocation decisions. After reviewing this opportunity with our partners, we believe this investment will prove to be yet another opportunity for our company. It's also important to keep this investment in perspective. You've all seen the gross number of $243 million. I want you to understand that $188 million of that is inventory being purchased by Hilco and Gordon Brothers and not by our buying group. Our initial investment is approximately $55 million by the group, of which our share is $33 million, including working capital.
The only reason we decided to make this investment is because we believe we can make money. If our model is right, we think we're buying this company at one to two times EBITDA with future growth opportunities ahead of it. We continue to believe that this will be an astute investment. For some of you who don't know ABG, it is backed by Leonard Green, which has been a significant, important investor in retail throughout the years, Whole Foods, Neiman Marcus, J.Crew, just to name a handful. Also, during the quarter, we acquired our partner's interest with McArthurGlen in our two outlets in Naples and Venice. We continue to focus on our industry-leading balance sheet. We completed a number of secured financings during the quarter. We continue to lower our borrowing costs, increase our debt maturity. A term or current liquidity of $6.5 billion.
Finally, on our dividend, in 2016, we will have paid $6.50. That's an increase of 7.4% compared to $6.05 that we paid last year. That's a lot. I'm ready for your questions.
Ladies and gentlemen, if you have a question, press star then one on your touch-tone telephone. If you have a question, press star then one on your touch-tone phone.
Hello?
Our first question is from Caitlin Burrows of Goldman Sachs. Your line is open.
Hi. Good morning. I just wanted to ask on the leasing spread topic, I know you touched on it, and it's been a popular point of conversation here. Since it's a trailing 12 months number, are the results we're seeing now in terms of lease spread, just a pull forward, an extension of something that happened to slow down in Q2? Did the third quarter slow too, realizing that it does include lease amendments?
Well, let's just put this number in perspective, number one. We do include lease amendments, and that's having the biggest impact of the growth slowing. Yet if you look at our average base rent, you can see we're doing new initial terms. We're doing very well. Some of the expiring leases also are expiring at a little bit higher level. Now, our investors know that over a long period of time, we've always felt like the $5 to $6 spread was kind of always part of our model. Fact is, we've done a tremendous job of outperforming that. The long term, we've always kind of felt, that $5 or $6 spread is kind of where we think the market is. We had a couple of years of significant outperformance, but we're not backing off our inherent value that we have in our leases, as they roll over.
We're just getting back to kind of more of a normalized environment. For us, and I don't know about our peers, but for us, we include lease amendments. The bottom line is, that is having some impact on the leasing spreads. That $6 to $7 is maintaining itself, and that's kind of what we've told investors year after year after year, and we feel very good about that.
Okay. Just also, you mentioned that right now, as you lease space, given the high occupancy, the remaining space might not be as well located. I guess my question is: Since you have that high occupancy, what are kind of the thoughts behind making these lease amendments and working with companies such as, and you pointed out, PacSun?
Well, it's literally a case-by-case analysis. I think we're as sophisticated as anybody. I think Aéropostale is a great example of our ability to analyze what the right trade is in these deals. In some cases, we're going to take the space back. In other cases, we're going to help the retailer go through the hard time. It's really a case-by-case analysis. There's nobody, I think, in our industry that's more sophisticated in our ability to kind of maneuver through those situations. It's case by case. Anything can happen. Well, sometimes we'll work, sometimes we'll get the space back. Certainly in the Aero case, we thought the opportunity was even more exciting to just buy the retailer and make a vertical investment that the entire S&P community is doing. Amazon makes vertical investments. The cable industry makes vertical investments.
Again, we decided to make vertical investments when we decided to franchise Starbucks locations two, three years ago. That's the nature of our company, is that we're going to be nimble. We have the right judgment when to make a deal with a retailer, when not, when to make vertical investments, when not, when to go to Europe, when not, when to pull the plug on Copley, and when not, and that's why we're in the position we are in today. Each and every case will be one by one. I do appreciate, and I hope I'm right with you, Caitlin. I do appreciate you waiting to write until we have our call. I do think that's important because the reason we have these calls is for, there's not every scenario where you can understand the nuances about what's going on in our business.
I do appreciate your patience to hear our story, and then obviously you write whatever you want to write.
Great. Thank you.
Sure.
Thank you. Our next question is from Steve Sakwa of Evercore ISI. Your line is open.
Thanks. Good morning, David.
Good morning.
I guess, is there a way for you to try and help separate out for us the impact of these amendments on the numbers? Meaning, if PacSun and Aero are having as big an impact as they are, is there a way to sort of strip them out and give us a sense for kind of what the remaining lease spreads look like? Obviously, this is kind of the biggest number that people are focusing on, and if these two leases or tenants are having a disproportionate impact, it might help to separate out those figures for us.
Well, look, Steve, I hear you. If we need to, we might. The fact is, you got to look at our business in totality. You can't look at it on one operating metric or not. What I would ask you to look at is, we have grown our portfolio NOI $300 million year-to-date. Let's talk about that. Do you want to talk about that? That to me is more material than any one operating statistic quarter by quarter. Yeah, we can slice and dice this any way, but if we can spend more time talking about how does a company grow its portfolio NOI. There are many REITs that don't have $300 million of NOI, yet we grew that in nine months. I would rather talk about that's more material, than the fluctuations that are occurring with operating metrics.
We could talk about sales. Sales are impacted by the fact that we have great properties in tourist markets and the strong dollar. That doesn't mean that's going to last forever. Again, there's this high desire to make that the be-all, end-all of all these metrics. Again, our number is clean. The results are the results. We can't speak to anybody else, how they do it. As I said to you, if you want my opinion on what's important, it's the $300 million NOI growth. If you don't want that, I got it, that's what I focus on.
I get it, I don't think people are dismissing your ability to deploy capital, whether it's through developments or expansions. Clearly, there's been more pressure on the mall business. I just think anything that you can do to assuage the fears about the internal growth prospects going forward. Perhaps it's just that a $6-$7 spread on a roughly $60 or $61 expiring rents means that normalized leasing spreads should be 10%. Maybe that's where we're going to head to. There's a new normal in the business, that's okay. I think people are just trying to get comfort with that.
Look, I think that's a good point. Let's talk about that. I mentioned that a little bit in the first question. I think, if you asked our investor group, we would've told them for 15, 20 years that our re-leasing spreads are $5 or $6 a foot. Okay? We have had a long period of outperformance on that. We've gotten better at what we've done. All sorts of reasons that we don't have to bore you. You're right, we may be going back to kind of what we have promised our investor base for a long period of time. The outperformance, I don't think from our standpoint, we ever guaranteed outperformance from how we looked at re-leasing spreads. We always said, "Look, it's $5 or $6.
One year it might be eight, one year it might be four, that's kind of what we see the long-term trend." I still feel comfortable that that's the basis. It's no surprise that retail generally has come under pressure. Lots of different reasons, which we could go into, unless you want to, let's not. We are impacted, as I said to you before, by our general GDP growth. Today, our retail generally is there's no inflation, our nominal GDP growth is 1.5%. Yet we're growing our comp. I mean, if nominal GDP, there is some inflation, maybe real GDP growth is, I don't know, 50 basis points? We're still growing our business with no inflation in our particular business at 3.5% comp NOI. That's not bad.
It's not four-plus that we did last year or the year before, but it's still in the scheme of being able to grow our business. That's not bad, and I'm not defensive about it. That's kind of what I think we should expect when we have essentially a real GDP growth of 1%, maybe a little bit less, maybe a little bit more. I think that's what you've got to put in perspective.
Okay. Well, I appreciate it. Thanks for the time.
Sure.
Our next question is from Christy McElroy of Citi. Your line is open.
Hey, it's Michael Bilerman here with Christy. How are you?
Good, thanks.
David, I wonder if you can talk a little bit about putting capital into your stock. Last year you bought, I think it was like $350 million at about $180. Obviously, the stock with some of the sell-off as well as some of the retail headlines, has come off 20%. We spent a lot of time talking about something you spent $30 million on. I was wondering, you got a $2 billion share repurchase program, how you feel about putting money into your stock?
Look, I think at the end of the day, the best thing we can do is invest in our product, okay? The stock will go up and it'll go down. By investing in our product and I think unfortunately what I've seen with a number of retailers is they have not invested in their product, okay? They've chased the holy grail of internet sales to the detriment of what they should be doing with their physical product, because still people want to go physical shopping. When they go physical shopping, you've got to have a nice physical environment. We have spent a lot of years wanting to invest in our physical product, and I think that's our number one focus, continues to be. We're well through that. The good news is we have been contrarian in that.
We started that in 2010, as you know, we're finishing projects. It's not just talking about projects, but it's finishing a lot of projects. I think as that wind downs, the opportunity to buy stock back is always there. I just don't think it's a high priority, but that could change depending upon where the world is and what the stock does. I think my job is, the number one job I should be doing, is investing in making my product better. That's my number one focus.
You talked in your opening comments about your deal making over the years and always taking a proper risk reward and thinking about the capital committed to whether it's a project or whether it's a venture investment. As you think about investing in Aero, putting $30 million in, is there a house limit that you'd want to have in those sorts of investments relative to the whole? Where would it sit within the Simon organization? Is it more within the venture side, or is there another sort of area? I don't know if it's in the David Simon bucket. I don't know. Where does it sit within the organization?
Well, look, even though I'm older, I can always learn new things, and I have learned a lot actually going through the Aero deal. We're going to act as an investor. We're going to give them strategic direction as a board member. Authentic Brands, I'd encourage you to look at the brands and the history of that company. They've done a great job of They are brand builders. They are entrepreneurs. We're not going to be running the business. We're going to help strategically like we did. I've got my IT guys helping with their IT systems. We've got our lawyers helping with their license agreement. We have a lot we can bring to the table, and that's what makes us unique. It's not going to overwhelm anybody's particular time.
They've got a good management team that with our strategic help, I think will continue to make that profitable. Look, based on the numbers, I think it's going to be a compelling investment. It's not without risk. There is risk out there whenever you make a venture-like investment, but I can't think of a better team between Gordon Brothers, Hilco, ABG, General Growth, to all put our collective judgment to bear to make this a profitable investment. Going back to your first question, I don't think this is going to be the wave of the future. AT&T, I mentioned vertical because I just try to put certain things outside of real estate in perspective, okay? AT&T is going vertical. They're spending $100 billion. Okay? I go vertical, I spend 33 million, not billion, 33 million. Again, I'm just trying to put these things in perspective.
I'm not comparing our business to AT&T or anybody else. Amazon, what's made Amazon great is they've had the latitude to go vertical. They've gone vertical, they've gone content, they've gone distribution, they've gone retail. That may be the future of corporate America, is that you're not going to pigeonhole these If we want to just talk about leasing a Sears box that we get back, that's okay for some companies, but that's not what we're about. Again, we have no bucket. It's not going to take away from what we're doing. My number one priority is to make our product better any way that we can. Technology, digital investments, look and feel, better retailers, different mix, redevelopment, however that transpires. Making a vertical investment here or there, not going to overwhelm us.
I want the latitude to, and I think the investment community should want us to. At the end of the day, if our underwriting numbers are right and there is risk, we're buying a business that ought to be valued at six times EBITDA, and we're buying it at one to two, and I think that's a pretty good trade. We're not there yet, and that's the goal, that's what we're trying to accomplish.
Hey, David, it's Christy. Sorry for the three questions. Just bigger picture. The consortium has talked about a 300-400 store base count for Aéropostale. There's been a lot of talk about store count rationalization among national retailers generally, and how many stores do they actually need to serve their customers in their markets today. Why is that the right number of stores for a retailer like Aéropostale, and what does that imply for your view of the need for other retailers to close stores, especially now that you're looking at this issue through that Aéropostale lens?
Well, look, I think you pointed out something that's very unique is that we are getting a lens, at a much granular level on retail, so it's very interesting. Sourcing. Look, there are five or six things that really make a retailer click. Sourcing, obviously rent expense, store expense, the merchandise, the quality of it, the packaging, all this stuff that I think at the end of the day, are going to make us better real estate owners. That remains to be seen. Aero, look, I'm probably going to get in trouble for this, since I like you, I'm going to tell you. Right now, we're looking at around 500 stores in the U.S., is kind of the model. Based upon, we expect every one of those stores to be profitable. It's a much bigger business than we initially went in the investment.
We were thinking we could justify our investment at a much lower store base. The fact of the matter is, we found out there's a lot more store profitability out there than we thought. It's going to be around 500, give or take. I think store closings, the pressure for the retailers to invest in the internet to close stores from their investment community is great. I would question whether that's the right strategy, because some of these stores are very profitable. They feel like the headline closing stores is the answer, and then all of this investment into the internet is going to pay all these dividends. Fact of the matter is, there's a really healthy physical store environment and mall environment, and I think all of us can't lose sight of that, and that's where we should be investing.
I do think there'll be more pressure on store closings. Unfortunately, over our history, we're pros of that. I don't need to remind you that the top 10 tenants that we went public with in 1993 no longer exist in 2016, and we will be able to deal with it. It's much easier to deal with it when you have a quality portfolio that we do across all the retail platforms that we have, it's the soup of the day. I don't think it needs to be 300 or 400 or 500. I think there are a lot of profitable stores that retailers are feeling the pressure, they've got to do something. I would like them to invest in their stores. It's something I would like them to do. I don't always win that argument. We're equipped to handle that.
That's what we do. I expect that trend probably to continue. What we did say when we started this year, our occupancy is up. Put that, Christy, it is up, so put that in perspective. We also said our bankruptcy store closings would be down in 2016. It is down. We had much greater in 2015, and we basically more or less leased all of the bankruptcies that we got back in 2015 in a flat to tough retail environment. I think everybody needs to put that in perspective. Okay? That doesn't mean we're doing cartwheels here. We're grinding. We're as good as it gets when it comes to grinding. That's the environment that is presented to us, and we'll have to deal with it.
Thanks so much for the color.
Sure.
Our next question is from Jeff Spector of Bank of America. Your line is open.
Great. Thank you. Good morning. I'm also here with Craig Schmidt. I guess, David, if we could just talk a little bit more about the current environment. Let's say it continues It persists through 2017, even 2018. How should we think about these rent amendments? How are you thinking about it when you're laying out your budget for next year? Is this just something that we should get used to as we transition here, as the retailers invest more money in their stores, we see more store closings? How should we think about that?
Look, I think, again, it's a retail-by-retail perspective. We are seeing a stabilization in our sales business. If you want to go focus on retail sales, quarter Q2 over Q3 is basically flat. If you take out tourism, you take out one retailer that's had decreases in sales, it's actually up. We're not like There is no huge concern here, but we are a product of the overall U.S. economy, and Jeff, what's the real GDP growth? You tell me. In that environment, what do you think it is, the real one? Real GDP growth. Merrill's got a bunch of smart people. What would they say it is?
I think we're saying around that 1%, 1.5%.
All right. We're good. I'm not that good, but I got a lot of people around me that are good. That's a constraint. It is what it is. We'll sort it through, and I do think, in that kind of environment, we're going to have certain deals where we'll go back, and then we're going to have a lot of other deals, frankly, where we're going to take the space back. My mood's changing a little bit that maybe we're better off taking the space back. I think we did play ball a little bit more with the bankruptcies in 2015 and the early 2016s. That's showing up in the lease spreads. I'm thinking, sales are okay, stabilizing. Maybe the world gets over all of this stuff that's going on out there. Maybe we stabilize.
A lot of people feel like we're headed for growth, maybe we take more space back. We've kept the buildings full, as evidenced by the occupancy. There's a trade-off. We're on our target for top-line increase. It's not all that bad. Just put in perspective, 2017 will transpire, and we'll do a combination. Sometimes we'll play ball, other times we're going to take the space back, and it's all a function of retail-by-retail decisions, space by space, retailer by retailer.
Okay, thanks. I think Craig has one question.
Great. Thanks. Maybe I could do a little bit of a pivot here. Looking at your new developments for the outlets, four of the five projects are international. Can we expect to see continued good growth in new projects on an international scale? Maybe more specifically, what your longer term plans are with McArthurGlen.
Well, I had a meeting with our partner last Friday. Their business is very good, very solid. Provence is opening in spring of next year, which will be fantastic. We're very close on getting the potential to build Normandie, which will basically cover the Western Parisian market. That could be fantastic. We've got a couple of acquisitions that we're working on, extensions that we're working on. It's all good there. The teams are working well together. Couldn't be more pleased with the investment, and I think, Craig, it's just kind of business as usual. We'll still see new development growth. Very pleased just that we've been able to create that partnership and create that relationship going forward.
In Asia, the team is working in two other markets that I'm hopeful over time, that we'll be able to build the premium outlet product there. We've got two big expansions in the works. Gotemba is an example that could be a landmark extension. That business, we're not slowing by any stretch of the imagination internationally in our outlet business, either with McArthurGlen or with our Asian partners.
Thank you.
Sure.
Next question is from Alexander Goldfarb of Sandler O'Neill. Your line is open.
Good morning. Good morning, David.
How you doing?
It's just fabulous. It's earning season. Life's great. Just a few questions here. Let me start with an easier one before I ask one on the favorite same-store topic. Here in New York, obviously, the demand for street retail has gone down a lot, so a lot of vacant spaces, articles about global brands rethinking their street retail needs, especially with where rents are and store profitability. As those brands have dialed back, have you seen them, I don't want to say shift back, but have you seen more interest in going in malls where they are profitable? Or from your perspective, they've always been running street retail, their investment there, separate from their decision to open up in malls?
I don't think there's a generic answer to that. I think it's brand by brand. Generally, on the luxury side of those brands, their business is actually starting to anniversary some of the strong dollar stuff, and obviously, we are as well. I meet with a lot of the folks. There are certainly some brands here and there that are pulling back. I'd say generally, and you're starting to see the numbers from LVMH and Kering that have posted recently, their business is good. Pretty good. I think New York is a novice because we have no street retail, but New York is a little confusing to them because you got Fifth, you got Madison, you got Downtown, you got new development, you got West 57th Street. They're all trying to sort that out. I think in our business, it hasn't changed.
If anything, I'd say the mood is generally better than it was 6 months ago. If you want a generic statement, I think New York City itself is just different because they're all trying to figure out where they need to be given what's going on in New York. We don't have a dog in that hunt. I think Brickell is going to be. We had a little delay with the hurricane, and I guess it really technically wasn't a hurricane or not, I'm not really sure. Brickell, I think, is going to be, a lot of the retailers will open in the first quarter of next year, but I think that mix there is really going to be great and cool. I think the Saks store is going to be great. The demand on that just continued to pick up, right, Rick?
Over month after month, I think that's a good indication that if you have a good product or you have a good scheme, retailers will come. Rick, you want to comment on Brickell?
I think Brickell is certainly going to show that there's going to be a great mix of designers, food, international retailers. Right now, we're 91% leased. As David said, the opening is going to take place over, we're going to have a big slug over the next few weeks and another big slug over the first quarter of next year. The only other thing I would say to you is that we are seeing the international retailers like Zara, like H&M, accelerating their focus on our properties in the U.S. because there is demand to grow in this market, and we are seeing that.
I would just say, just to finish the whole thought, then you can ask me. If it's on comp N OI, it's not a tough question. I'm going to tell you exactly what I'm thinking.
You don't know the question yet, David.
All right. Bring it on.
We don't give our questions in advance.
All right. Okay, good. Thank you. That's what I like about you, Alex. Just to finish the luxury people that would populate street retail in New York, we say luxury. Not that it's easy, but we're making progress with Clearfork, and that's in Fort Worth, Texas. We're going to have those kind of brands, not a lot of them, but the right ones. We opened King of Prussia with the connection, and again, a lot of those are opening, but the results from those high-end brands have been fantastic. That part of our business is different. I think it's interesting. It's actually starting to do better than maybe what you're seeing in whatever's being talked about in New York street retail scene. I don't know. I don't really have a dog in that hunt.
Okay. The second question is, it sounded like you said that the bankruptcies and the issues really peaked last year, and that you guys were more accommodative with retailers trying to restructure. Therefore, it seems like this year we're seeing the impact in the same-store metrics. At the same time, I think you said that the tourism impact strong dollar is also anniversarying. It almost sounds like next year we should expect same-store metrics to get a positive bump as these trends sort of anniversary. Is that fair? As you guys look into your leasing for next year, we still should see some of this impact, whether it's on re-leasing spreads or same-store NOI, et cetera. Should we still see that in 2017, or is 2017 going to be a little better because this stuff anniversaries?
I think the big unknown is just what's going on in the overall. You have to do, and you're a smart financial guy. Look at our P&L, right? You could see, put the leasing spreads aside, put all this other stuff aside. The reality is the comp in Hawaii is really a function of our overage rent. It's right there on the financial statement. Okay? It's down. Can't help it. It's really a function of the fact that we got these great tourist centers where we're suffering from that impact. I don't think that's a long-term impact, but it's starting to anniversary, and it shouldn't continue to get worse. Okay? Alex, it could get worse because no one knows what's going to happen with the dollar. The international tourist market is volatile at best. We live in an uncertain time.
I think we're doing to deliver this 3.5 and to deliver over six portfolio growth is, I think, reasonably good. It's not great, but it's reasonably good given some of the constraints that we're dealing with that are a little bit out of our control. A little bit. We're going to take responsibility for a lot of that stuff, but a little bit out of control. I think it's too early to tell you on 2017. Unfortunately, I say this because it starts not next week, the week after. Rick, when are property budgets?
Yep. Week after.
Week after, where we go one by one, space by space. We'll report back early next year what our view of that is. There's a little more volatility in the standard deviation's probably a little bit higher than it used to be, just because of the environment that we're operating in.
Just confirming, you're taking an $0.08 charge that's in guidance for Copley and-
I'm glad you asked that. The answer is yes, that is in guidance. That $0.08, if we had not taken that charge, our guidance would be up another $0.08.
Okay. Thanks, David.
No worries. Thank you.
Our next question is from Paul Morgan of Canaccord. Your line is open.
Hi, good morning. Just to follow on that would be $0.13. Is there anything you could point to as a driver of that kind of guidance increase in late October?
Well, generally, look, we're producing the results we want to produce. I know the operating metrics are not perfect. We're not going to deny that. We told at the beginning of the year, this is the plan, three and a half, six, and we're producing a little bit better on that front overall, and that's where it rolls up to. We're being very cautious on Copley. We haven't made the final decision on that, I think it's likely that we're going to do that. I've got to run it through the board, I want the market to know that may be off the table going forward, at least for the time being.
Look, we could have kept it on our books, and waited, but you know what, I think the right thing to do, if we in fact decide to do it, will be to take that hit.
Okay. You mentioned in terms of the same store number, not just to PacSun, but then also, I think you said intentionally kind of reducing the specialty leasing program in the common area at some of your high-end malls. Is that a material impact, and what's sort of the thought process behind that, and kind of maybe, I don't know if you have a number, you've given this in the past, kind of what that program is as a percent of NOI?
Well, I think it's material in that it does affect the comp number. The comps would be higher had we not chosen. Look, part of what we have to do is listen to our clients. Our clients, to some degree, especially in certain areas of the mall, very concerned about that. We want to be receptive. We've got competition in some of these markets that we've got to be responsive to, and we just think it's the right thing to do. Did a lot of research on the consumer. Consumer really doesn't care. On the other hand, when it comes to the property business, we've got to listen to our clients, i.e., the retailers, et cetera, and we obviously have to listen to the consumers.
They diverge here, but in this case, we want to be as sensitive to the clients as we can, and some are very sensitive to us, and we don't want to keep that from bringing the right mix into some of these centers. That has hurt us over the years. We've thinned out in the very high-end properties.
Has this been?
Yeah, go ahead.
Go ahead. I was just going to say, has this strategy been kind of accelerating recently, is why you mentioned it in terms of the same store number this quarter? Has it kind of been ongoing over the past period of time?
I think it's been Look, we didn't really do it last year because a lot of these projects were in a state of development, it's clearly been throughout 2016.
Okay.
Remember, this stuff builds.
Yeah.
As you go later in the year, it has more of a back-end impact. Okay. It kind of builds. It's less important in Q1 and Q2, just because seasonality of our business.
Great. Just last question. I appreciate all the color on the Aero economics, just wanted to ask. There've been dozens of similar bankruptcies over the years, and you probably could have had opportunities to do something similar then. Maybe could you point to anything, outside just the economics of it, that makes you think differently about this, and then just going forward. I know you had the kind of the macro view about vertical integration. Anything more kind of, your narrow business driven, where you didn't do this for years, and now it looks interesting?
I think that's a very good question, and I would say this. I think as we've gotten to know Authentic Brands Group, for us to have done this without their involvement on how to stabilize and then grow the brand, I might have that expertise a couple years from now, maybe. I say I, we. Should say we. I doubt it, but maybe. You never know. It's very interesting. I've been talking to Authentic Brands for a year about other brands that might fit into this model that we are creating. They didn't come to fruition for whatever reason. I think we finally, we have over this last year, been able to develop kind of an operating model and platform. They're great at brand building.
Having General Growth as part of that and their ability to bring their real estate and their thoughtfulness to the table in terms of how you operate a business, was very helpful. Having the liquidation angle solved with Hilco and Gordon Brothers was critical. In a nutshell, it was really because the partners were able to do it. The partners brought so much to the table that this was the right deal. If it were just us on our own, I'd be the first to tell you, I don't know that we would do it. We've done Starbucks franchises, but we did By the way, I encourage everybody that goes to Del Amo, go to Pink's Hot Dogs. That's owned by your company, Simon Property Group. I'm so excited about that franchise that we own. It's great hot dogs. It's an institution.
We've got a small group that kind of runs that business. This is a little bit out of the ordinary, and I would say, simply put, the fact that we had this partnership that was able to navigate all of the complexities of this. I think that's the important determinant of why we did this versus not doing others.
The partners see it as not necessarily just a one-off, but something that could be replicated.
Yes, we've got to walk the crawl before we run.
Great, thanks.
Sure.
Next question is from Rich Hill of Morgan Stanley. Your line is open.
Hey, guys. Thanks for the time this morning. Always appreciate the transparency. I wanted to just ask a quick question about the lease amendments, maybe in the context of your broader portfolio of malls. You have, obviously, the luxury of seeing across the productivity spectrum. When we're thinking about lease amendments and maybe your higher quality malls, is it maybe the case that some of these tenants are paying above-market rents to get into the best quality malls, and therefore, you might still be incentivized to make a lease amendment, maybe reduce their rent, but recognizing it's still in a pretty attractive rent overall? Is that the right way to think about it? Then maybe if you could provide some color, if any, about how you're seeing lease amendments on malls doing $700 a square foot versus maybe those doing $350.
I do appreciate that it's mall to mall.
Well, that's the bottom line. Certainly, we have some of those cases. It really is mall by mall, space by space, and what the retailer relationship is and what we think the retailer future is. I wish there were a simple, straightforward answer, but there is not. We try to use our business judgment in figuring out what the right is. It's also, do we want to be conservative or do we want to be aggressive? What's our mood of the future? As you know, last year, we had a lot of bankruptcies, and we gave direction to like, okay, we're starting to change our attitude a little bit. I can't tell you that it's going to be a complete reversal. We try to make the right judgment call. I will tell you, lease amendments are like anything else.
Once you do it for one retailer, don't kid yourself. You hear about it goes everywhere else.
Yeah, of course.
Part of our job is to contain that. We've experienced this before. We did do this in other economic times. Again, our business is fine. We're trying to be accommodating, but we could shift our strategy pretty quickly, and we try to evaluate it one by one. Rick, do you want to add anything to it?
I would say to you, the most important consideration for you to realize is these lease amendments are not forever. One of our considerations is do we have a better replacement tenant, but that tenant won't be ready to open for a year? Where it is in the project, and what is the project? All of those factors come into play as to how we want to deal with a specific room and how we price the room and how we interface with that tenant. The only other point I would make to you is that, and it gets lost sometimes, but today, our portfolio has never been stronger. It's never been in better physical condition, never had a better mix of small shop tenants, better mix of boxes, better mix of restaurants, better set of amenities.
We are on a continual basis taking share, and that's our focus, to make our properties as compelling as they can be, and that helps us in dealing with all the things you've been talking about.
Again, the business, we are 96.3% occupied. As an example, Macy's announced 100 store closings. They're closing. Macy's is leaving one of our malls. They're leaving one of our malls, we think, in a very small mall that has basically no financial impact to us at the end of the day. There is this narrative and the mood, but the fact of the matter is go back to 7.3% NOI growth. That's $300 million. Let's put it all in perspective. Okay?
Okay. That's very helpful. Thank you.
Thank you.
Our next question is from Floris van Dijkum of Boenning & Scattergood. Your line is open.
Great. Thanks. Could you give a brief update on what's happening with your Seritage JV?
We are basically in the same position that we articulated in our last earnings call. We have identified users for our boxes. We have plans for our boxes. We are not going to proceed with that redevelopment until we have a firm understanding of our returns and the costs of downsizing the Sears stores. There are conversations going on right now regarding those costs, as soon as we have a clear understanding of that, we are in a position to proceed to try and execute on some of those redevelopments.
That would include the Primark at Burlington Mall?
That is independent. That is proceeding, as is the addition of Primark at South Shore in a portion of Sears, which is not in Seritage. The Primark lease at Burlington was existing at the time we did our joint venture. That is proceeding.
Great. Thanks, Rick. David, a question for you in terms of how sustainable you're talking about this 6.6%-7% NOI growth. If you put that in perspective, you do that for a decade, you've doubled NOI. Is that realistic for a $100 billion company?
We're working to achieve that. Okay? I'm not that clairvoyant to look out that far.
Do you see anything near term that's going to break that streak?
I think we're going to lead our industry in portfolio NOI growth. We've done it for so long, I don't see any reason why we can't continue.
Great. Thanks, guys.
Sure. Thank you.
Next question is from Michael Mueller of J.P. Morgan. Your line's open.
Hi. I guess going back to Aero for a second, you discussed this as being more of an opportunistic investment. Out of curiosity, when you first thought about it and got into it, was it more a defensive play to control store closings, or how did you look at it initially?
Not at all. As I said in my opening comments, no one would put new money into a business that we didn't think would have an exciting future. That's evidenced by kind of the group that we have bought the company. We certainly get the benefit of Aero paying rent, that's not a reason to invest in a business. We could release those spaces, that's not a factor in putting new money into an investment.
Got it. Okay. On the outlet side, you talked about international expansion. Can you just talk about the U.S. and what the opportunities are that you see over the next five years, 10 years? Just what does that pipeline look like?
In our outlet business?
Yep, outlets. The business.
Yeah, I think the pace may not be as hectic as we've done over the last three or four years. Norfolk we open next year. We're going to actually start another outlet in the spring of this year, spring of 2017, in a very good growing market. We've got another one under serious examination. I don't think it'll be maybe as active as we've had over the last two or three years, but we'll selectively do some stuff. At least one a year on average, maybe two. We've got, I think, some unique opportunities. We're also very focused on expanding with the Allen deal. Adding 120,000 sq ft to a center that does, I don't know, $600 plus a sq ft in the outlet business is very attractive. There's a lot to do with our domestic portfolio as well.
Got it. Okay. That was it. Thank you.
Thanks.
Next question is from Ki Bin Kim of SunTrust. Your line is open.
Thank you. David, I just wanted to go back to something you just said just a minute ago. As you deal with retailers like Aéropostale and PacSun and go through lease negotiations, how do you really contain that risk that somehow leverage doesn't move more towards retailers that might be in trouble, that might come back to you and try to do similar deals going forward?
Well, as I said, when this happens, it does tend to spread. On the other hand, it's very simple. We say we're not going to do it. That changes the dynamics pretty quickly. Look, again, this is a space by space, retail by retailer decision. It's not pervasive throughout. And again, I explained to you our rationale for why we kind of did it 2015, 2016. It's something that we evaluate every day with every retailer. My instinct is that we could be changing how we dealt with kind of the 2015, 2016 stuff already. It'll be a case by case basis.
Okay. Just going back to your development pipeline, you have about three and a half billion worth of projects. Just given that some of those projects, or a lot of them, were probably started at a time where maybe the view of the health of the retail environment might be a little bit different. How should we think about the overall arc of capital deployment? Is it reasonable to expect that number to come down going forward?
Look, there is nothing in our redevelopment that we're not doing other than potentially Copley. I would encourage everybody to study what's going on in construction cost and what's going on in the supply and demand there. We did not want to be unfortunately, the build there is longer than it should be because of the nature of how we have to reinforce the structure. We spent a lot on it to get approvals and to make sure we had the engineering to do it. The reality is, when we started seeing the construction cost, just not the right time to do it with all the supply and the cost there. We don't see that anywhere else in the portfolio. We've got a lot of very interesting stuff to do, beyond what we're doing now.
Like I said, we've done some really good work in the field in King of Prussia, being part of Brickell, Clearfork. We've got plans to expand Fashion Valley, I could go through the whole list, but that part of the business is unabated. We think investing in our great real estate is what we should do for a living. That's not changing. We do have to worry about supply and demand, I'm not worried about supply and demand in our retail portfolio. In the case of Copley, I got nervous about it. Be the first to admit.
Okay. Thank you.
Sure.
Thank you. This ends the Q&A portion of today's conference. I'd like to turn the call over to Mr. David Simon for any closing remarks.
All right. Thank you for your questions, we'll talk to you soon.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Have a wonderful day.