Day, ladies and gentlemen, and welcome to the Simon Property Group Incorporated's First Quarter 2016 Earnings Conference Call. As a reminder, today's conference call is being recorded. I would now like to introduce your first speaker for today, Tom Ward, Vice President of Investor Relations. You have the floor, sir.
Thank you, Andrew. Good morning, everyone. 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 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 forward looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8 ks filing. Both the press release and the supplemental information are available on our IR website at investors. Simon.com.
For our prepared remarks, I'm pleased to introduce David Simon.
Okay. We had a strong start to 2016. We completed several significant redevelopment projects, started construction on others, announced more that will further enhance the value of our real estate. We completed the acquisition of the Schachs of Crystal, extending our presence in Las Vegas marketplace, and we continue to achieve strong operating financial results, which were highlighted by FFO of $2.63 per share, which is an increase of 15.4% compared to prior year. We had strong key operating metrics.
Mall and premium outlet occupancy was 95.6. Percent. Leasing activity remains healthy, which we the mall and outlet business had re leasing spreads of $10.24 per square foot, which is an increase of 17.5 percent and our base minimum rent was 49.70 dollars up more than $0.04 4% compared to last year. Total sales per square foot for our mall and outlet business was $6.13 compared to $6.21 in the prior year period. We measure our success through growth of operating income and cash flow.
We have a unique ability to drive growth through not only increases in comparable property NOI, but also through disciplined capital allocation for new development, redevelopment, acquisitions and investments. In our press release and supplement this quarter, we have provided additional new metrics summarizing the composition of our total portfolio NOI. These new metrics provide further detail on the profitability generated by our portfolio and we have broken them out into 4 categories, comparable property NOI, NOI from new development, redevelopment expansions and acquisitions that are not included in comp NOI, NOI from our international properties, which is our premium outlets and designer outlets. And then our share of NOI from investments, which includes Klepierre and HBS Global Properties. And then below the property NOI line, you have the corporate sources of NOI.
And importantly, for the Q1 of 2016, our total portfolio NOI increased 7.8%, of which comp NOI increase was 5.1%. Please see the supplement. The end of the Q1, redevelopment expansion projects were ongoing to 33 properties. Across all three of our platforms. Our share approximately $2,000,000,000 We finished the 2 year transformation of Rosewell Field, including comprehensive enhancements throughout the mall, the addition of 2 level fashion specialty store expansion with being anchored by Long Island's 1st Neiman Marcus store.
We also are nearing completion with Stanford Center, including the new Bloomingdale's as well as reclaiming that space for specialty stores. Transformations like these are examples of what's adding to our overall profitability. We started construction on several new projects, including the important expansion at the outlets at Orange. And construction continues on other major redevelopment and expansion projects at some of our most productive properties and some of the best properties in the country, the Fashion Center, Pentagon City, King of Prussia, Woodbury Common, the Gallery in Houston. Most of these projects will be completed in the next 12 months.
Construction continues on 2 new domestic outlets in Columbus and Clarksburg. Both are scheduled to open later this year, as well as our designer outlet in Provence, France, which is scheduled to open in the spring of 2017. We also started construction during the quarter with our partner Ivanhoe Cambridge on our 4th outlet in Canada in Edmonton, Alberta, which is scheduled to open in fall of 2017. Construction continues on 2 full new price developments, 1 in Miami at Brickell City Center and the other in Fort Worth at The Shops at Clearfork, which is scheduled to open 2017. Brickell will open in the fall of this year.
We also completed the acquisition of the Shops of Crystal. Purchase price was $1,100,000,000 We plan to place a $550,000,000 mortgage on the property in the next 2 months, and we're a fifty-fifty partner with Invesco. And we look forward to building upon a high quality asset with a successful foundation. We acquired a majority interest in a leading outlet center in Achtrip, Germany with our partner, MacArthur Glen. And during the Q1, we sold interest in 2 residential properties and 1 non core retail property.
As you know, gains and losses on our non retail assets, including investments are included in our FFO per share, which we believe is consistent with the white paper. This resulted in a quarter over quarter benefit of approximately $0.06 Capital Markets, we completed a notes offering of 1,000,000,000 dollars 3.5 weighted average interest rate of 2.978.2 years of duration. Our liquidity stands at 6 $1,000,000,000 We announced our dividend at $1.60 which is a year over year increase of 6.7%. We increased our guidance to $10.72 to $10.82 reflecting very good performance. And we're very pleased, frankly, with our overall performance given an overall lackluster U.
S. Economy, and we welcome your questions.
Our first question comes from the line of Christy McElroy from Citibank. Your line is open.
Hey, David. It's Michael Bilerman with Christy. I just wanted to go first and then Christy will have one. And I was wondering how the market should think about Simon strategically going forward. And it's about 2 years to the day when you spun off WPG, all the assets under $10,000,000 of NOI and arguably lower sales productivity.
And now you're left with this immensely high quality mall portfolio, a global outlet portfolio, the mills portfolio and a stake in Klepierre and some other sort of ventures around. Should we think about potential spins of any of those businesses going forward? Or do you think you're still going to own assets across the price spectrum of retail real estate?
Yes, We have no intention to spin off any other assets. We think they're absolutely synergistic across with our retailer relationships. We have the lowest overhead, lowest cost of capital given the portfolio. We've got historically the best comp NOI growth. So as long as we can continue to do what we're doing, I don't see any reason why we would want to spend anything off.
And they all fit nicely together. They're all in major metro markets. All the assets are producing great cash flow. And we're I mean, our results speak for themselves. I think the WP spin off was really a focus on we were a little we weren't focusing as much on the smaller properties as probably we should have, and we thought that was in the best interest of the shareholders.
But we don't see any other reason to take any other corporate restructuring beyond what we did.
It's Christie here. Just wondering if Aeropostale and Pakistan stops paying you rent at any time during the Q1 and if reserving for that might have impacted your bad debt at all in Q1? And maybe you could give us an update on sort of your overall outlook for retailer bankruptcies and store closings for the balance of the year and whether or not you're more or less cautious versus a quarter ago?
Well, look, I think a quarter ago, we were cautious. We continue to be cautious. I don't want to mention specific retailers, whether they paid rent or not paid rent. The only one that's filed bankruptcy thus far is Pakistan. I'm sure there were some pre petition amounts that we wrote off in the quarter.
I mean, it's not overly material. And that's part of what we have dealt with for 60 years, retail bankruptcy. So we remain cautious. Our biggest reason we're cautious is that the U. S.
Economy continues to flatten out. I mean, there's not a lot of growth. I suggest you look at a lot of industries in our beyond real estate to see what's going on in the U. S. Economy.
U. S. Economy. And it is what it is. We've been cautious on those couple of retailers, but we'll deal with it.
Thank you. Our next question comes from the line of Greg Schmitt from Bank of America. Your line is open.
Thank you.
I noticed other income and consolidated properties was up significantly. Was that related to one specific area?
Well, I would suggest you look to Page 21 on our supplemental. Our corporate this is after our property portfolio NOI. Corporate and other sources were up roughly $20,000,000 and that was a function of the residential land residential interest that we had that flowed through our corporate NOI number.
Okay. And you've been doing a great job touching on some really big redevelopments. I just wonder as you start to touch more and more of your top properties, will the shadow pipeline start to consider and include maybe a second tranche of redevelopments to continue that path of growth?
Well, I mean, if you look at our 8 ks, you can see all the stuff that we've been working on. I just spent an hour and a half with my guy that does residential, which by the way, he just made us $20,000,000 which ain't bad. We sold those at a lower cap rate than what we bought crystals at, which I thought was a pretty good interesting dynamic in our industry. He's got the meeting was longer than I wanted it to be because my attention span is decreasing. But as I get older, but the fact is he's got 20 things going on across the portfolio.
If you look at our 8 ks, all the stuff they're doing, I think we're touching a lot. We just opened Dick's Sporting Goods, an Independence Mall. Just to give you one small example of kind of a solid middle market mall that produces a lot of cash flow year after year, but continue we think continue to get better. And I mean, so the answer is we're touching everything.
And just bringing up Crystals, is there an expansion opportunity, I guess, with the Harmon Towers on that property?
Yes.
Okay. Thank you.
Sure. Thank you. Our next question comes from the line of Jeff Spector from Bank of America. Your line is open.
Great. Thank you. I just wanted to ask about the retail landscape. I feel like all the years Craig and I have been covering the sector. This past year, we've seen some real dramatic changes.
I guess, how have things changed in your view just from a year ago in your planning, whether with the lease contracts or your approach with retailers? What are your latest thoughts?
Well, honestly, I think maybe you're getting caught up in a lot of the media discussions. I mean, our business is as solid as it's ever been. We've had comp NOI increase of 5.1%. Our earnings grew 15.4 percent per year. We're projecting to have $10.72 to $10.82 So I think our simplistic view is it's not as bad as people want to write about.
And I think the biggest issue out there, frankly, is that we have a U. S. Economy. We don't we'll never use excuses, but I think you have to look at our performance in conjunction with what's going on in the U. S.
Economy. And the fact of the matter is the U. S. Economy is flatlining. And yet, we're holding our own and gaining market share with a lot of our properties.
And obviously, we've got great tourist oriented centers that have had a tough year. I think we will after this Q1, we'll probably anniversary the stronger dollar here coming up. But we've seen the tourism sales decrease, not necessarily the traffic, but the media about the depth of this and the depth of that, we don't see it. Demand is fine. Properties are getting better.
We got supply and demand in our favor. No one's building Class A outlets or malls to any degreeable issue. Certainly, there'll be retail space that gets repurposed, which will help us obviously in supply and demand equations. And I just I don't view it beyond that. The Internet is not the panacea.
A lot of CapEx have been spent there, not showing the returns for our retailers. So I think they're going to their biggest and best opportunity continues to be bricks and mortar. And we keep plugging along. I don't know if that answers your question, but that's how we view it from here.
Thank you. Our next question comes from the line of Alexander Goldfarb from Sandler O'Neill. Your line is open.
Yes. Hey, good morning, David. First, thanks for Page 21. The NOI breakout is helpful. A quick question, maybe you commented on the resi upfront, but can you just give a little more color which projects they were?
And then as we go through the rest of the pipeline, I mean, obviously, you got the tower that you announced down in Houston, but how much sort of embedded potential is there in the portfolio? And is each project that you guys undertake something that you're going to harvest themselves? So we should expect over the next several years more of these $20,000,000 quarterly benefits?
Yes. Look, I think we tend not to be long term. We look at these things more as investments than we do operating properties. That's been our point of view. Just like in Q1 'fifteen, we had a gain from a development site we decided to flip Europe as opposed to staying involved in.
So the good news is that we are able to create now we've had a few mistakes, so we're not perfect, but we are able to generate additional income in this company through all of our activity. And I mean, that's been proven in Q2 of last year. As you know, we had a big sizable gain in the sale of marketable securities. So please remember that when we report Q2. So we are able to do that and we do look at investments in whether it's hotels, residential.
We do look at them as investments and we do tend to look at those as ones that we're not going to own for 30, 40, 50 years like we do the vast majority of our retail holdings and that will flow through the P and L as rightly so. That's GAAP accounting by the way, which happy to explain to anybody that forgets GAAP accounting. And I do think with the list of all the activity, you're going to see that episodically, but certainly consistent with how we're going to drive our cash flow growth. Now specifically, we sold Firewheel Residential and we also sold South Park, which additionally, which goes to show you how things can change, we actually did South Park as a condo development. The market crashed.
We actually wrote off our investment in that and that went through FFO. And then now our investment in that was not big. So I think it was like $3,000,000 $4,000,000 of equity. But and then we just it turned into a residential, not a condo, but just a multifamily project and we just sold it. The 2 of them, as I said to you, I mean, we thought the cap rates were very aggressive.
Our partners wanted to sell. We view those, like I said, as investments, so we decided to sell them and the results flowed through this quarter. And I do think we'll have a pipeline of other investments that we don't consider core outside of retail always flow through our P and L. And hopefully, as I said, we haven't batted 1,000, but hopefully, there'll be a lot more income and gain, just like our Simon Venture Group. I mean, we've anything that is profitable will flow through FFO.
Anything that's a loss will wash out. And in fact, we had don't get panicky, but we've actually written off a couple of investments that have that just we don't see the value. Now they're still maybe plugging along, but we took a conservative approach to go ahead and flush those through and those are through FFO. So that's how we do it. But I'm hopeful that we'll continue to create value in all sorts of different ways, including building and selling residential.
When we do Copley and we part of that project will be condos. I mean those will flow through the P and F, as you would expect that those would happen and they will flow through FFO because that's how we view the definition of the FFO white paper, which as you know, we adhere to, stringently.
Yes. You guys have been quite vocal on that point. On Crystals, can you just talk I mean, you guys obviously have basically unlimited capital. So can you just talk about your decision to JV that, especially if there's development upside and how especially in that market, given how it bookcases the strip, your decision to JV and then other investments, how you figure out if you want to do it wholly versus bringing in a partner?
Well, in this case, it was relatively simple. We were approached a partner and we liked who approached us and we felt it would be beneficial to do a joint venture. We the assets been has a great foundation. It's been well leased. It does high sales productivity, and we're hopeful that we could add value to it over time.
And we have a great partner to do that and maybe some other things. So in this case, the opportunity really came from them. And so it was natural to just partner in it. That doesn't mean each deal is a little bit separately. We may or may not partner.
It depends on the circumstances. But in this case, they really approached us and we like to who approached us. And it's a very good asset that's been well leased and managed and operated by the owners and their manager ahead of time. And we hope that be able to add value to it over time. And look, I mean, it's not cheap, but given where A quality assets are being priced in all sectors, I think it's going to be a good deal for us in the not too distant future.
I think it's good to start and it will get better over time.
Okay.
Thank you. Are you guys able to hear me okay? Because I'm we're getting comments that you can't hear me, but it sounds like you can hear me fine.
Yes. You're coming through, clearly.
All right. Appreciate it.
Have a good one.
Thank you.
Thank you. Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Your line is open.
Hi, good morning. I was just wondering again on those non retail gains that were included in the Q1 results. Was that 0 point 0 $6 $6 gain that you referenced included in your prior guidance?
Yes.
Okay. And then if you look ex that $0.06 impact, the growth is still over 10%, but it doesn't look like your full year guidance is quite that high. So I was just wondering, is there anything else driving the Q1 to be especially strong or just trying to see to what extent you might be being conservative for the rest of the year versus actually expecting a slowdown, albeit from a pretty high level?
Good question. First of all, I believe our growth would have been 12%, 12%, if you wanted to, it's up to you. And I understand why you would want to, just say, okay, the 6¢ are the 6ths. But it's actually 12%. And look, I think we are as we started, I think it's consistent with what we described when we did our year end call is that we're still being conservative in how we are looking at the business because primarily, not because of the Internet, not because of department stores, not because of I don't know, but we do have exposure to tourism.
That's obviously affecting our overage rent. You can see that as playing a day on the P and L. And the U. S. Economy, even though it feels like it should be growing, is more or less flat lining.
I mean, I don't what does Goldman think the Q1 GDP is going to be this year? What is your guidance?
You asked me last quarter, so I looked it up 1.8%.
All right. Well, I take the under, okay. So we'll see. That's not Compton, is it?
I'm not sure who exactly it's from.
All right. Well, we know you have like 10 of them, so you'll get it right no matter what. But so we're just being I'd say we're being overly conservative and just because they're you've got the election year, you've by the way, I hear it's very interesting. We have essentially no exposure to the U. K.
But the U. K. Is softening. It's just there is a general softening worldwide in the worldwide economy. And we as much as I'd love to be immune to that, we can't be.
We're not. We're a consumer oriented company. And I mean, it is we are basically, the worldwide economy is flattening. There's a lot of stuff out there and we're just being a little bit of cautious. And obviously, I mean, we all know there's a few tenants out there that may or may not go bankrupt and may or may not close a bunch of stores.
And to be judicious in how we model their future.
Got it. Okay. And then also just if you could I know you mentioned, as we all know, tourist sales are not so great. If there's any comment you could make just on the malls versus outlets versus mills, either in numbers or just a general feeling?
I'm happy to say that our comp sales were up nicely in the mall business and down in the outlet business. And down in the outlet business, 100% due to our high producing tourist centers and the fact that the consumer the traffic is not down, the traffic is up in the outlet business, but the fact of the matter is their spend is less because of the stronger dollar. And we're going to anniversary that at some point this year, but we didn't anniversary yet in the Q1.
Okay. Thank you.
Thank you. Our next question comes from the line of Ross Nussbaum from UBS. Your line is open.
Hey, good morning. I'm here with Jeremy Metz. Hey, David, I thought the fact that you guys put up nearly 4.5% base rent growth in the quarter was pretty impressive despite the sluggish sales environment. But I guess it leads to the question of realistically how long can that continue? The occupancy cost is up year over year from 11.7% up to 12.5%.
So I guess realistically if in fact mall sales are at similar levels for the next year, do you think we're going to be looking at occupancy cost for your portfolio that's pushing 13.5% a year from now?
Well, again, we could argue ad nauseam and I've lost the argument. So I will admit defeat, okay? I will admit defeat publicly. We've lost the argument on the correlation or lack thereof between retail sales and our ability to drive rents, which happens, I believe, to tie more toward supply and demand then retail sales because as you know, if a retailer is not producing results and their lease happens to come up, we have the ability certainly to replace them with a retailer that's going to be more productive. Now as I also said, in the mall business, our comp sales are actually up.
It's in the outlet business where we're seeing the reduction in comp sales and that is absolutely unequivocally tied to what's going on with the tourism picture. And as I said, hopefully that will anniversary and then that base will move. Now the comp NOI growth was outstanding in for the whole portfolio, but it was particularly good in the outlet business. So that it is a very profitable category for our retailers and we have the ability to drive rents and drive NOI. So at this point, we can argue ad nauseam about the correlation.
I'd rather not. We'll do the best we can. And like I said, we're going to grow our comp NOI better. Maybe one day we'll revert to the mean and I'm not guaranteeing that we won't. But we have grown a couple of 100 basis points comp NOI above and beyond the GDP growth because of what I think as our portfolio skews toward the better customer.
And I'm hopeful that, that trend will continue. And I actually think it's more tied to what's going to go on in tourism and what's going to go on in the general economy than it is one particular retailer's sales. And that does not necessarily mean anything about the property. But I've lost the argument. I admit defeat.
We'll do the best we can.
All right. My follow-up question is on your guidance. If I focus in on the comment you made, which was I think $0.03 of the beat this quarter was not related to the asset sales. You only raised guidance for the full year by $0.02 So I guess the question is, if I annualized the non asset sale beat during the quarter, it's obviously a bigger number than what you raised guidance by. Are you being conservative or was there anything else going on in the quarter that's not necessarily recurring?
There's absolutely nothing going on. I mean the disclosure, you see the comp NOI, you see all of that. Ross, we continue to just be relatively conservative given what's going on in the general U. S. Economy.
And I'm not again, I'm not using that as an excuse, but there is a level of there's just a level around the world about consumer spending, growth in wages, election year. We still have certain retailers that may or may not impact us. Maybe we budgeted them right, maybe we didn't. All of that none of it really is all that material for us, thankfully. We built this company to sustain ins and outs of certain retailers.
All of this affects us on the margin. As you know, I mean, whether your slice is by product type, by geography, by retailer, you cut, slice, bake, Europe, whatever. I just think generally, we're operating appropriately given the growth in the economy. And again, our year over if you didn't hear our delta in quarter over quarter, Q1 'fifteen, Q1 2016 was really $0.06 because of the opportunity that we sold in Q1 of 2015 of last year, okay? So if you're going to look at the delta, don't look at $0.08 really look at $0.06 if that's important to
to you. Our next question comes from the line of Haendel St. Juste from Mizuho. Your line is open.
Yes, good morning. Thank you for taking my question. First one for you, David, I guess on the acquisition market. I'm curious on what you're hearing and seeing these days in your conversations with potential sellers? Are you getting approached a bit more?
Are you getting a sense that more people are willing to engage in conversations than maybe a year or 2 ago, given some of the concerns about the broader macro that you laid out earlier?
That's interesting. I would have thought maybe, but not really. Not really. I mean, as you know, we're not actively scouring the world for new deals. And as I stated to you before, the big deal business is not something on our drawing board at this time.
And there's a selective thing here or there, but it's not as if and maybe it's my personality, but it's not a I'm not getting a lot of phone calls. Rick, are you getting any phone calls? I'm not. I have a better personality. Rick certainly has a better personality.
But so the answer is not really. But our business is it's not easy. It's not for the faint of heart. And it is when we have a slow economy, it really requires a lot of patience, a lot of grinding, a lot of focusing on the details. Sometimes that creates opportunity in itself.
But at this point, nothing really jumps out at me.
Got you. And I appreciate that. And one more, if I might ask, be redundant, but I was having a little bit of trouble hearing you earlier. But did I hear you say that you'll be putting a $500,000,000 mortgage on Crystal Shops? And if so, just curious on thoughts for the use of capital?
Is it effectively earmarked for maybe the redev? Or how should we be thinking about any excess proceeds from that?
Well, no. Simplistically, we're going to it was $1,100,000,000 deal. We're going to put a $550,000,000 thereabouts mortgage on it, which will have positive leverage, which we think is very important, just using good old real estate 101 fundamentals. And the balance of the equity required will be split between us and our partner Invesco, simple as that. And so there's no excess financing proceeds.
The financing is really part of the purchase price financing, sources and uses.
Got it. And then one last one, more of an accounting one. But the other day, obviously, there was a big block floated by you guys on behalf of the DeBartolo, the 4,400,000 shares. Just curious if Simon bought any of those shares? Certainly, again, not maybe not as attractive of
a price a few months back,
but just curious if the company all participated in buying down any of those shares?
Well, just to be technically accurate, we didn't float it. It was part of the DeBartolo family estate. And we did not Simon Property Group did not buy any stock. But as you know, the shares were placed in a relatively quick and straightforward manner. But we had nothing to do with the sale of those shares.
That was all between DeBartolo and their DeBartolo family estate Holdings and their advisor. And they've been a great limited partner, very supportive. They're still a very, very significant owner. And those are the facts.
Wonderful. Thank you.
Sure.
Thank you. Our next question comes from the line of Jeff Donnelly from Wells Fargo. Your line is open.
Good morning, guys. Actually, first question just for Rick. I was curious as we're headed into ICSC, if broadly speaking there was any themes maybe you're thinking about as we head out to Vegas? And maybe more specifically any projects that are more mission critical for your team?
Well, it's interesting because as David has said, our portfolio has never been stronger and we still have significant demand for our properties. And where we are totally focused is maximizing the rents and productivity of our properties. And so our themes going out there is making sure we get the right retailers in the right spaces, in the right sizes, so we can maximize our revenue. And we obviously are spending time doing that. But frankly, for us, ICSC is relevant, but we have retailers coming in here all the time.
We have a major retail in here coming in tonight and here for the next 3 days going over the whole portfolio. So we are going out there optimistically. We've gotten a lot of good reverse inquiries as to our space and we've got a great portfolio across all of our platforms to try and market.
And maybe just a follow-up or 2, I guess maybe David, somewhat related to that, how do you think about the pursuit of omnichannel ultimately plays out for retailers down the road? Because while bricks and mortar, as you said, is the biggest and best channel today for retailers, Consumers do like to buy online, irrespective of whether or not it's weighing on retailer margins. So I guess I'm curious, I mean, as you think forward a few years, do you think lower margins are just the new normal for omni channel retailers and that's all she wrote? Or do you think retailers ultimately have to effectively price in the convenience aspect of buying online or take it to the extreme? Do you think there's going to be a time when retailers need to restructure and that gives them an opportunity to sort of reset their cost basis in their online business and shed weaker stores?
Well, again, I think the fallacy in what is talked about is the fact that even if the stores are don't have high sales per square foot, they could generate a lot of operating cash flow for them. So I don't look, if the store is losing money, they're going to close the store. That's for sure. The issue is that the store the sales metrics that we all accept us, but many, let's say, let me restate it, many focus on does not necessarily tie to profitability because a lot of these stores could have very low rent, could be fully depreciated, could be in markets that aren't great exciting markets that are growing, but they produce a lot of operating cash flow. They need that operating cash flow to make investments in whatever they want to make investments in, whether that's omnichannel or technology or new stores or whatever.
So the statement they're less productive, therefore, they're going to close stores is not how I think they look at it. I think they look at whether the store has a 4 wall profit and whether or not if they close it, what does it really do for the organization. So what is this all going to mean? I think at the end of the day, the all retailers have to be profitable. All e commerce players have to be profitable unless Wall Street and other investors are going to fund those investments.
And I don't have a crystal ball as to how it's all going to shake out. Could it put pressure on bricks and mortar? Certainly, it could. But I think you've got to keep in mind that a lot of these are cash cows that they're using. Maybe they're not investing in them like the way they should or we as owners of real estate would like to see them do it.
But that I don't think that equates to store closures necessarily. Now if they become unprofitable, they're going to close the store, simple as that. You have to weigh that against what they charge the store in terms of corporate allocations and overhead and all that. And I think certainly investments in technology is putting pressure on the retailer, and we have to be sensitive to that. But I think they're going to look at carefully what services they're going to need to provide to the consumer.
Because at the end of the day, they chase that and they can't create profitability out of it, that's not doing anybody any good.
That's helpful. And just one last question. There's been a lot of ink spilled by folks in our seats estimating the implication of the spin out of REITs in the S and P under the new sector classification. I'm just curious as the largest REIT, how are you guys thinking about that prospect? And anything you intend to do differently going forward to maybe position yourself differently in the eyes of that sort of newer larger pocket of capital?
Well, I think we're going to be explaining the company and what we do and how they ought to look at us. The good news of that group is they look at cash flow growth, they look at earnings growth, they look at balance sheet metrics, they'll compare us to other industries as opposed to just within our sector. They won't be thoroughly focused on NAV, which again, we can argue about. They won't worry about a quarter here or there of our retail sales. They're going to look at what kind of growth we have in our cash flow and our earnings.
And I think that plays perfectly well with us given the kind of earnings growth that we've had over many, many, many years and many different cycles. So we're very focused on trying to solicit them whether or not they're going to be interested and whether or not that's going to be a whole new category. I mean, we have no particular crystal ball on that front. But if they do look at us, I think we've got a great story to tell, and they're going to look at earnings and cash flow growth and know that we have hard assets, which never hurt in any cycle. They have hard
David, I guess maybe in light of kind of all your caution on the macro and the consumer, I'd see if Rick could offer a little sunshine and give some of the concepts where we're seeing expansion and maybe kind of particularly in the mall expansions and redevelopments you're doing, number 1, and then kind of number 2 for anchor spaces where you might be looking to replace a department store?
Well, 1st on the department store side, it is important to note, we have one vacant department store in the entire portfolio and we have like 4.41 of them. So again, the narrative out there would have you believe something very different. And when David opined earlier just as to what we think is going to happen with these department stores. That was a very informed opinion because we meet with these guys all the time. And that's what they're telling us.
If you look at the activity that we've put in the K, we have a significant number of anchors that are coming into the portfolio. David always makes fun of me when I list them, so I won't. No, please do. But there's a lot going in and they're across the portfolio quality wise in terms of the smaller properties, the more productive, the slightly less productive and they're all getting better. And if you just follow our momentum, we had 19 added in 2015.
We're now up to 35 in 2016. And it's across the gamut of restaurants, Neiman Marcus, Bloomingdale's, brand new Saks is opening this week space that enables us to accommodate the new cutting edge retailers that otherwise we would not be able to accommodate. And they are still looking to expand at productive properties. And so that is ongoing. And there's basically, if you step back, we're seeing demand from international retailers coming to this market, from new retail concepts like Suit Supply and Alts and Ani and Tesla, from e tailers opening stores that's been talked about a lot, brand extensions of our visiting retailers that White Barn Candle is growing aggressively.
Victoria's Secret is growing 4% this year. We're adding restaurants, as David said, throughout the portfolio. And all of this is just making the portfolio stronger and stronger.
And again, I mean, I we put in Page 21 to show you what the fruits of our efforts produce. And I believe the portfolio NOI, which doesn't include our corporate activity, increased 7.8% for the quarter. As my favorite guy that I love to quote, Adam Sandler, would say, that ain't too shabby. So we're conservative, but it's not getting in the way of producing the results we want to produce.
And then just on the kind of the teen segment, if we do get a ramp up in closings, I mean, obviously, closings for a lot of these chains have kind of going on for years. But let's say it ramps up. I mean, a lot of the chains themselves don't seem to be producing kind of sales at the volume of on a per square foot basis that kind of your portfolio averages. I mean, is there a pretty strong positive mark to market on that space? I mean, would we expect spreads to be consistent if you get hundreds of closings that you can bring in more productive retailers?
Or is that not the way to look at
Well, I think if you look at our activity generated last year where we had Wet Seal and Cache and Body Shop go out, we have been able to re lease a very significant amount of space at positive rents and positive productivity contributions because there are more productive retailers coming in. So is there going to be downtime? Certainly. Will that have an impact on short term results? Of course.
But at the end, we've certainly demonstrated an ability to replace those retailers that go out with better retailers. And frankly, that hasn't changed for decades. That's the business.
Great. Thanks.
Sure. Thank you. Our next question comes from the line of Tayo Okusanya from Jefferies. Your line is open.
Yes, good morning everyone. Just two questions from us. First of all, on the development and the redevelopment side of the business, just noticed a couple of yields change. The yields for the new developments in the premium outlets went down a little bit and also expected yields on the mills redevelopment went down a little bit. Is that purely due to mix?
Yes. Yes. So in the outlets, we added our Canadian deal, which changed the mix. And then there were a couple of changes in the mills mix. But no budget blows, no income blows, all just mix changes.
Okay. That's helpful. And then second of all, in regards to Sears Kmart, some announcement this week or last week that they're accelerating closures. Just wondering what you think the implications of that would be going forward either for your portfolio or also in regards to your JV with Sears?
Well, as far as we know, and I think it's a pretty safe statement, none of those closings are in any of our assets. So that has no impact. And if it makes Sears a healthier retailer, we're all for that. And it really doesn't impact our Seritage JV or our relationship with Sears. I mean, I think it's we're still doing business as usual there.
Okay. So it doesn't net salary the ability for you to make a couple of changes in regards to Syrah's moving out of some of the sell it tight space and you guys redeveloping and leasing that space?
No, nothing's changed given that recent announcement. We have no Kmarts in our portfolio. So I'd say it's pretty much business as usual there. We're still obviously spending a lot of time going through our JVs to redevelop some of those boxes. So that's not no different sense of pace or not, given the recent Sears announcements.
And I would
just point out the vast majority of those stores that Sears announced as closing were Kmarts and freestanding stores. I believe there was only 1 or 2 mall based stores in that entire list, ton of which were ours.
Great. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Carol Campbell from Hilliard Lines. Your line is open.
Good morning. Earlier in the call, you all mentioned that you think some of the best opportunities for many of the online retailers are opening physical stores. What kind of feedback have you received from the online retailers who have already opened stores in your malls?
Positive, very positive. The cost of customer acquisition, we'd encourage you to read the L2 study that we produced. The cost of customer acquisition for pure online retailer at a certain level, if they don't have physical stores is so high that they all view the physical stores as a way to really reduce their customer acquisition costs, extend their branding, extend their reach. And so far, it seems to be producing what they're looking to get out of that. So far, so good there.
Are you starting to see some of them that maybe you signed 10 leases with in the beginning looking to enter in the Moore your malls or are they kind of content with the space they have right now?
No, they're all looking to expand.
Okay, great. Thank you.
Yes, no worries.
Thank you. Our next question comes from the line of Ki Bin Kim from SunTrust. Your line is open.
Thank you. So I just want to ask you a couple of questions on occupancy costs. For new leases that you're signing, what are the occupancy costs look like? And I think when I asked this question last time, you said around 14 to 15. I was curious if that needle is moving closer to 15 or 14 lately.
It's so retailer, it's space specific. But I think the important thing is to look at our base our average base rent. We're it's still under 10%, well under 10% of what the sales are. Our averages mean a lot because we have this vast portfolio. You can see the rollover schedule.
There's no one there's just no way I can really answer that question. It's so specific on location, mall, retailer use, so on and so forth. But we're increasing our average base rents and our spreads are our spreads and our comp NOI or our comp NOI.
Okay. Well, I guess I was asking if there's any more general trends we're noticing, if things were changing at all. But I guess my second question is, how will you treat Tesla sales in your reported stats if they are going to be in there at all?
Well, if they report sales, they're in. If they don't, they're not. I mean, we have that policy with every retailer, the good, the bad and the indifferent.
I mean, so would that does that mean that their sales will eventually be included?
I just said, if they report sales, they're in. If they don't, they're not. And just as every retailer under 10,000 feet, Again, I mean, and I think they report in a couple. I think they don't report in the most of them. So and again, given the size of our portfolio, it's immaterial.
Okay. Thank
you. As you know, we have 100 and how many I forget, how many Tom, how many malls do we have? To change it all that much.
Okay. Thank you.
Sure.
You. Our next question comes from the line of Vincent Zhou from Deutsche Bank. Your line is open.
Hey, everyone. Just a couple of cleanup questions here. In terms of the other income, which I know we talked about inclusive of the resi gains, if we take out that impact, it seems like the it's about $52,000,000 or so for the quarter, which is similar to Q4, but up quite a bit year over year. Just curious if that's a decent run rate going forward or if there was some other there's a bunch of things in that line item. Just to wonder if there's other one timers in that?
I just think you're going to have to get used to the fact that you're going to have ups and downs in that number. Over the year, it kind of balances out. We generate a lot of additional income from our portfolio and we're hoping that that will grow. I'd say overall that number is around 200,000,000 dollars but it could be higher in 1 quarter, lower in the next. It could be higher over the whole year or a little lower over 1 year and it's just a number that's going to be volatile.
Again, we're our total revenue base is, Steve, when you include our share of the JVs, $8,000,000,000 of revenue. We're a big company. So it's not these things are going to go in and out a little bit. But the good news is it's income, it's not losses, okay?
Right. Okay. And just maybe another question, apologize if I missed it from earlier. On the 5.1% same store NOI comp for the quarter, it was quite a bit stronger than the last sort of couple of quarters that you reported. Again, obviously, we just talked about ins and outs on a quarterly basis.
Just curious though if there was anything surprising here in the Q1 for you guys relative to your initial outlook, but calling it 3 to 5.
Not really. We don't update our comp NOI quarter over quarter. We told you what we thought we would do. We're always trying to achieve better than that. Last year, we didn't.
We came in a little bit under what we had wanted to see in comp NOI. That was all related to the unanticipated, at least to the degree in our overage rent due to the decrease in tourism spending, yet we reduced our good earnings despite that headwind. All of that's explained in my shareholder letter. But we don't update it. We're hopeful to do better than that than we guided to early in the year and we'll see.
Okay. Thanks. And maybe just one last question on the anchor openings. I think there was about 4 backstages that opened this quarter. Just curious if you could provide some color on what you're seeing from that particular concept?
Well, those backstages that opened were done in existing Macy's stores. And if you look at how they're integrated into the store, they're basically taking one facade and one parking field and branding it Macy's Backstage. And it's I think too early to say what kind of sales impact it has, but it is another reason contribute the kind of positive sales impact that they are looking for. But the physical presentation of it is basically a dedicated entrance and a dedicated portion of one floor of an existing
Okay. Thank you.
Sure.
Thank you. Our next question comes from the line of Michael Mueller from JPMorgan. Your line is open.
Hi. I just have one quick one left. What was the dollar volume of dispositions that you announced including the residential?
The total not the gain, the total amount, do we can we do a quick guys? How about $65,000,000 $65,000,000 somewhere in that, including the outlet that we sold.
Okay. That was it. Thank you.
No worries.
Thank you. Our next question is a follow-up from Jeff Spector from Bank of America. Your line is open.
Great. Thank you. And I appreciate hearing some additional comments helped answer my first question is how things have changed in the last year. I guess thinking about it, David, would you consider disclosing the latest occupancy cost to sales for the outlets just to demonstrate the ability to continue to push rents further? At this point, you're just combining it with the malls?
Well, we've always we've combined them for the last several years. I mean, any look, I think all of these metrics manifest itself in their cash flow and comp NOI. And we are not as obsessed with metrics as maybe the analytic community. That could be good or that could be bad, but that's just the way we look at things. We also take a longer term view of the real estate than we do on a quarter by quarter and even a year by year view.
So I don't think that data is going to do you any good, frankly. It's not something we're like obsessed with. Oh, what's the occupancy cost going to be on this particular deal with this particular tenant? It's not how we run the business. We're looking at retail mix for the retailer does well and the consumer likes it.
And then if that works together, then environment that we're trying to do, which by the way, we're not we're decent at, good at, we're not great at, we can always do better. So another metric is just we just it's just not where we want you to think about us. Want you to think about our cash flow growth, how we're investing in our assets over the long term and so on. But all I can tell you is the outlet business, comp NOI growth is doing very well and we don't see a change in that even with the tourism slowdown that we're currently experiencing. Now we are our portfolio NOI grew 7.8% with tough tourism spend and a slow growth economy.
That's pretty good work. I can't guarantee we're going to do it every quarter, but I think that's pretty good work. That's what I'd like you to focus on.
Okay. Sounds good. And then my last question is just on retailer CapEx tenant allowance. Any change there as we think about whether how you're signing deals or some of your competitors? Is that increasing for some, decreasing?
Is it similar to what we've seen in the past?
If you look in the Q, our allowance has been flat year over year. And frankly, all that allowance is just for new tenants. We have minimal allowance for our renewals.
Great. That's helpful. Thank you.
No worries. Thank you.
Thank you. Our next question comes from the line of Christy McElroy from Citibank. Your line is open.
Yes. It's Michael Bilerman. David, I'm curious as you think about all the investments you're making in the Mall of the Future, how do you think effectively the return on that capital will come? Do you think it's going to come direct from the consumer to you? Or do you think it's going to come in the form of better sales, better productivity, better margins of your tenants and therefore higher rents that are able to be paid to you?
And maybe just talk about where we are in sort of your view about how close we are to this mall, the future that you envision?
Well, I think we're still in the very early stages. I mean, I wish we were more along that curve, but it's not easy. I would say to your first, but there's lots of things we're experimenting with. And I continue to think that as we do those investments that the consumer will appreciate them and it will lead to more traffic and more visits and more browsing, which is very important. I would say to you, I don't necessarily see I see it more as creating a better environment, which will lead to all the benefits of that as opposed to the consumer is going to pay us for it.
The consumer, frankly, as we all know, is getting a lot of stuff subsidized right now because of what's going on in the broader world, delivery, returns, just to name a couple. So I see it more as creating an environment that's going to drive traffic and lead to more demand from retailers wanting to be in those places where traffic is. And more demand, I think, relates to for us, hopefully, we'll be able to generate more cash because supply and demand is important in every industry and obviously very important in the real estate industry. So I think it's more of that, but I wouldn't rule out the consumer, but I think it's more creating the appropriate environment to give you a simple answer today. Right.
And I'd say, we're early days in that, but we're hopeful and we're hopeful to continue to improve the environment.
I'm curious how much buying you have from the retailers to start experimenting and bringing more experience based things to their stores. And clearly, you're doing all this stuff in terms of parking and direct on the consumer side to get them to come to the mall. But is there some retailers that are being better partners in terms of just trying to drive that increased traffic?
Yes, I think they're all very focused on it. I think the relationship on that front is excellent. We're getting a lot of cooperation, buy in. It obviously depends on the sophistication of the retailer. And frankly, they're very busy too.
But the good news is when we describe to them what we're trying to achieve and how they can play a role in, they're all very receptive. But they're also all very busy as well. So it's for us, it's prioritizing the biggest bang for the buck, making it easy as possible in terms of plug and play almost to use a technology terminology. We can deliver that to the retailer. That's a lot easier.
I mean, it gets a little gruesome with the details, which I'll spare you and me and everybody else on the call to go into that level. But I think they're being excellent. They're being very cooperative. And we all want to drive traffic to the physical world and we all see the benefit of that and we'll continue to experiment and plug them on here.
Great. And thanks for the NOI disclosure.
Sure. Thank you.
You. Our next question comes from the line of florist van Dischamps from Duignan. Your line is open.
Thank you. David, could you your gross international NOI exposure is 8% today. What is your net exposure? And would you consider expanding your international NOI based on low interest rates on offer in both Europe and in Japan? And in particular, when you look at your European outlets platform, do you think you can expand that by another 3,000,000 square feet over the next 5 years?
Well, look, I think we do want to expand our Asian premium outlet portfolio. But we only want to do it when there's about our MacArthur Glenn relationship as well. And the good news is having been back and forth to see the MGE folks twice in the last, I don't know, 4 or 5 weeks, they have a very good pipe. So the answer there is, yes, we want to build out their pipe in Continental Europe and the U. K.
And we certainly want to we certainly got a handful of opportunities in Asia as well. And listen, the low interest rates certainly make it easier in a sense, but it's always supply and demand. Can we lease the building? That's it. Can we lease the building in at what rent we lease?
On your net question, are you asking from a hedging point of view? I wasn't really sure what you meant by the gross versus the net. So maybe if I could ask you again that.
Sure. Yes. It's both on an asset and obviously you're partly hedged through local debt, but also on an FFO contribution in terms of your interest expense in local currencies, I. E, what is your interest sorry, what's your currency risk in that income on both the asset as well as the income side?
Well, we certainly hedged. We're in the high 90s in terms of our investment. And so that's hedged. But given you can see the NOI contribution, it's not it's real dollars once converted, obviously. So there is risk there.
And we're not overly leveraged. We'll make some of it on the interest expense as we mark that to dollars on a weighted average quarterly basis. But we've got they're extremely profitable. Our debt service ratios are extremely high. So we'll never be able to hedge the profitability of that and never be able to we don't want to hedge over our investment because then you will have that run through the P and L every quarter and I don't want to do that.
We will have the earnings run through the P and L, but I don't want to go outside of currency hedges that would have to be mark to market if we're over hedged. And so we've always hedged up to our investment. And I think we're in the 90 some odd percentile. One other question. I hope I answered your question.
Yes, partly. So the other question I had was regarding your Seritage JV. And in particular, maybe Rick, you can talk about, do you and your partner have similar views on the capital required to redevelop those boxes?
Certainly, we have the identical vision as to the potential for those boxes. Each of us are going to have to deal with the funding of that when the time comes through their own sources, but they fully recognize that and we do not perceive that as an issue.
And when do you expect you're going to start your first project there?
We're working with Suratage, but also working with Sears because we need to go through the pretty complicated process of downsizing these stores and that's not a straightforward enterprise.
Okay, thanks.
Thank you.
Thank you. That is all the time that we have for questions for today. So I would like to turn the call back over to David Simon for closing remarks.
Thank you for your questions and your interest. We really appreciate it, and we look forward to talking to you in the future.
Ladies and gentlemen, thank you again for your participation in today's conference call. This concludes the program and you may all disconnect your telephone lines at this time. Everyone have a great