Simon Property Group Inc (SPG) — Q3 2015 Earnings Call Transcript

Thank you, Julie. Good morning, and thank you for joining us today. Presenting on today’s call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of 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 with 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 am pleased to introduce David Simon.

Good morning, we had a productive quarter. We opened, started and completed several new projects and closed our joint venture with HBC, including the acquisition of certain co-op department stores which will serve as another avenue of growth for us. And most importantly, we continue to produce strong operating and financial performance. Results in the quarter were highlighted by FFO of $2.54 per share, which exceeded the first-call consensus by $0.07. These results were achieved even with the negative impact of $0.04 in the quarter compared to the prior year quarter due to the strong dollar. On a comparable basis, excluding the loss on the extinguishment of debt in the prior year period, FFO per diluted share increased 12.9% or $0.29 year-over-year. Key metrics show that occupancy was 96.1%. Leasing activity remains healthy. The malls and outlets recorded leasing spreads of $11 per square foot, an increase of 18.4%. Comparable NOI increased 4.3% in the third quarter of 2015, with a 3.8% increase year-to-date, keeping us on track for full-year guidance of 4% comp NOI growth. This is on top of our industry-leading growth of more than 5% in 2014. As a reminder, we do not include lease settlement income in our comp NOI disclosure or new transactions. We also do not include the impact of recently redeveloped or expanded centers. Total sales across the portfolio increased 1.8% for the trailing 12 months, even with the loss of bankrupt tenants. On a comparable basis, sales per square foot increased for the 12 months ended September 30 by 2.7%. They were strong in the mall, but effective in the outlet business due to the strong dollar impacting sales activity from international tourists in properties near the Canadian and Mexican borders, as well as traditional tourist markets. At the end of the third quarter, redevelopment and expansion projects are ongoing at thirty properties across all three of our platforms with a total committed spend of $1.7 billion. During the quarter, we opened significant expansions at two of the country's most productive outlet centers, San Francisco Premium Outlets and Chicago Premium Outlets. Following the expansions, the outlets in Chicago and San Francisco are the largest respectively in Illinois and California. We have recently opened the Fashion Wing at Del Amo. The Wing includes a new Nordstrom and more than a hundred exceptional brands, many of them exclusive to the trade area. With this transformation, we completed Del Amo, which is just another example of how we continue to invest in our proven assets to enrich the shopper's experience and enhance the value of our real estate. We have started construction on several new strategic projects during the quarter, including significant redevelopments at the Shops at Riverside, the Westchester, and our progress is excellent with our Sears boxes at Seritage. As we move forward, construction continues on major redevelopment and expansion projects at some of our most productive properties including Roosevelt Field, The Galleria and Houston, Stanford Shopping Center, King of Prussia Mall, Sawgrass Mills, and Woodbury Commons. All of these projects we expect to be completed over the next 12 months. In terms of new development, we opened two new centers in the quarter, Vancouver and Gloucester. We also opened Tucson Premium Outlets on October 1 and we are opening Tampa on Thursday of this week. During the quarter, we started construction on a new premium outlet center in Clarksburg, which is projected to open in October 2016. We are also working with our partner McArthurGlen on a new outlet in Provence, which is scheduled to open in March of 2017 and will be the only designer outlet in the south of France. Our share of investment in new outlets and full-price is currently $725 million, not including the recently completed Gloucester and Vancouver. Let's talk quickly about the balance sheet activities. We issued $1.1 billion of new notes with a weighted average duration of 7.8 years and an average coupon of 3.05%. We completed several secured placements during the quarter as well as the U.S. and German loan facility financings for a joint venture with HBC. Our current liquidity between the revolvers and cash on hand is approximately $6 billion. Our industry-leading balance sheet continues to differentiate us in a very positive manner. We exercised caution during the third quarter with respect to our common stock repurchase program and did not repurchase any stock during the period due to the increased market volatility and dislocation in the debt markets. We remain committed to our buyback efforts, of course subject to market conditions. In addition, we announced our dividend of $1.60 per share for this quarter. That's an increase of 23% year-over-year, and in fact that's the fourth consecutive quarter that we've increased our dividend. We will pay $6.05 in 2015, which is an increase of 17.5% compared to $5.15 from last year. So with all that said, no one is as active as we are in terms of redevelopment and new development. I am pleased, based on the performance to date. Once again, we raise our guidance for 2015 to $10.10 to $10.15 per share. This compares to our original FFO guidance of $9.60 to $9.70 per share, or approximately $0.48 higher from the respective midpoints. We are now ready for questions.

It's Michael Bilerman here with Christine Kilroy. David, your comment about the stock buyback, being I guess it's a volatile stock market and some uncertainties in the debt markets; isn't that exactly the time where you should be exercising your fortress balance sheet and significant cash proceeds to be able to buy the stock? I know hindsight is 20/20, watching the stock go up $27, but I'm just curious about the mentality at that point in time about not being aggressive at that point.

Well, Michael, I think stock buybacks, in terms of the marketplace reaction to them, may be overstated. What I'm most interested in at this company is growing our earnings and our dividends while maintaining our balance sheet, improving our properties, and enhancing our relationships. So I don’t look at it on a quarter-by-quarter basis. We are more focused on growing our earnings per share and our dividends. And the fact is that in August, the market was very volatile, as you know the debt markets gapped pretty significantly. We chose for one quarter to be cautious. I have no regrets about that because our number one priority is to grow our earnings and our dividends. To me, that is more important, and I think that's what the market should value more importantly than what one's buyback activity may be from one quarter to the next. We remain committed to it while we plan to be opportunistic about that, because we continue to believe. I'm terrible at reading from the script. I can barely get the words out. But as you know, our activity in redevelopment and new development is not hypothetical. It is ongoing, and I think prudence in that category of the buyback is appropriate. Again, I believe our number one priority is earnings growth and therefore dividend growth. After that, we can buy back stock when we feel like it's a truly opportunistic time.

And Christine has a question as well.

Sure.

Hey David, just thinking about the Simon venture Group stuff, and we appreciate the in-depth look at that business earlier this month. Beyond just sort of the small financial investment you've made, what do you view as the primary benefit of this business to Simon over the longer term as consumers' shopping habits continue to evolve? And maybe you can sort of give us a sense of how big you think that your investment in this business could reach over time?

Well, let me just talk about what I think the goal is. Ultimately, it's to help connect with the consumer. The mall business has historically felt like our job was to attract the right retailers to get them to do most of the connecting and drive most of the traffic, but I think the industry has evolved. We've got to become the drivers of traffic and we need to connect with the consumers. What I'm looking for in those investments and that connection with technology is: How do I connect with the consumer to drive traffic and make their shopping trip more enjoyable or more effective? How do I help the retailer do that as well? And then maybe, is there some new concept or new retailer that ultimately can proliferate our portfolio through these kinds of connections? If we can accomplish those two or three goals, then I think we will have succeeded. And it's all about trying to take the mall box and make it a smart, connected box to help our retailers and property owners connect with the consumer so that their trip is better, more efficient and more productive, which we think will lead to sales growth. So that's the goal. We may do a little bit here and there that’s a bit far afield, like funding a new retail or restaurant concept because we think maybe that has potential down the road. In terms of size, we're not going to get carried away, but it's really hard to pinpoint right now exactly how big that can be. We have a sense that we will ultimately be in the mid-20s by the end of this year; it wouldn't shock me if we reach the 50+ range by the end of next year, but that's just an estimate.

Great, thank you. Good morning. I guess, just thinking about the bumps throughout the year, David, what exceeded your expectations and how are you thinking about the budgeting process for 2016? I guess can you compare year-over-year, your mindset?

Well, I think what's interesting from the end perspective, first of all, is that as you look at our earnings growth, we have had an increase in lease settlement income. However, we've also had the negative impact of currency fluctuations from our foreign operations. If you put the two together over ‘14, we've actually had a negative $0.05 variance. The increase in lease settlement income from ‘15 to ‘14 offset against the reduction in earnings from our foreign investments due to the strong dollar has created this net-negative variance year-to-date. So, you have to put that in perspective. We've had good rental growth, good leasing spreads. We have obviously experienced far more bankruptcies in ‘15 than we did in ‘14. The other impact we've had on the negative side is that we've missed out on a certain amount of percentage rent from the outlet business because, specifically, the strong dollar has impacted tourism shopping, notably in outlet tourist centers more than in the mall business. However, the mall comparable sales have been better than our expectations, which is a testament to our leading portfolio. As we look into next year, we see a more positive perspective after dealing with the stronger dollar. That will not be the negative it was this year, and a significant focus, obviously, is going to be leasing up the bankrupt tenants. We probably have 60% to 70% of that completed, and the total loss square footage is around 1.3 million. We have our work cut out, but we have seen this scenario before. The good news is we have quality real estate that allows us to achieve industry-leading comp growth. The big exciting thing moving into ‘16, which won't show up in our numbers immediately, is all the major redevelopment done between King of Prussia, Roosevelt Field, Stanford, and the phenomenal changes at Del Amo, which is unbelievable what we've started there; we're still working on finishing it. It's a complex project but we've got Woodbury Common coming on board and the extension of Sawgrass colonnade in the latter half of ‘16, which positions us well for ‘17. The model remains reinvestment, generating excess cash flow, and paying high dividends. I should also remind you that our dividend [indiscernible] was $3, it was actually $2.70, and it's $6.05 today; we'll have significant growth next year as well. However, we need to show up, and we need to work every single day.

Thank you, that's helpful. Good timing on the, yes?

I hope that answered your question, but we've got work to do, and we focus on comp and alike; if you look at ‘13, I'm sorry, if you look at 5%, what we have guys at 5%, ‘14 we had 5%, this year we're going to have 4%. So we are building up a pretty strong base and we haven't had any down years of non-performance to build off, right? It's great to build off a strong foundation, especially since we've had non-performance, but we haven't had that, frankly. During the great recession, our comp and NOI was relatively flat, which was industry leading as well.

No, it's very helpful, thank you, and good timing on the Del Amo, because I know Craig has put in a request to visit it.

Come on down.

Great. And then my only, my one other question was just on your previous comments on the redevelopment pipeline. You mentioned through ‘17, or are you at the point where you think that pipeline could continue a billion-plus beyond ‘17? Are we correct on that?

Yes, I feel pretty good about that.

Beyond ‘17, or not yet?

Yes, no, no.

Oh, beyond? Okay.

No rest for [indiscernible]. So this morning, we are going through our budget cycle, which is a lot of fun. This morning we were going through our capital plan through ‘16, ‘17, and ‘18. We don't see it abating. In ‘17, it will be higher, probably around $1.5 billion, and in ‘18 it will be in that range. The big unknown is how quickly the Seritage things take off. We are in a joint venture, so it's not just a question of how fast we can go, but how quickly Seritage and Sears can move things along, which we are clearly trying to influence. But we don't have complete control in that regard. However, we certainly have a lot on the drawing board to pursue.

Great, thank you.

Hi, good morning. Earlier this year, mall REITs were of course impacted across the board by retailer bankruptcies, but your same-center occupancy was down 80 basis points this quarter, which is actually more than the first and second, which seems surprising. So, I was just wondering if you could talk about what drove that year-over-year decline in occupancy to remain in the third quarter and how you expect it to turn going forward?

We had more bankruptcies in the third quarter. So, Jones went out, causing more bankruptcies. We've also opened up a few centers, which has caused some decrease. We just saw we understand that we don’t include new centers in our statistics. The minute the rent in terms of occupancy or new expanded centers, they're not in our comps, NOI growth, but they are in our sales per square foot and they're in our occupancy. So part of that decrease was also that we added some new centers and some new expanded centers, which caused our occupancy to drop.

Got it. And then, like you're mentioning before, you guys have had consistent pretty strong same-store NOI growth, but do you think that this creates some easier occupancy comp for 2016 that should be able to help you even more?

Nothing is easy; if you see my grade here recently, nothing is easy. I won't say anything about gold, but we did read this retail report; we found your list of 100 malls curious, so I assume the real estate folks didn't have much to do with that, but we're happy to help you.

We will do. Thank you.

Thank you. Happy to help.

Good morning. Just on the sales trends, could you talk a little bit about whether and to what extent the tourist markets were dragged down due to the dollar, or maybe looking at any differences between the mall and the premium outlet portfolio?

We're not going to run from this; we're just going to tell you the reality. We have fantastic tourist centers. In our outlet business, Orlando, Woodbury, and throughout Las Vegas generate a lot of tourism dollars, but because of the strong dollar, you know, it has been quiet. The high-end luxury retail market in, say, New York City and Miami has also been affected, and we noticed a larger impact in the outlet business than we did in the mall business. We think the situation is generally temporary; these are great assets and have no impact on retail demand. We've seen increased space despite the challenges. The comp NOI growth has been strong, but that’s why the sales metrics are a bigger reaction for you than they are for us. We tell it like it is; the strong dollar has impacted our retail sales per square foot, but we don't think it will have an effect on our ability to sustain comp NOI growth.

Okay, that gives me another question, I guess, which is just, if you look at the public retailers, a lot of them or at least their stocks have been hit pretty hard over the past several months. As we head into the holidays, how is sentiment when you engage with them about their plans for next year? Has it been shifting at all? Is this just a shift in market share between different retailers, or is there anything more systematic about how they're approaching growth over the next year or two?

I'd say this; it’s retail-dependent. However, there are better retailers who are managing through the strong dollar with some short-term impacts. The fact is, retail growth is generally flat. We're growing our economy at 2%, and retail cannot avoid that reality. The good news is we outperform since we can cater to the better consumer. What we've seen from the better consumers this year is a slight move toward durable goods versus non-durable goods, impacting comp sales growth. The mall business this year has shown very strong comp sales retail growth, which was only offset by the tourist centers in the outlet business. Net-net we are up 2.7, but if I isolated just the mall, we'd be seeing much higher increases. This is a testament to our ability to continue growing results despite the anemic GDP growth.

Would you say that it hasn't translated into a meaningful shift in the appetite for space in your centers as people talk about next year?

Not really. I believe the opportunity for retailers to grow their business in quality real estate remains strong, and I don't see the current environment affecting that.

Great. Thanks.

Sure.

I am here with Jeremy Metz. Hey David, when we met the other day, you talked a little bit about the amount of money that consumers are spending in your malls for every minute they are there, saying there's like a one-to-one ratio. I'm curious if you've done any work to think about the spending of millennials and teens versus their parents to sort of further analyze whether the impact of the internet and technology is going to be a growing problem from a generational perspective?

I don't have that in front of me, but yes, we've analyzed generational spending gaps, that you would see between Baby Boomers, Generation X, and so on. I don’t have the specifics here, but those numbers suggest it's not what you might think; there isn’t a significant differential in spending between Generation X and millennials. What we're starting to see is Baby Boomers probably show more trend toward decreased expenditures than anything else. I believe millennials present great opportunities because they are expected to see higher income opportunities in the next decade. This is a large population base, greater than even the Baby Boomers. These individuals will eventually get married, have children, and typically move out of urban areas. They are, in our view, loyal mall shopping consumers. Our task is to continue to make the mall a better shopping experience for them. Thus, I don't think there is a notable differential in spending. They grew up in the mall environment, they’re comfortable there, and as their income rises and they age, have children, I believe they will remain loyal mall shoppers, especially given the environment we're creating.

I appreciate that. I think Jeremy has a question as well.

Sure.

Just two quick ones. In terms of the lease cancellation income, it was high this quarter. David, earlier you mentioned Jones; I was just wondering if there are any other tenants in particular that may have contributed. I think Forever 21 was in a few supersized locations, and they were looking to downsize, but I'm not sure if they were a part of it this quarter?

No, Forever 21 isn't included. Jones was the major one, but there were a couple of others as well year-to-date. I would prefer not to go through the various retailers as it tends to be somewhat confidential. The good news is lease settlement income has been relatively stable. When we get three years of rent and then have the opportunity to lease space again, that’s a good business move for us. To clarify, when I look at the stronger dollar from our foreign investments versus the increase in lease settlement income from '14 to '15, I'm in the whole $0.05 year-to-date. Please keep that in mind as you think about our business.

Switching gears quickly, Highwoods recently announced they were looking to sell Country Club Plaza. Is that something Simon would be interested in? Any thoughts on where that process is at?

I understand there is a process; I think it's good real estate. It has a good position in its market. Beyond that, I am not informed of any numbers or anything else about it, but I understand that there is a process. It has always been very good real estate in a good market.

Good morning. Just sticking with leasing, I’m curious—David, do you think the increase in lease settlement income you are receiving foreshadows potentially more space coming back to you guys after the holiday season through bankruptcy?

I actually think it’s tailing down. As I look at what generated the list, there are a few odd elements to consider. Our watch-list has been relatively stable; the retailers we were worried about have already now been addressed. It's out there as a possibility, but next year I actually think we'll have less impact from bankruptcies than we did this year.

Okay, and switching gears, I'm curious about your take on Macerich, as they have taken to joint venturing some assets at a low to mid 4 cap rate. We've been told those are fairly middle-of-the-pack for them. Does that pricing in the market lead you to feel there might be pockets of your portfolio where you're open to JVs or selling some assets entirely to expand your repurchase initiatives?

I don’t really want to comment on what may switch did, so.

I'm just curious, as a comp for transactions in the market, does something in the 4s compel you to think about selling your assets to fuel repurchases?

I don't know; the fact is we're very comfortable with what we're doing. Selling our assets typically leads to complexity when entering joint ventures. We like doing joint ventures when creating new opportunities, as they are easier to justify. Just to take a few examples, we're pleased to be part of new joint ventures on a couple of new developments, such as Brickell and Clearfork, with very good partners and great real estate. I like those kinds of joint ventures where it's more about new opportunity than the current cycle. We've recently sold several assets, including significant spin-offs of our strip centers and smaller malls. I don't rule it out, but it's not a priority. Our priority is to grow our earnings, grow our dividends, execute our redevelopment pipeline, and we don't need to rely on capital from existing properties for a joint venture to execute on the buyback.

Speaking of JVs, I guess you teamed up with Hudson Bay to acquire, was it Galleria Kaufhof Stores? What can you tell us about those properties and just maybe what are your future plans for those locations?

Well, it's great. It’s primarily city center real estate in Germany, which is a strong market with very little retail space per capita compared to the U.S. example. It has built-in growth potential, even if it just stays as credit lease that it is. However, there’s also potential for redevelopment of some stores to take back some of the front edge, more like we’re doing with some department stores here in the U.S. It’s a strong cash flow business at a fair valuation, with some upside potential from redevelopment.

Thanks. Just going back to your retailer watch list comments. Last year, we had RadioShack, Wet Seal, Deb Shops, Delia's, and some others. How early did you have an indication that they would go bankrupt overall?

Pretty early.

We certainly can see these things coming a long way off based on trends in their leasing activity or sales, and when they reported looking for new equity, so none of these have been surprises. As David said, those that went away had been on the ropes for years and just ultimately ran out of incremental equity sources.

Okay. Perhaps if you could put it in an easily digestible number, you mentioned 1.3 million square feet that was impacted this year. In broad numbers, what does that look like next year?

It’s hard to predict what next year will be, but as David said, we anticipate that next year will not have as many bankruptcies as we faced this year.

I know we spent quite a bit of time on the impact of the dollar and tourism sales, but could you give us some more specific color about Miami and specifically Brickell Center?

Well, Miami is feeling some heat from Latin America. That said, leasing at Brickell is performing very well.

Brickell is doing very well. It's opening in the fall of next year. We’ve been announcing periodically the tenants that will be starting up with a wonderful mix of designer tenants and restaurants, anchored by Saks with the Cinema. If you have been down there, it’s an exceptional project with two condo towers, an East Hotel, and two office buildings in addition to the retail in a market that stands as the financial center. We’re very excited about its prospects.

Okay, so it’s safe to say there is no impact on demand despite some of the tourism challenges in the near term, similar to your earlier comments?

I think what I said before is consistent with that perspective. Retailers at Brickell will be the better long-term thinking types. The fact that tourism is currently soft doesn’t deter the better retailers, and when I refer to 'better,' it's not just about the mix but about the overall quality of the retailers. This is a sentiment I’ve been trying to effectively communicate to many audiences over retail sales. Retail sales trends can be interesting, but they are not predictive when it comes to comp NOI growth. We’ve done regression analysis to validate this point regularly. While we report sales figures for clarity, they do not deter our ability to generate increased cash flow because it is more related to supply and demand dynamics and local rent potential. If you're in a good space within a well-performing mall, you will generate revenue growth even despite fluctuations in retail sales.

A couple of questions here. One, you might have indirectly answered before, but what was your share of the lease term you booked this quarter?

It’s in our supplemental.

The share of it is, because I thought that was the consolidated amount?

Well, if it is consolidated, that's our share. We may have a little minority interest in that. But if it is consolidated, it’s our share, right?

And then secondly on the outlet development side, can you talk a little about the returns you see when comparing Europe starts to the U.S. and Asia, and how you think about the pecking order of opportunities?

I would say that the development in Europe tends to be a little lower than ours here at home, around an 11% return on cost generally. Comparatively, in Europe it may be closer to 8 or 9 percent to start with, and in Asia we typically don’t engage unless we’re targeting double digits because of tax considerations, and we look for better risk-adjusted returns. Those in Asia may be around the 12% or 13% range.

Got it. And as you think about opportunities going forward, do you believe they’re skewed more toward the U.S. for new starts at this point, or do you anticipate seeing an uptick in Europe?

As I mentioned, we're quite excited about the Provence deal; about 90% of it is in a big project and an attractive market that hasn’t many quality outlets. So that’s good news. We've got two to three more projects with McArthurGlen making good progress; one in Spain that we hope to start construction on in '16 as we go through permitting, another in the western part of Paris where we are also progressing. There's one in Belgium where we are making good progress. In Asia, we've got a few more in the works, but they’re a little more challenging. We are confident that we will get our second one in Malaysia started, as well as in Mexico where we expect to start one next year too. So we are making progress.

How does your volume of temporary and pop-up tenants for this holiday season compare to the recent past? And historically, do you know what rate of those tenants convert to a longer-term lease once their temporary lease expires?

Typically, pop-ups don’t convert from temporary to long-term leases. I would say there is generally an increase this year, primarily because we have more space from the bankruptcies that we faced. Just to remind you, we don't include that in our occupancy numbers, which has to be for a year or longer. There will be more activity in pop-up stores for the season given the recent increase in vacancies.

I was thinking about your American Girl Store that's open in Castleton; I've seen that they are essentially using that to test the Indianapolis market. Are you seeing more retailers not just doing a pop-up store for the season, but more so to actually test the market?

You are starting to see a little bit more of that. I think that's a safe assumption.

I just wanted to ask about the Houston Galleria and the Houston market. Have you seen any change in the shopper demographics there or the retail sales trends more generally, and what are your expectations going forward?

In what sense?

Just whether you think that Houston will be hit, if retail is kind of the second impact from oil prices there?

Our Galleria is an exceptional asset. It tends to weather economic downturns well, but our retailers are not immune to changes. Houston is also a significant tourist market for many Mexican nationals, so there could be some slight impact on retail sales. However, it will have no long-term effect on the great asset that Houston Galleria represents, especially with significant transformations underway—new Saks store, new Saks Wing, and the new Webster's are launching in the next 30 days. We're doing a lot of incredible work there. That said, retail sales may have a slight impact, but Houston Galleria continues to represent a tremendous asset.

It's well positioned, as David indicated. It's got a unique mix of anchors, restaurants, and small shops in that market and has been very enduring throughout cycles in the energy belt for decades. If anything, I would argue that Houston has become less of the boom-and-bust scenario it used to be, given the growth of the medical university and medical facilities there; the economy is much more diversified now compared to the historical reliance on the oil industry.

Just two quick questions. I know you've talked a bit about the weakness in the U.S. and all that business, but just how are the international assets performing?

I’m sorry, I didn't catch your first part.

Sorry, is that better?

Yes, that's better, thanks.

I know you’ve mentioned the impact of the tourism markets for the outlet business here in the U.S. I'm curious about how the assets in Canada, Mexico, and even your few international assets in Japan are performing from a sales and leasing perspective.

I don't want to overreact. There is a little softness due to the strong dollar's impact on U.S. tourism, which you’re seeing across various business sectors, including hotels, but the international properties generally perform robustly. Retail sales in Europe are quite impressive, particularly for the Klepierre portfolio. Outlet sales with McArthurGlen are quite positive, and in Japan, those details are included in our 8-K. They are performing well, up about 7%. Korea is a little soft, mainly due to recent events that have led to lower Chinese tourist visitation. However, I would say that Mexico sales are strong; one asset there is performing well, and Canada, especially Toronto, is thriving. Overall, the international centers are doing exceptionally well, and we’re very pleased with those results.

And I guess the second question. You briefly touched on Klepierre. I didn't hear much about it on the call, but how has the integration gone? If you had to rank that on a scale of 1 to 10 in terms of all the initiatives you want to accomplish, where are you in the process of transforming the combined company?

You mean with respect to Corio?

Yes, Klepierre Corio and just kind of overall business.

I want to clarify—they brought Corio on board, and we don’t know. So we are not integrating with them. Just to distinguish that. They have done a lot of transformation over the three years we've owned them: selling, purchasing various properties. That part is pretty much wrapped up. The key focus in ’16 will primarily be operational enhancements, which they are improving through experience and strong performance. This will be a big focus for them next year. Now that the integration with Corio is effectively completed, with the sale of the significant Carrefour portfolio also completed, this will redirect us to focusing on operations—this will be a big focus for them heading forward.

No, I understand that. I'm just saying that sitting as Chairman you kind of have the vantage point to assess the execution of their strategies and I'm trying to gauge how much of their playbook has been executed and how much remains to be done.

There will always be a gap in terms of our strategies versus theirs. I still believe there is room for them to improve operationally, which takes time, but I’m confident they will make progress. We will assist as much as we can, and they’ve been successful in leveraging valuable insights strategically while ignoring any that might hold no value. Sometimes our strategies may not align perfectly. They are performing well overall and focusing on operations will be key.

Just a quick follow-up on the Hudson Bay partnership. Is the opportunity set to do deals like Kaufhof greater abroad versus here in the States? I guess how do you see that investment growing from a geographic perspective?

I do think perhaps the international business may present a few more opportunities, but I continue to believe there are also strong domestic opportunities. I wouldn’t rule out domestic opportunities.

Is the joint venture open to retail leaseback opportunities outside of traditional department stores as well?

Yes.

Okay. And not to dwell on the point on international, the softness in international tourism, but the mills operating metrics were impressive again. I think those are significantly influenced by Sawgrass. Is that similar to your comments on the Galleria? Is Sawgrass one of those assets that bucks the trend?

Yes. But we have experienced a bit of softness there too. While all these assets are impacted by trends, Sawgrass had a slight drop as well. Although not immune to fluctuations, they still perform well.

Thank you so much, and we will talk to you soon.