Simon Property Group Inc (SPG) — Q3 2016 Earnings Call Transcript

Thank you, Tyrone. Good morning, and welcome to Simon Property Group’s third quarter 2016 earnings conference call. Presenting on today’s call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, 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-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I’m pleased to introduce David Simon.

Okay. Good morning. We had a very productive quarter. We started, completed, and opened several significant redevelopment and transformation projects that will further enhance the value of our portfolio, and we continue to achieve strong financial results. Before I get to some of the highlights of the quarter, I would like to quickly highlight our outlook for the remainder of the year. Based on our performance year-to-date, our current view of the quarter is that we are once again increasing our full-year 2016 FFO per share guidance range to $10.85 to $10.87, which is higher than our original guidance of $10.70 to $10.80. Our increased range also reflects the potential charge of $0.08 per share regarding our likely decision to postpone the construction of the Copley Residential Tower due to the rapidly rising construction cost and our beginning concerns around supply and demand in the Boston residential market. Work will continue on redeveloping and modernizing the existing retail space at the center, as well as the development of the Southwest Corridor, which will create a new entrance to Copley. We expect this work will enhance the shopping experience for our guests and retailers and further strengthen our position in the heart of Boston and will be completed by summer of ’17. Assuming we make the decision to postpone, it does not foreclose the opportunity to build the tower in the future as market conditions warrant. Now let me turn to the quarter. FFO per share was $2.70, an increase of 6.3% compared to the prior year, for the first nine months, our comparable FFO per diluted share is at 10.1% compared to the prior year period. We continue to see strong demand for space across our portfolio, combined occupancy for our mall and premium outlets ended the quarter at 96.3%, an increase of 20 basis points compared to the prior year. Leasing activity remained solid. The mall and premium outlets recorded re-leasing spreads of $6.71 per share per foot, an increase of 10.9%. Given our high occupancy level of above 96%, the remaining space we are leasing, while not as well located, continues to produce healthy re-leasing spreads. And as a reminder, we include lease amendments for the restructuring of leases, where we choose to work with retailers in certain situations pre or post-bankruptcy, such as PacSun. Base minimum rent was $50.76, up 4.5% compared to last year reflecting growth in our rents, our occupancy cost is at 13%. Now, just as everyone knows, my focus is on cash flow growth and I believe this is the most important metric for the investment community to focus on. Our total portfolio NOI increased 7.3% year-to-date and 6.6% for the quarter, third quarter. To put our growth rate in perspective, the 7.3% year-to-date growth is more than $300 million. Our results to date keep us on track for our full-year guidance of total NOI growth of more than 6% for our portfolio. On the NOI overview schedule included in our supplemental filed this morning, you can see the various platforms of growth that contribute to our portfolio of NOI. The diversity of sources fueling our NOI growth is unique to Simon. Comp NOI increased 3.5% year-to-date and 2.2% for the quarter; our comp NOI results are affected by declines in overage rent due solely to the impact of the strong dollar on our tourist spending at our centers. We are active in an extensive redevelopment pipeline across all our property platforms as we relocate and reconfigure a significant number of tenants in order to enhance the future of retail and dining experiences at our properties and our decision to strategically moderate the marketing and specialty income in the common areas of our very high-end portfolio. Total retail sales per square-foot at our malls and premium outlets were $604 compared to $616 in the prior year period. Reported retailer centers continued to be impacted by the strong dollar at some of our tourist-oriented malls and premium outlets, reported retailer sales at our centers outside of our tourist-oriented centers. Our stable reported sales also include initial dilution from newly opened space and, importantly, we’re beginning to anniversary some of this decline as you can see; recent sequential quarters Q2 to Q3 of our sales productivity is basically flat. At the end of the third quarter, redevelopment and expansion projects were ongoing at 32 properties across all of our platforms. Our share approximately $1.1 billion, we opened, as you know, King of Prussia, which connected to the Plaza and the Court. We finished the Fashion Center at Pentagon City. We started the expansion of Allen Premium Outlets of 120,000 square feet in North Texas. In the next several weeks, we open 60,000 square-foot expansions at the Outlets at Orange. We are also opening our expansion in Venice, Italy, with our partner McArthurGlen of 67,000 square feet. So we continue to add value across the portfolio. Now, on new developments, we’re opening Clarksburg Premium Outlets tomorrow. The center will offer a great retail line-up. We expect it to cater to the whole Washington DC metro area. We currently have five, that's right, five outlets under construction, one in Northern Virginia, four in international markets including France, South Korea, Malaysia, and Canada, all of these will open in 2017. Even though we’re opening a new outlet next week, the week after we’re actually opening Brickell City Center in Miami, it's anchored by Saks. It’s got a great retail line-up with great partners in Swire and the Whitman Family and it’s part of a landmark mixed-use development. We look forward to managing the retail, and as a reminder we’re only investing in the retail. Construction continues on the full-price development at Fort Worth, the Shops at Clearfork, anchored by Neiman Marcus, opening in the fall of 2017. These eight new projects represent around $765 million of spend on our share. Let me turn to Aeropostale; we’re pleased to have partnered with GGP, Authentic Brands Group, Hilco, and Gordon Brothers to acquire Aeropostale, in addition to the existing management team. The ABG Group will add significant operating experience to Aero. We have a long track record of making smart capital allocation decisions. After reviewing this opportunity with our partners, we believe this investment will prove to be yet another opportunity for our company. It’s also important to keep this investment in perspective. You’ve all seen the gross number of $243 million. I want you to understand that $188 million of that is inventory being purchased by Hilco and Gordon Brothers and not by our buying group. Our initial investment is approximately $55 million by the group, of which our share is $33 million, including working capital. The only reason we decided to make this investment is because we believe we can make money. If our model is right, we think we’re buying this company at one to two times EBITDA with future growth opportunities ahead of it. We continue to believe that this will be an astute investment. For some of you who don’t know ABG, it is backed by Leonard Green, which has been a significant important investor in retail throughout the years, Whole Foods, Neiman Marcus, J. Crew, just to name a handful. Also during the quarter, we acquired our partners’ interest with McArthurGlen in our two outlets in Naples and Venice. We continue to focus on our industry-leading balance sheet. We completed a number of secured financings during the quarter. We continue to lower our borrowing costs, and increase our debt maturity, a term or current liquidity of $6.5 billion. Finally, on our dividend, in 2016 we will have paid $6.50, that’s an increase of 7.4% compared to 6.05% that we paid last year, that’s a lot. I’m ready for your questions.

Hi, good morning. I just wanted to ask on the leasing spread topic. I know you touched on it, and it’s been a popular point of conversation here. Since it’s a trailing 12-month number, are the results we’re seeing now in terms of lease spread just a pull forward and extension of something that happened to slow down in Q2 or did the third quarter also slow too, realizing that it does include lease amendments?

Well, we have had, look, let's just put this number in perspective number one. We do include lease amendments, and that’s having the biggest impact of the growth slowing. Yet if you look at our average base rent, you can see we’re doing new initial terms where we’re doing very well. Some of the expiring leases also are expiring at a slightly higher level. Now, our investors know that over a long period of time, we’ve always felt like the $5 to $6 spread was part of our model. The fact is we’ve done a tremendous job of outperforming that. But in the long-term we’ve always kind of felt that $5 to $6 spread is what we think the market is. We had a couple of years of significant outperformance. But we’re not backing off our inherent value that we have in our leases as they roll over. We’re just getting back to kind of more of a normalized environment. But for us, I don’t know about our peers, but for us, we include lease amendments. The bottom line is that it’s having some impact on leasing spreads. But that $6 to $7 is maintaining itself, and that’s kind of what we’ve told investors year after year after year. We feel very good about that.

Okay. And then just also you mentioned that right now as you lease space, given the high occupancy, the remaining space might not be as well located. So I guess my question is since you have that high occupancy, what are kind of the thoughts behind making these lease amendments and working with companies such as you pointed out, PacSun?

Well, it’s literally a case-by-case analysis. I think we’re as sophisticated as anybody. I think when Aeropostale is a great example of our ability to analyze what the right trade is in these deals. In some cases, we’re going to take the space back, in other cases we’re going to help the retailer go through the hard time. It’s really a case-by-case analysis. But there is nobody I think in our industry that’s more sophisticated in our ability to maneuver through those situations. So, it’s case-by-case; anything can happen. Sometimes we work, sometimes we get the space back. In the Aero case, we thought the opportunity was even more exciting to just buy the retailer and make a vertical investment that the entire S&P community is doing. Not to mention that Amazon makes vertical investments, the cable industry makes vertical investments. Again, I would encourage, we decided to make vertical investments when we decided to franchise Starbucks locations two or three years ago. That’s the nature of our company, we're going to be nimble; we have the right judgment on when to make a deal with a retailer or when not. When to make vertical investments or when not, when to go to Europe or when not; when to pull the plug on Copley or when not. And that’s why we’re in the position we’re already in today. Each case will be one-by-one. Now, I do appreciate, and I hope I’m right with you, Caitlin. I do appreciate you waiting to write until we have our call. I think that’s important, because the reason we have these calls is so not every scenario is understood regarding the nuances about what’s going on in our business. I appreciate the patience to hear our story. Then obviously you can write whatever you want to write.

Great, thank you.

Sure.

Thanks. Good morning, David.

Good morning.

I guess is there a way for you to try and help separate out for us the impact of these amendments on the numbers? Meaning if PacSun and Aero were having as big an impact as they are, is there a way to sort of strip them out and give us a sense for kind of what the remaining lease spreads look like? Because obviously this is kind of the biggest number that people are focusing on, and if these two leases or tenants are having a disproportionate impact, it might help to separate out those figures for us.

Well, I don’t, look, our business, Steve, I hear you. If we need to, we might. But the fact is you have to look at our business in totality. You can’t look at it on one operating metric or not. What I would ask you to look at is, let’s talk about the - we have grown our portfolio NOI by $300 million year-to-date. Let’s talk about that. Do you want to talk about that? That, to me, is more material than any one operating statistic quarter-by-quarter. Yes, we can slice and dice this in any way, but if we can spend more time talking about how a company grows its portfolio NOI, then that’s more important than the fluctuations occurring with operating metrics. We could talk about sales - sales are impacted by the fact that we have great properties in tourist markets and the strong dollar. That doesn’t mean that that’s going to last forever. Again, our number is clean; the results we can’t speak to anybody else how they do it. But as I said to you, if you want my opinion on what’s important, it’s the $300 million NOI growth. If you don’t want that, I got it. But that’s what I focus on.

No, I get it, and I don’t think people are dismissing your ability to deploy capital, whether it’s through developments or expansions. But clearly there has been more pressure on the mall business, so I just think anything that you can do to assuage the fears about the internal growth prospects going forward. And perhaps it’s just that a $6 to $7 spread on a roughly $60 or $61 expiring rent means that normalized leasing spreads should be 10%. Maybe that’s where we’re going to head to. There’s a new normal in the business. That’s okay; I think people are just trying to get comfort with that.

Well, look, I think that’s a good point, so let’s talk about that. I mentioned that a little bit in the first question. If you asked our investor group, we would have told them for 15 to 20 years that our re-leasing spreads are $5 or $6 a foot, okay? We’ve had a long period of outperformance on that. You’re right; we may be going back to kind of what we have promised our investor base for a long time. The outperformance, I don’t think, from our standpoint, we ever guaranteed outperformance from how we looked at re-leasing spreads. We always said look, it’s $5 or $6; one year it might be $8, one year it might be $4, but that’s what we see the long-term trend to be. I still feel comfortable that’s the basis. It’s no surprise that retail generally has come under pressure for lots of different reasons which we could go into, but unless you want to, let’s not. The fact is, we are impacted as I said to you before by our general GDP growth. To date, our retail generally is that there is no inflation, and our nominal GDP growth is 1.5%. Yet we’re growing our comps timing. If nominal GDP, there is some inflation, so maybe real GDP growth is I don’t know, 50 basis points. We’re still growing our business with no inflation in our business at 3.5% comp NOI; it’s not that. It’s not 4% plus that we did last year or the year before, but it's still a matter of being able to grow our business; that’s not bad. I’m not defensive about it; I mean, that’s what I think we should expect when we have essentially real GDP growth of 1%, maybe a little bit less, maybe a little bit more. That’s what you have to put in perspective.

Okay, I appreciate it. Thanks for the time.

Sure.

Thanks, Michael Bilerman here with Christy. How are you?

Good, thanks.

So, David, I wonder if you can talk a little bit about putting capital into your stock. Last year you had bought, I think it was like $350 million at about $180. Obviously, the stock, with some of the sell-off as well as some of the retail headlines, has come off 20%. We spent a lot of time talking about something you spent $30 million on. I was wondering, you’ve got a $2 billion share repurchase program; how do you feel about putting money into your stock?

Well, look, I think at the end of the day the best thing we can do is invest in our product, okay, because the stock will go up and it’ll go down by investing in our product. What unfortunately, I think a number of retailers have, they’ve not invested in their product, okay? Or they’ve chased the holy grail of internet sales to the detriment of what they should be doing with the physical product, as still people want to go physical shopping. When they go physical shopping, you’ve got to have a nice physical environment. We have spent a lot of years wanting to invest in our physical product. I think that’s our number one focus and continues to be; we’re well through that. The good news is we were contrary in that, and we started that in 2010. As you know, we’re finishing projects; that’s not just talking about projects, but finishing a lot of projects. If that winds down, then the opportunity to buy stock back is always there. I just don’t think it’s a high priority, but that could change depending upon kind of where the world is and what the stock does. My job is to make investments that improve our product. That’s my number one focus.

You talked in your opening comments about your deal-making over the years, always taking a proper risk-reward, and thinking about the capital committed to whether it’s a project or whether it’s a venture investment. As you think about investing in Aero, putting $30 million in, is there sort of a house limit that you would want to have in those sorts of investments relative to the whole? Where would it sit within the Simon organization? Is it more within the venture side, or is there another area? I don’t know if it’s in the David Simon bucket. Where does it sit within the organization?

Well, look, even though I’m older, I can always learn new things. I’ve learned a lot actually going through the Aero deal. We’re going to act as an investor; we’re going to give strategic direction as a board member. Authentic Brands, I’d encourage you to look at the brands in the history of that company; they’ve done a great job; they are brand builders and entrepreneurs. We’re not going to be running the business; we’re going to help strategically like we did. But we’re having our IT guys help out with their IT systems. We’ve got our lawyers helping with their license agreements. We have a lot we can bring to the table. That’s what makes us unique. But it’s not going to overwhelm anybody’s particular time; they’ve got a good management team that, with our strategic help, I think will continue to make that profitable. Based on the numbers, I think it’s going to be a compelling investment. But it’s not without risk. There’s always risk involved whenever you make a venture-like investment. I can’t think of a better team than Gordon Brothers, Hilco, ABG, General Growth to all put collective judgment to bear to make this a profitable investment. I don’t think, going back to your first question, this will be the wave of the future. I mean, AT&T, I mentioned vertical because I just try to put certain things outside of real estate in perspective, okay? AT&T was buying, going vertical. They’re spending $100 billion, okay? I go vertical, I spend $33 million, okay? Million not billion, $33 million. I’m not comparing; I just try to put these things in perspective; I’m not comparing our business to AT&T or anybody else. Amazon, what’s made Amazon great is they’ve had the latitude to go vertical. They’ve gone vertical; they’ve gone content, they’ve gone distribution, they’ve gone retail. That may be the future of corporate America; you’re not going to pigeonhole these comps. If we want to just talk about leasing a Sears box, I mean, that’s okay for some companies, but that’s not what we’re about. We have no bucket; it’s not going to take away from what we’re doing. My number one priority is to make our product better, any way that we can, technology digital investments, look and feel, better retailers, different mix, redevelopment, however that transpires. Making a vertical investment here or there is not going to overwhelm us. I want the latitude, and I think the investment community should want us to. If our underwriting numbers are right, and there is risk, we’re buying a business that ought to be valued at six times EBITDA, and we’re buying it at one to two. I think that’s a pretty good trend. But we’re not there yet; that’s the goal, but that’s what we’re trying to accomplish.

Hi David, it’s Christy, sorry about the three questions. Just, bigger picture, the consortium has talked about 300 to 400 store-based count for Aeropostale. There has been a lot of talk about store-count rationalization among national retailers generally in how many stores do they actually need to serve their customers in their market today. Why is that the right number of stores for a retailer like Aeropostale? And what does that imply for your view of the need for other retailers to close stores, especially now that you’re looking at this issue through that Aeropostale lens?

Well, look, and it’s very unique; we’re getting a lens at a much more granular level on retail. Sourcing, there are five or six things that really make a retailer click; sourcing, obviously rent expense, store expense, merchandise, packaging, all the stuff that, at the end of the day, we’re going to make us better real estate owners. But that remains to be seen. Aero, we’re probably going to get in trouble for this; but since I like you, I’m going to tell you. Right now, we’re looking at around 500 stores in the U.S. as kind of a model. We expect every one of those stores to be profitable. It’s a much bigger business than we initially went in with the investment. We thought we could justify our investment at a much lower store base, but the fact of the matter is we found out there is a lot more store profitability out there than we thought. The number is going to be around 500 give or take. I think there will be more pressure on store closings. Unfortunately over our history, we’re prone to that. I don’t need to remind you that the top 10 tenants that we went public with in ‘93 no longer exist in 2016. We will be able to deal with it; it’s much easier to deal with it when you have a quality portfolio that we have across all the retail platforms. It’s the soup of the day. I don’t think it needs to be 300 or 400 or 500; I think there are lots of profitable stores that retailers are feeling pressured to do something. I would like them to invest in their stores; that’s something I would like them to do. But I don’t always win that argument. We’re equipped to handle that; that’s what we do. But I expect that trend probably to continue. Our occupancy is up; firstly, it is up; so put that in perspective. We said our bankruptcy store closings would be down in ‘16; they are down. Much greater in ‘15, we’ve more or less leased all of the bankruptcies that we got back in ‘15 in a flat-to-tough retail environment. Everyone needs to put that in perspective. That doesn’t mean we’re doing cartwheels here; we’re grinding—that’s as good as it gets when it comes to grinding. That’s the environment we’re in, and we’ll have to deal with it.

Thanks so much for the color.

Sure.

Great, thank you. Good morning. I’m also here with Craig Schmidt. I guess, David, if we could just talk a little bit more about the current environment. Let’s say it continues; it persists through ‘17, even ‘18. How should we think about these rent amendments? How are you thinking about it when you’re laying out your budget for next year? Is this just something that we should get used to as we transition here as the retailers invest more money in their stores, we see more store closings? How should we think about that?

Well, look, I think again, it’s a retail-by-retail perspective. We’re seeing stabilization in our sales business; if you want to go focus on retail sales Q2-over-Q3 is basically flat. If you take out tourism, you take out one retailer that’s had decreases in sales, that’s actually up. We’re not like, there is no huge concern here. We’re a product of the overall U.S. economy. Jeff, what’s real GDP growth? You tell me. So, in that environment, what do you think it is the real one? Real GDP growth; what would Merrill’s got a bunch of smart people, what would they say of this?

I think we’re saying around that 1%, 1.5%.

So, I mean, we’re good; I’m not that good, but I’ve got a lot of people around me that are good. That’s a constraint. But it is what it is. We’ll sort it through, and I do think in that kind of environment, we’re going to have certain deals where we will go back and then we’re going to have a lot of other deals, frankly, we’re going to take the space back. My mood is changing a little bit—maybe we’re better off taking the space back. We played ball a little bit more with the bankruptcies in ‘15 and early ‘16, and that’s showing up in the lease spreads. I’m thinking sales are okay, stabilizing; maybe the world gets over all of this stuff going on out there, maybe we stabilize. A lot of people feel like we’re headed for growth. Maybe we take more space back. We’ve kept the buildings full, as evidenced by the occupancy; there’s a trade-off. We’re hitting our target for top-of-the-line increase, so it’s not all that bad. Just put in perspective; ‘17 will transpire and we will do a combination; sometimes we will play ball, other times we’re going to take the space back. It’s all a function of retail-by-retail decisions, space-by-space and retailer-by-retailer.

Okay, thanks. I think Craig has one question.

Great, thanks. Maybe I could do a little bit of a pivot here. Looking at your new developments for the outlets, four of the five projects are international. Can we expect to see continued good growth in new projects on international scale? And then maybe more specifically with your longer-term plans are with McArthurGlen?

Well, we just had a meeting with—I had a meeting with our partner last Friday. Their business is very good, very solid. Provence is opening in spring of next year, which will be fantastic. We’re very close on getting the potential to build Normandie, which we think will cover the Western Parisian market; that could be fantastic. We’ve got a couple of acquisitions that we’re working on, extensions that we’re working on. The team is working well together. I couldn’t be more pleased with the investment. It’s just kind of business as usual. We’re still seeing new development growth. Very pleased we’ve been able to create that partnership and create that relationship going forward. In Asia, the team is working in a couple of other markets that I’m hopeful over time we’ll be able to build the premium outlet product there. We’ve got a couple of big expansions in the works; Gotemba is an example that could be a landmark extension. So that business is—we’re not slowing by any stretch of imagination internationally in our outlet business either with McArthurGlen or with our Asian partners.

Thank you.

Sure.

Good morning, David.

How are you doing?

Just fabulous; it’s earnings season, life is great. So, just a few questions here, let me start with an easier one before I ask one on the favorite same-store topic. Here in New York, obviously, a lot of demand for street retail has gone down a lot, so a lot of vacant spaces; articles about global brands rethinking their street retail needs, especially with where rents are and store profitability. Have you seen as those brands have dialed back, have you seen them, I don’t want to say shift back, but have you seen more interest in going to malls where they are profitable? Or from your perspective, they’ve always been running street retail; their investment there is separate from their decision to open up in malls?

I don’t think there is a generic answer to that; I think it differs brand-by-brand. Generally on the luxury side of those brands, their business is actually starting to anniversary some of the strong dollar stuff. Obviously, we are as well. I meet with a lot of the folks; I mean there are certainly some brands here and there that are pulling back, but I’d say generally, and you’re starting to see the numbers from LVMH and Kering that have posted recently; their business is good, pretty good. I think New York is a little confusing to them because you’ve got Fifth Avenue, you’ve got Madison, you've got Downtown, you’ve got different new developments, you've got West 57th Street, so they’re all trying to sort that out. In our business, it hasn’t changed. If anything, I’d say the mood is generally better than it was six months ago, if you want a generic statement. I think New York City itself is just different because they’re all trying to figure out where they need to be given what’s going on in New York. But we don’t have a dog in that hunt. I think Brickell is going to be—I mean, we have a little delay with the hurricane; I guess it really, technically wasn’t a hurricane or not, I’m not really sure. But Brickell, I think is going to be lots of retailers rope-in in the first quarter of next year. The mix there is really going to be great. I think the stack-store is going to be great. The demand on that continues to pick up, right Rick, month after month. That’s a good indication that if you have a good product or you have a good scheme, retailers are coming. Rick, you want to comment on Brickell?

I think Brickell is certainly going to show that there is going to be a great mix of designers, food, international retailers; and right now we’re 91% leased. As David said, the opening is going to take place over. We’re going to have a big slug of openings over the next few weeks and another big slug over the first quarter of next year. The only other thing I would say to you is that we are seeing the international retailers, like Zara and H&M, accelerating their focus on our properties in the United States because there is demand to grow in this market. We are seeing that.

Just to finish the whole thought and then you can ask me, if it’s on comp NOI, it’s not a tough question, it’s going to tell you exactly what I’m thinking.

You don’t know the question yet, David.

All right, all right, bring it on.

We don’t give our questions in advance.

All right, okay, good. Thank you. That’s what I like about you, Alex. But just to finish, on the luxury side, people that would populate street retail in New York, we say luxury—not that it’s easy, but we’re making progress with Clearfork in Fort Worth, Texas. We’re going to have those kinds of brands, not a lot of them but the right ones. We opened King of Prussia with the connection, and again, a lot of those are opening; but the results from those high-end brands have been fantastic. That part of our business is different; actually starting to do better than maybe what you’re seeing and whatever is being talked about in New York street retail. I really don’t have a dog in that hunt.

Okay. Then the second question is it sounded like you said that bankruptcies and the issues really peaked last year and that you guys were more accommodative with retailers trying to restructure. Therefore, it seems like this year we’re seeing the impact in the same-store metrics. At the same time, I think you said, the tourism impact strong dollar is also anniversarying. So it almost sounds like next year we should expect same-store metrics to get a positive bump as these trends sort of anniversary. Is that fair? Or as you guys look into your leasing for next year, do we still see some of this impact, whether it’s on re-leasing spreads or same-store NOI, etc? Should we still see that in ‘17, or is ‘17 going to be a little better because this stuff anniversaries?

Look, I think the big unknown is just what’s going on. All you have to do is—and you’re smart, financial guy; look at our P&L, right? You could see; put the leasing spreads aside, put all those other stuff aside; the reality is the comp NOI is really a function of our overage rent, which is right there on the financial statement; okay, it’s down. Can’t help it. It’s really a function of the fact that we got these great tourist centers, and we’re having; we’re suffering from that impact. I don’t think that’s a long-term impact, but it’s starting to anniversary; it shouldn’t continue to get worse, okay. But Alex, it could get worse because no one knows what’s going to happen with the dollar. The international tourist market is volatile; at best, we live in an uncertain time. We’re doing this to deliver this 3.5% and deliver over 6% portfolio growth; I think is reasonably good; it’s not great, but it’s reasonably good given some of the constraints we’re dealing with that are a little bit out of our control. We’re going to take responsibility for a lot of that stuff too. There’s a little more volatility in being able; the standard deviations probably a little bit higher than it used to be just because of the environment. I could be stretching the measuring tape. Unfortunately, I say this because it starts when not next week, the week after, Rick—property budgets?

Yes, week after.

Week after where we go one-by-one, space-by-space, and we’ll report back early next year what our view of that is. There’s a little more volatility in being able; the standard deviations probably a little bit higher than it used to be just because of the environment we have that we're operating in.

Okay. And just confirming you’re taking an $0.08 charge—that’s in guidance for Copley?

I’m glad you asked that. The answer is yes. That is in guidance. If we had not taken that charge, our guidance would be up another $0.08.

Okay. Thanks, David.

No worries. Thank you.

Hi, good morning. Just to follow-on on that, that would be $0.13. I mean, is there anything you could point to as a driver of that kind of guidance increase in late October?

Well, generally we’re producing the results we want to produce. I know the operating metrics on that; perfect; we’re not going to deny that. I mean, but we told at the beginning of the year this is the plan; 3.5%, 6%, and we’re producing a little bit better on that front overall. That rolls up to the performance. We’re being very cautious on Copley—we have made the final decision on that. I think it’s likely we’re going to do that; we’ve got to run it through the board. I want the market to know that maybe it’s off the table for now; we could have kept it on our books and waited. The right thing to do if we in fact decide to do it will be to pick that hit.

Okay. And then you mentioned in terms of the same-store number not just PacSun, but then also I think you said intentionally kind of reducing the specialty leasing program in the common area at some of your high-end malls. Is that a material impact? What’s sort of the thought process behind that? If you have a number, you’ve given us in the past kind of what that program is as a percent of NOI?

I think it’s material in that it does affect the comp number. The comps would be higher had we not chosen. But part of what we have to do is listen to our clients. Our clients, to some degree especially in certain areas of the mall, are very concerned about that. We want to be receptive; we’ve got competition in some of these markets we’ve got to be responsive to. We just think it’s the right thing to do. We did a lot of research on the consumer; the consumer doesn’t really care. But on the other hand, we have—when it comes to the property business we’ve got to listen to our clients—i.e., the retailers, etc. We obviously have to listen to the consumers; they diverge here; but in this case, we want to be as sensitive to the clients as we can. Some are very sensitive to it, and we don’t want to keep that from bringing the right mix into some of these centers. It has hurt us over the years. We’ve thinned out in the very high-end properties.

Has this strategy been kind of accelerating recently, is why you mentioned it in terms of the same-store number this quarter, or has it kind of been ongoing over the past period of time?

I think it’s been, look, we didn’t really do it last year because a lot of these projects were in development. But it’s clearly been throughout ‘17.

Great. Then just last question; I appreciate all the color on the Aero-economics. Just wanted to ask, there’ve been dozens of similar bankruptcies over the years; you probably could’ve had opportunities to do something similar then. Maybe could you point to anything outside just the economics of it, that makes you think differently about this? Going forward, I know you had the macro view about vertical integration, but anything more, your narrow business driven where you didn’t do this for years and now it looks interesting?

That’s a very good question. I would say this: as we’ve gotten to know Authentic Brand Group, we now have—if we had done this without their involvement in how to stabilize and then grow the brand, I doubt we would have done it. We have talked; it’s interesting; I’ve been talking to Authentic Brands over the past year about other brands that might fit into this model that we’re creating. They didn’t come to fruition for whatever reasons. We’ve been able to develop an operating model and platform; they’re great at brand building. Having General Growth as part of that helps with their real-estate and their thoughtfulness in terms of how you operate the business. It’s important; we’ve got to walk before we run.

And the partners see it as not necessarily just a one-off, but something that could be replicated?

Yes, but we’ve got to walk, crawl before we run.

Hi guys. Thanks for the time this morning; and I always appreciate the transparency. I wanted to just ask a quick question about the lease amendments, maybe in the context of your broader portfolio of malls. You have obviously the luxury of seeing across the productivity spectrum. So, when we’re thinking about lease amendments in maybe your higher-quality malls, is it maybe the case that some of these tenants are paying above-market rents to get into the best-quality malls and, therefore, you might still be incentivized to make a lease amendment? Maybe reduce their rent, but recognizing it’s still a pretty attractive rent overall? Is that the right way to think about it? Then maybe if you could provide some color, if any, about how you’re seeing lease amendments on malls doing $700 a square-foot versus maybe those doing $350. But I do appreciate that it’s mall-to-mall.

Well, I mean, that’s the bottom line. Certainly, we have some of those cases, but it really is mall-by-mall, space-by-space; what the retailer relationship is and what we think the retailer future is. I wish there were a straightforward answer, but there is not. We try to use our business judgment in figuring out what the right is. It’s also we want to be conservative or do we want to be aggressive; what’s our mood of the future. We had a lot of bankruptcies last year. We gave direction to like okay, and we’re starting to change our attitude a little bit; I can’t tell you that it’s going to be a complete reversal; we can try to make the right judgment call. I will tell you lease amendments are like anything else—once you do it for one retailer, don’t kid yourself; you hear about it and it goes everywhere else. Part of our job is to contain that. We’ve experienced this before; we did do this in other economic times. Our business is fine, but it’s not—we’re trying to be accommodating, but we could shift our strategy pretty quickly. We evaluate it one-by-one.

The most important consideration is these lease amendments that are not forever. One of our considerations is do we have a better replacement tenant, but that tenant won’t be ready to open for a year or where it is in the project and what is the project. All of those factors come into play as to how we want to deal with this specific room and how we price the room and how we interface with that tenant. The only other point I would make is that, and it gets lost, our portfolio has never been stronger; never been in better physical condition; never had a better mix of small-shot tenants; better mix of boxes; better mix of restaurants; better set of amenities. We are on a continual basis taking share and that’s our focus to make our properties as compelling as they can be. That helps us in dealing with all the things you’ve been talking about.

Again, we’re 96.3% occupied. As an example, Macy’s announced 100 store closings. They’re leaving one of our malls, a very small mall, that has basically no financial impact to us at the end of the day. There’s this narrative and mood but the fact of the matter is go back to 7.3% NOI growth; that’s $300 million. Let’s put it all in perspective.

Okay, that’s very helpful. Thank you.

Thank you.

Great, thanks. Could you give a brief update on what’s happening with your Seritage JV?

We’re basically in the same position we articulated in our last earnings call. We have identified users for our boxes. We have plans for our boxes. We are not going to proceed with that redevelopment. We have a firm understanding of our returns and the costs of downsizing from the Sears stores. There are conversations going on right now regarding those costs. As soon as we have a clear understanding of that we’re in a position to proceed to try next year on some of those redevelopments.

That would include the Primark at Burlington Mall?

That is independent. That is proceeding as is the addition of Primark at South Shore in a portion Sears which is not in Seritage. The Primark lease at Burlington was existing at the time we did our joint venture, and that is proceeding.

Great. Thanks, Rick. David, a question for you in terms of how sustainable do you see—you’re talking about the 6.6% to 7% NOI growth, but if you put that in perspective, you do that for a decade you’ve doubled NOI. I mean, is that realistic for a $100 billion company?

We’re working to achieve that, okay. I can’t, I’m not that clairvoyant to look out that far.

But do you see anything near-term that’s going to break that streak?

I think we’re going to lead our industry in portfolio NOI growth as we’ve done for so long. I don’t see any reason why we can’t continue.

Great. Thanks, guys.

Sure.

Hi. I guess going back to Aero for a second; you discussed this as being more of an opportunistic investment. But out of curiosity, when you first thought about it and got into it, was it more a defensive play to control store closings? How did you look at it initially?

Not at all; as I said in my opening comments, no one would put new money into a business that we didn’t think would have an exciting future. That’s evidenced by kind of the group that we have bought the companies. We certainly get the benefit of Aero paying rent. But that’s not a reason to invest in a business. We could re-lease those spaces. That’s not, that’s not a factor in putting new money into an investment.

Got it, okay. On the outlet side, you talked about international expansion. Can you just talk about the U.S. and what the opportunities are that you see over the next 5 years, 10 years; just what does that pipeline look like?

In our outlet business? The pace may not be as hectic as we’ve done over the last three or four years. But Norfolk we open next year; we’re going to start another outlet in the spring of this year, spring '17 in a very good growing market. We’ve got another one under serious examination. So, I don’t think it will be as maybe as active as we’ve had over the last two or three years, but we’ll selectively do some stuff—one at least one a year on average, maybe two. We’ve got some unique opportunities. We’re also very focused on expanding with the Allen deal, adding 120,000 square feet to a center that does $600 plus a foot, and the outlet business is very attractive. There’s a lot to do with the domestic portfolio as well.

Got it, okay, that was it. Thank you.

Thanks.

Thank you. So David, I just wanted to go back to something you just said just a minute ago. As you deal with retailers like Aeropostale and PacSun and go through your lease negotiations, how do you really contain the risk that somehow leverage doesn’t move more towards retailers that might be in trouble, that might come back to you and try to do similar deals going forward?

As I said, when this happens, you do get a—it does tend to spread. On the other hand, it’s very simple; we’re not going to do it; so that changes the dynamics pretty quickly. This is a space-by-space, retail-by-retailer decision. It’s not pervasive throughout. I explained to you our rationale as to why we kind of did it between ‘15 and ‘16. It’s something we’ll reevaluate every day with every retailer. My instinct is that we could be changing how we dealt with kind of the ‘15, ‘16 stuff already, but it will be a case-by-case basis.

Okay. And just going back to your development pipeline, you have about $3.5 billion worth of projects. Just given that some of those projects or a lot of them were probably started at a time where maybe the view of the health of the retail environment might be a little bit different, how should we think about the overall arc of capital deployment? Is it reasonable to expect that number to come down going forward?

There is nothing in our redevelopment that we’re not doing other than potentially Copley. Copley was, I mean, I would encourage everybody to study what’s going on in construction costs and what’s going on in supply and demand there. We did not want to be—the build there is longer than it should be because of the nature of how we have to reinforce the structure. We spent a lot on it because to get approvals and to make sure we had the engineering to do it. The reality is, when we started seeing the construction costs, it was just not the right time to do it with all the supply and the cost. We don’t see that anywhere else in the portfolio. We’ve got a lot of very interesting stuff to do beyond what we’re doing now. We’ve done some great work in the field; King of Prussia being part of Brickell, Clearfork, we’ve got plans to expand Fashion Valley; I could go through the whole list. The business is unabated because we think investing in our real estate is what we should do for a living, and that’s not changing. But we do have to worry about supply and demand. I’m not worried about supply and demand in our retail portfolio. In the case of Copley, I got nervous about it. Be the first to admit.

Okay, thank you.

Sure.

All right, thank you for your questions. We’ll talk to you soon.