Simon Property Group Inc (SPG) — Q4 2018 Earnings Call Transcript

Thank you, Lauren. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information 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.

Good morning. We are pleased to report another year of record results, which marks our 25th year as a public company. Our full 2018 FFO per diluted share is $12.13, an increase of 8.2% year-over-year, which will be at the high end of our peer group. We beat the top end of our initial 2018 guidance by an impressive $0.11. Over the last four years, we've grown our FFO per share on a compound annual basis of 8%. To provide perspective on our FFO generation, we produced approximately $165 million in our first full year as a public company, and in 2018, we produced $4.3 billion. Through our commitment to our strategy, active portfolio management, disciplined investment, relentless focus on operations, and cost structure, we have increased our annual FFO generation by more than 25 times since our IPO. For the fourth quarter, FFO was $1.15 billion or $3.23 per share, an increase of 3.5% year-over-year. We continue to grow our cash flow and report solid key operating metrics. The total portfolio increased 3.7%, more than $230 million for the year. Our top NOI increased 2.3% for the year and 2.1% for the fourth quarter. Leasing activity remains solid. Average base rent was $54.18. The malls and Premium Outlets recorded leasing spreads of $7.75 per square foot, an increase of 14.3%. We are pleased that retail sales momentum continued in the fourth quarter. Reported retail sales per square foot for the mall and outlets was a record $661 compared to $628 in the prior year period, an increase of 5.3%. Retail sales were strong across the portfolio, with growth in consecutive months throughout the year. Each platform ended the year at record retail sale levels. Our mall and premium outlet occupancy ended the quarter at 95.9%, an increase of 40 basis points from the third quarter, and an increase of 30 basis points compared to the year prior. Leasing activity accelerated throughout the year, with occupancy for the combined malls and Premium Outlets increasing 130 basis points from the end of the first quarter through year-end. We opened two new outlets in 2018: the Premium Outlet Collection in Edmonton, Canada, and Denver Premium Outlets. Construction continues on three new outlets in leading international markets, two of which will open this year: Queretaro, Mexico will open in the summer, and Malaga, Spain will open in the fall. We are also under construction on a new outlet in Cannock, United Kingdom, which will open in the spring of 2020. We expect to break ground on a new outlet in Bangkok, Thailand in the next few weeks. Our new development projects and extensive pipeline of development opportunities across all of our platforms reinforce our industry-leading position. It's important to note our diversified income generation by geography and product type, with 48% of our NOI from domestic malls, 42% from our value platform, which consists of Premium Outlets and Mills, and 10% internationally, distinguishing Simon from all other retail real estate companies that are publicly traded. We completed several redevelopment expansion opportunities across our portfolio during 2018. The expansions include Aventura, Toronto Premium Outlets, Shisui in Japan, and Johor Premium in Singapore, where reclaiming department store spaces continues to be a focus and significant opportunity for the company. We currently have 10 anchor redevelopment projects under construction, with a gross cost of approximately $725 million. We are actively working on an additional 25 projects that are in various stages of development. We continue to fund these redevelopment projects through our internally generated cash flow. Quickly turning to the balance sheet, our liquidity ended the year at $7.5 billion. We maintain the strongest credit profile metrics in the REIT industry, with a net debt-to-EBITDA of 5.1 times, the lowest in our sector. Our interest coverage ratio was 5.1, and our long-term issue rating of A/A2 continues to be the highest in the REIT sector. Our balance sheet remains a distinct advantage that should not be overlooked. During the quarter, we repurchased approximately 287,000 shares of common stock for approximately $47 million. We also redeemed 405,000 limited partnership units for $74 million. Concerning dividends, we paid a record dividend in 2018 of $7.90 per share, achieving a compound annual dividend growth rate of more than 11% over the last four years. We have paid more than $28 billion in dividends over our 25-year history as a public company. Today, we announced a dividend of $2.05 per share for this quarter, a year-over-year increase of 5.1%. At this current rate, we will have paid more than $100 in dividends per share by the second quarter of this year. Before I turn to our 2019 outlook, let me summarize our 2018 results. We posted another year of industry-leading record results, including revenues, cash flows, FFO per share, and dividends. Our reported FFO diluted share per share for 2018 was $12.13, which beat the midpoint of our initial guidance for the year by $0.17. Moving on to 2019, our FFO guidance is $12.30 to $12.40 per share. When analyzing our 2019 range in the context of our 2018 results, it's important to note the following: We expect the impact from FASB’s ASU 2016-02, the new lease accounting standard, to reduce FFO per share by approximately $0.13. Some items included in our 2018 FFO per share are not expected to recur in 2019, including our gain of $0.10 per share related to the contribution of our investment in the Aeropostale licensing business for an increased ownership interest in ABG, and higher income related to distributions from international investments of approximately $0.05 per share. These non-recurring items total approximately $0.15 per share in FFO for 2018. Adjusting 2018 for those factors, we arrive at approximately $11.85. With our new guidance for 2019, we expect growth of approximately 4% to 4.5% compared to this adjusted number from 2018. We anticipate our growth rate to be at the high end of our peer group. Additionally, we expect lower lease settlement income in 2019 compared to the prior year, and we will have lost rents in 2019 due to closed department store spaces and the downtime related to the redevelopment of those spaces. The impact on our NOI this year is temporary, as these investments will yield healthy returns and accelerate our NOI growth in 2020 and 2021. We also expect the impact of rising interest rates and a stronger dollar to affect our results for 2019 compared to 2018. Furthermore, we will experience a loss of our share of the FFO from the German operations of our HBS joint venture, which was sold at the end of 2018 for a gain of $91 million. Additional assumptions supporting our 2019 outlook include the following: comparable NOI growth for combined malls and premium outlets and mills platform of 2%, no planned acquisition or retail disposition activity, and a diluted share count of approximately 356 million shares. To conclude, we've had another excellent year, capping a solid first quarter century as a public company. We have consistently posted industry-leading returns along the way through hard work, innovation, great people, and great assets. As in any industry, it is more important than ever that we drive change and focus on delivering an exceptional experience for our tenants and consumers. We are now ready for questions. Thank you for listening.

Thank you. First, just wanted to congratulate Rick given the changes that are going to come later in 2019.

Thank you.

My questions, I guess, you touched on in your opening comments, but maybe you could talk about some of the other possible impacts from the repurposing of the Sears anchors, you know, like sales disruption or any kind of competition you might have to give tenants while you're working on the Sears space, and especially with the densification efforts?

Well, you know, Craig again, I think I'd implore you and others who cover us to look at it differently. Some of the numbers that I gave you need to be factored in. We started our enterprise with $165 million in funds from operation. Today, we have $4.3 billion. We have 48% of our business in the mall business, and when we started that was 90% to 95%. There's always disruption in our industry, department store spaces that we reclaim either through lease termination or acquisition, we think will be beneficial in the long run. There are down-times associated with that, and like I said, that's kind of manageable for a company like ours. We provide you the best sense of our guidance, and it’s all factored in there within this range that we hope to produce. We have obviously a history that's unrivaled, frankly, I think, of beating expectations. We'll see this year. We've got a lot going on. So I don't think we're going to zero in on one particular property, one particular tenant, or one particular issue because you have to look at us on a broader basis. We're a little bit different.

Okay, thanks. And then I just wondered, if you've been having any discussions with JCPenney about potential store closings?

No.

Okay, thank you.

Yeah, good morning. It's Michael Bilerman here with Christy. So, David …

From the hip I'm like happy, but I don't know, Rick. I think Rick is square down here. What do you think?

I just hope that Rick is still going to be on these calls to go through the laundry list of retailers that are coming into your malls. So, David, you are pretty quick to deny the speculation of Simon trying to buy Macerich, which I can understand. But, I guess, if I step back, why wouldn't you buy them? Every deal that you've done in the past 25 years has worked out pretty well for shareholders, with great cost of capital. You talked about your under-leveraged balance sheet being a distinct advantage that shouldn't be overlooked. You have an unbelievable platform that can produce synergies. You've proven out your redevelopment and densification efforts. You can probably access as much third-party capital as you want. You've consistently raised your cash flow and your earnings, which has led to dividend growth, which is pretty much contrary to every one of your peers, by the way. So with that set of facts and the performance, why wouldn't you be more aggressive on the acquisition front?

Well, first of all, Michael, thank you for recognizing some of our achievements. Over the last 25 years, I mean, we do try to explain the company. Maybe we're not very good at it, to the best of our abilities. We're a little bit different because of some of those factors. But obviously, Michael, I'm not going to comment on any specific company. We tried to do a deal with Macerich a long time ago; that’s, as I've said before, yesterday's news. We're glad to partner with them in Carson, which is moving forward, and I'm not going to comment on any deal we may or may not do or any particular company. We have no plans currently to pursue M&A activity, and we're very focused on what we've got in front of us. We're excited about the evolution of the mall industry the way it's been evolving for 60 plus years. We are excited about our outlet business in the international breadth and depth that it has. And as I mentioned in my calls, you know we had leading sales per square foot in every platform. So we've got plenty to do, and we have no plans at all to think about anything else. We're focused on executing the vast amount of activity that we have.

Hi David, it's Christy. Good morning.

Good morning.

You're coming off of a year of positive sales growth from a tenant perspective. You've been able to gain occupancy and maintain pricing power. Just from where you sit today and what you're seeing in terms of the health and store performance among your shop tenants, would you expect that 2019 would be a little bit of a tougher year from a tenant sellout and leasing perspective? And then just sort of related to that, as you've been building your fifth platform and announcing more consumer-focused initiatives, maybe you can talk about what you see coming down the pipe in 2019?

Well, maybe I'll just start, and Rick can chime in. Look, I do think on the retail front, the strong are getting stronger. As you've seen by numbers throughout the retail community, the days of a rising economic boat don't lift or tide and don't lift all retail boats. You have a lot of outperformance and a lot of underperformance. The underperformance, I can talk off-line on a theory of why that is, but I don't want to bore you. Some retailers out there are making us nervous. In the first quarter, bankruptcies are trending lower than they were in 2017 and 2018. However, there are some rumored names out there that could ultimately end up being similar to 2017 and 2018. 2018, as we said and anticipated, we thought it would be less than 2017, and we ended up being right there. That said, I do think there will be more bankruptcies to come in 2019. That's why we're relatively conservative as we look at our comp NOI. It takes time to lease space, and even though we anticipate it, it takes time to lease the space. We have our work cut out. We are concerned about a few retailers. That will shake out in Q1, but I think the retailers that are investing in their product, store experience, and branding are having decent results. Physical retail can produce good results, but it can't be distracted with a lot of other activities. We've had a number of retailers, the list is long, the landscape is littered with leveraged buyouts in our industry, and we continue to sort through that. So that, I hope, answered the first question. On the second one, we're very close to launching this platform, but it’s a little bit like building something. We think we’re going to open in Q3, but it might go to Q4, then to Q1. We’ve had a couple of those delays, maybe in Spain and Mexico, where it happens – get delayed a quarter. So I would expect us to launch. The earnings impact will be, I think, completely on the margin. I hope the market appreciates that. However, since we don’t have a set date yet on when that might happen, we are not going to factor it in our numbers yet. When we do launch it, we'll show it to you. It's not a big deal. It's a couple of cents here and there. And it's an investment in our future, and we'll see where it goes. We expect that to happen, but when and how is up in the air, so we'll keep it off the table for now. But when we do, we'll share it with you. Again, I think we're pretty transparent. The reason I take a step back and think about our company is, we have all these assets, international, outlets. So if we got as granular as you wanted, it would waste your time and ours. You have to think of us differently. We’re not just a handful of assets here and there.

Great, thank you, David.

Sure.

Thanks, good morning. David, I don't know, you or Rick can maybe talk about some of the newer tenants and some of the online tenants, kind of your experience and success bringing some of these folks into the mall, and your outlook for their growth into 2019 and 2020.

Hi, it's Rick. Just to step back, in all of these discussions, the single-best thing we have going for us are incredibly strong properties across all three of our platforms. So in any dynamic you talk about, the key is do we have places where retailers want to be? Happily, we do, and they're getting better by the day as we invest our capital and enhance them. In terms of the retailers, e-retailers are certainly one aspect of it. We're working with probably 40 different ones. We've rolled out Untuckit, you've heard all the names, and they want to be in our best properties. We are doing deals with Warby Parker, Fabletics, Indochino, and Untuckit, and I could go on. They are finding success. You don't have to take our word for it; you can take what they're saying. A lot of them are expressly raising money to roll out more stores. So that has been an important part of diversifying our tenant mix and keeping our properties current.

Okay. And then, David, I just wanted to circle back. You talked about the anchor redevelopment, and you said you're actively working on another 25. Just in terms of the mix between retail, hotels, and office and multifamily, how are those projects sort of breaking out in terms of alternative uses?

Actually, I think we've never been busier on the alternative uses. We’ve got a list in the 8-K that shows you what's been approved, but that pales in comparison to the future activity. I'll just throw out three off the top of my head, Steve, that are massive mixed-use projects, include Northgate, where we have made a deal with the NHL franchise in Seattle to do their corporate office, their practice facility, and ice facilities for the general public. We also have Brea, where we have reclaimed a department store space that is in the process of permitting to do a massive amount of residential. The same applies to Stonebridge in California. Those aren't even on our list. We have a significant amount of redevelopment going on, and we're feeling the pressure in our portfolio. So the vast majority of these spaces are much more focused on changing the mix, adding additional elements, such as wellness, fitness, restaurants, residential, and hotels to make it a standard statement of live, work, play, etc. So rarely is it just small shops. I would say that the vast majority includes all those elements.

One other thing I would add is, to echo David's point, this trend is accelerating. This time last year in our K, we listed 11 projects for 2018 and beyond. This year, we have 19. As David said, we have many more in the pipeline that are going to be coming in here. We have a dedicated team and demand because our properties are located in great places. That is going to be an accelerating portion of our development activity.

And maybe just to follow up on the cost and kind of yield when you look at these future projects, just given what we've seen in construction cost increases, how would you sort of estimate the returns on the future projects versus the ones that are either recently completed or currently underway?

Well, look, it's not redevelopment. It's not new development returns, but I think our redevelopment efforts will be consistent in terms of return that we have over the last several years. It's certainly accretive to the value of the asset, otherwise, we wouldn't do it. The range is kind of 6 to 10, and a lot goes into that, Steve. But it's accretive to the value of the asset; otherwise, we wouldn’t invest. The fact is, due to the size and scope of our portfolio, we don’t feel compelled to invest in an asset just to maintain it. That's not to say we don’t do appropriate maintenance investments; we do. But we make our investments with the lens of consumer expectations, retailer wants, and the value of that asset.

Okay, thanks. That’s it from me.

Sure. Thank you, Steve.

Good morning out there.

Good morning, out there is right. I want people to know it’s cold and snowing, but we are here.

Well, at least the malls are heated, so they have somewhere to warm up.

You bet.

So, Rick, congratulations, and David, I think you said $25 billion in dividends over the time, which is pretty remarkable.

Alex, you've never been great at math, not as good as we are, but it's actually $28 billion.

$28 billion. Okay. So, I was a little off.

I'm just kidding, it was a joke. Okay. You are very good at math actually.

Your time. Just following up on Christy's question on the consumer platform that you're talking about, I mean, is this something like Simon Brand Ventures that will interplay with – throughout the company or is this truly something totally separate and apart from your existing malls, mills, outlets, etc.?

Put it this way, we would not be doing what we're doing if we didn't own the assets that we own then had the branding that we do and had the consumer touchpoints as well as the retailer touchpoints. So, it is absolutely unequivocally related. We hope it will be synergistic between what we do today and what we want to do in the future. We would not be doing it if we didn't have the business that we're currently, obviously, involved in daily. So, it is complementary, and where it goes will be a function of our commitment to invest, our courage to invest, our conviction, and our ability to execute what we think might be a real interest.

But this is something that would add like where SBV adds NOI or adds income to the overall company. This would be something commensurate, correct?

Well, there will be an investment period, but the reality is, yes, we think it will have a financial return associated with it, but there is a little bit of an investment period before we get to that point.

Okay. And then the next question is on retailers. You said you're expecting more shakeout. Clearly, minimum wage increases and just strong economic growth, low unemployment are pressuring the wage front. Across your tenants, are you seeing all of them absorbing the higher wage, or are the rising incomes allowing them to offset by raising their prices because their consumers are having more income? Just sort of curious how the wage and operating expense dynamic is occurring with your retailers, and if you think that's going to be growing pressure point among your tenants?

Well, I do think the category that seems to be most sensitive to that today is clearly in the restaurant category. Those pressures are affecting decision-making. We haven't seen that pressure in the soft goods apparel side or wellness. Those folks are very sensitive to location. The extent that states have enacted minimum wage laws that are higher than federal mandated numbers, it's got to be a unique opportunity for the restaurants to deal with that. Thankfully, we have most of those, but it is affecting the marginal deal in some of those states. So, yes, I do think that across the spectrum, we are seeing those pressures.

Okay, thank you.

Sure.

Hi. Good morning.

Good morning.

I was just wondering if you could go through the decision to do buybacks during the quarter and then generally how that compares to your other uses of capital?

Well, on the units, it’s just that we have the right. By and large, we believe in the growth of our business units. We have the ability when they want to convert to buy the cash. It’s a pretty simple trade, and we’ll continue to do that as that happens. December had a period where the world was changing, equities were being pushed around, and we took advantage slightly, but we took advantage of that.

Okay. And then on the balance sheet side, which obviously is a great differentiator for Simon. You previously had $600 million that was actually maturing today. So, I guess, I was just wondering what were the sources there, and especially considering the development spend this year. Do you plan to issue new unsecured debt?

Hi, Caitlin. This is Brian. You're absolutely right. We had a $600 million maturity today. As David mentioned in his remarks, we ended the year with $7.5 billion of liquidity, so we used existing liquidity to retire those notes this morning.

The good news is we paid it off. That's not always the case in the real estate industry.

Great.

That's not always the case in the real estate industry, okay, that we pay it off.

And then maybe one more if I could. Could you discuss maybe market rent trends? And where they’re stronger versus less so, for example, by U.S. quality or outlet versus mills or open air versus enclosed?

It's Rick. Frankly, we are having pricing power across our portfolios. That’s a function of quality of the properties; it all starts there. As we continue to improve them, we’re able to drive our rents. I think that’s demonstrated in the spreads that we’ve reported.

Look, I would only add that the reality of how leasing works is that it does take time to lease space. It’s not like we make a deal, we negotiate the lease, and the retailer builds the store, etc. If you look at the NOI growth, the comp NOI growth is being affected by some of these retailers going through this significant change. We tend to work with them because at the end of the day, we tend to do it on a shorter-term basis. Because we know, ultimately, we have to re-lease the space to someone. So there is a bit of supply and demand that we are working through, and that’s been manifesting itself in the numbers over the last year or so. We expect it to manifest itself in 2019 as well. But it comes to a good property with a good retailer, we’re making strides. We’re working with some of the ones that are going through their various restructurings. Ultimately, that has some impact, certainly in the short run.

Okay. Thank you.

Sure.

Hey, good morning.

Good morning.

You guys mentioned the 10 anchor positions you have underway, the additional 25 you’re working on. Given some of the other development and redevelopment opportunities you obviously have on your plate as well, are you comfortable taking leverage up some from here as you kick off more of these projects? Is there anything holding you back on starting more of these, other than just getting those right plans in place? Basically, would you be comfortable taking the pipeline up another billion when they’re ready to go?

Look, unfortunately, in a lot of these areas I mentioned earlier when Steve asked the question, there is a real process about permitting. We see it all the time, and it’s a process where you scratch your head sometimes because all you’re doing is making the asset better for the community. But municipalities are, in a lot of areas – you’ve got to go through a real process. I would say that holds us back more than anything because if I had approvals in places like Brea, we would start; in King of Prussia, we would start. If we had approvals in Oyster Bay, we would start, but we don’t. Stoneridge we would start. That to us is the governor, more than the balance sheet, though I will say we respect our balance sheet and we are very focused on it.

That’s helpful. Appreciate that color. And then you did mention in your outlook for 2019 your expectations for comp NOI of 2%. You’ve been more focused on portfolio NOI growth, though, in most of your commentary, so I know that's what matters more to you. Any color on where the expectations are for that to trend?

We didn’t – I don’t think we’re giving guidance there. We don’t have a big portfolio NOI because a lot of the new developments that generate that are acquisitions we’re not planning. We had some delays in a couple of our international deals that I mentioned earlier. We have a reduction in that because the German sale of HBS. So it's not going to be the growth that we had in 2018, where we had a lot of external activity. Part of it will add incrementally, but it’s not going to be like the spread between what we had in 2018, primarily because our developments have been delayed and our new developments have been delayed. And again, we sold our HBS German business.

Got it. That makes sense. And last one for me. You’ve had some really solid sales results here obviously in the past few quarters. Your lease spreads have been solidly in that double-digit range. I assume you’re still pushing your standard kind of 3% rent escalators through. So I guess I’m wondering if some of that has been translated into higher ADR growth necessarily. Is there anything we are missing there? Or should the ADR growth really start to follow suit here?

I think that the pressure – I mentioned it earlier. The pressure that we have is that we are still dealing with a handful of retailers that, for whatever reason, have to go through their various restructurings. Because we can’t lease every space, every minute, we tend to work with them, and that does put pressure on our ADR. But it’s moving in the right direction. I do think the cycle of the levered retailers is working its way through the system. At the end of the day, we’re suffering the pain. 2% comp NOI is not – we’re not ecstatic about it, but the primary factor in that is the retailers that are going through the various restructurings that we had. As that’s cleansed, we will get to that number. Retailers are very focused on their cost and operating model. Stores continue to be their best investment and return. Obviously, there's a lot to talk about how profitable the Internet is and e-commerce and who's bearing the brunt of the investment and all that. I don't want to get into the psycho-babble talk about that, but the reality is because of a lot of investments, they’re looking at every expense category. We are having those discussions, and they’re not easy.

Thanks for the time, David.

Sure.

Hey, good morning.

Good morning.

So David, as have been discussed, you have one of the best balance sheets, platforms, and track records in the REIT sector. And yet you trade at an implied cap rate of about mid 5, which seems to be in line with the overall REIT sector. So, curious why you think that’s the case. If it’s fair, and what levers do you consider pulling to address that?

Well, I’m not worried. Look, I think you – what we focus on is trying to make our product better as opposed to what levers we can pull to where we think we ought to trade at a better number than the next guy. I mean, if I took that philosophy, we’d be more levered. I don’t look at it like that. I look at it, how do we make this company better day in and day out? That’s the focus. Why do I personally think that? I have no idea. You guys know better than I do. I always wonder, why aren’t we, given our cash flow generation and our ability to make appropriate, strategic investments and withstand the restructuring that's been ongoing in the retail industry, better than most? If I had to tell you one thing, it’s probably because people think we’re going to buy something. Then when we tell people we’re not buying, they ask, why aren’t you going to buy? So, I don’t sit here and obsess over it. We are focused on making this product better. People that get obsessed with where their stock price is, I think, end up making mistakes. That’s not a REIT statement; that’s a corporate America statement. That’s the philosophy. I hope shareholders appreciate it. Maybe they don’t, but that’s how we operate the business. That’s how I think our board thinks about it: how do we make our products better and our business better? When we do that, it tends to manifest itself in earnings, and then we go from there. But I don’t know. If I didn’t answer your question, I’m happy to hear what you – do you have any ideas? You tell me.

Well, look, I think perhaps the sector is one variable to consider. It is a tougher business these days, but I think what you guys have built certainly merits value and should be acknowledged though. I'll just leave it there. My second question is on the rising cost of labor, which has been well-documented. Maybe you could talk a little bit about the labor cost inflation built into your 2019 guide, maybe from a maintenance and corporate G&A perspective. The corporate G&A has been trending down the past couple of years, and I'm curious if you think that could continue as well.

I think we’re budgeting pretty consistent numbers for our G&A next year. We don’t see any major changes in that. The area we’ll beef up is in mixed-use development, so we’ll be adding some bodies over time. Our overhead ratio is still the lowest by a large margin. I can’t remember the numbers, it's 2 or 2.5, right, to 10, and it’s a staggering difference. It’s not like we’re talking about 100 basis points, it’s like 700 to 800 basis points. So, it’s not going to be anything out of the ordinary for us. But we are going to add some people in certain areas that we need to execute on these redevelopments.

And last one, was there any reason that you can perhaps share with us on the sale of the German outlet, I think the designer outlet, Ochtrup?

I’m not – I’m sorry, I don’t think that’s accurate. What was your question again?

I was just curious about the rationale for the sale of the German outlet.

We did not sell the outlet. Actually, Ochtrup, we bought a few years ago. What we sold was our investment in the HBS joint venture, which we had with Hudson Bay, among others. We had the Kaufhof real estate investment that, because of the merger with Kaufhof and Karstadt, they wanted to own the real estate, so they bought out the real estate interest in the department stores that Karstadt leased. That’s what triggered our $91 million gain. But we didn’t sell an outlet.

Got it. Got it. Okay, thank you for that.

Yes, of course.

Hi, good morning.

Good morning.

In 2018, you guided same-store NOI to above 2% and came in at 2.3%. Now you're looking for 2% growth in 2019, implying slight deceleration. But understanding that this also reflects what's happening with more closures and the Sears redevelopment, do you view 2% as a trough? Or is this sort of a steady-state, long-term growth rate for high-quality outlets and malls?

We do not think it's our steady-state, but we are – because of the redevelopment, we have a significant amount of reduction in 2019 due to income we received from certain department stores. That takes a year or two to build, and we’re suffering from that in 2019. We don't view 2% as our steady state.

Thanks. And then through your Simon Ventures Fund when you look at some of these nascent brands you’re nurturing for this platform, what are some of the business models or concepts you’re seeing that make them more successful versus what’s happening with some of the struggling legacy retailers? Are these concepts more niche-like in nature or could be grown, scaled, and replicated across a larger physical base?

I don't think you can go from that point to the next point. The retailers that have struggled, by and large, have been over-leveraged, so they couldn't do what they needed to do. You just can’t have too much leverage in any business when you run into economic difficulty or need to make investments. We would have a long list of struggling retailers, and the vast majority have been over-levered. I prefer not to scare you right now. We see those who have a vision and who invest in their products and store experiences, doing well. For example, we’re an investor in FabFitFun, which just raised $80 million from Kleiner Perkins; they have a subscription business, it’s been done before, but they just do it better and more creatively. It always comes down to someone taking an existing idea and executing it better than the next person.

Thanks.

Sure.

Thanks. Just have a quick one. For the 2019 outlook, are there any significant one-time, either expenses or benefits that we should be aware of? I guess, for example, like the Puerto Rico insurance recovery, anything like that?

Actually, Puerto Rico came in lower than we thought in 2018. So, as a company of this size, we’re always going to have some of that stuff. We don’t get into that level of detail. I mentioned some of the other items that we think will be lower this year like settlement income. Rising rates will have some negative impact as will a stronger dollar. Some of that stuff is moving around, so we’re always going to have some significant non-recurring impacts each year.

Got it. Okay. And then last thing, the sales of $661, do you have that number on a weighted – NOI-weighted basis?

We do, and the number is $832. So we took – I asked, Tom, do people care about that NOI-weighted number? And he said no, no one’s ever called or asked me, so we took it out. But the number is $832 a foot.

Yes, it just seems like if you’re doing any of the buildup, you should apply a weighted average cap rate.

Yes, we don't disagree. If people really like it, we are happy to put it back in, and they can call Tom.

Good morning. Just a question on your tenant reimbursements. You had an unusual situation last year where the reimbursements declined about 1% for the year. Same impact in the fourth quarter. What’s driving that?

That's usually just a quarterly spread of how things go. Nothing's driving it. You need to look at the totality of the year and not just quarter by quarter. We had a significant rise in utility cost and other items, with disposals that factored in there, but nothing material.

Okay. Thank you.

Good morning all there. When you think about your capital allocated to redevelopment deal and newer development, what do you think about the risk profile of the newer deals you're doing, like the Sears repositioning or densification deals? Is the risk profile for those deals similar to what you've done in the past in terms of redevelopment, or is it a little bit different?

I mean, that's what we do. I don’t think there’s a difference. There’s no – I’d say the risk is – we don’t feel like we are higher-risk than redeveloping a department store space or anything else.

We are applying the same discipline to decide whether we’re going to build a multifamily, office, or hotel that we apply when we’re doing a retail redevelopment. We do our market studies and assess market rents. Our risk profile is the same because we’re doing the same underwriting.

Okay. Just going back to the same-store NOI. Can you provide a little more detail around what type of cushion you’re building in, specifically, around the temporary retailers that you’re having to recover your position? How much of an impact is that making to that 2% same-store NOI growth?

Look, we don't do that. I encourage you to think about our company a little differently and look at our history and realize that we are a very large company. We don’t get into that granular detail; I encourage you to look at our history. The fact that this number that we roll up, we don't provide that kind of detail.

All right. Thank you.

Sure.

Hey, good morning everyone. You mentioned there are some tenants that may be a little less relevant these days, and some of them don’t have balance sheet issues. Have you seen any changes in tenant retention at lease expiration? How much of a headwind is this for same-store NOI, due to the 10 basis point headwind each year, or 50 basis points?

We have maintained pretty much the same percentage of renewals that we've had historically. So that has not manifested as an issue.

Okay. And then, for a given year, is it typically about a 20 basis point impact? Does that seem about right?

In what context? We are renewing about the same percentage of tenants. We do have tenants that we are intentionally not renewing because we want to bring in more productive tenants that are better operators. We have tenants who are going through issues.

Okay. Thanks a lot.

Sure.

Hey, it’s Michael Bilerman. I just had two quick follow-ups. David, at the end of your opening comments, you talked about all the changes in 2018 relative to 2019, you rattled off the FASB change, the Aero gain, the loss of FFO, the sale of the German operations, lower Houston fees, the impact of rising rates and the rising dollar on your international operations, and then you talked about and you mentioned it a couple of times was this impact of the lower department store NOI, as you take those boxes back and you redevelop them. Are you able to at least recognize your large company? We should think about you differently, but are you able just to identify the impact of that item? You produced $5.7 billion of same-store NOI. I'm just trying to get a sense of how big that piece is, the impact of that 2% growth rate?

Well, I guess if it is material enough to mention, we don’t get into the granularity of these debates. We ask that you look at our track record and our ability to generate cash flow. That’s how I’d respond to it.

And I do that, right?

Again, so we recognize it, but we don’t give that number because we don’t want to make excuses. A lot of companies say next year is a throwaway year because I'm investing this, that, and the other, and we don’t do that here.

Listen, I always take when a company says, 'Well, if you exclude this,' like shareholders don't have that choice; they'll see the whole thing. I was just trying to focus on you brought it up and I was just trying to figure out what sort of headwind it was creating on that 2% number?

It’s material enough to warrant it, but we also don’t want to make excuses.

And then just a clarification on this whole consumer initiative when you and I spoke about this a bunch after you put it out in your shareholders letter last year. You sort of said there's a few cents potentially as a cost. I'm just trying to understand, is that a cost to capital cost or let's say you go out and you put $500 million or it’s a $1 billion investment, the impact is the cost of carry before the initiative starts to produce results?

Again, it’s an investment. It's not going to be, let's assume, we earned $12.35. We're not going to be at $12 because of that. We are thoughtful folks, and we do have a track record that allows us to think about it a little bit that warrants our thoughtfulness.

I have no qualms with the company making investments. There was just more or so I was trying to understand if that was – the cost was making the dollar investment which is very small, right. A few pennies, $10, $12 million bucks, or does that represent the cost of carry on a much larger investment? It's like investing $500 million and the effective opportunity cost of that capital.

You’re dealing with the guys who know accounting. The reality is it's both because you have to depreciate the cost; you don't add it back for FFO. Some investments, IT spend, sums are amortized, and we can sit down and go through the P&L if you're interested.

It would be scintillating.

It will be scintillating.

Okay, I appreciate it, David. Thank you. Have a good rest of the year.

No worries.

Good morning.

Good morning.

Could you help us understand the retail leasing environment today versus six or 12 months ago? Any category stand out from a lease term or store closure versus store opening perspective? Has rising sales per square foot over the past year plus translated into higher demand for space?

I would say that the demand is better. Better sales produce more interest in opening. There are new and more retailers coming into the market all the time. The only offsetting this is certain retailers who are dealing with legacy financial issues that have never been properly addressed.

Okay. And then just to continue on the ten-anchor redevelopment projects and the pipeline of 25 others. So, beyond the large-scale mixed-use transformative redevelopment, which to be fair, we think is the future, however, it's likely not justified for most reclaim Sears or other returned large boxes. So, where is that demand coming from to lease this space? We've seen Lifetime Athletic and some co-working facilities. Can you share any other demand you're seeing?

There is a great deal of retail demand. Frankly, we are dealing with fitness centers, but they are closed country clubs, theaters, entertainment uses. We’re adding small shops or specialty store space because we have great properties that have demand. There is substantial retail demand in addition to the densification efforts that we’ve talked about previously.

Yes, we have strong property locations.

Yes, we know, we've got the best locations.

Okay. Thanks.

Sure. Thanks for your questions, and we’re available if you like to talk further. Thank you.