Simon Property Group Inc (SPG) — Q1 2019 Earnings Call Transcript

Thank you, Bridget. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Rick Sokolov, Vice-Chairman; 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. 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 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 had a very productive quarter and are pleased with our financial results. Results in the quarter were highlighted by funds from operation of $3.04 per share, an increase of 5.9% compared to the prior year. Our reported FFO per share exceeded the First Call consensus at the end of the first quarter by $0.10. Adjusting the prior year for the $11.3 million impact of expensing internal leasing costs, our FFO per share growth was 7%. We continue to grow our cash flow and report solid key operating metrics. Total portfolio net operating income increased 1.7% compared to the prior year, and our comp NOI increased 1.6%. NOI growth was impacted by approximately 100 basis points due to the impact of retailer liquidations and bankruptcies resulting in higher bad debt expense, unfavorable foreign exchange rates, and slightly lower NOI from properties undergoing significant redevelopment. Redevelopment activity is moving quickly and, in some cases, it's moving quicker than we originally anticipated. For example, the transformation of Northgate in Seattle, which was originally budgeted to occur next year, will start this summer with the demolition of the mall. The NOI will be significantly reduced while we begin this massive redevelopment. These types of decisions are in the best long-term interest of the asset and our future growth. Especially when you think about a property like Northgate where we are replacing a majority of the retail with the NHL Seattle Corporate office, practice facility, ice skating facilities for the public, as well as significant residential, hotel, and office uses. Leasing activity remains solid; average base minimum rent was $54.34. The malls and outlets recorded leasing spreads of $14.17 per square foot, an increase of 27.3%. Reported retail sales per square foot for our malls and outlets was $660 per foot, compared to $641 in the prior year period, an increase of 3.1%. Keep in mind this growth is on top of a very strong growth throughout 2018, and reflects a late Easter and Passover, as well as some recent lackluster tourism spending at some of our tourist-oriented centers due to the strengthening dollar. Our malls and outlets' occupancy ended the quarter at 95.1%, an increase of 50 basis points compared to the prior year. On the outlet business, which we continue to drive corporately, we broke ground on Siam Premium Outlets in Bangkok, our first outlet in Thailand. This center is scheduled to open in the first quarter of 2020. We are also delighted to have received approval to begin construction on our luxury designer outlet in Western Paris. The center's proximity to Paris, coupled with its affluent, fashion-conscious local trade area, offers significant opportunity for tourists and locals. Construction actually begins in May of this year. Queretaro, Mexico, will open in May and Malaga in Spain will open in the fall. We will also open a new outlet in Cannock, England in the fall of 2020. So let me just restate this: you're talking Bangkok, you're talking Paris, you're talking Mexico, Malaga, Spain, and Cannock, England, all because of our corporate resources dedicated to the outlet business—and all of these will be thoughtful investments, high return on investment, and add to our overall franchise value. Redevelopment activities are underway at more than 30 properties domestically and internationally across all of our platforms, where we are creating monitored, innovative live, work, play, stay, and shop communities. This includes 10 former department store space redevelopment projects that are ongoing, and we have more than 25 projects in various stages of pre-development. We continue to then supply our centers with the addition of mixed-use components including hotels and multifamily office uses. As examples, during this quarter, we started construction on a 430-unit multi-family residence at Round Rock Premium Outlets, and construction began on 80 hotels by Marriott at Delano, 177 keys, Sawgrass Mills, 174 keys, as well. Our extensive identified pipeline of more than $5 billion in new development and redevelopment opportunities across all of our platforms will fuel our future NOI and FFO growth and reinforce our well-located properties. As many of you know, we're excited to have launched the data version of Shop Premium Outlets and are encouraged by the feedback we have received thus far. This is a unique long-term investment for us, which capitalizes on the power of the Premium Outlets brand, our large base of loyal and engaged shoppers, and the strong relationships we have with our retail partners. This is an opportunity to extend our reach, enhancing and deepening our relationships directly with shoppers. We look forward to a full public launch, with ongoing costs in the platform. We'll continue with these costs running through our income statement. Balance sheet: our liquidity at the end of the first quarter was $7 billion. We expect to generate approximately $1.5 billion in cash flow after dividend distributions, which we will use to fund the investment in our development and redevelopment opportunities. We continue to have the strongest credit profile in the industry, including net debt to NOI at 5.1 times, fixed charge cover ratios of 5.1 times, and approximately 95% of our indebtedness is fixed-rate, long-term, with an issue rating of A/A2. During the quarter, our board of directors also authorized a new common stock repurchase program of $2 billion. Today, we announced our dividend of $2.05. This is an increase of 5.1% year-over-year. Including this dividend, we have now officially paid over $100 per share in dividends to our shareholders since becoming a public company. Yet another accomplishment that separates us from others. We're also reaffirming our guidance this year in the range of $12.30 to $12.40 per share. In conclusion, we produced another quarter of impressive results and operating metrics. We continue to operate our business with a long-term view, a focus on cash flow generation, managing each asset as if it's our only asset. Our track record speaks for itself. Whether it's 1, 3, 5, 10, 7, or 6 years, we have outperformed the industry in earnings, cash flow, and dividend growth through the combination of our assets, people, and hard work. We expect to continue our industry-leading track record, and we're now ready for any questions.

Thank you. Just to clarify, what's the Opry Mills settlement in your original guidance of 2020, $12.30, $12.40?

Well, Craig, we don't give specific itemized guidance. As you know, we do provide comp NOI guidance, and I think it's important to remind folks that every year we have a lot of ins and outs of our company because of our size. So this year, as an example, we expect to have lower lease settlement income compared to last year. We budgeted a higher distribution income from our value retail investment, which we now expect to be lower. We have a stronger dollar than we anticipated. We're accelerating our vacant anchor and redevelopment program, as an example, in Northgate, which does about $15 million of NOI. We're shutting that mall down essentially this year, so that's different than our budget. And then obviously, we have some unanticipated bad debt, it's not called bad debt, but I'll call it bad debt for this quarter because of bankruptcies that occurred in the first quarter. And then we have certain SPO costs. So as much as you would like us to itemize each and every aspect of our business, we don't do that. We're a big company. We've got roughly $5 billion of FFO. So, again, put that in perspective. We are an earnings machine. That's how we think about ourselves. We obviously knew about the settlement when we gave you guidance; it was disclosed in our 10-K on February 22, but we don't give itemized specific guidance because of the nature of our company. I hope that addresses your question.

Okay great. And then on the leasing spreads that are up 27.3%. Was this impacted by anchor releasing or what drove that number higher?

Yes, I think it's generally a mix. We are taking out some less performing retailers, putting in better ones. We're not going to guide necessarily for that spread, but we're certainly proud of it. And our mix continues to change. We feel confident; we still have leases that are under market and we expect to continue to post the positive leasing spread.

And then just finally, the month-to-month leases increased. I know they did that last year as well. Is there anything that happens seasonally that increases month-to-month leases in the first quarter?

Not really. I mean, a lot of the bigger, larger accounts just take some time, and that's really all that's ongoing there.

Okay. Well, thank you.

Sure. No problem.

Hey, good morning.

Good morning.

David, morning. Going back to last quarter, you were expressing some caution around the closing environment and the bankruptcy that you saw lingering out there. You seemed to know that you thought they were going to pick up. We've seen a number of closing announcements since that last call. So just wondering how you're feeling today, looking at what's out there and what still needs to possibly shatter here in 2019?

Well, good question, Jeremy. I think it's safe to say that we did anticipate some bankruptcies. We are looking at a few others that we'll see how the rest of the year shapes up for them. We were a little bit— a lot of cases when you do run into a bankruptcy, you see a kind of a reward opportunity. A couple of bigger ones just liquidated; that was different than our plan. But that's what makes our company unique: we’ll take that space back. But that's what makes our company unique is that we'll take that space back; we will lease a lot. And I don't think it will affect the long-term prospects of our cash flow generation, but it’s going to take some work this year to balance that. But I think most of the bad news is behind us. I can't guarantee that.

Okay. I appreciate that color. And then just I was wondering if in terms of your tenant sales, and 3% increase, is there any sort of additional detail or just color you can provide across some of your bigger categories to understand what's helping lift that, and on the other side, what's dragging on it right now?

Yes, I think [Technical Difficulty]

Hey, it’s Michael Bilerman. David, I don't know if it's just our line, but your line sounds like you're at a bad McDonald's drive-through.

Well, I don't— it may be your line. I haven't heard that before.

No, no. There you go. Now, now we can hear you. That's perfect.

Okay.

Thank you. You talked in your opening comments about the impact to total NOI from the increased bad debt and the foreign exchange. What you're doing at Northgate, which sounds very exciting from an NHL perspective. How much of that impacted the same store 1.6% in terms of—I know it wouldn't be the redevelopment, but I'm sure the store closures and the bad debt may have had an impact, and did that shift at all your view towards the 2% growth for the year?

Yes, I think I said this obviously if I was in the McDonald's drive through if you didn’t hear it, but for Northgate has no impact on that. That's in the portfolio NOI number because it's going through a redevelopment. The fact is though we had budgeted a lot more NOI through that this year; that's now going to go offline. So it does affect our overall $12.30 to $12.40 estimate. And I’ll put that in mind. Remember that's $12.30 and $12.40 which I do think is the leading REIT per share earnings, but you would know that better than I would. And I—basically the number between the stronger dollar and the extra bad debt expense is around 100 basis points. I did— I think I said that in my commentary early, but you may not have heard that. So I—and getting to your question, the 2%. If we felt we had to back off that, we would tell you today. Listen, there are no guarantees. But we have a lot of levers in this company and we're going to try to achieve that to our best abilities. We felt it wasn't achievable; we would back off it. We are not backing off of it. I would say the biggest unknown is not necessarily future unanticipated bankruptcies, but our average rent always is at the— we're at the mercy of retailers, and that's a number that we do have a little bit of volatility in it because of our high producing properties. So yes. So that's the one element that we watch every quarter and we'll see how it shakes out. But the reality is if we wanted to back off of 2% we would tell you today that we're not at that point.

Right. Yes, I know what threw me off is when we talked about 100 basis points in the opening remarks. You talked about the impact of retailer liquidations and bankruptcies resulting in higher bad debt, the effects and then the slightly lower NOI from properties going into redevelopment. And so, I took the 100 basis points as being total. And I was trying to get the impact just at the same store pool on that 1.6%.

Yes, it covered a little bit of both. But the reality is, the biggest comp NOI situation is because of the foreign exchange rates and the bad debt.

And you talked a little bit about percentage rents, and that having an impact as things go through the year with all the accounting changes that got implemented this quarter. From a disclosure perspective, you've now rolled everything into the lease income line, right? So now that has the minimum rents, the percentage rents, has tenant reimbursements, if often has the bad debt. Can you...

Yes. You say we’re not—it’s not we talked to our [Indiscernible].

No, I get that. What all the other companies have done is they've given us a supplemental disclosure. The way it was before in a separate page so that we can still look at the trends of reimbursement, we can look at the trends on percentage rents, and we can look at what bad debt was. And so if it's possible, I think I know investors would, and certainly from an analytical community we would really appreciate getting the same level information knowing that your face of the income statement furnished to the SEC is going to be the way it is. That you've presented it, but having that supplemental disclosure on each of the line items I think will be helpful as we model the company given the various pieces that do have some seasonality and volatility in them?

Well, I appreciate the comment. The reality is, we don't want to necessarily do that. So when the SEC says you can't do that, then you’re asking us to do it. I'm not sure what the right approach to do that is. We take your comments certainly under advisement. For us to say bad debt, when there is no longer a bad debt, is not something we necessarily want to do, but we’ll. Let's see how this year shapes out, and we're certainly open to it, but we don't know what to call it if it's not allowed to be. It's contra revenue as opposed to bad debt expense.

Correct. No…

We don't know. It's a little tricky, but you know, we’ll. I do think generally we disclose all the relevant facts of our company. We have an exhaustive 10-K. We have an exhaustive 10-Q. We do an 8-K. I think our industry; the REIT industry does a tremendous amount in disclosure, much better than many other you know Corporate America. So you know, and again, I always maybe I fail at this Michael, but our company is—it’s just a little different. It's a little bigger. There are more moving pieces. We're more international; we’ve got more platforms. We have much lower overhead. So it's just—we're a different, a little different animal, and to get into the nitty-gritty detail that you get from all these other companies, we could—we could argue whether it's really all that material and relevant. So we’ll have that discussion for a later day.

Yes, that was just more, so trying to be consistent with what you've provided before, so that we can keep up with the trends that we've modeled the company for the last 20 years on. But happy to follow up off line and share some examples with you as well.

Sure. Okay.

Good morning, thanks. Looking at the development, redevelopment pipeline, yet, you raise the expected yield on that to 8%. It looks like it was the new developments that are getting higher yields now. Can you just talk about what drove that higher?

Well I mean, it changes. It's just the mix a little bit. We do, as I mentioned, we have driven through our corporate relationships; have driven the outlet business internationally. We’ve got some really good returns on that coming online. And then some of these redevelopments, we're taking back anchor department stores or are driving that. But it's a mixed number, and it's subject to change quarter-to-quarter. But again, the general theme about our ability to adapt to having accretive return on investment hasn't changed.

Okay. And then just going back to the online platform, it sounded like for the Simon Premium Outlet business. How is the early customer adoption looking there, and it sounds like you're spending money on that, but should we think about that as being additive to earnings this year in a positive way?

No. I don't think it'll generate, you know, we expect it to generate FFO losses. I'm not—as much as I know you want to know the number, I'm not going to necessarily give it to you. Certainly, you know, and again, this is one of the things that when we budgeted our initial $12.30 to $12.40 that we re-affirm. We weren't really sure whether or not we were going to get the beta or not. But, we're able to withstand, reaffirm our guidance and withstand those losses even though we got the beta. So, and we do expect to be you know for public sometime in the next few months. So those losses will go through. I would think in the scheme of our company, we can handle it. It's a long-term investment, and we continue to be excited about it, and ultimately be an important part of our company and our platforms. But, it's early days there. So I can't necessarily make specific predictions other than to say we wouldn't be doing it unless we felt confident. But we'll see.

Okay. Appreciate it.

No worries. Thank you.

Thanks. Good morning. David and Rick. I guess, I was wondering if you could just maybe talk a little bit about the leasing environment. Obviously, it was nice to see occupancy up 50 basis points here despite all of the closures and bankruptcies. So just—what if you think about the pipeline and the activity level, you know how would you sort of maybe stack up the pipeline today versus say a year ago, and kind of the mix of those tenants?

It’s Rick, Steve. Frankly, there are still a great many tenants that are happy to have the opportunity to get in to take advantage of the inventory that we have now that we haven't had historically. And that leasing interest is frankly accelerating. And if you think about it, we've got new retail concepts. We still have a lot of retailers internationally; they're trying to come into this market and have significant space needs. We are growing the retailers, because they all have made the decision. They need to have a bricks and mortar presence. And we still have the brand extensions from our existing retailers. So there is a lot of activity from a lot of different sources, and I think that's reflecting itself in our occupancy and in our spread.

Okay. And I guess, David, to go back to your comment earlier, and this was touched on a little bit about the accelerating sort of opportunities that you have on the redevelopment side. I know you've sort of generally budgeted about $1 billion a year plus or minus. Do you see that number dramatically changing, just given the activity level that you've got or is it sort of on the margin?

Yes. I do. I do think you know I do think it's going to increase, but some of the bigger ones that we have ready conceptually of what we want to do. We're still in the midst of the planning approval process. So we've got just to take two examples that jump out at the top of my head, Brea and Stonebridge both in California. I mean, they are big, big redevelopments, I should say, with former share stores that we now control. Those are 300 plus apiece in that range, and that's not, as you know, we don’t put that in our profile until we get approvals with the municipalities there. So, yeah it is. And we are, I mean, we are blowing and going on that front. So generally across the company, we're really, really I'd say as active as we've ever been. So the answer is I think it's going to go up. It's a little bit out of our control in the sense not that we don't want to do it, but we have some big ones that are going through the planning process. But, I don't think it'll be $2 billion a year; it could average $1.4 billion, $1.5 billion just to give you kind of an order of magnitude. But it is— it is active, and it hasn't. It's not slowing down anytime soon.

Okay. Thanks very much.

Sure. Thank you.

Hey, good morning. Good morning out there.

Good morning.

Hey David. Yes, I'd echo Bilerman's comments on the disclosure. If you get your accounts comfortable with it to break out those line items that were compressed and aggregated would be—would be helpful. One of your hallmarks has been growing cash flow annually and not you know just presenting the numbers as you grow regardless of—if you know this quarter it seems more like an anomaly as far as what was going on the quarter between the outsider Opry Mills on our numbers it looked like NOI was late. I obviously, I can't speak for my peers, but as far as the NOI that's coming off line for the redevelopments you mentioned that you're not going to guide line by line, but yet we're all looking at you guys making your number. Are there some points here that you can talk about maybe whether there were some onetime items that impacted NOI in the first quarter, or maybe sort of quantify what the NOI impacts are from things coming off line, that help us you know better...

Yes. Look, I think I explained that to you. But I'm happy to do it again. I mean, we have—we are. Let me just say this. I think we had a very strong quarter. And our numbers are pretty darn good. But I appreciate your comments. Let me give you a few things just comparing quarter over quarter, but also keep in mind, we did lose, we did have a much. And again, it's not called bad debt expense anymore, and I know everybody knows that, I know accounting. So you know it's not—it's not bad debt; it's contra revenue. But we had a much bigger bad debt expense than we did quarter-over-quarter. And that's what affected our comp NOI number. Now, I also want to make sure you understand that the Opry settlement is not in our net operating income. Are you clear on that? That's in our other income area.

Yes, of course.

Okay. So, but we also had lower lease termination income from quarter-over-quarter. That was a material number you can basically see that that was around $0.07, so I'll just give you a couple things. And that's why I think you'd feel a little bit better about what we produced this year. We had lower lease settlement income of $0.07. We again, we do only—and I’ve made this perfectly clear last quarter. We, as you know, we're an investor in Value Retail. We only book; we do not book our pro-rata share of net operating income or FFO. We only book when we get cash receipts. So, i.e., cost, the cost method of accounting. Are you familiar with that? I am. You are, that was one of my favorite classes. The reality is we had $0.06 lower, and you can see that in our 8-K. Obviously, least capitalization foreign exchange. We did dispose of our HBS, you know HBS, Europe operations. You know that's another $0.05, $0.06. You put it all together. So that gives you a sense of kind of what's moving around. And again, that's what we—that's what happens with the size of this company. And again, I try to—I try to push people there because that's what happens. But we did have 7% growth when you take into account just trying to normalize the new accounting for leasing cost, which is pretty good and in a market that’s dealing with a lot of bankruptcies.

And then can you just. David, but can you give us some context for the rest of the year, the NOI that may be coming off line from the redevelopments?

Well, it's all in our $12.30 to $12.40. And again, what I was trying to explain on Northgate we had budgeted you know the one thing we're not going to do is budget every mall and show you every mall NOI, and it’s just—it's not what we're about. And again, remember to take $12.30 times 363 shares outstanding, and that's our total rental total FFO. We work and I just give you a simple example, okay. We were budgeting Northgate mall around $15 million of NOI because we thought the redevelopment of that was really going to start in earnest in 2020. That $15 million is going away, okay. That's just one example. But I'm not going to get in here about every up and down in our company because we've got—that's not what people do when you run a big company. Okay. If you have 10 assets, I don't know who does that, but that's not what public companies should be talking about. I mean, we have ups and downs on assets every time. And what you said earlier still holds true.

You mean that you guys just grow year after year?

We're going to grow year after year and we have $1.5 billion positive cash flow after dividends, and let's keep that in mind as well.

Hi. Good morning. I'm wondering if we could talk on the leasing spreads to this quarter they were pretty high. And I guess that's understandable as department store space gets converted to higher rent uses. But I was wondering if you could comment on in line space in particular, how rents trending there? How would you compare in place rents versus market rents for that, I guess subset, but significant subset of your space?

Well, again, if you look at our occupancy cost, we still feel like we have a—certainly opportunity to continue to drive spreads, and I think that hasn't changed. And then when you add the redevelopment opportunities, getting either the space back for the right price and/or leases terminating with these boxes like you know the penny box with King of Prussia where they were basically, I don't remember, Rick, what were they paying a foot, five, six…

$5.

Five bucks a foot. And we haven't even started on that one. I think there's going to continue to be the rent spreads that we have historically achieved. The environment's obviously there's a little bit more supply due to the bankruptcies. On the other hand, you know, and I don't want to overemphasize this, but generally the retail community really values physical retail on one hand. On the other hand, an additional hand, they are now valuing who the landlord is. Who has the capital to continue to invest and evolve the product, which was the mall business has been doing for year after year, it has been around 60 years and it has always evolved during that period of time and will continue to evolve. We're in a good spot because one is they want physical retail. It's profitable to them. Two is the landlord today, and I assure you this, please talk to whomever you want. You guys have a great system of information at Goldman Sachs. And it could get into the consumer business even more you’ll have even more information. Is that the landlord is really, really important. It's always been. But now the ability to invest, the ability to make the products and continue to evolve is really important. We have those attributes. So we have to execute, but that's you know people are going to when they when they look to open to buys and they look to make a bet on it, we’re going to be top of mind.

Got it.

The only what I think to add, David has been emphasizing the size of our enterprise when we have our—that’s statistic that millions of square feet of openings. So that's not something that's not a number they can't influence by just one or two transactions. That's a whole lot of transactions and that's a very pronounced trend.

And I'm glad you said that, Rick. So when I would also say to you is that we don't feel like you know one of the reasons we've grown, the way we've grown is because we've been really decent capital allocators. So I think, Caitlin, you'd say that, right?

Yes.

You don't have to answer it; it's not fair. I don't have to say it. You can write whatever you want to write. So don't answer that. So—and the reality is our size, as Rick mentioned, also allows us to say, hey, you know, we'll just milk this asset because we don't believe in the long-term location. So we can actually be almost scientific. I mean our business is an art, not necessarily a science, but we can be scientific about where we want to put our capital because at the end of the day, not any one particular asset, obviously some are more important than others, is not going to make or break our company. So that again gives us the ability to be you know it kind of feeds on itself in terms of why you're a decent capital allocator because you can be clinical in the sense about where you want to put some doubt. And I hope that makes sense to you.

It does. Thanks. And then maybe also when we think about comp center NOI, so its 1.6% 1.6% in the quarter. I know when you guys were originally giving guidance you’d pointed out that in 2019 kind of extra additions from development wouldn't be as significant this year. But now you have the growing pipeline, so I guess any commentary you could give on when we—you think that redevelopment activity will start to create a larger spread on that total portfolio, NOI growth versus comp center. Could we see that in 2020 or you think it would take longer?

No. I think 2020 is good because we have a lot of new developments coming online, and I do think you point out very good points in that. We always thought this year was going to be a little muted because we really—I mean the international outlets do take time. We have a couple opening this year, but most of that's open in 2020. And then we have a lot of redevelopment ongoing that’s opening in 2020. So then you've got obviously the downtime—when you're restructuring a piece of real estate like Northgate then you've got a lot of moving parts about that. And literally we just made the decision; we were studying it the last two or three months and we felt like look, if we just go ahead and scrape the center, we're going to accelerate the development. That's not great for our earnings this year, but in the long run it's the right thing to do. So we have a number of those that we just—we're just going to try to make the right real estate decisions as opposed to short-term earnings impact. But yet, with all these moving parts, with all the volatility with certain retailers, we're still got growth. We've still got a billion five cash flow. We still have the best dividend coverage. We’re still growing our dividend, and we're still had growth in our earnings. With all that said and our new investments in SPO, I mean we're going to—we're trying to land the plane at the $12.30 to $12.40 range which as my friend—not a friend, he doesn't know me but I feel like I'm a friend—not too shabby.

Okay. Thanks for that.

Okay. Thank you.

Hey, David. I saw you bought back some shares this quarter. So I was hoping you could maybe give us some color about how you think about that relative to the various different capital allocation choices, decisions that you've mentioned previously on the call?

Look, I think we have that flexibility if there's weakness in the stock, we’ll get active. We've been—we did it in 2017 and 2018. It’s certainly we feel like it's a good investment, and investing in our company through share buybacks is a real opportunity. And that's why we've got it. We had run out of our authorization, and that's why we got reauthorized. So, I expect it to be in our arsenal this year, and if there's weakness in the stock, we're going to be active.

Got it. And then one modeling question. It looks like in 1Q 2018 and other income, you had some distributions from other international investments which maybe were not included in 1Q 2019. Is that something that we should expect to come in 2Q or 3Q or was that a one-off event in 1Q 2018?

Yes. Look, this is associated with our investments and value retail. That's one of these things that we have. I said it earlier but I'll just restate it more succinctly I hope. We cost account for that. So we only book cash income when we actually get this dividend or distribution—technically it’s a distribution from the business. Last year we—that was all associated in the first quarter. We had budgeted number this year. It looks like that number may be—we may have over-budgeted. So, but again it's a little bit harder for us to budget. So we took our best estimate. Unfortunately, it's coming in lower not because anything is going on with the business. It just—that's just—we're not in control of that situation. So, we don't anticipate that coming in; like you're going to see that in Q3 or Q4 or Q2. So, and that's all associated, that distribution income is all associated with our interest in value retail.

Got it. Okay. That's it for me. Thanks you. That's very helpful.

Thank you. Sure.

Good morning. David, just since you're talking about capital allocation, I'm curious where is external investment, whether that's another malls, platforms, or even I guess financing other malls that you might not own, fall on the spectrum of that allocation considering that your redevelopment pipeline is around 7% to 8% return. Do you give much consideration to that these days?

That's a good question. The reality is nothing has peaked our fancy at this point. I wouldn't rule it out, but honestly we looked at a few things—not again corporately—but just the asset here or asset there. Nothing has really peaked our interest, but that's still—we're still looking at individual assets here and there. And there could be one or two that we would add to the portfolio, Jeff. So it's still there. We're fortunate enough to be in a position where we could do that. We do have people that approach us to do stuff and if it's really good long-term real estate fairly priced, I mean I think we would have an interest, but it's not—we're not—I’d say we’re not active; that active, but it's—I wouldn't rule it out. But we're not that active.

Do you feel you're better served by waiting? You certainly have one of the better balance sheets, better liquidity if anyone out there in the public markets and probably private markets and access to capital is certainly key right now. Do you think your value proposition gets better the longer you wait?

That's a good question. I don't—what do you think? Some days I wake up saying I should wait; other days, I don't know. The answer is I don't really—it's a tough one to say. I think we've been doing the right stuff, but we're happy to take input.

I'll hold off on that a little bit. If I could maybe for old times' sake direct one toward Rick? Is it—some of the other retail REITs out there have been saying that the challenges in the volume of tenants coming in the front door, it's the flow leaving out the back. I'm just curious with Sears and the Sears filing behind us if you will as an industry, do you think Simon has seen the peak of unanticipated tenant loss, the ones that surprise us all whether you manage that is square footage loss or rent loss? Is that all in the rearview mirror or do you think this is sort of a plateau we're going to operate at for a little while?

David mentioned it earlier, we would hope that we'd have seen the vast majority of the fallout from the over-levered retailers that just liquidated. You can never say there isn't going to be somebody else out there that goes, but we're making very good progress in releasing the space. We are getting back and we still have very good demand then. The bottom line is our properties are getting better and better; there's $1.5 billion that we're talking about. We're adding great tenants, we're renovating properties, we're adding amenities. We are making this portfolio better and more attractive to retailers. So I think we benefit in the long run from what's going on because our properties are getting stronger and others may be getting weaker.

And actually, the last question for you David. Can you talk about the costs you see with the shoppremiumoutlets.com website and is that just merely a referral site to your retailers or are you guys engaging in fulfillment there?

Well, it's early days. Ultimately, I can't predict exactly all the services that this business will provide. And no, unfortunately I cannot give you the cost, other than the cost of this is now again another thing when we budgeted our numbers we weren't really sure whether we’re going to get to better or not and ultimately operating. We're now doing that. And it's kind of been in our estimates, but I can't—I'm not going to itemize it at this point. At some point we anticipate we will. But in the meantime, we're just going to accept the burden in our overall corporate numbers.

Thanks guys.

Sure.

Hi. Good morning.

Good morning.

Just curious how well is the bottom quartile of the portfolio holding up when you think of sales, spreads, NOI growth. Is it close to the average or is that a big gap?

It's everything is an asset by asset. Again, you've got to look at the asset in its trade area and what's going on with that trade area. I mean there are a couple of malls where we've had the department store closures. It's interesting; we've actually seen a small shops pickup from that, but it could put— maybe there were leases in those from the department stores so those no longer are generating income. So I would say when we look at sales and everything else, there's no absolute trend that you can put a finger on and they still hold their own. We have a big portfolio. There's always going to be a couple of assets that that put pressure on us, but we've been dealing with that since I've been here; that's just 30, let's see what years?

It's over 19.

Okay. So, that's only 29 years. Rick’s has been doing it for 63 years. I'd say, he started this when he was five, so, it would be a lot more fun. So, I mean we always have assets that put pressure on us and we figure out how to deal with it. But a couple of them where you had a couple of department stores close at the same time, yes, they are a little bit more of a pain in the neck.

Okay. But it doesn't sound like there's a broad-based large gap once you had a certain sales level toward the bottom?

No. It's really. It really is an asset by asset, and what— is it the only mall in that trade area and all the typical real estate stuff.

Got it. Okay. That was it. Thank you.

Sure.

Hi. The line item that you call bad debt expense isn't really bad debt expense? You said it was up a bit quarter-over-quarter. Do you think 1Q is the higher, could 2Q to be higher and when would it start to see improvement?

Well, technically it’s now called a contra revenue number. So I'm not—we don't— we had an anomaly in Q1. We don't expect that to happen the rest of the year. So I don't know if that answers your question, but we did a much bigger contra revenue hit to our revenue this quarter compared to certainly last quarter and our expectations of that are to decrease.

Okay. And then when you look at some of the advances that Amazon is making, most recently the availability of one-day Prime shipping up from two days, do you think this – do you see this is having a meaningful impact in driving more market share shift? Some analysts have discussed the idea of shipping elasticity faster you get something the more you buy. I'm just wondering if you have thoughts about this?

Well, I mean, that's a big question, lots of lots, I don't want to talk about one particular company, but that's a big question and probably I’m happy to talk to you about online. I do think from a society environmental point of view we should be thoughtful about this drive for, what is it do to our environment? What does it do to our infrastructure to drive this one-day shipping to whomever does it? And I don't know. We'll have to see what happens. I think our retailers do generally have a real significant advantage with the footprint that they have because the bottom line pickup in-store doesn't cause extra transportation and environmental cost. It already exists and it does—the consumer does want convenience and speed, and it seems to satisfy that desire. So, we'll see how that offsets against the one-day shipping. But I don't really have any other comment than that.

And then final one; how do you feel about the retail environment in the U.K? What are some of the similarities or just similarities you see with the U.S. right now?

While in the U.K, we're only in the outlet business. And right now with the pound it's actually pretty decent. So we don't have any pull price in England and with the pound a little bit weaker tourism, okay, we're building a new center there that we think will be good. I mean, there is some trepidation from retail commitments on the new stuff. But long term we don't expect any real inability to lease out.

Thanks.

Sure.

Good morning. So, talking about your shop Premium Outlets platform, it's an interesting idea and there's probably a lot of upside from data analytics to the fees or just being more involved in the ecosystem. So, a couple of questions. One, how's the demand pipeline looking from other retailers wanting to sign on? And second, of course, there's kind of interesting single interface in the backend piping is actually at nine different retailers that are funneling up their different systems and shipping methods to SPO. And for example, if I'm a customer that want to buy one thing from each retailer, I would get nine different packages and pay potentially nine different shipping fees. I realize this is just a beta version, but longer term how do you think about that? And do you think to offer kind of singular shipping and make it really work?

Well, I think listen; you can't—when you build something it's like building a shopping mall. When you build something, you know what that mall is today may be something what it is it's going to be different five years from now. So I think we—that's how we're thinking about that. And I think all the great Internet companies and startups and all of the new technology companies have all started with one product, one idea, and then morphed into several. I mean obviously you can look at Amazon and Google as prime examples about where they started and where they end up. You can look at WeWork, you know they call themselves we company now because they go in different directions. So I think you have to put that—we're not even close to those companies, but we have to think about our product just along those lines and that we start somewhere as we get traction we add to it. So in direct response to your questions, I will say we’re adding more retailers. We do have a universal shopping cart. And yes, you're right; we're not in the fulfillment business today, but one day we could be, one day we could be doing it from the mall or the outlet. So we'll have to see how it transpires. But it is early days. And I think the retail receptivity has been rewarding otherwise we wouldn't have started. If the retailers hadn't expressed an interest in our product, we would have killed it a couple of years ago.

And you bring up an interesting point about the Internet companies, but they're also kind of bound by a different set of rules versus Simon. I mean I think it feels like the focus is on a lot more revenue than expenses, almost like 90-10. But for your company, a cash flow driven company, the markets probably are a little bit more hesitant to allow you to express losses for the sake of kind of a longer-term revenue potential. So how do you think about that dynamic?

Well, I guess what I would say to you is there is nobody that values cash flow more than me. And I think you know that, right? So we're getting into this business; it's got—we're going to invest in it like we invest in our real estate product. If we thought—and I—there are no guarantees. You're right; it could—maybe we don't find the secret sauce, maybe we don't get the consumer buy, or maybe this, maybe that. But there is nobody that values cash flow more than me. And we've got enough free cash flow that is to build this platform and see where it goes, and if we’re not successful, then we’re big people and we’ll go on to the next. In the meantime, we’re not going to risk the company. It's not make or break; it's—I don't want to say it's on the margin, but this is what we do, we invest in our products and this is just another product.

All right. Thank you.

Sure.

Okay. Thank you. David, not to beat a dead horse, but I just want to be absolutely clear in this, when you have the insurance recovery out of the operating mills this quarter, I think you made it clear, but I just want to confirm that those recoveries are not in operating income, right?

That’s correct.

Okay, good.

It's absolutely correct. And by the way, it wasn't a recovery. Well, it was a recovery, but we had to actually litigate to get the recovery. So it was a settlement of the lawsuit, but that is not in our net operating income, to be absolutely clear.

Okay, good. Thank you. Second question. You've talked and written for a couple of years about the industry issue about over-levered private equity owned retailers and how they conduct their business and how it's really not been good for your business. It appears—and I don't know, maybe Rick can chime in on this—but the so-called digitally native retailers that some quarters have written a lot about appear to be in the early stages of doing a series of IPOs; we'll see if they're successful, but a few of them who I think are in your centers are talking with underwriters, and we may be entering a phase where the next phase of capital formation in terms of who's company in the front door as opposed to who is going out the back door, may be a group of well-capitalized, maybe profitable, maybe not, retailers who are going to raise a significant amount of capital in the public market; we'll see if that develops. But I'm just curious from your standpoint, do you regard these new retail, this new development of retailers as a material source of incremental demand or not?

Well, I would generally say yes, but I think we're early days in it. I don't expect suddenly a 60-store or a 100-store expansion from the folks, but I do think—and with all the changes that have occurred in our industry and with all the changes that have occurred in corporate America, I will say this: the entrepreneurialism, the idea, the ability to get something funded, the idea to create a new concept has never been greater. That's terrific for us. We want to nurture those. In fact, we're not opposed to helping those folks grow their business, and in some cases, we'll invest in that. There is nothing—I'm not saying that it wouldn't be great not to—people—I don't necessarily love people shopping online, Jim, as you might imagine, but this technology has allowed just a lot more entrepreneurs to get started. And I think that's terrific and we're embracing that and trying to help them in every way we can, and I think it's good. Are they at the point now where they're going to do 100 stores a year? No, but in some cases 20, 30, 40 stores. Rick, I don't know if you want to add?

The other thing that I would say, and it's sort of related but different; there have been several announcements about companies spinning off various businesses. Historically what we have found is when these new businesses are formed, their first call is to ask to figure out how they can grow that business because now they have a dedicated management team and dedicated source to capital and a much more focused growth strategy because there is a standalone business and that there is something going on right now that I think is going to augur well for us in the future as well.

So green shoots, but not maybe a material element at this point?

There is activity and we're taking advantage of it, and it's more than isolated instances. I mean we're working with scores on these retailers online and they are all agreeing that having a bricks and mortar presence is an essential component of their overall offering. So that is a very good thing, and we're taking advantage of it because they're going to the better properties which we have.

And actually, the last question for you David. Can you talk about the costs you see with the shoppremiumoutlets.com website and is that just merely a referral site to your retailers or are you guys engaging in fulfillment there?

Well, it's early days. Ultimately, I can't predict exactly all the services that this business will provide. And no, unfortunately I cannot give you the cost, other than the cost of this is now again another thing when we budgeted our numbers we weren't really sure whether we’re going to get to better or not and ultimately operating. We're now doing that. And it's kind of been in our estimates, but I can't—I'm not going to itemize it at this point. At some point we anticipate we will, but in the meantime we're just going to accept the burden in our overall corporate numbers.

Thanks guys.

Sure.