西蒙地產 (SPG) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simon Property Group third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I will turn the conference over to your host, Tom Ward, Senior Vice President, Investor Relations. Please begin.

Thank you, Tyrone. Good morning and welcome to Simon Property Group's third-quarter 2016 earnings conference call. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer.

Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements.

Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filings. 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. We started, completed, opened several significant redevelopment and transformation projects that will further enhance the value of our portfolio. And we continued to achieve strong financial results.

Before I get to some of the highlights of the quarter, I would like to quickly highlight our outlook for the remainder of the year. Based on our performance year-to-date and our current view of the quarter, we are once again increasing our full-year 2016 FFO per share guidance range to $10.85 to $10.87, which was higher than our original guidance of $10.70 to $10.80.

Our increased range also reflects the potential of $0.08 per share with respect to our likely decision to postpone the construction of the Copley residential tower due to the rapidly rising construction cost and our beginning concerns around supply and demand in the Boston residential market. Work will continue on redeveloping and modernizing the existing retail space at the center, as well as the development of the southwest corridor, which will create a new entrance to Copley. We expect this work will enhance the shopping experience for our guests and retailers and further strengthen our position in the heart of Boston and will be completed by summer of 2017.

Assuming we make the decision to postpone, it does not foreclose the opportunity to build the tower in the future as market conditions warrant.

Now let me turn to the quarter. FFO per share was $2.70, an increase of 6.3% compared to the prior year. For the first nine months our comparable FFO per diluted share is up 10.1% compared to the prior-year period.

We continue to see strong demand for space across our portfolio. Combined occupancy for our malls and premium outlets ended the quarter at 96.3%, an increase of 20 basis points compared to the prior year.

Leasing activity remains solid. The mall and premium outlets recorded re-leasing spreads of $6.71 per share -- per foot, an increase of 10.9%. Given our high occupancy level of above 96%, the remaining space we are leasing, while not as well located, continues to produce healthy re-leasing spreads.

And as a reminder, we include lease amendments for the restructuring of leases where we choose to work with retailers in certain situations pre or post bankruptcy such as Pac Sun.

Base minimum rent was $50.76, up 4.5% compared to last year, reflecting growth in our rents. Our occupancy cost [of] 13% as well.

Now just, as everyone knows, my focus is on cash flow growth and I believe this is the most important metric for the investment community to focus on. Our total portfolio NOI increased 7.3% year-to-date and 6.6% for the quarter -- third quarter. To put our growth rate into perspective, the 7.3% year-to-date growth is more than $300 million.

Our results to date keep us on track for our full-year guidance of total NOI growth more than 6% for our portfolio. On the NOI overview schedule included in our supplemental file this morning, you can see the various platforms of growth the contribute to our portfolio NOI. The diversity of sources fueling our NOI growth is unique to Simon.

Top NOI increased 3.5% year-to-date and 2.2% for the quarter. Our comp NOI results are affected by declines in overage rent, due solely to the impact of the strong dollar on our tourist spending at our centers; our active and extensive redevelopment pipeline across all our property platforms as we relocate and reconfigure a significant number of tenants in order to enhance the future retail and dining experiences at our properties; and our decision to strategically moderate the marketing and specialty income in the common areas of our highly -- of our very high-end portfolio.

Total retail sales per square foot at our malls and premium outlets were $604 compared to $616 in the prior-year period. Reported retailer centers continue to be impacted by the strong dollar at some of our tourist-oriented malls and premium outlets. Reported retailer sales at our centers outside of our tourist-oriented centers are stable.

Reported sales also include initial dilution from newly-opened space. And, importantly, we are beginning to anniversary some of this decline. As you can see, our recent sequential quarters, Q2 to Q3, of our sales productivity is basically flat.

At the end of the third quarter, redevelopment and expansion projects were ongoing at 32 properties across all of our platforms. Our share approximately 1.1.

We opened, as you know, King of Prussia, which connected to the Plaza and the Court. We finished Fashion Center at Pentagon City. We started the expansion of Allen Premium Outlets of 120,000 square feet in North Texas.

In the next several weeks, we open 60,000 square foot expansion at The Outlets at Orange and we also are opening our expansion in Venice, Italy, with our partner, McArthurGlen, of 67,000 square feet. So we continue to add value across the portfolio.

Now, on new developments, it just so happens tomorrow we are opening Clarksburg Premium Outlets. The center will offer great retail lineup. We expect it to cater to the whole Washington DC Metro area.

We currently have five -- that's right, five -- outlets under construction: one in Norfolk, Virginia; four in the international markets including France, South Korea, Malaysia, and Canada. All of these will open in 2017.

And even though we are opening a new outlet next week, the week after we're actually opening Brickell City Center in Miami. It's anchored by Saks. It's got a great retail lineup with great partners in Swire and the Whitman family and is part of a landmark mixed-use development.

We look forward to managing the retail. And as a reminder, we are only investing in the retail.

And construction continues on the full-price development at Fort Worth, the Shops at Clearfork, anchored by Neiman Marcus; opening in the fall of 2017. These eight new projects represent around $765 million of spend, our share.

Let me turn to Aeropostale. We are pleased to have partnered with GGP, Authentic Brands Group, Hilco, and Gordon Brothers to acquire Aeropostale. In addition to the existing management team, the ABG group will add significant operating experience to Aero.

We have a long track record of making smart capital allocation decisions. And after reviewing this opportunity with our partners, we believe this investment will prove to be yet another opportunity for our company.

It's also important to keep this investment in perspective. You have all seen the gross number of $243 million. I want you to understand that $188 million of that is inventory being purchased by Hilco and Gordon Brothers and not by our buying group. Our initial investment is approximately $55 million by the Group, of which our share is $33 million, including working capital.

And the only reason we decided to make this investment is because we believe we can make money. If our model is right, we think we are buying this company at 1 to 2 times EBITDA with future growth opportunities ahead of it and we continue to believe that this will be an astute investment.

For some of you who don't know ABG, it is backed by Leonard Greene, which has been a significant, important investor in retail throughout the years. Whole Foods, Neiman Marcus, J.Crew, just to name a handful. Also during the quarter we acquired our partners' interest, with McArthurGlen, in our two outlets in Naples and Venice.

We continue to focus on our industry-leading balance sheet. We completed a number of secured financings during the quarter. We continue to lower our borrowing costs, increase our debt maturity a term; our current liquidity at $6.5 billion.

And, finally, on our dividend. In 2016 we will have paid $6.50. That is an increase of 7.4% compared to $6.05 that we paid last year. That is a lot. I'm ready for your questions.

(Operator Instructions) Caitlin Burrows, Goldman Sachs.

Good morning. I just wanted to ask on the leasing spread topic. I know you touched on it and it has been a popular point of conversation here.

Since it's a trailing 12 months number, are the results we are seeing now in terms of lease spread just a pull forward and extension of something that happened to slow down in Q2 or did the third quarter slow too, realizing that it does include lease amendments?

We have had -- look, let's just put this number in perspective, number one. We do include lease amendments and that's having the biggest impact of the growth slowing. Yet, if you look at our average base rent, you can see we are doing -- new initial terms we are doing very well and some of the expiring leases also are a little bit -- expiring at a little bit higher level.

Now, our investors know that over a long period of time we have always felt like the $5 to $6 spread was always part of our model. Fact is we have done a tremendous job of outperforming that, but the long term we have always kind of felt that that $5 or $6 spread is where we think the market is. We had a couple of years of significant outperformance, but we are not backing off our inherent value that we have in our leases as they rollover. We are just getting back to kind of a more normalized environment.

But for us -- I don't know about our peers, but for us, we include lease amendments and the bottom line is that is having some impact on the leasing spreads. But that $6 to $7 is maintaining itself and that's kind of what we've told investors year after year after year and we feel very good about that.

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

Well, it's literally a case-by-case analysis. I think we are as sophisticated as anybody.

I think when -- Aeropostale is a great example of our ability to analyze what the right trade is in these deals. In some cases, we are going to take the space back. In other cases, we are going to help the retailer go through the hard time. And it's really a case-by-case -- it's a case-by-case analysis. But there is nobody, I think, in our industry that is more sophisticated in our ability to kind of maneuver through those situations.

So it's case-by-case; anything could happen. Sometimes we will work; sometimes we will get the space back. Certainly in the Aero case, we thought the opportunity was even more exciting to just buy the retailer and make a vertical investment that the entire S&P community is doing.

Amazon makes vertical investments. The cable industry makes vertical investments. Again, I would encourage -- we decided to make vertical investments when we decided to franchise Starbucks locations two, three years ago.

That's the nature of our company is that we are going to be nimble. We have the right judgment: when to make a deal with a retailer, when not; when to make vertical investments, when not; when to go to Europe, when not; when to pull the plug on Copley and when not. That's why we are in the position we are in today and each and every case will be one by one.

I do appreciate -- and I hope I'm right with you, Caitlin -- I do appreciate you waiting to write until we have our call. I do think that is important, because the reason we have these calls is for -- there's not every scenario where you can understand the nuances about what's going on in our business. So I do appreciate your patience to hear our story and then, obviously, you write whatever you want to write.

Great, thank you.

Steve Sakwa, Evercore ISI.

Thanks. Good morning, David. I guess is there a way for you to try and help separate out for us the impact of these amendments on the numbers?

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

I don't -- look, our business -- Steve, I hear you. If we need to, we might; but the fact is you've got to look at our business in totality. You can't look at it on one operating metric or not, because what I would ask you to look at is why --.

Let's talk about the three -- we have grown our portfolio NOI $300 million year-to-date. Let's talk about that. Do you want to talk about that? That to me is more material than any one operating statistic quarter by quarter.

So, yes, we can slice and dice this anyway but if we can spend more time talking about how does a company grow its portfolio NOI --? There are many REITs that don't have $300 million of NOI, yet we grew that in nine months. So I would rather talk about that that's more material than the fluctuations that are occurring with operating metrics.

We could talk about sales. Sales are impacted by the fact that we have great properties in tourist markets and the strong dollar. That doesn't mean that that's going to last forever.

But, again, there is this high desire to make that the be-all of all these metrics. Again, our number is clean; the results are the results. We can't speak to anybody else, how they do it, but I -- as I said to you, if you want my opinion on what's important, it's the $300 million NOI growth. If you don't want that, I got it, but that's what I focus on.

No, I get it and I don't think people are dismissing your ability to deploy capital, whether it's through developments or expansions. But clearly there has been more pressure on the mall business, so I just think anything that you can do to assuage the fears about the internal growth prospects going forward --.

And perhaps it's just that a $6 to $7 spread on a roughly $60 or $61 expiring rent means that normalized leasing spreads to be 10%. And maybe that is where we are going to head to. There's a new normal in the business. That's okay; I think people are just trying to get comfort with that.

Look, I think that's a good point, so let's talk about that. And I mentioned that a little bit in the first question.

You know, I think, if you asked our investor group, we would have told them for 15, 20 years that our re-leasing spreads are $5 to $6 [a quarter]. We have had a long period of outperformance on that. We've gotten better at what we've done; all sorts of reasons that we don't have to bore you.

And you're right; we may be going back to what we have promised our investor base for a long period of time. The outperformance, I don't think from our standpoint we ever guaranteed outperformance from how we looked at re-leasing spreads. We always said, look, it's $5 or $6. One year it might be $8, one year it might be $4, but that's kind of what we see the long-term trend. And I still feel comfortable that that's the basis.

Now, it's no surprise that retail generally has come under pressure. Lots of different reasons, which we could go into, but let's -- unless you want to, let's not. But the fact is -- and we are impacted, as I said to you before, by our general GDP growth.

Today our retail generally is -- there's no inflation and our nominal GDP growth is 1.5%, yet we are growing our comps. And if nominal GDP, there is some inflation so maybe real GDP growth is, I don't know, 50 basis points.

We are still growing our business with no inflation in our particular business at 3.5% comp NOI. That's not bad. It's not 4%-plus that we did last year or the year before, but it's still -- in the scheme of being able to grow our business, that's not bad and I am not defensive about it.

That is kind of what I think we should expect when we have essentially a real GDP growth of 1%; maybe a little bit less, maybe a little bit more. And I think that's what you've got to put in perspective.

Okay, I appreciate it. Thanks for the time.

Christy McElroy, Citi.

Thanks. Michael Bilerman here with Christy. David, I wonder if you can talk a little bit about putting capital into your stock. Last year you had bought I think it was like $350 million at about 180. Obviously the stock, with some of the selloff as well as some of the retail headlines, has come off 20%.

We spent a lot of time talking about something you spent $30 million on. I was wondering -- you got a $2 billion share repurchase program -- how you feel about putting money into your stock.

Look, I think at the end of the day the best thing we can do is invest in our product. Because the stock will go up and it will go down, but by investing in our product -- and I think, unfortunately, what I've seen with a number of retailers is they have not invested in their product.

Or they have chased the holy grail of internet sales to the detriment of what they should be doing with the physical product, because still people want to go physical shopping. And when they go physical shopping, you've got to have a nice physical environment. So we have spent a lot of years wanting to invest in our physical product and I think that's our number one focus continues to be.

We are well through that. The good news is we have been contrarian in that. We started that in 2010 and, as you know, we are finishing projects. It's not just talking about projects, but it's finishing a lot of projects.

So I think as that winds down then the opportunity to buy stock back is always there. I just don't think it's a high priority, but that could change depending upon where the world is and what the stock does. But I think my job is -- the number one job I should be doing is investing in making my product better and that's my number one focus.

You talked in your opening comments about your deal-making over the years and always taking a proper risk/reward and thinking about the capital committed to -- whether it's a project or whether it's a venture investment. As you think about investing in Aero, putting $30 million in, is there a house limit that you would want to have in those sorts of investments relative to the whole?

And where would it sit within the Simon organization? Is it more within the ventures side or is there another sort of area? I don't know if it's in the David Simon bucket. Where does it sit within the organization?

Well, look, even though I am older, I can always learn new things and I have learned a lot actually going through the Aero deal. We are going to act as an investor; we are going to give them strategic direction as a Board member.

Authentic Brands, I would encourage you to look at the brands and the history of that company. They've done a great job of -- they are brand builders; they are entrepreneurs.

So we are not going to be running the business. We're going to help strategically, like we did. It will be -- but we are helping -- so I've got my IT guys helping with their IT systems. We've got our lawyers helping with their license agreements.

So we have a lot we can bring to the table and that's what makes us unique, but it's not going to overwhelm anybody's particular time. They've got a good management team that with our strategic help I think will continue to make that profitable.

And, look, based on the numbers, I think it's going to be a compelling investment but it's not without risk. It is -- there is risk out there whenever you make a venture-like investment, but I can't think of a better team between Gordon Brothers, Hilco, ABG, General Growth to all put our collective judgment to bear to make this a profitable investment.

I don't think -- going back to your first question, I don't think this is going to be the wave of the future. AT&T, I mentioned vertical because I just try to put certain things outside of real estate in perspective.

So AT&T is buying -- going vertical. They are spending $100 billion. I go vertical I spend $33 million; not billion, $33 million. And again, I'm not comparing -- I'm just trying to put these in perspective. I'm not comparing our business to AT&T or anybody else.

Amazon, what has made Amazon great is they have had the latitude to go vertical. They've gone vertical; they have gone content; they've gone distribution; they've gone retail. And that may be the future of corporate America is that you are not going to pigeonhole these companies.

If we want to just talk about leasing a Sears box that we get back, that's okay for some companies, but that's not what we are about. Again, we have no bucket. It's not going to take away from what we are doing.

My number one priority is to make our product better anyway that we can -- technology, digital investments, look and feel, better retailers, different mix, redevelopment -- however that transpires. And making a vertical investment here or there is not going to overwhelm us. But I want the latitude to and I think the investment community should want us to.

At the end of the day, if our underwriting numbers are right and there is risk, we are buying a business that ought to be valued at 6 times EBITDA and we are buying it at 1 to 2, I think that's a pretty good trade. But we've got -- we are not there yet; that's the goal. That's what we're trying to accomplish.

David, it's Christy. Sorry for the three questions. Just bigger picture, the consortium has talked about a 300 to 400 store base count for Aeropostale. There has been a lot of talk about store count rationalization among national retailers generally and how many stores do they actually need to serve their customers in their markets today.

Why is that the right number of stores for a retailer like Aeropostale? And what does that imply for your view of the need for other retailers to close stores, especially now that are looking at this issue through that Aeropostale lens?

Look, it's very -- I think you have pointed out something that's very unique is that we are getting a lens at a much granular level on retail, so it's very interesting.

Sourcing. Look, there are five or six things that really make a retailer click: sourcing, obviously rent expense, store expense, the merchandise, the quality of the packaging. All the stuff that I think at the end of the day are going to make us better real estate owners, but that remains to be seen.

Aero, look, I'm probably going to get in trouble for this, but since I like you, I'm going to tell you. Right now, we are looking at around 500 stores in the US as kind of the model. Based upon -- we expect every one of those stores to be profitable so it's a much bigger business than we initially went in the investment.

We were thinking we could justify our investment at a much lower store base. The fact of the matter is we found out there's a lot more store profitability out there than we thought, so it is going to be around 500, give or take.

But I think store closings, it is -- the pressure for the retailers to invest in the internet, to close stores from their investment community is great. I would question whether that's the right strategy, because some of these stores are very profitable. Yet, they feel like the headline closing stores is the answer and then all of this investment into the internet is going to pay all these dividends.

Fact of the matter is there is a really healthy physical store environment and mall environment and I think all of us can't lose sight of that. And that's where we should be investing.

So I do think there will be more pressure on store closings. Unfortunately, over our history, we are prone to that. I don't need to remind you that the top 10 tenants that we went public with in 1993 no longer exist in 2016. And we will be able to deal with it. It's much easier to deal with it when you have a quality portfolio that we do across all the retail platforms that we have, but it's the soup of the day.

And so I don't think it needs to be 300 or 400 or 500. I think there are a lot of profitable stores that retailers are feeling the pressure; they've got to do something. I would like them to invest in their stores is the something I would like them to do, but I don't always win that argument.

So we are equipped to handle that. That's what we do and -- but I expect that trend probably to continue. Now what we did say when we started this year, our occupancy is up. So put that -- Christy, it is up, so put that in perspective.

We also said our bankruptcy store closings would be down in 2016. It is down. We had much greater in 2015 and we basically, more or less, leased all of the bankruptcies that we got back in 2015 in a flat to tough retail environment. And I think everybody needs to put that in perspective.

But that doesn't mean we are doing cartwheels here. It is -- we are grinding. We're as good as it gets when it comes to grinding. That's the environment that is presented to us and we will have to deal with it.

Thanks so much for the color.

Jeff Spector, Bank of America.

Great, thank you. Good morning. I'm also here with Craig Schmidt. I guess, David, if we could just talk a little bit more about the current environment.

Let's say it continues; it persists through 2017, even 2018. How should we think about these rent amendments? How are you thinking about it when you're laying out your budget for next year? Is this just something that we should get used to as we transition here as the retailers invest more money in their stores, we see more store closings? How should we think about that?

Well, look, I think again I think it's a retail-by-retail perspective. We are seeing a stabilization in our sales business. If you want to go focus on retail sales, Q2 over Q3 is basically flat. And if you take out tourism, you take out one retailer that has had decreases in sales, it's actually up.

So we are not like -- there is no huge concern here. But we just -- we are a product of the overall US economy. And, Jeff, what's the real GDP growth? You tell me. In that environment, what do you think it is, the real one, real GDP growth? Merrill has got a bunch of smart people; what would they say it is?

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

All right, so we are good -- I'm not that good, but I've got a lot of people around me that are good. That is a constraint, but it is what it is; we will sort it through.

And I do think that in that kind of environment we are going to have certain deals where we will go back and then we are going to have a lot of other deals, frankly, where we're going to take the space back. My mood is changing a little bit that maybe we are better off taking the space back.

I think we did play ball a little bit more with the bankruptcies in 2015 and the early 2016s and that is showing up in the lease spread. And I'm thinking, you know, sales are okay, stabilizing; maybe the world gets over all of this stuff that's going on out there. Maybe we stabilize. A lot of people feel like we're headed for growth, so maybe we take more space back.

But we have kept the buildings full, as evidenced by the occupancy. There is a trade-off. We are on our target for comp NOI increase. So it's not all that bad.

Just put it in perspective, 2017 will transpire and we'll do a combination. Sometimes we will play ball; other times we're going to take the space back and it's all a function of retail-by-retail decisions. Space-by-space, retailer-by-retailer.

Okay, thanks. And I think Craig has one question.

Great, thanks. Maybe I could do a little bit of a pivot here.

Looking at your new developments for the outlets, four of the five projects are international. Can we expect to see continued good growth in new projects on an international scale? Then maybe more specifically, what your longer-term plans are with McArthurGlen.

Well, we just had a meeting -- I had a meeting with our partner Friday, last Friday. Their business is very good, very solid.

Provence is opening in spring of next year, which will be fantastic. We are very close on getting the potential to build Normandie, which we think will be a great -- which will basically cover the Western Parisian market. That could be fantastic.

We have got a couple of acquisitions that we are working on, extensions that we are working on; so it's all good there. It has been -- the teams are working well together. Couldn't be more pleased with the investment and I think, Craig, it is just kind of business as usual. We will still see new development growth. Very pleased just that we have been able to create that partnership and create that relationship going forward.

In Asia, the team is working in a couple of other markets that I am hopeful over time that we will be able to build the premium outlet product there. We have got a couple of big expansions in the works. Gotemba is an example that could be a landmark extension.

So that business is -- we are not slowing by any stretch of the imagination internationally in our outlet business, either with McArthurGlen or with our Asian partners.

Thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning, David.

How are you doing?

Just fabulous; it's earnings season, life is great. Just a few questions here. Let me start with an easier one before I ask one on the favorite same-store topic.

Here in New York, obviously, a lot of -- sorry, the demand for street retail has gone down a lot, so a lot of vacant spaces; articles about global brands rethinking their street retail needs, especially with where rents are and store profitability. Have you seen -- as those brands have dialed back, have you seen them, I don't want to say shift back, but have you seen more interest in going in malls where they are profitable? Or from your perspective, they have always been running street retail, their investment there, separate from their decision to open up in malls?

I don't think there's a generic answer to that. I think it is brand-by-brand. Generally, on the luxury side of those brands, their business is actually -- they are starting to anniversary some of the strong dollar stuff and obviously we are as well. And I meet with a lot of the folks.

There are certainly some brands here and there that are pulling back, but I would say generally -- and you are starting to see the numbers like from LVMH and Kering that are posted recently. Their business is good, pretty good.

I think New York is -- this is a novice, because we have no street retail, but New York is a little confusing to them because you got Fifth, you got Madison, you got downtown, you got different -- you got new development, you got West 57th Street. So they are all trying to sort that out.

I think in our business it hasn't changed and, if anything, I'd say the mood is generally better than it was six months ago, if you want a generic statement. And I think New York City itself is just different because they are all trying to figure out where they need to be, given what's going on in New York. But we don't have a dog in that hunt.

And I think Brickell is going to be -- we had a little delay with the hurricane. I guess it really technically wasn't a hurricane or not, I'm not really sure. But Brickell, I think, is going to be -- now a lot of the retailers will open in the first quarter of next year, but I think that mix there is really going to be great and cool.

I think the Saks store is going to be great and the demand on that just continued to pick up. Right, Rick? Over month after month. And I think that's a good indication that if you have a good product or you have a good scheme, retailers will come. Rick, you want to comment on Brickell?

I think Brickell is certainly going to show that there's going to be a great mix of designers, food, international retailers. We are -- right now we are 91% leased. As David said, the opening is going to take place over -- we're going to have a big slug over the next few weeks and another big slug over the first quarter of next year.

The only other thing I would say to you is that we are seeing the international retailers, like Zara, like H&M, accelerating their focus on our properties in the United States because there is demand to grow in this market and we are seeing that.

I would just say we've got -- just to finish the whole thought and then you can ask me -- if it's on comp NOI it's not a tough question. I'm going to tell you exactly what I'm thinking.

You don't know the question yet, David.

All right, I hope it's -- bring it on.

We don't give our questions in advance.

All right, thanks. That's what I like about you, Alex.

But just to finish the luxury -- people that would populate street retail in New York, you say luxury; we are -- not that it's easy, but we are making progress with Clearfork and that's in Fort Worth, Texas. We're to have those kind of brands; not a lot of them, but the right ones. We opened King of Prussia and the connection. Again, a lot of those are opening, but the results from those high-end brands have been fantastic.

So that part of our business is different. I think it's interesting, it's actually starting to do better than maybe what you are seeing in whatever is being talked about in New York -- on the New York street retail scene. But I don't know; I don't really have a dog in that hunt.

Okay. Then the second question is it sounded like you said that bankruptcies and the issues really peaked last year and that you guys were more accommodative with retailers trying to restructure. And, therefore, it seems like this year we are seeing the impact in the same-store metrics.

At the same time, I think you said that the tourism impact strong dollar is also anniversarying. So it almost sounds like next year we should expect same-store metrics to get a positive bump as these trends sort of anniversary. Is that fair?

Or as you guys look into your leasing for next year, we still should see some of this impact, whether it's on re-leasing spreads or same-store NOI etc.? Should we still see that in 2017 or is 2017 going to be a little better because this stuff anniversaries?

Look, I think the big unknown is just what's going on in -- all you have to do -- and you're a smart financial guy. Look at our P&L. You can see -- put the leasing spreads aside, put all this other stuff aside, the reality is the comp NOI is really a function of our overage rent. It's right there on the financial statement.

It's down; can't help it. And it's really a function of the fact that we've got these great tourist centers where we are having -- we are suffering from that impact. But I don't think that's a long-term impact, but it is starting to anniversary and it shouldn't continue to get worse.

But, Alex, it could get worse because no one knows what's going to happen with the dollar. The international tourist market is volatile at best. We live in an uncertain time, but I think we are doing -- to deliver this 3.5% and deliver over 6% portfolio growth I think is reasonably good. It's not great, but it's reasonably good, given some of the constraints that we are dealing with that are a little bit out of our control. A little bit; we're going to take responsibility for a lot of this stuff, but a little bit out of control.

So I think it's too early to tell you on 2017. Unfortunately, I say this because it starts not next week, the week after. Rick, when are property budgets --?

Yes, week after.

Week after where we go one by one, space by space, and we will report that early next year what our view of that is.

It is a little -- there's a little more volatility in being able -- the standard deviation is probably a little bit higher than it used to be, just because of the environment that we have -- that we are operating in.

Okay. And just confirming, you are taking an $0.08 charge. That's in guidance for Copley?

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

Okay. Thanks, David.

Paul Morgan, Canaccord.

Good morning. Just to follow-on on that, so that would be $0.13. Is there anything you could point to as a driver of that kind of guidance increase in late October?

Generally, we are producing the results we want to produce. I know the operating metrics are not perfect. We are not going to deny that, but we told at the beginning of the year this is the plan -- 3.5%, 6% -- and we're producing a little better on that front overall. And that is where it rolls up to.

And so we are being very cautious on Copley. We haven't made the final decision on that, but I think it's likely that we're going to do that. But we've got -- I've got to run it through the Board, but I want the market to know that that may be off the table going forward, at least for the time being.

Look, we could've kept it on our books and waited, but you know what? I think the right thing to do -- if we in fact decide to do it -- will be to take that hit.

Okay. Then you mentioned in terms of the same-store number not just Pac Sun, but then also I think you said intentionally reducing the specialty leasing program in the common area at some of your high-end malls. Is that a material impact?

What is the thought process behind that? And maybe -- I don't know if you have a number. You've given us in the past what that program is as a percent of NOI.

I think it's material in that it does affect the comp number. The comps would be higher had we not chosen, but, look, part of what we have to do is listen to our clients. The clients -- and our clients, to some degree, especially in certain areas of the mall, are very concerned about that so we want to be receptive. We've got competition in some of these markets that we've got to be responsive to and we just think it's the right thing to do.

We did a lot of research on the consumer. Consumer really doesn't care, but on the other hand, we have to. When it comes to the property business, we've got to listen to our clients, i.e., the retailers, etc., and we obviously have to listen to the consumers. They diverge here, but in this case we want to be as sensitive to the clients as we can.

Some are very sensitive to us and we don't want to keep that from bringing the right mix into some of these centers. And that has hurt us over the years. We have thinned out in the very high-end properties.

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

I think it's been -- look, we didn't really do it last year because a lot of these projects were in a state of development, but it's clearly been beginning -- it's clearly been throughout 2017. And remember, this stuff builds so it has more of a -- as you go later in the year it has more of a back-end impact. So it kind of builds; it's less important in Q1 and Q2, just because seasonality of our business.

Great. Then just last question; I appreciate all the color on the Aero economics. Just wanted to ask, there have been dozens of similar bankruptcies over the years and you probably could've had opportunities to do something similar then.

Maybe could you point to anything outside just the economics of it that makes you think differently about this? And then just going forward, I know you had the macro view about vertical integration, but anything more kind of narrow business driven where you didn't do this for years and now it looks interesting?

I think that's a very good question and I would say this: I think as we have gotten to know Authentic Brand Group, we now have --. For us to have done this without their involvement on how to stabilize and then grow the brand, that would -- I might have that expertise a couple years from now, maybe. I mean I say "I," should say "we." I doubt it, but maybe, you never know.

I think having -- it's very interesting. I have been talking to Authentic Brands for a year about other brands that might fit into this model that we are creating, but they didn't come to fruition for whatever reason. But I think we finally -- we have, over this last year, been able to develop an operating model and platform.

They are great at brand-building. Having General Growth as part of that and their ability to bring their real estate and their thoughtfulness to the table in terms of how you operate a business was very helpful. So having the liquidation angle solved with Hilco and Gordon Brothers was critical.

It was really the long -- in a nutshell, it was really -- because the partners were able to do it. The partners brought so much to the table that this was the right deal. If were just us on our own, I would be the first to tell you I don't know that we would do it.

Now we have done Starbucks franchises, but that's -- we did -- by the way, and I encourage everybody that goes to Del Amo, go to Pink's Hot Dogs. That is owned by your company, Simon Property Group. I'm so excited about that franchise that we own. It's great hotdogs; it's an institution.

That is -- we've got a small group that runs that business. This is a little bit out of the ordinary. And I would say, simply put, the fact that we had this partnership that was able to navigate all of the complexities of this and so I think that is the important determinant of why we did this versus not doing others.

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

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

Great, thanks.

Rich Hill, Morgan Stanley.

Thanks for the time this morning; always appreciate the transparency. I wanted to just ask a quick question about the lease amendments, maybe in the context of your broader portfolio of malls.

You have obviously the luxury of seeing across the productivity spectrum. So when we are thinking about lease amendments in maybe your higher-quality malls, is it maybe the case that some of these tenants are paying above-market rents to get into the best-quality malls and, therefore, you might still be incentivized to make a lease amendment? Maybe reduce their rent, but recognizing it's still a pretty attractive rent overall? Is that the right way to think about it?

Then maybe if you could provide some color, if any, about how you are seeing lease amendments on malls doing $700 a square foot versus maybe those doing $350. But I do appreciate that it is mall to mall.

I mean that's the bottom line. Certainly, we have some of those cases, but it really is mall by mall, space by space and what the retailer relationship is and what we think the retailer future is.

I wish there were a simple, straightforward answer, but there's not. We try to use our business judgment in figuring out what the right is. It's also do we want to be conservative or do we want to be aggressive? What's our mood of the future?

As you know, last year we had a lot of bankruptcies and we gave directions to like, okay, we are starting to change our attitude a little bit. I can't tell you that it's going to be a complete reversal, but we try to make the right judgment call.

Now I will tell you lease amendments are like anything else, they -- once you do it for one retailer, don't kid yourself, you hear about it; it goes everywhere else. Part of our job is to contain that.

But we've experienced this before; we did do this in other economic times. Again, our business is fine, but it's not -- we are trying to be accommodating, but we could shift our strategy pretty quickly and we try to evaluate it one by one.

Rick, do you want to add anything to it?

I would say to you the most important consideration for you to realize is these lease amendments are not forever. One of our considerations is do we have a better replacement tenant, but that tenant won't be ready to open for a year or where it is in the project and what is the project? So all of those factors come into play as to how we want to deal with the specific room and how we price the room and how we interface with that tenant.

The only other point I would make to you is that -- and it gets lost sometimes but -- today our portfolio has never been stronger. Never been better physical condition; never had a better mix of small shop tenants, better mix of boxes, better mix of restaurants, better set of amenities. So we are, on a continual basis, taking share and that's our focus: to make our properties as compelling as they can be. And that helps us in dealing with all the things you've been talking about.

Again, the business -- we are 96.3% occupied. As an example, Macy's announced 100 store closings. They are closing -- Macy's is leaving one of our malls. They are leaving one of our malls we think and a very small mall that has basically no financial impact to us at the end of the day.

So there is this narrative in the mood, but the fact of the matter is, go back to 7.3% NOI growth, that's $300 million. Let's put it all in perspective.

Okay, that's very helpful. Thank you.

Floris van Dijkum, Boenning.

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

We are basically in the same position that we articulated in our last earnings call. We have identified users for our boxes; we have plans for our boxes. We are not going to proceed with that redevelopment until we have a firm understanding of our returns and the cost of downsizing the Sears stores.

There are conversations going on right now regarding those costs. And as soon as we have a clear understanding of that, we are in a position to proceed to try to execute on some of those redevelopments.

And that would include the Primark at Burlington Mall?

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

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

You know, we are working to achieve that. I can't -- I'm not that clairvoyant to look out that far.

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

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

Great. Thanks, guys.

Michael Mueller, JPMorgan.

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

Not at all. As I said in my opening comments, no one would put new money into a business that we didn't think would have an exciting future. And that's evidenced by kind of the group that we have buying -- bought the Company.

So we certainly get the benefit of Aero paying rent, but that's not a reason to invest in a business. We could re-lease those spaces and that is not a factor in putting new money into an investment.

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

In our outlet business?

Yes, outlets.

I think we will -- the pace may not be as hectic as we have done over the last three or four years, but Norfolk we open next year. We're going to actually start another outlet in the spring of this year, spring of 2017, in a very good, growing market. We've got another one under serious examination.

So I don't think it will be maybe as active as we have had over the last two or three years, but we will still selectively do some stuff. At least one a year on average, maybe two.

We've got I think some unique opportunities. We are also very focused on expanding with the Allen deal. I mean adding 120,000 square foot to a center that does, I don't know, $600-plus a foot in the outlet business is very attractive. So there's a lot to do with our domestic portfolio as well.

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

Ki Bin Kim, SunTrust.

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

As I said, when this happens you get -- you do get -- it does tend to spread. On the other hand, it's very simple: we said we are not going to do it. So that changes the dynamic pretty quickly.

Look, again we don't -- this is a space-by-space, retailer-by-retailer decision. It's not pervasive throughout, but it's -- again, I explained to you our rationale for why we kind of did it 2015-2016. But it's something that we evaluate every day with every retailer.

And my instinct is that we could be changing how we have dealt with kind of the 2015-2016 stuff already, but it will be a case-by-case basis.

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

Look, there is nothing in our redevelopment that we are not doing other than potentially Copley. And Copley was -- I would encourage everybody to study what's going on in construction costs and what's going on in supply and demand there.

We did not want to be -- unfortunately, the build there is longer than it should be because of the nature of how we have to reinforce the structure. We spent a lot on it to get approvals and to make sure we had the engineering to do it, but the reality is when we started seeing the construction costs it's just not the right time to do it with all the supply and the costs there.

We don't see that anywhere else in the portfolio, so we've got a lot of very interesting stuff to do beyond what we are doing now. Like I said, we've done some really good work in the field: King of Prussia, being part of Brickell, Clearfork. We've got plans to expand Fashion Valley; I could go through the whole list.

But that part of the business is unabated because we think investing in our great real estate is what we should do for a living and that's not changing. But we do have to worry about supply and demand, and I'm not worried about supply and demand in our retail portfolio. In the case of Copley I got nervous about it; be the first to admit.

Okay, thank you.

Thank you, this ends the Q&A portion of today's conference. I would like to turn the call over to Mr. David Simon for any closing remarks.

All right, thank you for your questions and we'll talk to you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.