西蒙地產 (SPG) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Simon Property Group Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host for today's conference, Mr. Tom Ward, Senior Vice President, Investor Relations. Sir, you may begin.

Thank you, Bridget. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; 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 that 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 or 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. The last couple of months, obviously, have been challenging as the country has endured the devastating impacts of natural disasters and tragedies, which had impacted millions of people across the country, including many of our Simon employees and their families. Our thoughts and prayers go out to all affected. There has been significant disruption from Texas to Florida, Puerto Rico and California, and due to the dedication and heroic efforts of our field team members, thankfully, all of our personnel got through these events.

Across all of our platforms, we closed 45 of our centers for a combined 412 days due to natural disasters, including the one that occurred in May in Colorado Mills due to a hailstorm. All of our centers in Texas and Florida have been back to normal. Our centers in Northern California are now back to normal operations as well, after the horrific wildfires there, and we expect Colorado Mills, which has been closed since May, to open in time for the holidays. Our 2 centers in Puerto Rico are currently not open, and we are in the process of making repairs, where possible. We expect full restoration of these centers to take some time, given the damage to Puerto Rico's infrastructure and availability of building materials. We are fully insured for this event, including business interruption insurance. We currently expect the closure of Puerto Rico centers to impact our FFO by approximately $0.03 in the fourth quarter of 2017, and this reduction is currently included in our guidance. I couldn't be more proud of the Simon team who have demonstrated courage, resilience, perseverance in how they professionally responded to these unprecedented events.

Now let's talk about the third quarter. We had another very productive quarter, and are very pleased with our financial results. Results in the quarter were highlighted by funds from operations of $2.89 per share, an increase of 7% compared to the prior year. For the 9 months ended, our comparable FFO per share growth is 6%, which without question, will be at the high-end of our peer group. We continue to report solid operating metrics and cash flow growth. Our malls and outlets occupancy ended the quarter at 95.3%, an increase of 10 basis points compared to the occupancy at the end of the second quarter. Leasing activity remains solid. Average base rent was $52.42, up 3.3% compared to last year, reflecting strong retailer demand and pricing, power for our locations, the malls and outlets, re-leasing spreads of $7.22 -- $7.21 per square foot, an increase of 11.2%. Reported retailer sales per square foot for the malls, and outlets were -- was $622 compared to $604 in the prior year period, which is an increase of 3%. Total portfolio increased 4.8% year-to-date or $212 million and 3.9% for the third quarter. Comp NOI has increased 3.6% year-to-date and 2.5% for the third quarter. I remind everybody, once again, we do not include resettlement income in our comp NOI disclosure. Also, as a point of reference, our third quarter growth is typically less than the growth rate we achieved for the first half of the year if you are interested in that and have a desire to look historically. Now on an NOI weighted basis, our operating metrics were as follows. Reported retailers sales on NOI weighted basis would be $776 per foot compared to $622. Average base rent would be $68.54 compared to $52.42. Leasing spreads would increase 17% compared to 11.2%, and these weighted metrics, again, reinforced the quality of our assets, and they are not to be ignored.

At the end of the third quarter, redevelopment expansion were ongoing in 31 properties across all 3 of our platforms. During the quarter, we opened a significant expansion in Allen Premium Outlets in North Texas. We had a significant opportunity to continue to improve our portfolio through the densification of our centers with the addition of mixed-use components: hotels, multifamily, office and others. And included in our supplement this quarter, you'll begin to see that list of activity. We have a number of projects underway. We'll continue to add different uses to our centers, where we see the opportunity to generate accretive returns. Construction continues on several major redevelopments and expansions, including the shops at Riverside, Aventura Mall, Toronto Premium Outlets, just to name a few, and we expect these again to open over the next 12 months. We recently opened a shop at Clearfork, a great new center. This open-air center is an excellent example of the type of vibrant mixed-use community-centric environment we create, along with our partners. We have carefully curated a mix of shopping, dining, entertainment, office, and the shops at Clearfork will be the dynamic hub of a timeless asset in the terrific city of Fort Worth, Texas. Construction continues on 2 new outlet centers, both in really good markets: Edmonton, Canada and north side of Denver, Colorado, which will open in the spring and fall of 2018, respectively. Our share development -- redevelopment activities continues to approximate $1 billion.

Simple update on capital markets. During the first 9 months of this year, we closed on 12 mortgage loans, totaling $2 billion. Our share of that is $1.4 billion, weighted average interest of 3.12%, term of 6.8 years. Our current liquidity is $6.5 billion. Our balance sheet is as strong as ever. We have the highest investment grade credit rating in the industry, more than 5x interest coverage, and I again reinforce our financial flexibility as a real advantage that cannot be, but continues to be overlooked. Today, we announced a dividend of $1.85 per share for the quarter. That's a year-over-year increase of 12.1%. We're on -- we will pay $7.15 per share in '17, which is an increase of 10%, and lookout for 2018. So -- which will be higher. We are updating our guidance range to $11.17 to $11.22 of FFO per share. That is the highest in the REIT industry. This is an increase of 3% -- $0.03 on the low end of the range compared to our prior guidance, even with the $0.03 reduction for the quarter I mentioned previously due to the closure of our 2 Puerto Rican assets.

So finally, as you can see from our results this morning, we've produced yet another quarter of impressive results and metrics. We continue to invest in our product, and generate the kinds of returns that will continue to grow our earnings cash flow and dividends.

We're now ready for your questions.

(Operator Instructions) Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill.

Good morning out there.

It's not that far out there. We're in the Midwest. It's not like we're way out there, okay? There is activity for all of those investors west of the Hudson. I just want to point people -- I want you to point that out. Alex, what can I answer for you?

So 2 questions. First, just in Puerto Rico, can you just tell us sort of a breakout number of tenants who are paying, or said differently, the number of tenants who aren't paying? And then on the business interruption insurance, maybe for there or elsewhere, what the impact is and if we should expect anything into next year or if the $0.03 is really just in the third -- just in the fourth quarter this year, and next year, we shouldn't expect any impact?

Yes. I'll give it to you, really, very high level. So we've taken a deductible. We had a deductible expense that went through the P&L in the third quarter for Florida and Puerto Rico. After that deductible, we're fully insured. In the fourth quarter, there is nobody paying rent at this point, and we don't collect business insurance until all of that is resolved. That -- and it really -- they won't begin to pay the rent until we restore the building. And I wish I could give you a sense of that, but it's really going to depend on the next couple of months because it is -- there is a lot going on down there, and power needs to be restored permanently. And as I said, we're doing our repairs and restoration work concurrently, but it's going to take some time to get it all -- to get it going. So that $0.03 is what we expect that would have been essentially our net operating income for those 2 properties in the fourth quarter. It could drag into '18, however, if it does, we would expect some of that eventually to be recouped through the BI. But we can't book the BI until it's actually cash collected, and so we'll have a -- when we do our earnings in '18 guidance, we'll have a better idea of exactly the impact. Again, it's -- I'm more focused on the tragedy at Puerto Rico. At the end of the day, if you extrapolated the $0.03, that's less than 1% of our business, so it's obviously immaterial, but we're more interested in what's going on there. We -- if you take out our redemption here, we're going to -- you know that we earn well over $11.50. So if we're at $0.11 or so, that's basically less than 1%. Even you, Alex, could do that math, right?

Yes. Although I do have a colleague for backup if need be. Then the second question is in the other income breakout, the lease settlement income jumped and then marketable securities gains. Can you just provide a bit more color? And then on that lease settlement, was any of that from Teavana or is that still outstanding?

Well, none of that is from Teavana, and there's been a little bit more lease settlement income this year. Again, that's not in our comp NOIs. You know, we did own Seritage stock. We did sell that. And I would only point out for those of you that I would hope most people would study our P&L without making statements, is that we also had more than offsetting, what I'd call, unusual expense on the expense line. All of that, you can see in our 8-K in our P&L. So I kind of think like this is all washes, if anything, it's a little bit more negative, but that's up for you guys to determine. But -- and we outperformed even with the deductibles, even with the extraordinary expenses that we incurred that we're higher than, what I'd call, the higher-than-normal lease settlement income, and obviously, the Seritage marketable securities gain. It's a gain, by the way, not a loss. Let's keep that in mind too.

And your next question is from Christy McElroy with Citi.

It's Michael Bilerman here with Christy. David or Rick can you just talk about sort of occupancy in terms of the trajectory as we move into the fourth quarter and into next year? And right now, in the third quarter, you're sitting at about 100 bps over the last year, which was a record high. You got to 96, say, by the fourth quarter. You're at 96.3 in the third quarter. How should we think about the trajectory into the fourth quarter relative to that spread? And how does that lineup as we move into next year from an occupancy perspective?

Well, what we -- should have improvement in the fourth quarter, that's number one. We're not going to give you a number. Number two is we gave the guidance in '18 in February, but the reality is, the only reason why it's down is we've had some extra bankruptcies this year. And I mean, we had a bunch in '15. We had less in '16. We had a bunch in '17. The portfolio's in excellent shape. So we'll continue to improve upon that. And we've done more leasing this year. I don't have the exact number. Rick might have the total number, but we've leased a lot of space this year, what, over...

7 million.

No, more than that. But the point is -- and we're dealing -- the issue with bankruptcies is you're at the whim of the court. So you have a lease. They can cancel it at a moment's notice, and it does take time to lease. But we've leased over 10 million square feet this year. That's a lot of leasing, and we'll continue and improve, and like I said, I think we'll have an uptick in the fourth quarter.

Right. I was wondering whether that year-over-year spread is going to continue to widen, right? So you've gone from 40, 70 to 100 basis points relative to last year given some of the bankruptcies. How we should think about how the fourth quarter is shaping up, whether that number stays flat or whether it narrows as people start to take this up?

Well, when you get -- we had a lot of bankruptcies go through the third quarter. It's -- you can't lease space in 1 month or 2. It's certainly harder to lease space to open up to the fourth quarter once you get that space back in the third quarter because you had build-out and so on. But like I said, we have an uptick, and it's essentially all on the margin, the way I look at it.

And then just second question in terms of capital, and you've talked about how strong the balance sheet is and how much liquidity. We noticed that you didn't buy back any shares in the third quarter. Can you sort of just elaborate a little bit about why that was the case, how that differed relative to what you did in the first half?

Well, the simple answer to that is we've got -- we're very close to some significant redevelopments that we're excited about, and we're very conservative. So we're creating a pile of financial power that we want to take advantage of, and we've got a little bit more redevelopment that you'll see in the next, I don't know, month or 2 that's really exciting for the portfolio, and we figured we might as well hoard some cash. And we love -- actually, we also love raising this dividend. I mean, I love raising the dividend 10% a year. I mean, I really like that. So between the redevelopment, raising the dividend, having a balance sheet that cannot be compromised with significant firepower, I know it's all ignored right now, but I don't ignore it, and I'm going to rely on my judgment that that's stuff that I shouldn't ignore. So I know no one wants to pay attention to it. I know nobody cares, but raising that dividend, 8%, 10%, 12% a year, having a hoard of cash to put back in the portfolio of accretive returns is really exciting. And having a balance sheet, tried, tested, ready to go to work is really a competitive advantage that I really like, and that's what we're going to do. So this dividend is going up. The earnings are going up. The balance sheet is going to get stronger. That's the model we got. That's what we're doing.

Our next question is from Craig Schmidt with Bank of America.

I noticed on the development activity report that the Edmonton project is listed under Mills. I wondered if this indicates a different sort of leasing approach that maybe is broader in value scope than just outlets?

It will be. It's always been designed as Mills. Our partner there actually owns the Mills in Toronto and in Vancouver, and this has always been organized as a Mills. It's enclosed. It's, what I'd say, bigger in size. So it's always been kind of -- we consider it more Mills-like with the boxes and the outlet and the entertainment uses. So our partner is the owner, Vaughan Mills, and the one that they've just opened in Vancouver as well.

Great. That's encouraging. And then the -- it seems like you may be taking the change in direction on the new redevelopments, maybe more densification? Is -- I don't know. Is that something you just need to wait the next couple months for?

Well, I think we've got a terrific portfolio set to do, so the answer is yes, Craig. I think we'll -- you'll see more and more stuff from us along those lines. I mean, obviously, we're not going to do it just to do it. The idea is to increase the value of those portfolio. But Rick and I went over our plans yesterday at King of Prussia. King of Prussia is basically a $2 billion asset. We had $0.01 that just didn't fit there with Neiman and the Nordstrom and the Lord & Taylor and the Bloomingdale's at all. It's as you know -- you know the center very well. It's very big. We didn't need another department store. They've closed their store there. We could have done traditional, but the fact of the matter is the pivot of kind of the -- what's the front and what's the back of that center has evolved over time and we have the ability for hotel, apartments, office, and complementary retailer -- retail with outdoor work and play space. That's going to be unbelievable for that community and I -- listen, we've got to do it. We've got to get it done. We've got open it, but I think that's -- a lot of folks are missing those kind of opportunities in our kind of -- you cannot -- one thing you cannot do is replicate the real estate that we have, and that's a unique, unbelievable opportunity. It's going to be a significant investment. It will be our Hudson Yards version for suburban, but wealthy King of Prussia. It's a great market. It's a growing market. That's what having good real estate's all about and it's underappreciated, but I get it. We've got to do it. We've got to improve it. But if you've seen some of the mixed-use stuff that we've done over the past few years, you've seen that we were -- our core competency is increasing in this area. So again, we will devote capital to those kind of projects that are very exciting, and we'll take that $2 billion asset to, I don't know, $3 billion, $3 billion-plus, why not, right?

Our next question is from Steve Sakwa with Evercore ISI.

Just a couple quick things, David. One, I think you mentioned that you did have a deductible hit in the third quarter, but I don't think you quantified it. Could you give us that number?

$2 million. It's $1 million per occurrence. The flood in Harvey and all the flooding did not reach the deductible expense. We had other expenses, but not up to that number.

Okay. And then I also noticed on that other income page and expense page, professional service fees were up quite significantly, and I also noticed that the regional and home costs were down. I just don't know if you can provide any commentary around the large jump from professional fees in the quarter.

Well, it's mostly associated with legal expenses. As you know, we had this situation with Woodbury. You know our point of view in terms of how we felt about that, but they were significant expenses. That to me is a onetime expense. And then, obviously, we're going to be -- we're running our business as efficiently. We have the highest margins in the business. We've got the best overhead percent of revenue in the business. We take pride in that, that we have the highest margins. We take pride that we have the lowest overhead, again, something that's underappreciated, and we'll continue to do that. We did not have an LTIP for the senior dudes because we knew -- we knew this year would be a little bit tough. It's actually coming out better than we thought. We're hitting every number. We've got best growth in the industry. We've got the best balance sheet. Our operating metrics are -- sales were up, all of that's pretty good, but you know what? We thought it might be a little tough, and so we tightened the screws, and that's what I like about my team. They're willing to tighten with me and we tightened.

Okay, that's good. And then I guess just lastly on that 10 million feet that you talked about leasing, I don't know if you or Rick could maybe provide a little detail just broadly by category. Presumably, a lot of that was other things besides apparel, but can you just kind of help us give a breakdown of maybe how much was traditional apparel, how much was home, food, and just some of the broad categories to show the diversity of leasing?

In our -- this is Rick. In our new leases that we have been signing, the percentage devoted to apparel is down about 20%. The percentage devoted to food and entertainment is up about 20%, and the number is over 11 million square feet this year over our 3 portfolios, which is malls, Mills and Premium Outlets.

Your next question is from Jeremy Metz with BMO Capital Markets.

And I just want to say being from the Midwest, I agree it's actually not that far out there.

Right.

I had a question for Rick. I was just wondering if you can give us some high-level color here on the sales and traffic trends at the Premium Outlets versus the malls? And then maybe just as a follow up, can you comment on your watch list and any changes there? Maybe digging in a little bit, are you worried that we can get -- another bankruptcy or adverse retailer event here late in the year, whether it's a Charlotte Russe or anyone else that's -- of the troubled retailers out there?

Well, we're not going to comment on individual retailers. That's not our place. Our Premium Outlet traffic is up. The mall traffic is stable. We're not seeing the kinds of trends that have been publicly reported by all these algorithms and black box things that have been out there and talked about in the trades. It's very stable and frankly, yes, there was a lot of bankruptcies. But frankly, we're also having many of our tenants get reorganized emerge with very, very good balance sheets. And in the last several months, we've had Gymboree, Payless, rue21, all come out with restructurings with very stable balance sheet and growth strategies.

Yes. On the occupancy that Mike Bilerman asked, which I probably was -- I should have mentioned, I mean, part of this dip in occupancy that we have is also we've added new product to the portfolio. So they -- obviously, both in redevelopments, expansion space, as well as new developments, they are never up to our 95%, and I don't know what that number is but...

That's a 30 bp impact...

Okay. So it's about a 30 basis point impact, and I probably should have answered that when Michael asked, so -- but in any event. So part of that is just the portfolio is expanding and you tend not to be initially at 100% occupancy when you opened, but yet, once the space comes in, the space comes in our number, and it is what it is.

Okay. Appreciate that. And I guess, David, I was just wondering if you could just kind of talk about your appetite here for dispositions, specifically, kind of the lower end of the portfolio. You've talked about NOI-weighted results, so that we see further highlights how much of the revenue and value is really driven by the top. As I think about the 13 -- I'm thinking about 13 assets in the other bucket and maybe just more broadly some assets, where for whatever reason, the market and maybe demographics are moving against it? Does it make sense to sell those sooner versus later? Or just how are you thinking about pruning the bottom from here?

Yes, look, I think it's a question of there are assets that don't fit with our portfolio. We generally have been a seller or spinner offer of assets. The market is not great. On the other hand, I think we'll have at least a sale potentially by year end or early next year. But it's a very simple -- there's no asset here that we lose sleep over or that we have consternation over. And it's a function of if we get the right price, we'll sell. If we don't, and the present value of those cash flow is greater than the price, I mean, yes. To me, cash flow is still -- there's nothing to be embarrassed about. I know this world doesn't want to focus on cash flow, but there's nothing to be embarrassed about cash flow and I can take that cash flow and invest in something that's higher growth, and that's okay. I mean, that's kind of what, I think, people like me should think about, but we'll continue to prune the portfolio. We're in pretty good shape. If the value is right, but we're not going to do anything that's a fire sell because we really have no need to. We can operate effectively. The thing about us is we can operate effectively from luxury centers to terrific suburban malls, west of the Hudson to outlet centers to the Mills product, to Europe, to Asia, to mixed-use properties. I mean, we have the ability -- I mean, the fact -- if you had only seen how this company dealt with the -- these devastations, you would -- our multiple would go up, okay? You don't see it, but I see it. We had crews of people. We chartered plane. We have crews of people go down to Puerto Rico. We had people in the field that put their own personal situation on the back burner to deal with our physical assets. Crazy, crazy stuff. So we can operate. I mean, people forget that we lost a mall in Nashville because of a flood that was shut down for, I can't remember, 1.5 years, 2 years? And we built that back better than ever. We'll build Puerto Rico back better than ever. Those assets are important to that community. We will deliver, and that's what people lose sight of. They want to focus on metric here and there. I don't know. Sometimes, it's interesting, but I don't know what you're asking, I forgot. But the point is, thanks for your question. If I didn't answer it, ask it again. Something about asset sales. The point is we operate in any kind of environment. We do extraordinary stuff. We give back to the community. Simon Youth Foundation is important, check into it. Look at what we've done for the Komen Foundation with breast cancer research. Look at the fact that our operating income -- somebody reported sales that had operating income of $347 million. We had $1 billion. 35% of operating income, 3x what somebody else had, and focus on that. Focus on those kind of things that you think would be helpful in your analysis. You should tell us what you want us to focus on. On the other hand, it's a 2-way street, my friend. Thanks for your question.

Our next question is from Vincent Chao with Deutsche Bank.

I think he called uncle. Next.

Our next question is from Caitlin Burrows with Goldman Sachs.

I was just wondering if you could talk about, on the sales side, you guys did have a nice 3% increase this year, year-over-year, which is been the strongest since '13. So I was just wondering if you could comment where in the portfolio that was if it was more the international tourist high volume centers coming back or if it was across the board?

Simply put, it's basically across the board. And got to remember, September, we dealt with a lot of crap. So I mean, I was really pleased with that number. It's across-the-board. And I think that there's definitely been a pause with all these natural disasters, but -- I mean, unfortunately, they hit us hard from Texas to Florida. Don't underestimate the Las Vegas impacts. Thankfully, we had nobody involved, but it's a tragedy that changes the psyche of the consumer for a period of time. I think I heard from Southwest Airlines that their flights down to Vegas are down. It'll come back, but we had to deal with that. And unbelievably, I mean, we've never had malls where we had to shut because fires. The untold natural disasters, what's happened in Northern California, it's been unbelievable. We had our partner in a mall there whose own home burned down. Just tragic, tragic stuff and then obviously, the Puerto Rico situation is in another level. So even with all that said, our sales came in pleasantly surprised. I think the consumer mood is better. Look, we can talk online or not online. The reality is I saw something interesting, how physical books outperformed electronic books. Who knows, but maybe that's a trend. I think it will -- I think that you'll see that as well. People get bored. Despite all of the rhetoric out there, you would expect me to say that. But generally, sales and traffic are not bad. Pretty good, absent, obviously, these things going on in the tragedies of these unfortunate circumstances that we've had to deal with, and again, I can't -- I wrote a letter to the company, I can't tell, and I don't know how many people listen from the company on the call, but I can't tell you how people have stepped up in this company dealing with these crazy, crazy events. I'm proud of the organization.

And then I was wondering, on recent outlook development projects, Denver is under construction. It opens about a year from now. I'm wondering how the pre-leasing is going there and how that trajectory around kind of 1 year from opening looks at this point versus I know Norfolk opened earlier this year and others of the past?

Great. I think that's going to be great. Denver's a great city. The growth there is phenomenal. It's a great site right on I-25. We are -- our head of outlets, took a bunch of retailers there last month. I think we've got a great design. I think it will be a great addition to the community there.

And I would say to you that there's still considerable demand in the outlet sector. Those tenants are growing and are actively looking for new opportunities. So Norfolk now is performing very well. I mean, we've got everyone opening, and it's a lovely physical plant right on the water. We incorporated outdoor diving there. I mean, the -- I would hope you go visit our product, Clarksburg, because the level of design and customer amenities is substantially elevated, along with (inaudible) mix in these properties.

Our next question is from Michael Mueller with JP Morgan.

David, I think you said your NOI weighted spreads were 17% a quarter. When I look at my notes from last quarter, you talked about 14% spreads. Is that an apples-to-apples methodology, so they actually increased in the third quarter?

Yes, sir.

Okay. And I guess, on the development pipeline, about $1 billion right now, where do you see that number trending over the next 2 or 3 years?

Well, I think it's got the potential to go up, frankly, because, as you know, we're going to have some opportunities, like the King of Prussias of the world that are going to be a really dramatic and change the face of some of these great pieces of real estate. So I think you'll see more from us in this area even this year that would tend to suggest that, that number could be higher. Look, the -- so it is -- we are very focused on the redevelopment part of our business, investing in our product. We're actually in very good shape there. We've done a lot, as you know, since 2010, and we're still very optimistic on -- we'll announce at least one more expansion of a material asset this year, yet, Rick, probably, right?

As it should be.

With really good tenant demand. We'll announce another major mixed-use development at some point, along the lines of King of Prussia that I talked about. So I think we've got good stuff working.

Got it. And I guess, maybe for a second, going back to the first question, in those spreads again, going from 14% to 17%, does anything jump out over the last 3 months in terms of what would've caused that increase?

No. I mean, we have such a large portfolio that it would -- they would have to jump really high to change the number.

And our next question is from Vincent Chao with Deutsche Bank.

I think I had a little headset technical issue there before but, David, you talked a lot about the dividend and the importance of the dividend. Then, obviously, you've increased it this quarter and alluded to increases in 2018. I know a lot of this has to do with taxable income and REIT rules and things like that. But I'm just curious, as the markets continue to, sort of, not really pay attention to the discount between the private and -- private market values versus your own stock. Would you consider increasing the dividend more than you otherwise would in 2018 to continue to give back some of that return to shareholders?

I think the simple answer to that is, yes. I mean, if we are -- if we -- if you look at where we are versus what we've paid, obviously, if we keep increasing that level off a bigger base, that's a pretty big number. And I think the simple answer is, yes. We have the ability to continue to grow our cash flow and, like I mentioned, I mean, I just encourage people to look at our operating income for the third quarter. I mean, there's $1 billion. Operating income essentially being FFO, right? Net income plus depreciation, more or less, right? I mean, it's a $1.035 billion. Nobody gets excited about that number. But guess who does? I do. So when you put it in comparison to other companies and some of their multiples, we are, I'd say, truly undervalued. But I'm not going to -- Mr. Market is Mr. Market. We can only -- I think a good way to demonstrate that is by raising our dividend on a consistent basis. We'll continue to do that.

Okay. And then maybe just going back to your comments about the psyche of the consumer. Obviously, there's been a lot of unusual things going on in the country here, and with the natural disasters and in Las Vegas, as you mentioned. Overall, traffic sounds like the trends are stable, but I'm just curious if the traffic trends in Florida, Houston and Vegas, as well -- sounds like maybe not Vegas, but in Florida and Houston, have they returned to the...

Well, it's interesting. What happens -- you know, unfortunately, we've seen this before. What happens is it does -- and I will say this to you, I mean, prior to this like string of natural disasters, the business was actually -- sales and traffic were up. They were good. I mean -- and what happens generally is, you lose the week before, because there's the preparation, and then you lose 2, 3, 4 weeks after, because, obviously, people are not yet back to normal. Houston, I -- having just visited Houston recently, was -- I mean, they -- we didn't really have that much property damage, but there was unbelievable amount of damage to that city. And I'll give it to Houstonians and Texans. They come back fast and hard. Florida, probably, it's wild because it was East Coast, West Coast, East Coast, West Coast. I mean that hurricane couldn't make up its mind where it's going to hit. But the reality, it does slow traffic and sales. Florida is back a little bit more normal. I think Houston took a little bit longer to get back to normal, given the amount of devastation there. Vegas, we were having a great September in Las Vegas, great. I think that's going to take some time. I mean, what happened there was horrific. But we'll see. I mean, it's so hard to predict. But these things, they don't just snap back day 1, it does take time for people to get in their normal pattern. And I don't blame them, frankly. I mean, they got other things to worry about.

Our next question comes from the line of Nick Yulico with UBS.

David or Rick, going back to your watchlist and some questions about that. I was hoping to get your early read on whether 2018 will be a better or worse year for store closures and bankruptcies, based on what you've seen now with tenants dropping off the watchlist and reselling this year?

Look, you know, I know we all want to talk about '18. As you know, we don't talk about '18 until our year is gone. We actually -- you're more than welcome, if you would like, next week, you come here in Indianapolis spend -- we go through, space-by-space, 200 properties. So it's kind of like mind numbing, but we're doing our business plan for next year. If you want to burn a day or 2 or 3 or 4, or a weekend, come on in. We'll show you how we run the business. But we'll tell you about '18 when we tell you about '18. All I can tell you is that, we've got a great real estate operating model that has historically worked over many years and many cycles. We've weathered lots of storms. One way or another, we'd certainly love a better natural retail environment. It's not quite there. It was headed there. We'd like our -- would like a more stable retailer environment. We're diversifying away from the have not to the haves. That takes time. But you can't duplicate our real estate, can't duplicate our balance sheet, can't duplicate the fact that this company can operate across this country as well as in many parts of the world. And we put it altogether, we put it in a blender, we pull the right triggers and, lo and behold, we grow our earnings. And that's what we're all about. I don't expect '18 to be any different than the history, but I've got the next 2, 3 weeks of planning for the execution of '18. But like I said, we planned for '17. We're doing a good job in '17. We're overcoming a lot. Whether it's retailer bankruptcies, natural disasters, changing market conditions, we did the same thing in '16, '15, '14, '13, '12, '11, '10, even in '09. I mean, you know, it is what it is.

Okay, appreciate that. And then, just going back to that second question. Going back to releasing spreads, which I know is one of your favorite topics. You did -- you talked about the NOI spreads getting better, but way the spread's getting better this quarter, yet the ones on Page 23 of your supplemental, that spread got a bit worse this quarter versus the last year?

Yes, I think that's a simple -- the simple thing is that we had more -- we put everything in there, so we got more boxed deals. And we don't have -- so that tends to damper down the spread for the entire portfolio as opposed to the ones that don't have as much box activity, NOI weighted. As simple as that.

Okay. But just...

You saw what I said.

Yes. No, I get it. Just to be clear here though, if we were thinking about the impact to your cash same-store NOI, are the numbers, the spread that are on Page 23 more important? Or the ones that you're citing on the NOI-weighted spreads?

Well, look, the reality is there is so much that goes in the NOI, spreads, it's just one element of it. So I think you put it all in the blender and it -- look, we've been operating with our NOI, with the strong dollar, with our overage rent significantly, yet we've produced pretty damn good NOI -- comped NOI number growth. So there's so much that goes into it that it's hard. I would tend to look at -- well, if I had to look at it, it's probably more important to look across the board, but they're both metrics for you to chew on. I don't -- honestly, I'd never run my business for metrics other than one. And guess what that is?

Dividend growth?

No, no, no. Cash flow growth, okay? Okay? That's the only metric I worry about, okay? So it is what it is.

Our next question is from Linda Tsai with Barclays.

On Puerto Rico. Sorry, if I missed this. What's the basis point impact of Puerto Rico on FF NOI in the fourth quarter?

Well it's $0.03 FFO all-in, because -- we don't anticipate any BI and/or those centers right now to be opened by the end of the year, fourth quarter. But they might be, but we don't anticipate it.

So you wouldn't quantify it from a basis point impact on FF NOI?

Well, it's less than 1 -- it's out of NOI. It's completely out. There is no NOI that we're going to be booking in the fourth quarter. Is that your question?

Yes. Well, okay. I guess maybe from a NOI impact, what would it have been? Or how much is the takeaway?

Well, less than 1%, essentially.

Okay. And then in your lease negotiations with some of the retailers that have been challenged, if you look at how you've handled them this year, I realize it's retailer by retailer and location by location. But are there any takeaways you can share from this process and how you might approach the leases that are coming up for renewal next year?

It really -- I think you answered it best. It really is space by space, retailer by retailer. I mean, I think, we really don't -- we do across the board account client-oriented leasing, as you might imagine. But it is space by space, lease by lease.

And I would also tell you that we're already working very significantly on next year's as activity, and we can evaluate now where we think market rents are going to be for the spaces coming up, and we're doing everything that we can to have alternative users. So we'll have incremental bargaining power in that renewal process. If we don't get a rent we like, that tenant's going to be gone, and we're going to bring in a new, more productive tenant that's going to pay us more rent.

Our next question is from Handel St. Juste with Mizuho.

So a couple. First, I guess, David, the percentage of NOI from U.S. malls has continued to drift down over the last couple of years. There's been a WPG a few years back. Certainly, accelerated a piece of that. But now you're at below 50% for the first time in your corporate history. So I'm curious what you think the right balance on U.S. mall exposure is going forward in light of the new retail paradigm? And then also, as part of that, curious if you're seeing any interesting acquisition opportunities out there? Anything that might be -- that might fit your quality spectrum, and are you sensing any change in the psyche of any of the owners of those quality assets?

Well, on the last question, not really. We're really not looking externally to -- if we could approach and certainly consider something, but we're actually not looking at much externally. As you know, the big focus has been on the redevelopment, new development, and that continues to take up most of our time. Actually, look, I don't -- we're not running away from -- I just simply -- the mass is the mass, the opportunities are the opportunities. The fact that we've always considered ourself as a retail real estate company. I think, as things change, we now consider ourself as a -- we're going to have more mixed-use opportunities. So that's going to change the mix a little bit on the margin, but we're not running away from the mall business or running away from the U.S. business, because literally, we look at opportunities so granular -- like the previous question about how you look at leasing? It's space by space, mall by mall. I mean, that's how we look at the opportunity set that we have here. And because of that, we may -- the U.S. may go down -- U.S. Malls may go down, but it's really because we saw opportunities elsewhere, and not because we're running from the mall business. We went into the outlet business in 1998, and I made a -- we've built -- it's 20 storey -- if you got a minute. We've built a mall for $4 million of equity in Orlando, shows you how stupid I am, but we at the same time, we spent this money on the Internet and we lost -- remember -- by the way, we were ahead of our time. Some of this stuff, today, probably will be worth $100 billion, but -- okay? But we made some mistakes. I think we had a $30 million write-off back in -- around that period of time, and I -- we built an outlet mall in Orlando. I had $4 million equity outlook. I think of my -- what's our return on equity. David Bloom at Chelsea at that time came to me and said, he wanted to own 100% of Orlando, and I go, "Well, not really." But you know what he said? "I'll give you $40 million for it." And so that was about a 10x in about a year, which even the smartest private equity or venture capital guys like 10x in a year. I said, "Okay." Little did I know, in 2004, I'd buy it back at a number even greater than that. But the point is, we like to go where opportunities are. We bought Klépierre in '10, when the euro was going to be disbanded. We bought it under NAV. But -- so that -- it's more -- that's more our philosophy than "Boy, I want to reduce a percentage of our mall business in the U.S. to get to this number." If that helps at all and suits your question.

Certainly it does. Certainly, I appreciate the perspective. And also, I guess, speaking of opportunities. I'm curious on your thoughts on JCPenney this morning. Not asking for your comment on them specifically as a retailer. I know you don't do that. But I was more curious about how you might be thinking about potentially buying back some of those boxes, maybe retailing opportunities? Are there any natural expirations or store closure on the horizon that we might be concerned about?

Well, we really -- I haven't really studied the Penney numbers, obviously. I know they weren't that good. We had confidence in JCPenney, and obviously, they had a -- they're still recovering from the activity that occurred when they had a different shareholder base. And I have -- I think Marvin Ellison's done a very good job. We think they served a real need to the consumer. I do think they're still, unfortunately, dealing with some of the traumatic events of their different shareholder base. That's taking time, but it's cash flow generating company. We'll study the numbers, see what they all mean. But I think they definitely have a loyal consumer base, and have a business that generates operating cash flow, and I don't expect anything too radical there. But I think over time, we are going to want to get some space back from the department stores, and we may get some space back, but it's all going to be on the margin. They don't pay any rent, even at places where they pay rent. So the opportunity to retenant those buildings on an accretive basis is pretty, pretty significant for us. And to the extent that they're not investing in their store and we are investing in the mall. There's a disconnect for the consumer that we hope to -- potentially we can modify that disconnect by having a better or different use. We're poised. We're focused on it. We spend a tremendous amount of time assessing what we want back, what we might get back, and I think the opportunities are a lot more significant in what we want back than what we might get back.

And just with respect to your question on their leases, in '15 and '16, they had 14 options. All were exercised. In '16, then in '17, they had 7. All are exercised. In '18, they have 6. 4 borrowings that've exercised and we expect the other 2 to be exercised. So we've not been experiencing any closures through lease actions with Penny.

Got it, got it. And one last more, if I could squeeze one in. I'm not sure if I missed it or if you didn't specifically mention what drove the year-over-year decline in that home and regional office cost? Is it just that you're rightsizing the organization given the smaller asset-base? And does that flow through same-store NOI?

No. Primarily, the reduction in our incentive comp, primarily.

Got it. And then, is it...

I mean we're really not reducing -- I mean, we're really not reducing any kind of overhead on that kind of base. We're just -- you get us for a cheaper price. Some may think that's good, some may think that's bad. But it is what it is. As I said...

We're on sale.

We're on sale. He's got a good point.

Our next question is from Rich Hill with Morgan Stanley.

Given that my family is from Kentucky, I can assure you Indiana is not that far out there. I wanted to talk a little bit about your same-store NOI. I'll preface this. I know you focus on cash flow, and look, we do as well. But how much do you think that same-store NOI might be -- being a help there? Or might be helped by the development pipeline? The development pipeline, obviously, it looks like it's a really big growth engine for you now and there's thousand moving parts in there.

It's not in the comp NOI number. So until it's open for the year .

Right. So when I -- and, David, what I was trying to think about was, last year, you put up 2.2% in 3Q '16 prior to...

Let me just reinforce this, and I'd made the statement which -- historically, we do not look at our comp NOI on a quarterly basis. We do not look at that. Never have, never will. We look at it over a year. We told you -- told the market that we hope to do 3%. I think that's it. That's without lease settlement income. That new development kind of a pure number, and we're on our way to do at least that, and for that, given the -- all the complexity in the world today, that's pretty good. That's what I focus on. I do not focus on third quarter number, I don't focus on the second quarter number. We give you the facts, we tell you, and we look at it on a holistic year basis, because when overage rent comes in and out, it's variable. It's when they hit it. And they could hit it in the third quarter, they could hit in the fourth quarter. Third quarter tends to be the lower end of our comp. If you're interested in that. I don't really look at that. I don't know what else I can tell you other than how I think about it, and that's how I think about it, okay?

All right. So let me ask the question maybe a little bit different way. 3% same-store NOI guidance for the year, I think, at midpoint. How much do you think the development pipeline is influencing that versus your core portfolio? Was that something that...

I answered that. That's not in the number. It's all in the 8-K. You can see the components of comp NOI, and you can see the other new development which is not in the comp NOI. We've made that clear for a long period of time, okay?

And the next question is from Jeff Donnelly with Wells Fargo.

I'm curious, you guys produce, obviously, a lot of cash. You've been talking on that today. But you didn't repurchase shares in this quarter. Can you speak more broadly about how you're thinking about capital allocation in the next 12 months to 24 months? And do you think you'll be using a greater share of your capital for redevelopment and expansions? Or -- where do repurchase factor in that?

You probably were bored. Which, I don't blame you, right. We answered that question earlier, which is basically, we've been -- because of some of these mixed-use opportunities, like King of Prussia that I mentioned before, we think our development -- our redevelopment pipeline is going to be potentially increased. So we're being very judicious on that. In addition, the more I think about that -- I just love raising dividend 10% per year, is the cost of carry on that is increasing, and I think that's more meaningful for long-term investors than episodic buybacks here and there. But it's in our arsenal, it's in our capital toolbox, it's -- we'll take it a step at a time, but we are -- we've got some really big mixed-use opportunities. And I just love having a powerful balance sheet. I just can't tell you how it excites me every morning.

I should've ask that differently. I guess, the question is, is it's not off the table then?

It's never off the table, no. We have authorization and it's ready to go to work, if, in fact, we're ready to go, and I would take that authorization seriously. Otherwise we wouldn't have it.

And maybe just sort of a joint one for you and Rick, but I'm curious how our lease terms evolving in this environment and specifically around percentage rents. Because frankly, I'm wondering if you think landlords get a fair shake on the accounting for retail sales because it strikes me that given the way consumer shop today, buying online, maybe returning in store, the reporting optics maybe favor the online channel in the retailer versus the bricks-and-mortar, and I'm just curious if you think leases need to adapt for that?

Well, our leases are very well-positioned to cover that point. And we are very focused on making sure that all their sales that are required to be reported under our leases are getting reported.

Jeff, I think you -- I will tell you this. And I think you pointed out a really important point, okay? Is that we are absolutely, unequivocally, underreporting sales. We can only give you what we get from the retailers, but we've done enough work to know that there is an issue there, and I think our sales that we report to you would be higher, even -- and we have very interesting leases that deal with the point that Rick's making, but I am absolutely convinced that our productivity is much higher than what's been reported. Even though the lease requires them to do so. So that's it. I don't want to get into that, it's a complicated matter. But what you pointed out is very, very interesting. Now the market rewards -- let's face it, the market rewards an online sale more importantly than it does at brick-and-mortar. So the markets trying to get retailers. The retailers would rather prefer an online sales of bricks and mortar, regardless of the profitability. But it's a very interesting point, and I will tell you today, in my humble opinion, there's absolutely an underreporting going on. But I don't want to say anything other than that, okay?

Do you think they have the systems -- do most retailers have the systems to be able to handle whatever the new formal reporting would be? I mean, like you said, they don't really have an incentive to adapt, but -- again, I'm just curious what you said of new leases you talked about it? Do you think they're getting more broad-based in the future?

Yes. Generally, they know what they should be reporting. I would say so. And again, I want to leave it at that. Let's leave it at that. It's a good point, but I will tell -- I do say it's safe to say that the numbers we have are underreported. Absolutely underreported. It's a very astute point. And by the way, we're not giving that up on future leases. Because it's all melding, but you bring up a very interesting point, and I'll prefer not to talk about it after this.

Only one last question. I'm just curious. I'm sure in this environment, you've been contacted by kind of private capital sources, maybe to look at JV and properties and whatnot. What sort of returns do you think they're looking for when they approach you guys? Are you able to speak to that?

I'm not sure. To do something new or to buy -- I'm not sure.

To buy -- the buy interests in your existing properties?

We've had this discussion. I'm not really, you know -- that doesn't do much for us. So it's not something we are really are pursuing.

Our next question is from Jeff Spector with Bank of America.

Sorry for keeping you longer today. But just a couple of follow-up questions. On the department stores, just given the overhang on the stocks -- on the mall stocks, are you seeing any initiatives that you're more positive on? Or anything you could share from you're -- what you're hearing from your mall managers and some of the things we're reading about? Or seeing -- because I would have thought, given your dominant properties, that a lot of these initiatives would be occurring in your properties at those department stores?

Well, that's a big question. And look, it's -- I don't want to really get in too much about having a discussion with our clients. Look, I think ambience, service, speed of execution is really important in today's consumer-oriented focus. I do think there's things that can be done at the store level that will improve that. I mean, I think as simple as a fast checkout at a store would improve sales and productivity dramatically. And there's all sort -- I mean, there's been a huge focus on technology investment toward the -- their online activities, I'd love for that to shift toward the store environment, because that's a real advantage. And I think if they did that in a more comprehensive way, whether through checkout, service, styling and there's so many things you can do today in the -- and much like Apple does when you go to their store in town squares. Much -- with if the focus were to shift a little bit there, I think they would see a pick up in their in-store sales environment. And it's all over the board, Jeff, frankly. I do think it could improve. And just like what we need to do, we need to do -- we need to improve our in-store experience and the stuff that we can -- the in-mall experience on the stuff that we can control. So I think it needs to be a greater focus, it's around the edges. I'd like a little shift in that, but we'll see if that happens.

Okay. And then another follow-up, just listening to the comments on mixed use. Earlier in the week, we received a lot of questions on the WeWork and L&T purchase, upper levels. And again, we're thinking, okay, that's just a unique situation. Maybe there's a few other properties like that in the country, but when we -- I'm listening to your mixed use comments. I mean, do you think that a WeWork type of format? Or, I mean, do you see that entering suburban malls or your malls? Or is that -- that's not what you're talking about?

No, I -- well, we're talking -- I mean, that's included in what we're talking about. I mean, just so you know, we did a WeWorks deal in Clearfork in Fort Worth, Texas. So no, I do think that environment will absolutely accelerate in the -- and again, I don't know that I would call these suburban. They're like -- it's where the good demographic people live outside that urban area, right? I mean, there's still 330 million people, okay.

In the urban, suburban?

Okay. I know New York City and San Francisco is urban environment, but there are lots of places outside of those that -- where people live and work and play and be entertained. So the answer is, yes, I expect us to do more and more with WeWorks. Both directly, like we did at Clearfork, and through our relationship with Lord & Taylor. We know those guys, we like them. I've spent time with them. They're very creative. Both companies are very creative, L&T or HBC in that case, as well as WeWorks. Good people too. Like them.

Okay. And then my last question. I was just curious with the Amazon-Wholefoods merger, are you more or less interested in adding grocers to your Malls?

No, no, no real chain. I think we've always liked it where it made sense for both parties, and the Amazon acquisition of Wholefoods doesn't change our -- I think -- I don't know if it's changed their thinking, Wholefood's thinking, but it certainly hasn't changed our thinking. We'd love to have them in the properties where it makes sense for them and for us.

And our next question is from Christy McElroy with Citi.

Just regarding The Edit at Roosevelt Field, how do you connecting with and choosing these digitally born concepts to participate in this effort? How are you leveraging your venture capital business in this? And is there a plan to roll this out further to more of your centers as you think about this as an incubator for new retailers?

So the answer is, absolutely. Assuming we -- this has legs, this will be rolled out throughout our network of -- and we have to look at our platform as a network, and this will absolutely roll out. I mean, the great news is, we've got a team dedicated to up-and-coming new retailers that may start digitally and then go online like MeUndies is a good example of that, where we're opening a pop-up store in Stanford. So we have a team wholly dedicated to that. We also -- Appear Here, which is a network where we're both an investor and a player. They're actually started in London and have a number of -- basically a platform that connects real estate owners with brands that want access to a portfolio in a very seamless way. They've also been instrumental in identifying up-and-coming retailers of concepts, and so it's a big effort on us to do that. And not only that, but also lease. Not just through what we're doing at The Edit, but also through just normal deals like the antartics of the world. I mean, there's a lot of that new business out there that is exciting for us, because we are bringing in the up-and-coming retailers or food operators that know how to connect directly to the consumer, but also have a little different spin on how they connect with the consumer in the in-store environment. I think they're -- it's -- they're very smart, digitally savvy, speaks to the millennials. We love them as part of our platform and our properties.

And then just given the natural seasonality of retailer income, how should we be thinking about the impact of Aeropostale -- the Aeropostale investment in Q4? So what's in your guidance?

Well, we don't break out that. It's in our guidance. We're pleased with the business, we bought it very -- we're way in the money, and we're performing according to plan. I don't give out quarterly numbers, but we're -- they're kind of -- they're where they should -- there's a little more volatility in the fourth quarter, like a lot of retailers. Even tech companies have a lot of volatility in the fourth quarter. There's a little bit more of that than what we have, since it's our first fourth quarter, let's see what goes on, but we're way in the money -- we basically bought it at 1x cash flow. I kind of like those deals. If you have a few more of those, send them my way.

David, it's Michael. If we can just come back to the professional fees and other. It's like a $34 million, $35 million increase in the quarter. I thought the AG settlement on Woodbury was just under $1 million. So that would be a hell of a lot of legal hours, even at a $1,000 an hour. So can you just break out just big chunks of that $35 million? Because it's not an inconsequential number. And I don't think it is ideal...

Well, I think it's actually almost irrelevant, because it's a onetime number, and it is what it is, okay? So I'd actually argue that there's no reason to focus on it, because it's out of the ordinary and it's not going to repeat. And these -- unfortunately, this is a very expensive scenario that we had to deal with. The fee was nominal, which reinforces what we -- the fact that we -- again, we made an announcement how we felt about it, I don't need to relive that. It's behind us. And so I'd actually argue that the opposite of that, just like the Seritage sale, it goes through the numbers, but I wouldn't count -- we're not going to replicate that gain either.

If I could know if there was just -- where it was coming from, if that was just all legal expenses effectively (inaudible)?

Well, we have other things that run through that. We actually had a write-off -- and again, not to get in miniate, but we also took a write-off in a -- one of our European outlet development projects that also flowed through that. That's a onetime number. But that -- the delta is onetime, including that write-off, okay? So that's the important message to send here, okay? I wouldn't worry about it too much. I mean, I don't like it -- believe me, I don't like it. I'm not happy with it.

It's a big number, right? It's a big number.

I'm not happy with it. Not happy with it, but we had to -- we also had that -- like I said, we had a European development deal with McArthurGlen that flows through that other number as well. But it's nonrepeating, and I appreciate your question, it's nonrepeating, it's out-of-the-ordinary and that's all I can really add to it. Yes, no worries.

Okay, we've exhausted everyone, including myself. And for that, please join us next week as we go through space by space. Rick Sokolov will set up the appointments, and have a great weekend.

Ladies and gentlemen, this does conclude the program, and you may now disconnect. Everyone have a great day.