西蒙地產 (SPG) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2018 Simon Property Group Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Mr. Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Christie. Good morning, everyone. 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 the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com.

For our prepared remarks, I'm pleased to introduce David Simon.

Good morning, everybody. We're pleased to report a strong start to the year. Retailers are performing better, following a strong holiday season and decent start to the year. Demand is picking up for our space, and traffic and sales were up. We continue to invest in our product, with a long-term view of creating compelling, integrated environments for our consumers to live, work, stay, play and of course, shop.

We completed several significant redevelopment projects, are under construction on others and announced more activity that will further enhance the value of our real estate and grow our cash flow. And we continue to identify unique strategic new development opportunities globally that will extend our reach and create world-class destinations.

Before I turn to the results of the quarter, I'd like to provide some perspective. First, we expect to generate in excess of $4 billion in earnings this year, that's FFO. There are only 40 companies in the S&P 100 that are projected to generate over $4 billion in earnings this year, and have an A-rated balance sheet. Simon is one of them.

Second, we expect to distribute approximately $3 billion in dividends this year, which would make us one of the top 40 dividend paying companies in the entire world and country, and obviously, in the S&P 100.

Finally, our stock is trading at a 12x multiple, which is a 30% discount to our historical average multiple of approximately 18x. This is the lowest multiple SPG has traded at over the last 8 years, despite compound annual growth rate of more than 11% in earnings and 14% in dividends over that period of time.

And as you know, our numbers speak for themselves. Results in the quarter were highlighted by FFO of $2.87 per share, an increase of 4.7% compared to the prior year and exceeding the first call consensus estimates by $0.04 per share. This marks the first time we generated in excess of $1 billion of FFO in the quarter. We continue to grow our cash flow and report solid key operating metrics. Total portfolio NOI increased 4.8% or more than $70 million in the quarter, and our comp NOI increased 2.3% for the quarter. And as you remember, and I want to reiterate, they do not include lease settlement income.

Leasing activity remains solid, continues to improve. Average base minimum rent was $50 -- $53.54, up 3.3% compared to last year. The mall and the outlets recorded leasing spreads of $8.45 per foot, an increase of 12.6%. And we are pleased that retail sales momentum continued to pick up in the first quarter. In fact, each of our platforms posted record sales productivity for the period.

Reported retailer sales per square foot for our malls and premium outlets was $641 compared to $615 in the prior year, an increase of 4.2%.

As a reminder, this sales metric is based on information reported by the retailers. As a point of reference, while reported retail sales grew a strong 4%, we know there are significant number of retailers who are underreporting their sales number because they are deducting returns of online sales that were not previously recorded as store sales.

This is not allowed under our leases. Although we plan to continue to provide reported retailer sales, it is important for the investment community to understand we believe this metric is understated.

Our malls and outlets ended the quarter at 94.6%, and occupancy is down compared to last year due to the timing of bankruptcies processed last year and the first quarter of this year and as well as the addition of new space brought online last year that is slightly lower than the overall average for the quarter.

On an NOI weighted basis for our operating metrics were as follows: reported retail sales on an NOI weighted basis is $804 per foot compared to $641. And again, this number, we believe, is still understated. Occupancy is 95.6% compared to 94.6%. An average base minimum rent is $70.34 compared to $53.54.

Just to turn to new development. In Edmonton, Canada, the Premium Outlet Collection will open next Wednesday, May 2, marking our fourth outlet center in Canada. Construction continues on 4 additional new outlets: Denver, Colorado, opening in December (sic) [September]; Queretaro, Mexico, which will open in December; Malaga, Spain, which will open in the spring of '19; and Cannock, United Kingdom, which will open in the spring of 2020.

We have development -- redevelopment expansion projects underway at nearly 30 of our properties across all of our platforms in the U.S. and internationally. And we continuously evaluate our portfolio for additional opportunities.

During the quarter, a 175,000-square-foot expansion opened at Aventura mall, one of the most productive retail centers in the U.S. During the quarter, we started construction on a significant redevelopment at Southdale. We're replacing a former JCPenney box, with Life Time Athletic, Life Time Sport and Work, specialty shops, restaurants, a 146-room Homewood Suites as well as a Restoration Hardware and Shake Shack restaurant.

We're also working through the entitlement process for our transformative redevelopment projects of the former department store spaces at Phipps Plaza and the King of Prussia. Phipps has started construction and KOP will start, we hope, by the end of the year.

Lastly, we announced our plans to redevelop in 5 locations -- 5 Sears locations: Brea, Burlington, Midland and Ocean and Ross Park mall. Each of these projects has unique plans dependent upon the needs of the communities in which they are located, including entertainment, fitness, dining halls restaurants, residential, hotel, office, and of course, new to market retailers. These are all go projects. Our industry-leading balance sheet continues to differentiate us.

During the quarter, our A/A2 unsecured credit ratings were affirmed with a stable outlook by S&P and by Moody's, respectively. And by the way, similar A and A2-rated companies in our sector do not come close to our financial characteristics.

However, it is what it is. We amended and extended our $3.5 billion revolving credit facility, with a lower pricing grid for 5 years. And we closed and/or committed on 6 mortgages, totaling $513 million for roughly 5 years at 3.4% interest.

Keep in mind, we have no unsecured senior notes or consolidated secured debt maturing for the remainder of this year and little for 2019. Net debt to NOI was 5.5x. Our coverage was 5x. Only 6% of our total variable -- of our debt is variable. Our liquidity is more than $7 billion. And during the quarter, we repurchased 1.5 million shares for $228 million.

We announced our dividend of $1.95 per share for the quarter, a year-over-year increase of 11.4%. We're increasing our FFO guidance from $11.95 per share to $12.05 per share. This represents approximately 6.5% to 7.5% growth compared to our reported FFO of $11.21 per share for 2017.

To conclude, strong start to the year. We expect to generate $1.5 billion in excess cash flow, which will allow us to fund our new development -- redevelopment, execute on our share repurchase authorization or decrease our leverage, which is already significantly below our peer group.

We welcome and encourage your questions.

(Operator Instructions) Our first question comes from the line of Steve Sakwa of Evercore ISI.

Just a couple of quick things here. So it looks like a lot of the operating metrics of kind of pointed up in the right direction, leasing spreads improving, sales improving. I know occupancy can balance around and there's been some store closures and a few bankruptcies. But I also know that some of the new developments that are brought online tend to kind of pull that number down. So I'm just wondering if you or Rick can just share, how much of the 100-basis-point occupancy decline was maybe development related? And then how much of it was kind of natural store closings or maybe bankruptcies?

Well, I would say over the majority is related to bankruptcies. And remember, Steve, we are very focused on putting the right tenant in the right space. And when a -- we're at the mercy of the bankruptcy court. So the reality is you file Chapter 11, you can reject the lease at any time. And as you know, the build-out and getting the space leased take some time. We do expect that we will get back to where we were last year, maybe a little bit better. But again, that will depend upon, if there is a little bit more bankruptcies or not. So it's pretty much what we expected. Remember, as we gave guidance, we thought we would get back to where we were. We're processing the bankruptcies. And then I'd say, I don't know, 20, 30 basis points are probably just a new space that we've added on. So in that range of 70, 30, somewhere in that range.

Okay, great. That's helpful. Secondly, it's a little more of a housekeeping item. But on -- and we noticed on the other income that you had a large jump in interest dividend and distribution income. I think the lease settlement income sort of speaks for itself. But can you just provide any color on what the large jump was in the quarter? And is that recurring? Or is that just a onetime item?

It is recurring. It's just we don't know when it recurs. So that is, basically, the distribution we get from our interest in value retail. And so it does manifest itself. We -- just so you know, I know a little bit about accounting, so we cost account for that. We do not equity account. So when you cost account, you basically only record cash, that happens to be a cash distribution. And it does happen. It's happened every year for the last several years. It is lumpy. And that's what it was from. We put that in that line item because it's technically a distribution as a -- that's a function of -- it's cash flow, refinancing activity. I mean, it all goes into a pot there. But we cost account for that. And then we only book it when we receive the actual cash.

Okay. And then just last for me. Just share repurchase. I know you didn't do anything in the fourth quarter, but you, obviously, took advantage in the first quarter. How should we just think about your buyback activity over the course of the year?

I think it's going to continue with these levels. I mean, we are -- if you look at our balance sheet, you'll look at very little exposure to potential rising rates. The underperformance of our stock price, the kind of the mood is getting better. Retail demand increasing, market is not recognizing it. Why not buy stock back? So I think we'll continue that. I think, just like anything else, like we typically do, we'll be cautious about it. But it's certainly in our plans.

Our next question is from Christy McElroy of Citi.

It's Michael Bilerman here for Christy. Two questions. The first -- in your shareholders letter, you talked about the fifth platform being focused on the consumer. And I was wondering if you can delve a little bit deeper into the resources that you're committing to that? How you're going to measure success? How much capital you want to put towards it? I'm not sure if you're thinking grander of like what Westfield did with Westfield Labs and OneMarket. And I know that a lot of different things that you've done, whether it's a Snapchat, the Family app, Facebook, Happy Returns, all these things that you're trying to get together with the consumer. But if you can delve a little bit deeper into how you envision that going forward?

Well, at this point, given what's going on, I really don't have a lot to share, other than we're dedicating resources and efforts to it. I hope to have something to talk to the market about later in the year.

I wouldn't compare it to, whatever it's called, One Labs, Westfield Labs, I'm not sure what that's all about. We're actually working on this right now. I -- we think about it all the time. We are a retail real estate company, but we have the flexibility to think about other investments and other ways that technology can improve our consumer experience without jeopardizing, basically, the core business. And that's a huge focus for the company. As you know, our -- even though Tom wanted me to take it out of my letter, I did hint to the market kind of what our marketing connection to the consumer brings every year. It's in the letter. Thank you for reading the letter, first of all. And I mean, it's real money, you capitalize it. It's a real business, depending on how you want to capitalize that. I think we have this huge connection to the consumer, 100 million consumers, 2 billion visits a year. So a lot is going on there, but I'm not really ready to get granular with you, but I hope to do it by the end of this year.

But is that something that you feel like you want to go and acquire something? Or is it all being built and investing in house?

Right now we're building, but I wouldn't rule out a strategic investment at all. And we just -- right now it's tough for us to make any investment, right? So you look at how those values compared to our values, but there are -- we have tremendous amount of optionality on how to continue to grow our business, because of the position that we're in. So we will continue to look at every -- everything under the hood. As you know, we make investments through our venture group. There could be larger investments. We've tended to make those kind of relatively small investments, but there could be larger investments. We're building something right now that I think will be very interesting. And that's the thing I'm referring to that I hope to debut by the -- at least, by the end of this year, but as you know, when you're building something, it's always a little -- it's not quite like building a mall, but there are a lot of analogies to it.

David, it's Christy here. Just a quick one from me. It seems like the property expense recovery rate was down in the quarter from recent trends. Just wondering if there was anything onetime in there? And how we should be thinking about the property level expenses going forward?

Not really. First quarter has no -- had utility expenses that were -- it was a little bit -- we had a little bit of a spike up in those. We're also adding some properties to it, so that those numbers tend to go. But basically, our utility expenses and snow expenses, as you know, we've had a -- the spring has not sprung yet. Maybe it has. Maybe it's springing right now as we speak. So it's really more of that I wouldn't read anything else into that.

Our next question is from Richard Hill of Morgan Stanley.

It's just maybe a quick question for you. One of the things that we're looking at was maybe a little bit of increase on the month-to-month leases. It looks like they increased to around 3.5 million square feet versus around 1.6 million square feet. I recognized that's still small overall, but I'd be curious if you can give us any color as to whether that's timing related, or seems to be strategy? How you are thinking about that?

Well, it's -- when you get bankrupt space back, you wait for the right tenant. So it's really just typically part of our strategy here that we are looking at the regional local markets a little bit more in detail. So we tend to do those a little bit shorter term sometimes, but it's really just a function of us recycling our portfolio through.

Now remember, in our occupancy, we only include leases that are over a year. So the 94.6% just includes that -- it doesn't include like short-term leasing, to us it's 3 to 6 months. But -- so all of that is about a year.

The only thing I would add is that we're maximizing our revenue. And so we go out of our way to try and make sure that we have as much space occupied for as long as we can, and we're also able to incubate tenants out of that program. We got a number of tenants that have started with us, temporary tenants, which, in fact, end up going longer term leases because they find they can make money and like the experience.

Got it. Helpful. And can you remind me, and maybe going back to Christy's comment here a little bit. Do those month-to-month leases pay reimbursements? Or is that a typical...

And remember, a lot of those month-to-months are leases that we haven't finalized the negotiation with. So we tend to take a big retailer, okay? Maybe they're headquartered in San Francisco. And I won't name names. Believe it or not, just because of the 2 organizations back and forth, we may not have those leases negotiated completely. So they're not going to leave and then come back. So those tend to go month-to-month. And what you're looking at in the 8-K, essentially that backlogs, okay? So -- you need to differentiate between short-term leasing and month-to-month. Month-to-month is, basically, our total book of business that we have many national retailers in '18 that are done. So -- and those tend to be done throughout '18. Even though we try to get them all done, we may have a strategy not to get them all done for all sorts of reasons. So I think you need to separate those two out. those month-to-month are primarily national retailers that have just not been finalized, and they go -- and remember, a lot of our leases expire at January 31. So a lot of those leases don't get -- believe it or not, don't get done until May and June. And don't ask me, but that's been year after year after year. So I hope you understand the difference.

So let me repeat. So what you're seeing in the 8-K is mostly vast majority of national tenants that we haven't finalized our deal. So they automatically go to month-to-month. In our 94.6%, only leases that are 1 year older are in that number, okay?

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

We see that you're continuing to ramp up your densification pipeline. I'm just wondering, as you look out your portfolio, how many projects do you think you could be pursuing the densification effort on? And it seems, primarily, hotels have been your densification effort of choice. Do you see more office and resi efforts as you densify?

Yes. I would say to you that -- just off the top of my head, we have at least 20 major projects, one of which is under construction now. We have to move the fire station at Phipps. But Phipps is a great example, where we're building a hotel with Nobu and a restaurant and an office building. There's no residential there, but as you know, we already built residential in our development there. But we have a lot of residentials. So like -- and Craig, you know the portfolio. So it's Stoneridge in the East Bay, significant amount of resi will be part of this Sears redevelopment. Same thing with Brea in Orange County. So I wouldn't say it's mostly hotel. The reality is, I think, you'll see more and more resi build. And just a gross number of at least 20, but we're building a hotel on Sawgrass. So I mean it's all over the board. It's something that we're excited about, and it's something that we're dedicating more, obviously, capital, but also human resources toward.

Great. And then, regarding Bon-Ton, maybe you could share some of your future plans for the repurposing efforts of those department stores?

Yes, I'll let Rick speak other than Bon-Ton is a nonmaterial event for us. We've already got users identified. Again, we don't own all of the real estate, so some of it will be out of our hands, at least for some period of time. But Rick, you can add to that.

We, basically, have already identified users for virtually every one of the stores. And as David said, there are some that we own that we're moving aggressively on right now. There are some that Bon-Ton owns, some that are third-party owned, but we have users. They have said, "Yes, let's make -- finalize economics, and we would hope to have information about that later in the year." The stores aren't going to even come back until third quarter, while they finish their processes.

Our next question is from Alexander Goldfarb of Sandler O'Neill.

Just two questions from us. First, David, in your opening comments, you referenced Internet returns and how you make sure that the tenants aren't understating their sales. Can you just expand on that? As far as -- it sounds like you guys get a full detailed P&L, and somehow you're able to double check and make sure that the retailers, the tenants aren't leaving off anything to further understate. But maybe you could just elaborate a little bit more on that.

Well, there's not much to elaborate other than we actually don't get P&Ls, we get -- we have audit rights. And in our normal procedure, we saw some anomalies about sales. And as we've gone through our audit rights, just like the retailer has audit rights on us, in some cases. Now if you go back historically, it used to be all these CAM audits, but since we all went to fixed CAM, that's less of an issue. We found out that there -- it's -- what's fascinating to me about the Internet, and it's never really discussed, is everyone talks about the Internet's gross sales; they never talk about the net sales. And I think by and large, bricks and mortar are -- because as you know, apparel could be 30%, 40% returns. And I think most of those returns are occurring, in a lot of cases, in the physical world, which is good for the retailer, because maybe they give them a credit or maybe they exchange it. But we've just found that we're getting dinged by the Internet return when in fact, they're not allowed to, because the reality is the only thing they are allowed to offset in terms of sales is returns from the store. And in many cases, we limit the total returns that they are allowed to net against us. So this is an issue. I mean, I don't want to make a big deal about it, but when the market is fascinated by our sales per square foot, we just think we need to tell you the other side of the story. What happens here and how it gets dealt with is anybody's guess. It's certainly part of our lease negotiations, but we just want to tell the market. We are giving you our reported sales, and there are less than what's going on at that market, because the Internet sales returns. And that's -- I can't quantify it, but I do think -- I wouldn't tell you if it weren't material. How's that?

That's what I figured. The second question is, part of your redevelopments that you guys have been doing has also been upgrading the food courts, which I don't think usually get much attention. So whether it's like Woodberry or Westchester, yes, certainly, it's pretty dramatic from what it was. But as far as measuring returns, like it's easy to say, "Hey, you add a restaurant, we drive this much more NOI, this much traffic, you add new retailers, new hotel, you can judge that." How do you -- are the food courts really dramatically increasing sales and NOI? Or are these more just, "Hey, you got to upgrade it and make it look good. It's probably got the same sales than it was doing before, but if we're going to do with the center, we have to." So is this more defensive spend? Or are you actually getting a good return when you're doing those?

Look, I think it's all -- it's offense, it's defense. The reality is those numbers are all in our numbers. So, however, you want to look at it. I don't think it's that critical to say it's offense or defense. When we do make an investment in our food hall operations, we -- it's all -- that cost and that income that we get is all in the numbers that Tom provides in his 8-K.

And just remember, and we don't talk about this, we've been thinking about it. I've been thinking about it. The 8-K we had here is just approved projects ready to go that we've -- our own capital committees approved. It does not include our soon to be approved deals like at Phipps, or all of the Sears redevelopment, we cut the deal with at the end of the year. And that's basically -- it's more than a shadow pipeline, but it is a significant amount of investment that we think will give accretive returns on. But I would just say that it's simply -- it's -- yes, it's both. It's offense, it's defense. The cost and the income from that is certainly in our numbers. And the world wants newness, healthy food, community place to hang out. All of the stuff that's really good. There's a lot of great operators. We need to do more and more of it. We're excited about it. Our peers have done it. They've done a nice job with it. And I think it will continue to move forward.

Now on some cases, we may take it out, because the reality is there's a better use for it. And each -- the thing about real estate is yes, there are these trends, but the reality is it's going to -- it's boils down to the location, the demographics and all that stuff that makes real estate unique.

Our next question is from Ki Bin Kim of SunTrust.

This is Ki Bin. So David, for a couple of quarters you've mentioned that you think the retail demand or environments is getting better. So what is it that you see in your seat every day that that's not apparent in the supplemental snapshot every quarter?

Well, we talk to our sales folks, and they tell us demand is picking up. Now leases take time. Bankruptcies don't take any time, okay? So they have a lease, they reject it. And then, we don't know if they're going to reject it or not. There's lots of games of chicken, but we've got one of the best leasing groups in the country, in the world. I look at them in the eye, they tell me their demand is picking up. So I talked to retailers, Rick talks to retailers. I mean, obviously, results are historical. They're not future expectations. We feel better about the business than in '17. We gave you our judgment that bankruptcies would be less in '18. So far we're right. We're not perfect in our estimates and our judgments, but we've been doing this a long time. The guy that oversees leasing, John Rulli, tells me green shoots. I don't know. Sometimes I wonder whether -- but John and I've been working together a long time. I tend to -- I believe his judgment. Rick, you can comment on this, what do you think?

Interestingly, we have meetings every week with tenants, where we're in their offices and they're coming in to Indianapolis, and we're going over the portfolio, and that optimism is being generated out of those meetings, where we're exposing opportunities to them. And where, last year, they would have said, "We expose 20." And they were interested in 3, now they're interested in 12. So there's definitely a more optimistic view. They have more capital to spend, and they are more focused on new opportunities than they were last year, and that's the cause of our optimism.

And that's helpful. And is that just broad-based? Or is there a certain segment? Is it new type of tenants? Is it the old guard? Just curious, how does that look like?

Well, it's a combination. I mean, look at -- each company is different, but look at -- just from the GAAP, look at Old Navy, they're growing the Old Navy business, right? Now, maybe they weren't 2 or 3 years ago. Obviously, the great thing about what's been going on in our industry is there are more and more entrepreneurs in the food and, obviously, in the retail front. I mean, I don't have to -- I know Rick -- this is usually where Rick updates his list. Let's move the call along and we'll avoid it, but he's happy to give it to you. There are more folks. I mean, our new business group is doing new and new deals, new ideas.

Our business always recycles itself. It's done it for so long. Our product has been around for 70 years. And despite -- and I don't want to blame -- I don't want to like be negative on the media, but the media wants this one narrative. But it's just not reality and look at our numbers, okay? We're going to make $4 billion this year, okay? And that's -- yes, I mean, it's not perfect, they're -- I'd love for everybody -- I'd like not to have slight decrease in occupancy and this, that and the other, but it's -- we're in good shape, but I think the business, generally, is getting a little bit firmer. But -- and again, I go back and Tom might know it, but I wrote an article on my shareholder letter in '15. And I told you my concern about the leverage going into the system on retailers. And the two big bankruptcies this year had basically -- Claire's had nothing to do with its operation. It's all about too much leverage. And Toys "R" Us, it was about the fact that it was so levered to begin with that they could never invest in the product, whether that's online or in the stores or anything. And the natural media narrative is, "Well, it's the mall." Well, it's not. Look at -- peel the onion, figure it out. And I agree with Tom, when did I write that in my letter? '15? '15. What year is it?

'18.

'18. Nobody reads my letter, but the reality is I told you about it in '15. So that's where -- we tried to explain it to you methodically. We show it, we back it up with our numbers. And every retailer is different, but the reality is we just feel a little bit better than -- now, it's easier to feel better where you don't have all these bankruptcies. But we're going to have some more. And no, I'm not going to tell you which ones. And yes, some of it are because their operations are not -- the life has passed them by. But that's been going on in our business forever. Traffic is up, sales up, demand's up, and our numbers are catching up.

Our next question is from Jeremy Metz of BMO Capital Markets.

David, Rick, I just want to continue on your comments about the mood getting better and retailer demand increasing. I'm wondering what you're seeing from your tenants in terms of reinvesting in their existing stores? Are you seeing encouraging activity here relative to maybe a year ago?

I think there are tenants that are now recognizing that they are only going to and be able to increase their share by giving the consumer a better environment. And David has been talking about that over the last quarters, asking our retailers to invest in the store. And we are seeing that more now. And that is, in fact, encouraging.

One of the things that we are very focused on is rightsizing our tenants. So where we have the tenants that we believe is -- got too much space, we will work with them and reallocate that space, get them to a smaller store that's more productive. We make money, and we get back more space than we can lease to another productive tenant. And that's just like manufacturing new space without having to build it. And so we're very focused on that, and the tenants are more inclined to work with us than they were in the last year or so.

Great. I appreciate that. And then just switching gears. In terms of those Sears boxes, the 5 redevelopments you recently announced the plans for, you mentioned earlier that those are construction spend numbers aren't in the pipeline yet. But given it sounds like those can be some pretty significant projects. You're adding additional use of the hotels, office, resi. I'm just wondering if you can give us any sort of sense of how much capital those 5 could total here?

Well, let me answer it this way. We've made a deal with Sears to control 12 boxes. And when I say Sears, I should also mention Seritage. Our total investment in that -- now, some of these are not this year. The 5 are this year, because we're getting those back this year. But the 12 in total is about $1.2 billion. And that will flex a little bit up and down. So I think you should look at the total amount as opposed to the 5. But you'll see the 5 start coming into our 8-K. But I would say to you, that if you look at the 12, and it's about $1.2 billion altogether.

Our next question is from Caitlin Burrows of Goldman Sachs.

I guess also just on these densification projects in the supplement, and I know another example is Northgate Mall outside of Seattle, which is in the news. That one mentioned it could have housing and offices but reduced square footage of retail. So I was just wondering, to what extent the projects you're doing could involve a reduction of retail square footage, so that even though the end result might be or should be an increase in NOI, that there could be some decline in between?

Yes, there's no question that, that will have a reduction in retail space. Because remember, we have Penney, Macy's, Nordstrom, and it's a tight site, but it's a great piece of real estate. And ultimately, it will be a residential office and still retail, but I'd say roughly the retail will be cut in a half more or less in that range. Obviously, this is a process over time. We've got to go through the approval process, but the retail there will be dramatically reduced.

I guess when you think about the densification projects overall, is that normally the case? Or more often is it like on a parking lot on the side that wouldn't end up impacting the retail portion?

Well, look, I think a lot of this is happening with our Sears stuff. So if you consider Sears a retailer, in theory, it's taking that out. I mean, all the 12 -- in a lot of cases, we're just changing the mix. But it'll still be retail. So I would say to you, a lot of it is reducing the department store. Not so much the small shops, but really reducing the department store square footage, and not the small shops. So the income opportunity is really enhanced because, as you know, either they pay very little rent or will able to buy the box on an accretive basis. Because we're -- getting small-shop kind of rents, or we're having a mixed-use development. So in a lot of cases, the retail will be reduced in total, but it will mostly department store reduction as opposed to what you and I would consider small shops.

What I would say to you a great example of that is focusing not just on the box, it's the land, the King of Prussia, the Penney store, it's going to be demolished. That gives us 17 acres of land adjacent to King of Prussia Mall. And that is going to be a significant mixed-use project with hotel, office, residential, restaurants, retailer and amenities. And so that's a major opportunity for us to substantially upgrade what is already one of the best properties in the United States.

Got it. And then just last one, using Northgate -- or on the [South Lake], but just using Northgate as an example. Is the reason that's not listed yet just because the decision-making process is pretty early stage?

It's early. Listen, the critical path there is approvals. And then, once the approvals come, we'll start to build. So Seattle is, obviously, a great market and a great city. And this is a great piece of real estate. The new Metro line is -- it basically dumps off in our parking lot. But it's a multiyear process.

I think that the most exciting thing that we've got, that the market could focus on if they want to say, "Okay, what are you doing now?" it would be Phipps. I mean, Phipps' Belk leaves at August of this year. We demolished the store. It's a little complicated, because we've got to demolish the parking and then go up. But that's going to happen. That, basically, -- we have this odd process here. I mean, it's basically -- they're finalizing all the numbers, but that will show up in either next quarter closely thereafter. But it's for all intents and purposes a go deal. It's roughly, if I remember right, around $350 million. And it will be accretive. And it's going to make that real estate just tremendous, fantastic. The only thing that could flex there is the office. But we think a brand-new building there in that area, with that parking and those amenities, will be exciting. And we will be doing it -- a new food hall there along with Life Time Work and Fitness and Sport, Nobu hotel restaurant. That's going to be the one you can say, "Well, this is great, you got to talk about this all." But this is actually happening. Northgate is a year or so process. But the other big ones to look for are Brea, Stoneridge, and obviously, KOP. I mean those are the big, what I'd say to you, are the big 4 that are all going to be programmed in here in the next year or so.

Got it. Okay. And then just switching topics. The income and other taxes line item was historically an expense last year in the first quarter. It was positive, I think, due to a loss from Aéro this year back to an expenses. Just wondering if you could go through the impact Aéropostale had to your earnings this quarter and the outlook for that investment?

Well, last year -- I mean this is the good news and the bad news. So last year, as you know, the first quarter of retail operation usually loses. Yes, we have the tax benefit of that. This year, because of the lower tax and the operations are better, we have less of a tax benefit. And that's really what it manifests itself. I think Aéro business, generally, is -- they are doing what they're supposed to do. So -- I mean, that's a business that, with a little elbow grease, and less worry about comp sales and all this other stuff, I mean, I think we're going to -- our operating business will -- should have an EBITDA. And again, we only own 49%, but should have an EBITDA of, I don't know, $35 million. And we bought it basically at 1x EBITDA. So, I don't know, people criticize me for it. But somehow, it's working out. And as you know, they're going to take on the Nautica operations. We think that's another unique thing that can be done that will add to the profitability of the Aéro operating company. And then our partner, besides General Growth, Authentic Brands Group continues to do an excellent job in the brand development of both Aéro and then ultimately all their brands as well as Nautica, which we expect to close here in the next 30 days. So it's okay. I mean, we have a decent story to tell in our retail investments so far. So it's okay, it's good.

Our next question is from Nick Yulico of UBS.

Looking at the increase in tenant sales per square foot, trying to figure out how much is attributed to churning out weaker tenants from the portfolio versus sales growth? And so could we get some perspective on what is the average sales per square foot for tenants that have fallen out of the portfolio through bankruptcy in the quarter and in the last year?

We don't have those numbers there. But we have such a huge portfolio. We lost 1 million square feet in bankruptcies. Our small shops are 6 to 85 -- 65 million. So no matter how you want to do that, Nick, it's not going to be material, okay? You can do with -- make up a number and do it yourself and you'll see that's it's not material. 65 million square feet is still 65 million square feet.

Okay. And then on the development page, recognizing these numbers can fluctuate, but the expected return is now 8%. It was 9% last quarter. What's driving that? Is it tougher construction costs? Or some change in product mix location?

Things come in, things go out. We round it, so there's some rounding up and rounding down. But nothing out of the ordinary mix change. That's it.

Our next question is from Vincent Chao of Deutsche Bank.

Just want to go back to the Aéropostale conversation a little bit. Obviously, you've done a good job stabilizing it on a big basis, but I'm just curious there are some special circumstances when you bought that. I guess what's the longer-term plan there? It seems like it's not something you would necessarily keep for long term, but just curious how you're thinking about the long term for that investment?

Well, again, it's a small investment. We have, basically, less than $30 million in it. So honestly, it's a very good investment. It does -- we bought it really, really -- fortunately, the team has done a very good job. But, again, our investment in this is basically $30 million. So it's not like I'm obsessed with it. I do obsess with making sure the operations continue to move forward in a positive manner, which they have been, but it's not -- for $30 million, I'm not going to -- it's not like, "Oh God! We got to do something with Aéro." But I'm open to any your ideas if you'd like.

Leveraged buyout.

That's one thing we will not do, okay?

I guess just another question, maybe something that you obsess over a little bit more, just the big projects that you mentioned that are going to come into the pipeline. We saw the share of your net cost there, the reported number go up for the first time in a little while. I guess, after these are all in there, I guess -- or maybe by the end of the year, what do you think the pipeline will be? Is it going to be over $1.5 billion at that point? Just given some of the things that are being brought on? And then, from a delivery perspective, is that more of a 2020 kind of NOI uplift?

Well, what I would say to you is the stuff that we're working on now -- again, part of the timing is -- the great thing about us is we're not long development, so we can turn it on and turn it off, just like our balance sheet. But I would say to you, the stuff that's in the pipeline now is over $4 billion. And I would call that more than a shadow pipeline, I'd call it the real pipeline. The difficulty in answering your question, which is not that it's not an appropriate question, it's just that it's hard to tell you exactly when that will come online. But I would say to you, as Thomas described, it's going to be about is $1 billion plus a year. I still feel like that's the right number, because we got this $4 billion pipe that I see and I can identify clearly, whether it's $2 billion in 1 year, $1 billion another year, kind of -- that's harder to -- because of these are a little bit out of our control in that you just have to go through the approval process. But the real stuff is $4 billion, and all that's like in works now. And so that's why I still think that is $1 billion plus a year is probably a pretty good number, because it will take 3, 4 years to get all basically done. And then we'll add to that as well, because, obviously, even though we have 12 Sears stores, that's not -- there's going to be more, that's not the end.

Our next question is from Michael Mueller of JPMorgan.

Appreciate the color on the development pipeline. I guess the one question I have left is, the first quarter lease term, how much of that was contemplated in guidance? And is there anything else material that you're expecting in the balance of the year?

Yes. It was all pretty much in our initial guidance, because there was a unique situation that was -- that we had anticipated that was going to be resolved.

Okay. For the balance of the year, anything else material in there?

On lease term, not really. Not really. And again, I just -- it's always been part of our business. It's an okay part of our business, because if you get the present value of the lease obligation, and then you get the space back, it's not too shabby, as my hero would say. But I don't sense if there's anything really that's going to be that extraordinary. And again, remember, Michael, it's not in our comp NOI.

Our next question is from Floris van Dijkum of Boenning.

Question on -- David, I mean, you've built a reputation as being a pretty astute capital allocator. And as you look at the various platforms that you're allocating capital to, whether it's your U.S. mall business, your outlet business or your international business, or for that matter, buying back your own stock, can you maybe talk about the attractiveness as you sit right now for each of those uses of capital? Clearly, you continue to invest and plow money back into your U.S. mall portfolio. But maybe if you could talk about the relative attractiveness, particularly regarding your stock as well.

Well, I mean, right now it's basically 12x. It's highly attractive. And the only hypothetical constrain in that is that we just think having the -- it's not really manifest itself in our multiple. The optionality of having this powerful balance sheet is something that I never want to get rid of. So we could buy a ton of stock back. But we always are going to be conservative on that front, only because we want this powerful balance sheet for optionality reasons, optionality to do something, external optionality to weather any storm, make additional investments, make our properties better. And so we're never going -- remember, Rick and I are workout dudes, okay? Rick, I mean, when I got back to the real estate business in 1990, I spent from '90 to '93 doing workouts. Rick did it as well. Right, Rick?

Yes.

So Andy is here, he's conservative. So that's -- we will never jeopardize the balance sheet. Now I don't think we'll get rewarded for it, as much as we probably should, but that's fine. It is what it is. I don't think the rating agencies appreciate it as much as they should, but that's fine. It is what it is. And so for us, I just think we're never going to be wildly aggressive on buying our stock back just because we want that ultimate flexibility. But the priorities are, we'll continue to buy stock back. The biggest priority we have, obviously, is we're really excited about all this mixed-use stuff that we're doing in some of these big projects. That's going to be the future of a lot of investment and growth.

And then, we may take the company in a different direction. Michael Bilerman mentioned the consumer. I mean I wouldn't rule out some interesting thing from us down the road, because I think -- I just think we have the ability to do stuff like that, that we shouldn't rule out. So I hope that answers your question. But I -- and thankfully, we have $1.5 billion cash flow after dividend that we can put back in to the business. And we're not over our skis. If we end up in a really tough recessionary environment, we're not going to be -- we're not going to -- and I wrote this in my letter. we are not -- again, we are not going to -- the development community historically leverage, leverage, increased rates of return, blah, blah, blah. We are never going to push that to the limit, even though it makes your return on investment that much better and all the other metrics associated with that. It's just not who we are.

So I mean, it's a long-winded answer, but I mean -- so we'll continue to cut it. What we're doing, I think, right now is what we'll continue to do. But I want the option that if, obviously, it gets different, I'm going to step one thing up or decrease one thing up. That allows us -- we have the optionality to do that.

One other question, David. I'd love to get your color on what you think the Unibuy entry into the U.S. via Westfield means for the global retail dynamics and also for the U.S. mall dynamics?

Well, first of all, I would say 1 or 2 points. One is people that are looking for a mark on values, it's a very, very healthy mark. And two, is operationally. I don't see -- we'll wait and see. I mean I'll reserve judgment there. But I don't see a big significant change. I mean Westfield did a good job before, I'm sure they'll do a good job after.

But I think the most important thing is that there is a very healthy mark out there, if you are interested in those marks. I think from our standpoint, we'll have little to no impact.

Our next question is from Linda Tsai of Barclays.

Do you have any comments on 1Q traffic across the different property types? What kind of uptick are you seeing given improved trends coming out of a better holiday season?

I think, generally, it was -- I mean it wasn't like a 5%, it was up around 1% across the word. And it didn't really matter if it we're outlets or malls, it was kind of across the board. The outlets tend to get a little bit more hit because of the weather. But even though, they were up.

Are you seeing tourism come back to the outlet?

Yes. Yes, we are, even though -- it's not as robust as it has been. It continues to move up. Outlet sales were really, really nice in the first quarter. So a lot more retailers are doing better. So we were very pleased with, generally, with the outlet results.

Great. And then can you offer some insights on Klépierre walking away from its bid of Hammerson? And what might have been the thinking behind that?

Well, it's really -- even though lots of discussion on this. Klépierre, there's a supervisory board and executive board. We're on the supervisory board, but the executive board really runs the company and makes those decisions. So it's really more important to hear from them. That was a Klépierre-led effort in transaction. Obviously, they didn't do it without the supervisory board giving them the green light to do yes or no. But it's really -- that question is really much better directed toward them.

Our next question is from Christy McElroy of Citi.

David, it's Michael Bilerman with two quick follow-ups. Is there anything with all the things going on with all of your competitors whether it is the Westfield, Unibuy merger, the GGP-Brookfield deal. Clearly, you've had management changes that at (inaudible) in financial activism, you have activism at Taubman. Does this allow Simon at all to take advantage of all those things going on for shareholders at all? In terms of just operations and dealing with things, when there's just more some uncertainty at all of your competitors, not from an M&A perspective?

I don't think so. I mean I think they're all running their business I think very effectively. So I don't see that at all. I mean, they're all -- they all had good -- the ones you mentioned all have good properties, good management teams. I would imagine all of that's business as usual regardless of whatever corporate activity is going on. So I don't think so.

And you're not hearing from the retailers that just may, like, loves drama going on C-suite or corporate at all?

Not at all. Not at all.

And then just going back to this whole thing about returns and the leases, and your comment about the CAM audits and the movement towards fixed CAM, and how that changed. Is there any change in the way you're doing new lease agreements to address this, for you to make sure that you're getting your fair share of percentage rent in the right rent at the end of day for a space?

Well, I mean, that's a really good question, and it's a big question. And every retailer is different. It's just it's -- I mean, believe it or not, Rick, Me, John Rulli and his team, I mean, we're -- every retailer is different. We're very focused on it. There's not a standard response yet, but it's -- it needs to be addressed in the future leases. Because, look, we all -- we don't mind Internet sales, because we do think there's a lot of returns associated with that. We obviously want those returns in the store, because that's facilitates a trip and it helps the retailer. And it's all just a function of making sure it's appropriately dealt with. So it's not like -- it's not an adversarial scenario. But it's just needs to be appropriately addressed. And we're in the midst of trying to figure out what's the right approach. And unfortunately, it's not a cookie-cutter answer because every retailer does a little bit different. But it's not -- we want the returns in the store. We want the trip in the store, but -- as you know, I've been like, don't worry too much about sales, and I've been poo-pooed on that. And I understand why the market doesn't like my view of that, but the reality is it's becoming even -- there's even a bigger gap on the focus on this, because there is more -- certainly more business being done online, but that also means more returns. And the consumer likes to do the returns in the store.

And the reality is, this whole green effort, we wrote a white paper 3, 4 years ago about the fact that we all want higher levels of sustainability from an energy point of view. And the reality is the Internet and the constant packaging and the constant state of returns is really a lot less green than doing your trip in total, okay? So there's a lot of specs on this, but I won't bore you.

But the point is I don't have a good answer for you yet, other than we are working cooperatively with our clients to find out what the right answer is. And it's not a fair share thing, it's just -- as long as we have to report that number, I want -- we need that -- somehow the market needs to understand there is this issue that's out there.

Right. And then I wanted to congratulate Andy on his retirement. It's nice to go out with a $30 billion balance sheet at under 3.5% rate, with a 7-year average maturity, certainly calling it probably at the peak from that perspective. But is there any comments in terms of CFO process? What you're going through internal versus external? And how you think that's going to be timing-wise?

Well, yes. And that's a good question. So first of all, Andy -- we'll say goodbye to Andy not to the end of this year. But Andy has done a fantastic job as we all know. And when I wrote the comments about his retirement, I really, really meant them. And not that I don't mean what I write, but the fact to the matter is I felt in my heart, how I felt about Andy, he has done a tremendous job. He's done such a good job that there is no financing that we need to do, okay? So that's kind of ironic, right?

So this is a CFO that's done such a great job. The reality is, there's nothing to do. I'm kidding, there's always something to do. But currently, the simple answer is, we're looking more internally. We have some really good internal candidates, and I'm thinking more that as opposed to external, but I haven't put a pin on it yet and -- but Andy has done an unbelievable job with the balance sheet. He and I have worked together 25 years. He's got the best relationships in the industry -- banking industry, and will certainly miss him. But the reality is he's done a good job, there's nothing to do.

We've $16 billion in the last 3 years, plus 2 revolvers, but you've got a great internal group that can step up in a New York minute. We've always had a great infrastructure here, with very, very strong candidates. And it's a team environment in the financing department.

So the answer is I am thinking about it. I'm getting closer and closer but it's -- Andy is right. It's a team effort and -- but it will develop this year.

David, it's Christie just one more quick one for me. You suggested that buybacks are likely to continue. To what extent our assumptions for additional buybacks from here contemplated in the current FFO guidance range?

They really aren't other than what we've already done.

And that concludes our Q&A session for today. I'd like to turn the call back over to Mr. David Simon for any further remarks.

All right. Thank you, everyone. Appreciate your questions and your comments.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.