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Edited Transcript of SPG earnings conference call or presentation 1-Feb-19 1:30pm GMT

Q4 2018 Simon Property Group Inc Earnings Call

INDIANAPOLIS Feb 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Simon Property Group Inc earnings conference call or presentation Friday, February 1, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. McDade

Simon Property Group, Inc. - Executive VP & CFO

* David E. Simon

Simon Property Group, Inc. - Chairman & CEO

* Richard S. Sokolov

Simon Property Group, Inc. - President, COO & Director

* Thomas Ward

Simon Property Group, Inc. - SVP of IR

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Haendel Emmanuel St. Juste

Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst

* Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Linda Tsai

Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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

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

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Thomas Ward, Simon Property Group, Inc. - SVP of IR [2]

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Thank you, Lauren. 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; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer.

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [3]

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Okay. Good morning. We are pleased to report another year of record results, which marks our 25th year as a public company. Our full 2018 FFO per diluted share was $12.13, an increase of 8.2% year-over-year, which will be at the high end of our peer group. And we beat the top end of our initial 2018 guidance by an impressive $0.11.

Over the last 4 years, we've grown our FFO per share on a compound annual basis of 8%. And to provide perspective on our FFO generation, we produced approximately $165 million in our first full year as a public company, $165 million. And in 2018, we produced $4.3 billion. Through the commitment to our strategy, active portfolio management, disciplined investment, relentless focus on operations and cost structure, we have increased our annual FFO generation by more than 25x since our IPO.

For the fourth quarter, FFO was $1.15 billion or $0.0323 per share, an increase of 3.5% year-over-year. We continue to grow our cash flow and report solid key operating metrics.

Total portfolio increased 3.7%, more than $230 million for the year. Our top NOI increased 2.3% for the year and 2.1% for the fourth quarter.

Leasing activity remains solid. Average base rent was $54.18. The malls and the Premium Outlets recorded leasing spreads of $7.75 per square foot, an increase of 14.3%.

We are pleased that retail sales momentum continued in the fourth quarter. Reported retail sales per square foot for the mall and outlet was a record $661 compared to $628 in the prior year period, an increase of 5.3%. Retail sales were strong across the portfolio, with growth in consecutive months throughout the year. And each platform ended the year at record retail sale levels. Our mall and premium outlet occupancy ended the quarter at 95.9%, an increase of 40 basis points for the -- from the third quarter, an increase of 30 basis points compared to the year prior. And leasing activity accelerated throughout the year, with occupancy for the combined malls and Premium Outlets increasing 130 basis points from the end of the first quarter through the year-end.

We opened 2 new outlets in 2018: the Premium Outlet Collection in Edmonton, Canada; Denver Premium Outlets. Construction continues on 3 new outlets in leading international markets, 2 of which will open this year: Queretaro, Mexico will open in the summer, and Malaga, Spain will open in the fall.

We're also under construction on a new outlet in Cannock, United Kingdom, which will open in the spring of 2020. We expect to break ground on a new outlet in Bangkok, Thailand in the next few weeks. And our new development and projects and extensive pipeline of development opportunities across all of our platforms reinforce our industry-leading position. Important to note, our diversified income generation by geography and product type, with 48% of our NOI from domestic malls, 42% from our value platform, which is the Premium Outlets and mills; and 10% internationally, distinguishes Simon from all other retail real estate companies that are trading publicly.

We completed a number of redevelopment expansion opportunities across our portfolio during 2018. Again, the expansions include Aventura; Toronto Premium Outlets; Shisui, Japan; Johor Premium in Singapore, where reclaiming department store spaces continue to be a focus and significant opportunity for the company. We currently have 10 anchor redevelopment projects under construction, with a gross cost of approximately $725 million. And we have an additional 25 opportunities we're actively working on that are in various stages of development. We continue to fund these redevelopment projects through our internally generated cash flow.

Quickly turning to the balance sheet. Continues to lead our industry. Our liquidity ended the year at $7.5 billion. We have the strongest credit profile metrics in the REIT industry. Net debt-to-EBITDA of 5.1x, lowest in our sector. Our interest coverage ratio was 5.1. Our long-term issue rating of A/A2 continue to be the highest in the REIT sector. Our balance sheet continues to be a distinct advantage that should not be overlooked.

During the quarter, we repurchased approximately 287,000 shares of common, for approximately $47 million. We also redeemed 405,000 limited partnership units for $74 million.

Going to the dividend. We paid a record dividend in 2018 of $7.90 per share. We have achieved the compound annual dividend growth rate of more than 11% over the last 4 years. We have paid more than $28 billion in dividends over our 25-year history as a public company. Today, we announced a dividend of $2.05 per share for this quarter, a year-over-year increase of 5.1%. At this current rate, we will have paid more than $100 in dividends per share by the second quarter this year.

Before I turn to our outlook for 2019, let me summarize our 2018 results. We posted another year of industry-leading, record results, including revenues, cash flows, FFO per share and dividends. Our reported FFO diluted share -- per share for 2018 was $12.13, which beat the midpoint of our initial guidance for the year by $0.17.

Moving on to 2019. Our FFO guidance is $12.30 to $12.40 per share. When analyzing our 2019 range, in context of our 2018 results, it is important to note the following: We expect the impact from FASB's ASU 2016-02, the new lease accounting standard, to reduce FFO per share by approximately $0.13.

There were some items included in our 2018 FFO per share that are not expected to recur in 2019, including our gain of $0.10 per share related to the contribution of our investment in the Aéropostale licensing business for an increased ownership interest in ABG; higher income related to distributions from international investments of approximately $0.05 per share. These nonrecurring items are approximately $0.15 per share in FFO.

For 2018, when you then adjust '18 for those factors, you get to $11.85. With our new guidance for 2019, we will have approximately 4% to 4.5% growth compared to this adjusted number for 2018.

We expect our 2000 (sic) [2019] growth rate will be at the high end of our peer group. Also, keep in mind, when we are looking at our 2019 number, we are expecting lower lease settlement income in 2019 compared to the prior year. We will have lost rents in 2019 to -- due to closed department store spaces and the downtime related to redevelopment of those spaces. This impact to our NOI this year is temporary as these investments will yield healthy returns and accelerate our NOI growth in 2020 and 2021.

We expect the impact of rising interest rates and a stronger dollar to affect our results for '19 compared to '18. And we also have the loss of our share of the FFO from the German operations of our HBS joint venture, which was sold at the end of 2018 for a gain of $91 million. So therefore, a lot there. Hope you're a fast study like I am.

Additional assumptions supporting our 2019 outlook include the following: Comparable NOI growth for combined mall, Premium Outlets and mills platform of 2%; no planned acquisition activity or retail disposition activity; assuming no launch of our consumer-oriented platform; and a diluted share count of approximately 356 million shares.

To conclude, we had another excellent year, capping a solid first quarter century as a public company. We have consistently posted industry-leading returns along the way through hard work, innovation, great people and great assets. As in any industry, it's more important than ever that we drive change, focus on delivering exceptional experience for our tenants and consumers.

And we are now ready for questions. Thank you for listening.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [2]

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My question's, I guess, you touched on it in your opening comments. But maybe you could talk about some of the other possible impacts from the repurposing of the Sears anchors, like sales disruption or any kind of compensation you might have to give tenants while you're working on the Sears spaces, especially with the densification efforts.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [3]

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Well, you know, Craig, again, I think, I'd implore you and other people that cover us, you got to look at us differently. We are in -- some of the numbers that I gave you need to be factored in. So we started the -- our enterprise at $165 million of funds from operation. Today, we have $4.3 billion. We have 48% of our business in the mall business. And when we started, it was 90% to 95%.

So there's always disruption in our industry. Department store spaces that we reclaim, either through lease termination or acquisition, we think will be beneficial in the long run. There are downtimes associated with that. And like I said, we'll -- that's all kind of manageable for a company like ours, and we give you that sense of our guidance. And it is -- it's kind of all factored in there within this range that we hope to produce.

We have obviously a history unrivaled, frankly, I think about beating expectations. We'll see this year. We've got a lot going on. So I don't -- we're not going to 0 in about one particular property, one particular tenant, one particular issue, because you've got to look at us on a broader basis. We' re a little bit different.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [4]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [5]

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No.

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Operator [6]

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Our next question comes from Christy McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [7]

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It's Michael Bilerman here with Christy. So David, you were pretty quick to deny the speculation of Simon trying to buy Macerich, which I can understand if you weren't buying them. But I guess if I step back, why wouldn't you buy them? Because every deal you've done the past 25 years has worked out pretty well for shareholders. Great cost of capital. You talked about your underleveraged balance sheet being a distinct advantage that shouldn't be overlooked. You've an unbelievable platform that can produce synergies. You've proven out your redevelopment and densification efforts. You can probably access as much third-party capital as you wanted. You've consistently raised your cash flow and your earnings, which has led to dividend growth, which is pretty much contrary to every one of your peers, by the way. So with those set of facts and the performance, why wouldn't you be more aggressive on the acquisition front?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [8]

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

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [9]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [10]

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Well I'll just start and Rick can chime in. Look, I do think on the retail front, the strong are getting stronger. It's -- as you've seen by numbers throughout the retail community, the days of a rising economic boat don't lift -- or tide won't lift all retail boats. And you've had a lot of over -- outperformance and a lot of underperformance. The underperformance, I can talk off-line on a theory of why that is, but I don't want to bore you. And there are some retailers out there that were nervous about, I mean, so far in the first quarter, bankruptcies are trending lower than they were in '17 and '18. However, there's some rumored things out there that could ultimately end up being a similar '17 and '18. '18, as we said and as we look and anticipated '18, we thought it would be less than '17. We were -- ended up being right there. But I do think there'll be more bankruptcies to come in '19. And that's why we're relatively conservative as we look at our comp NOI. Because, look, it takes time to -- it's a little bit out of our control when we get the space, and then to do a lease takes time. And even though as much as we anticipate it, we -- we just take time to lease the space.

So I mean, we have our work cut out. We are concerned about a few retailers. That should shake out in Q1. But I think the retailers that are investing in their product, in their store experience, in their branding were having decent results. So physical retail can produce good results, but it can't be distracted with a lot of other activities. And obviously, as you know, we've had a number of retailers. The list is long, the landscape is littered of leveraged buyouts in our industry that we continue to sort through.

So that, I hope, answered the first question. On the second one, look, we're very close to launching this platform. And if these things always -- it's a little bit like building something, but it's not quite as certain. It's more like to building internationally, where you think you're going to open in Q3, it goes to Q4, then goes to Q1. We've had a couple of those in maybe Spain and Mexico, where it happens, delay a quarter there. So it -- I would expect us to launch. It will affect, I mean, again, I mean, we're going to -- you see our numbers, it will be -- the earnings impact to it will be, I think, completely on the margin. I hope the market appreciates that. But because we don't have a set date yet on when that might happen, we're not going to put it in our numbers. And then if we launch it, we'll show it to you. We will say, oh, boy, that's worth a shot. It's not a big deal. It's a couple of cents here and there. And it's an unbelievable investment in our future, and we'll see where it goes. So we expect that to happen, but a little bit -- we just don't know exactly when we'll launch, so we've been hesitant to say, it's a Q1 or Q2 or Q3 debut.

So again, in summary, with the retailers are focused on product, brand, service, they're doing better, that they're leveraged. We have an investment in their business, overinvested in e-commerce, struggling. Leveraged buyouts were not ultimately beneficial, by and large, to our business. That's kind of working its way out of the system. And we are excited about our fifth platform. We expect it to debut, but when and how is a little bit up in the air, so we'll just keep it at that. We'll keep it off the table for now. But when we do, we'll share it with you.

Again, I think we're pretty transparent. I mean, the reason -- I guess, when you take a step back and think about our company, we're not -- we got all these assets. We got all this business. It's all international. It's outlets. So if we got as granular as you wanted, it would waste your time and waste our time.

So again, just -- you've got to kind of think of us a little bit differently that we're not these handful of assets here and there yet. And that's why we tried to give you a broader, bigger picture of what we're all about and what we expect during next year or this year.

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Operator [11]

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Our next question comes from Steve Sakwa with Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [12]

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David, I don't know, you or Rick, maybe just talk about some of the newer tenants and some of the more online tenants, kind of your experience and success bringing some of these folks into the mall. And sort of your outlook for their growth into '19 and '20.

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [13]

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It's Rick. Just to step back, in all of these discussions, the single-best thing we have going for us are incredibly strong properties across all 3 of our platforms. So in any dynamic any of you talk about, the key is do we have places where retailers want to be, and happily, we do, and they're getting better by the day as we invest our capital and enhance them.

In terms of the retailers, e-retailers are certainly one aspect of it. And there, we're working with probably 40 different ones. We've rolled out Untuckit. You've heard out all the names, and they want to be not unlike any other retailer in the best properties. And so we are doing deals with Warby Parker, Fabletics, Indochino and Untuckit, and I could go on. And they are finding success. And you don't have to take our word for it. You can take what they're saying. A lot of them are expressly raising money to roll out more stores. So that has been an interesting and important part of diversifying our tenant mix and keeping our properties current.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [14]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [15]

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Actually, I think we've never been busier on the alternative uses. We got a list in the 8-K that shows you what's been approved, but that doesn't -- I think, essentially, that pales in comparison to the future activity. I'll just -- 3 off the top of my head, Steve, that are massive mixed-use projects, include Northgate, which we have made a deal with the NHL franchise in Seattle, to do their corporate office as well as their practice facility and ice facilities for the general public. We have Brea, which we have a reclaimed department store space that is in the process of permitting to do a massive amount of residential. Same thing with Stonebridge in California.

So those aren't even on our list. We, obviously, had a significant redevelopment. We're feeling the pressure what we're going through in our portfolio. So I would say by and large, when we're looking at these spaces, they're much more focused on changing the mix, adding additional elements. And then adding the wellness, fitness, restaurants, resi, hotels to kind of make it kind of a standard statement of live, work, play, et cetera. So rarely is it just small shops. And I would say, by and large, the vast majority has all those elements that I just mentioned. Do you, Rick, want...

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [16]

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The one other thing I would say to you, to echo David's point, this trend is accelerating. This time last year in our K, we listed 11 projects for '18 and beyond. This year, we have 19. And as David said, we have many more that are in the pipeline that are going to be coming in here. So we have a dedicated team. We have demand because our properties are located in great places. And that is going to be an accelerating portion of our development activity.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [17]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [18]

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Well, I mean, look, it's not redevelopment. I mean, it's not new development returns, but I think our redevelopment efforts will be consistent in terms of return that we have over the last several years. I mean, it's certainly accretive to the value of the asset, otherwise, we wouldn't do it. And 6 to 10 is kind of the range, and a lot goes into that, Steve. But accretive to the value of the asset, otherwise, we're just not going to invest.

I mean, the -- we don't feel like we have to, because of the size and scope of the portfolio, we don't feel like we have to invest in an asset just to maintain it. That's not to say that we don't do appropriate maintenance investments, like a typical renovation and that kind of stuff. But we don't feel compelled to do it. We do it with the lens of what the consumer expects, what the retailer wants and what the value of that asset is in our minds. And that's when we pull the trigger. Our investment returns -- and we haven't batted 1,000, as my favorite -- I don't want to attribute because you may get mad at me. But I think our returns on investment have not been too shabby over our career.

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Operator [19]

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Our next question comes from Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [20]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [21]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [22]

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$28 billion. Okay, so it's a little off.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [23]

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I'm just kidding. That was a joke, you're very good at math.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [24]

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Just following up on Christy's question on the consumer platform that you're talking about. I think you're -- is this something like Simon Brand Ventures that will interplay with -- throughout the company? Or this truly is something totally separate and apart from your existing malls, mills, outlets, et cetera?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [25]

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

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [26]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [27]

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Well, there will be an investment period. But yet, the reality is yes, we think it will have a financial return associated with it. But it is a little bit -- there isn't a serious investment period before we get to that point.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [28]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [29]

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Well, I do think the category that seems to be most sensitive to that today is clearly in the restaurant category. So I do think those pressures are affecting decision-making. Now we haven't -- and I think it's interesting, because they're very -- those folks are very sensitive to location. And to the extent that states have enacted minimum wage laws that are higher than federal mandated numbers, it's got to be a really unique opportunity for the restaurateur to do it. And thankfully, we have most of those, but is it affecting the marginal deal in some of those states? I would have to say yes. I don't necessarily see it on the -- what I'd call the soft goods, apparel side. I haven't seen it in the wellness, other side. But it think it's something to pay attention to. And where we see it initially is in certain states and primarily when it comes to restaurants.

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Operator [30]

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Our next question comes from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [31]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [32]

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Well, on the units, it was just -- we have the right. So by and large, we believe in the growth of our business units. We have the ability, when they want to convert, to buy cash. So it's a pretty easy, simple trade, and we'll continue to do that as that happens. And there was a period of time in December, obviously, where the world was changing. I mean, the -- obviously, equities were being whipsawed around, and we took advantage slightly. But we took advantage of that whipsawing.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

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

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Brian J. McDade, Simon Property Group, Inc. - Executive VP & CFO [34]

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Caitlin, it's Brian. You're absolutely right. We have $600 million maturing today. As David mentioned in his remarks, we ended the year with $7.5 billion of liquidity. So we're using this liquidity to retire those notes this morning.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [35]

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

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [36]

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

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [37]

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It's Rick. Frankly, we are having pricing power across our portfolios. And again, that is the function of quality of the properties. It all starts there. And as we continue to improve them, we're able to drive our rents. And I think your -- that's demonstrated in the spreads that we've reported.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [38]

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Look, I would only add to that. Look, the reality of how leasing works is that it does take time to lease space, right. It's not like we make a deal, we negotiate the lease, the retailer builds the store, blah blah blah. So with -- and if you look at the NOI growth, I mean, it's only -- the comp NOI growth, it's only -- it's being affected by some of these retailers that are going through this significant change. And we tend to work with them because at the end of the day, we tend to do it on a shorter-term basis. Because we know, ultimately, we have to re-lease the space to someone. So there is a little bit of supply and demand that we are working our way through, and that's -- I think it's been manifesting itself in the numbers over the last year or so. We expect it to manifest itself in '19 as well. But when it comes to a good property and a good space with a good retailer, we're making strides. But we're working with some of the ones that are going through their various restructurings, and that ultimately has some impact, certainly, in the short run.

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Operator [39]

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Our next question comes from Jeremy Metz with BMO Capital Markets.

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Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [40]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [41]

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Well, look, unfortunately, in a lot of these areas that I mentioned earlier when Steve asked the question, there is real process about permitting. I mean, we could show you our permitting file, and you wonder whether it's -- I'll refrain. But it is a process where you scratch your head sometimes, because all you're doing is making the asset better for the community and for everybody that lives there. But municipalities are, in a lot of areas, are -- you got to go through a real process. We see it all the time. And we still see it in Long Island, as an example, on our project that we got the land in Syosset. I mean, we see it everywhere to go through. It's just a process. I would say to you, Jeremy, that holds us back more than anything, because if I had approvals in, like Brea, we would start and the King of Prussia, we will start. If we had approvals in Oyster Bay, we would start, but we don't. Stoneridge we would start. That hit us is governor more than the balance sheet, though, I will say we respect our balance sheet, and we're very focused on it. I'd also say that -- but I'd say the permitting is the biggest constraint. The second is, I mean, human resource constraint is not to be underappreciated, because everybody here is really hustling, very active. And pressure is intense here. Probably comes as no surprise to most. I mean, that's more of a constraint as opposed to, boy, we can't make this investment, because we're too levered or we're worried about our cash flow generation or our maturities that are coming up. I mean, we don't do that. But I say that with all due respect, because the fact of the matter is if we didn't take that into account, we wouldn't be in the spot that we're in today. So we do take it into account. We just it by -- it's just ingrained in the culture that we do it by osmosis.

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Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [42]

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That's helpful, appreciate that color. And then you did mention in your outlook for '19 your expectations for comp NOI of 2%. You've been more focused on portfolio NOI growth though in most of your commentary, so I know that's what matters more to you. So any color on where the expectations are for that to trend?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [43]

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We didn't -- I don't think we're giving guidance there. We don't have a big portfolio NOI because a lot of the new developments that generate that are acquisitions we're not planning on. And we had some delays in a couple of our international deals that I mentioned earlier. We have a reduction in that, because the German sale of HBS. So it's not going to be -- it won't be the growth that we had, obviously, in '18 were we had a more external activity. So part of -- it will add incrementally, but it's not going to be like the spread between what we had in '18, primarily because our developments, as I mentioned to you, have been delayed, and our new developments have been delayed. And again, we sold our HBS German business.

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Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [44]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [45]

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Well, look, I think that the pressure -- I mentioned it earlier. I mean, the pressure that we have is that we are still dealing with a handful of retailers that, for whatever reason, have to go through their various restructurings. Because we can't lease every space, every minute, we tend to work with them, and that does put pressure on our ADR. But it's moving in the right direction. I do think the cycle of the levered retailers is working its way through the system. And I think at the end of the day, we need to just like cleanse, and they were suffering the pain. I mean, 2% comp NOI is not -- we're not ecstatic about it, but the primary factor in that is the retailers that are going through the various restructurings that we had. So I think, though, as that's cleansed, we'll get to that number.

But retailers are very focused on their cost and their operating model. Stores continue to be their best investment and their best return. Obviously, there's a lot to talk about how profitable the Internet is and e-commerce and who's bearing the brunt of the investment and all that. I don't want to get into the psycho babble talk about that, but the reality is, because of a lot of investments they're making, they're looking at every expense category. And they're -- we are having those discussions. They're not easy.

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Operator [46]

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Our next question comes from Haendel St. Juste with Mizuho.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [47]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [48]

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Well, I'm not worried. Look, I think you -- I think what we focus on is trying to make our product better as opposed to what levers we can pull to where we think we ought to trade at a better number than the next guy. I mean, if I took that philosophy, we'd be more levered. We'd be this. We'd be that. I don't look at it like that. I look at it, how do we make this company better day in and day out? So that's the focus.

Why do I personally think that? I have no idea. You guys know better than I do. I always think, why aren't we, given our cash flow generation and our ability to make appropriate, strategic investments and our ability to withstand the restructuring that's been going on in the retail industry better than most, I don't know. If I had to tell you one thing, it's probably because people think we're going to buy something. And then when we tell people we're not, they ask, why aren't you going to buy something? So I don't know.

I don't sit here and obsess over it. We are focused on making this product better. People that get obsessed with where their stock price is, I think, end up making blunders. That's not a REIT statement. That's a corporate America statement. And that's the philosophy. I hope shareholders appreciate it. Maybe they don't, but that's how we operate the business. That's how, I think, our board thinks about it. How do we make our products better and our business better? When we do that, it tends to manifest itself in the earnings, and then we go from there. But I don't know. I mean, if I didn't answer your question, but I'm happy to hear what you -- do you have any ideas, you tell me.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [49]

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Well, look, I think, perhaps the sector is one variable to consider. It is a tougher business these days, but I think what you guys have built certainly merits value and should be acknowledged though. I'll just leave it there.

My second question is on the rising cost of labor, which has been well documented. Maybe you could talk a little bit about the labor cost inflation built into your 2019 guide, maybe from a R&M and corporate G&A perspective. The corporate G&A has been trending down the past couple of years. I'm curious if you think that could continue as well.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [50]

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I think we're budgeting pretty consistent numbers for our G&A next year. We don't see any major changes in that. I mean, I think we -- the area that we are going to end up beefing up is in the area of mixed-use development. So we're going to be adding some bodies over time. But again it's -- that's the other nice thing about the company. We still have the lowest overhead ratio by a large margin. I don't -- I can't remember the numbers. It's 2, 2.5, right, to 10, 10 and 11 to other companies, basically your G&A to NOI roughly, right. So I mean, it's a staggering difference, okay. It's not like 100 basis points. It's like 700, 800 basis points. So I mean, that's not going to be anything out of the ordinary for us. But we are going to add some people in certain areas that we need to, to execute our vision on some of these redevelopments.

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [51]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [52]

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

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Haendel Emmanuel St. Juste, Mizuho Securities USA LLC, Research Division - MD of Americas Research & Senior Equity Research Analyst [53]

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I was just curious on the rationale for the sale of the German thing you're selling, the outlet.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [54]

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We did not sell the outlet. Actually, Ochtrup, we actually bought a few years ago. What we sold was our -- we're partners with Hudson Bay, among others, in addition to other institutional investors. We had the Kaufhof real estate investment that, because of the merger with Kaufhof and Karstadt, they wanted to also own the real estate. So they bought out the real estate interest in the department stores that Karstadt leased. And that's what triggered our $91 million gain. But it's not -- we didn't sell an outlet.

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Operator [55]

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Our next question comes from Linda Tsai with Barclays.

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Linda Tsai, Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs [56]

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In '18, you guided SS NOI to above 2% and came in at 2.3%. And now you're looking for 2% growth in '19, implying slight deceleration, but understanding that this also reflects what's happening with more closures and the Sears redevelopment. Do you view 2% as a trough? Or is this sort of a steady state, long-term growth rate for high-quality outlets and mall?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [57]

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Well, we do not think it's our steady state, but we are -- because of the redevelopment, we are -- there is a significant amount of reduction in '19 due to income that we received from certain department stores. And then it takes a year or 2 to build, and we're going to -- we're suffering from that in '19. So that's certainly part of it. And then the other part is, just what I mentioned earlier, just dealing with some of the retailers that have been continuing to go through a more difficult time. But no, we don't -- I don't view 2%. No, 2% makes me -- I mean, we try to give you a sense of where we're at. We'd hope to do better. But I do not, under any circumstance, think 2% is our steady state.

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Linda Tsai, Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs [58]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [59]

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Well, I don't think you can go from that point to the next point. I mean, I think retailers that have struggled by and large have had -- and again, we have a list that -- and I don't know if I should -- well, put it this way. We have a long list of retailers that have struggled. 80% to 90% of that list have been overlevered. So they couldn't turn left or right. And you just can't have too much leverage in any industry, in any business when if things are -- you run into an economic difficulty or you need to make investments, you just got -- you have nowhere to go. And if I read you the list, you would -- it might -- it comforts me in one sense because we withstood this pretty successfully. On the other hand, I might scare you. So I prefer not to scare you this morning, okay. But it's something that we've been able to withstand and so I think that will -- that's where -- and the retailers that have a vision and whether they're starting from the Internet or just been around, but they've invested in their business and their product. We're seeing pretty good results. Let's look at the higher-end luxury category. They don't have a lot of Internet sales. They invest unbelievably in the store experience and in the product. And oops, guess what? They have great results.

So it's not overly complicated. The technology and some of the new concepts that we've seen out there that have been successful, usually it's a visionary leader. It's a visionary group that's dedicated to the business. They may have a little bit different angle on something that exist today. And they just execute it better than the next person. I mean, as an example, we're an investor in FabFitFun, which just raised $80 million from Kleiner Perkins, and that's basically a subscription business, which has been done before, but they just know how to do it better and more creatively and with better focus than maybe the next person. And that's always been the case in industries, right. There's somebody -- there may be another idea, but the group takes that idea and then just does it a little better than the next person.

So -- I think the power of our industry is that we can withstand the ups and downs of a retailer -- or retailers. There are points in time where it's painful as we go through that with them. But ultimately, whether they turn it around or not, if we get the space back, historically, we've been able to lease it to a better person. So that's what we've done.

Now will give you a number that I probably shouldn't, but we tend to be on most retailers' unsecured creditors committees. We have somebody internally that's -- he's been around as long as me, Rick, so he's -- been through his time. He has -- and this is -- I think this is actually a great, positive statement about our industry and our business. But he is currently on his 200th, 200th unsecured creditors committee. Now okay, yes, that might say -- holy cow, that makes you a little nervous. On the other hand, I mean, we did earn $4.3 billion. And my colleagues that's been on this committee, leasing committee, is on his 200th. So I think more importantly, it speaks to the resilience of our industry, our product and what the consumer really wants.

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Operator [60]

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Our next question comes from Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [61]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [62]

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Well, actually. Puerto Rico came in lower than we thought in '18. So as a company of this size, we're always going to have some of that stuff. We don't really get into that level of detail. I mentioned some of the other items that we think will be lower this year, like resettlement income. We do think rates rising will have some impact negatively as well as the stronger dollar. Now some of that stuff is moving around. I mean, who knows how it all shakes out. So we'll -- we are always going to have -- I think that's another interesting thing about this company, is that we're able to create other income opportunities. We have some, but we don't really get into that level of detail. It's all kind of factored into our numbers.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [63]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [64]

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

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [65]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [66]

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

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Operator [67]

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Our next question is from Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [68]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [69]

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That's usually just the quarterly spread of how things go. Nothing's driving it. I mean, again, you need to look at the totality of the year and not quarter-by-quarter.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [70]

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Yes, that's what I'm saying. If you look the year, your reimbursements declined 1%, and so that's what I'm trying to figure out. What was usual? I mean, your occupancy is going up. Your expenses are going up. How come your tenant reimbursements are going down?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [71]

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Those are the numbers.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [72]

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I mean, is that something, David, when you're talking about earlier when you're working with some retailers, is low reimbursements one of the tools you're offering to challenge retailers?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [73]

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No. I think we had a significant rise in utility cost and other items. So we're not just -- you had some disposals that factored in there. I don't think it's anything material.

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Operator [74]

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Our next question comes from Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [75]

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When you think about your -- the capital you're allocating to redevelopment deal, newer development, what do you think about the risk profile of that newer deals you're doing, like the Sears repositioning or densification deals? Is the risk profile for those deals similar to what you've done in the past in terms of redevelopment? Or it's a little bit different?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [76]

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No. I mean, that's what we do. I don't -- there's no -- I'd say the risk is -- we don't feel like we are at -- on the higher-risk plank than redeveloping a department store space than anything else.

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [77]

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We're applying the same discipline to decide whether were going to build a multifamily or an office or a hotel that we apply when we're doing a retail redevelopment. We do our market studies. We assess market rents, and we make sure that we're doing a good capital allocation decision as we decide to put in these incremental elements to our properties. So the risk is, frankly, the same because we're doing the same underwriting.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [78]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [79]

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Look, we don't do that. I encourage you to think about our company a little bit differently, look at our history and realize that we're a very large company with a very -- we don't get into that granular level of detail, and we would encourage you just to look at our history. And the fact that this is the number that we roll up, and we don't really get into that kind of detail.

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Operator [80]

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Our next question comes from Wes Golladay with RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [81]

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You mentioned there's some tenants that may be a little less relevant these days, and some of them don't have balance sheet issues. Have you seen any changes in tenant retention at lease expiration? And how much of a headwind is this for same store NOI, due to the 10 basis point headwind each year, or 50 basis points. Any context around that would be great.

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [82]

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We have had pretty much the same percentage of renewals that we've had historically. So that has not been manifesting or seen itself as an issue.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [83]

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

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [84]

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In what context? I mean, we're renewing about the same percentage of the tenants. We have tenants that we are intentionally not renewing, because we want to bring in more productive tenants that are better operators. And we have tenants, as David has referenced, that through own issues, have to be falling out. So that hasn't changed over all the years we've been operating. It's just the same constant dynamic.

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Operator [85]

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Our next question is a follow-up from Christy McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [86]

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It's Michael Bilerman. Just had 2 quick follow-ups. David, at the end of your opening comments, you talked about all the changes '18 relative to '19: your rata loss, the FASB change, the Aéro gain, the loss of FFO from the sale of the German operations, lower lease term fees, the impact of rising rates and the rising dollar on your international operations. And the other thing that you talked about, and you mentioned it a couple of times, was this impact of a lower department store NOI as you take those boxes back and you redevelop them. Are you able to at least -- I mean, I recognize you're a large company, and we should think about you differently. Are you able to just to identify the impact of that item? You produced $5.7 billion of same store NOI. I'm just trying to get a sense of how big that piece is.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [87]

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So I guess it's immaterial enough to mention it, okay. But again, I -- we are not -- we don't get into this -- the granularity of these debates. We ask that you look at our track record and our ability to generate cash flow. I mean, as we do -- I guess -- and I answered it exactly how I would answer it. In other words, we would mention it if it was $12, okay. But we also wouldn't mention it -- we would mention it if it's material. But we don't -- we don't give that number. It all goes into our buildup. And -- but we also don't want to make -- I mean, and the purpose of not disclosing it is because we don't want to make excuses. A lot of companies say next year is a throwaway year, because I'm investing this, that, and the other. And we don't do that here. And that's -- so the reality is yes, we're going to have the best growth, I think, in the retail real estate industry. I don't know if anybody's going to be better. But if there is, maybe 1 or 2. We're going to have the best dividend growth probably in the industry. We have the best balance sheet in the industry. And yes, we've got some setbacks. And you know what, we're not going to have a throwaway year. We're just going to keep doing what we do. And we don't want to use that as an excuse. And that's the fact.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [88]

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Listen, I always say when companies say, well, if exclude this from this, we produce 10%. It's like, well, shareholders don't have that choice. Shareholders own the whole (expletive) thing, right. I was just trying to focus in on -- you brought it up and I was just trying to figure out what sort of headwind it was creating on that 2% number.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [89]

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It is -- again, I'll answer it exactly how I said it, which is that...

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [90]

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You don't need to answer the same way.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [91]

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Yes, okay. All right. Again, I just think we got -- let me micromanage. I will micromanage with my team. You guys look big picture, okay. And when you look big picture, you're going to say, hey, we paid $28 billion in 25 years. That aren’t -- that's not too shabby. And again, tenant reimbursements, okay, well -- look, let's talk about tenant reimbursements. Real estate taxes go up because the municipalities won't attack the golden goose. They don't want to attack the Internet sales, yet they're like figuring it out. So let's just see how it all evolves. We know what the -- we know how to deal with this stuff, and we'll continue to produce, I think, industry-leading results. If we don't do it in 1 year, call us what you want to call us.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [92]

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

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [93]

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Again, it's -- we point it out, because it's an investment. It's not going to be -- let's assume we earned $12.35. It's not -- we're not going to be at $12 because of it, okay. We're not -- I would appreciate just the understanding that we're thoughtful folks. But yet, we do need to make investments for the future, and we have the track record that allows us to think about that a little bit -- that warrants our thoughtfulness. So it's going to be a number, and it's not going to be a big deal, and we'll figure it out going forward.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [94]

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Okay. And I have no qualms with the company making investments. That was just more so -- I was just trying to understand if that was -- the cost of making the dollar investment, which is very small, right, a few pennies in $10 million, $12 million, $13 million. Or does that represent the cost of carry on a much larger investment, just thinking about it of, look, I'll go out and I'll put $500 million on this one thing, and the effective opportunity cost of that capital is...

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [95]

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You are dealing with a guy that knows accounting. So the reality is both, right. Because you have to depreciate this stuff. You don't add it back for FFO. Some's investments, some's operating expenses, so it's actually -- it would be both, okay. It's not -- you don't add the FFO back from -- for depreciation, because it's not real property. So it's a little bit above the amortized certain costs. It's IT spend, some's expense, some's on amortized. We can sit down and go through the P&L if you're really interested.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [96]

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It will be scintillating.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [97]

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It will be scintillating.

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Operator [98]

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The next question comes from Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [99]

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Can you help us understand the retail leasing environment today versus 6 or 12 months ago? Any category standout from a lease term or store closures versus store opening perspective? And has rising sales per square foot over the past year plus translate into higher demand for space?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [100]

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Well, I would say, as we discussed, that by and large, demand is better. Better sales produce -- for the retailer, produce more interest in opening it up. There's new and more retailers coming into the market all the time. And the only offsetting of this is certain retailers that are in the process of dealing with not recent problems, but legacy financial issues that have never been properly addressed.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [101]

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Okay. And then just to continue on the tenant redev projects and the pipeline of 25 others. So beyond the large-scale and mixed-use transformative redevelopment, which trust me, we think is the future. However, it's likely not justified for most reclaimed Sears or other returned, large boxes. So where is that demand coming from to re-lease this space? We've, like, Life Time Athletic and some co-working facilities. Could you share -- air any other demand you're seeing?

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [102]

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I don't -- what do you mean? I'm not sure I understand, not justified. Could you restate that, please?

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [103]

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Well, I mean, for all 25 projects, if a large densification effort maybe not justified for all markets, right, so you might to be looking at a box where maybe you just want to bring in another tenant to fill it. And I'm wondering where that demand is coming from. I've seen Life Time and some coworking. Just wondering who else is kind of out there.

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Richard S. Sokolov, Simon Property Group, Inc. - President, COO & Director [104]

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There is a great deal of retail demand, frankly, we are dealing with. I call them fitness centers, but they're, frankly, enclosed country clubs, theaters, entertainment uses, a number of the -- a larger-format retailers. In many of these instances, we are adding small shops, specialty store space, because, as I said, prior, if we have a great property, there is demand for that property. And the spaces we are getting back are spaces that are in great properties that have demand. So there is substantial retail demand, in addition to just the densification efforts that we've talked about previously.

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David E. Simon, Simon Property Group, Inc. - Chairman & CEO [105]

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Sure. All right. Well, thanks for your questions. And we're available if you'd like to talk further. Thank you.

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Operator [106]

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Ladies and gentlemen, this concludes today's question-and-answer session, and thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day.