Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2018 Simon Property Group Inc. Earnings Conference Call. At the time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now to introduce your host for today’s conference Mr. Tom Ward, Senior Vice President-Investor Relations. Sir, you may begin.

Thank you, Lauren. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. And actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I'm pleased to introduce David Simon.

Good morning. We 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 to be $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 four 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 25 times since our IPO. For the fourth quarter, FFO was $1.15 billion or $3.23 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…

Thank you. [Operator Instructions] And our first question comes from Craig Schmidt with Bank of America. Your line is now open.

Thank you. First just wanted to congratulate Rick given the changes that are going to come later in 2019.

Thank you.

My questions, 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 you know like sales disruption or any kind of competition you might have to give tenants while you're working on the Sears space and especially with the densification efforts?

Well, you know, Craig again, I think, I'd implore you and other people that covers just, you got to look at it differently. We are in – some of the numbers that I gave you need to be factored in. So, we started, our enterprise in a $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% through 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 down-times associated with that and like I said, well – that's all kind of manageable for a company like ours, and we give you the best sense of our guidance, and it is 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 zeroing about one particular property, one particular tenant, one particular issue because you got to look at us on a broader basis. We're a little bit different.

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

No.

Okay, thank you.

Thank you. Our next question comes from Christy McElroy with Citi. Your line is now open.

Yeah, good morning. It's Michael Bilerman here with Christy. So, David …

From the hip I'm like happy, but I don't know, Rick. I think Rick is squarer down here. What do you think?

I just hope that Rick is still going to be on these calls to go through the laundry list of retailers that are coming into your malls. So, David, you are pretty quick to deny the speculation of Simon trying to buy Macerich, which I can understand, if you are buying them. But, I guess, if I step back, why wouldn't you buy them because every deal that you've done in the past 25 years has worked out pretty well for shareholders. Great cost of capital. You talked about your under leveraged balance sheet being a distinct advantage that shouldn't be overlooked. You have 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?

Well, first of all, Michael thank you for recognizing some of our achievements. Over the last 25 years I mean we do – we try to explain the company maybe we're not very good at it, to our 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 long time ago that's, as I've 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 or 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 in the international, breadth and depth that it has. And as I mentioned in my calls you know we had 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.

Hi David, it's Christy. Good morning.

Good morning.

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?

Well, maybe 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 don'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 2017 and 2018. However, there's some rumored names out there that could ultimately end up being a similar 2017 and 2018. 2018, as we said and as we look and anticipated 2018, we thought it would be less than 2017. We were ended up being right there. But I do think there will be more bankruptcies to come in 2019. 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 – would 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…

Great, thank you, David.

Sure.

Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.

Thanks, good morning. 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 2019 and 2020?

Hi, 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 three 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.

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?

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 – three 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 to…

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 2018 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.

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?

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.

Okay, thanks. That’s it from me.

Sure. Thank you, Steve.

Our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is open.

Good morning out there.

Good morning, out there is right, it’s – I want people to know it’s cold and snowing. But we are here.

Well, at least the malls are heated. So they have somewhere to warm up.

You bet.

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

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

$28 billion. Okay. So, I was a little off.

I'm just kidding, it was a joke. Okay, just – you are very good at math actually.

Your time. Just following up on Christy's question on the consumer platform that you're talking about, I mean, 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.

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 then had the branding that we do and had the consumer touch point as well as the retailer touch points. 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 complementary 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.

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

Well, there will be an investment period, but 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.

Okay. And then the next question is on retailers, you said, you're expecting more shake out. Clearly minimum wage increases and 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's going to be a growing pressure point among your tenants?

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 that – 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 were higher than federal mandated numbers. It's got to be a really unique opportunity for the restaurant toward 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 I 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.

Okay, thank you.

Sure.

Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.

Hi. Good morning.

Good Morning.

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?

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 the 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, obviously equities were being whipsawed around and we took advantage slightly, but we took advantage of that whipsawing.

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

Hi, Caitlin. This is Brian. You're absolutely right. We had $600 million maturity today. As David mentioned in his remarks, we ended the year with 7.5 billion of liquidity. So we use existing liquidity to retire those notes this morning.

Good news is we paid it off.

Great.

That's not always the case in the real estate industry, okay, that we pay it off. Caitlin Burrows

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?

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.

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 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 2019 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.

Okay. Thank you.

Sure.

Our next question comes from Jeremy Metz with BMO Capital Markets. Your line is open.

Hey, good morning.

Good morning.

You guys – good morning. 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?

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 have to land and sign off it. 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 to us is governor more than the balance sheet, though, I will say we respect our balance sheet, and we are 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. And that 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 are 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.

That’s helpful. Appreciate that color. And then you did mention in your outlook for 2019 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?

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 2018 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 2018, 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.

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?

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, Jeremy, at the end of the day, we to just like cleanse, I mean, we’re 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.

Thanks for the time, David.

Sure.

Our next question comes from Haendel St. Juste with Mizuho. Your line is now open.

Hey, good morning.

Good morning.

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 about 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?

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 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.

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.

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're 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.

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.

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

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

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.

Got it. Got it. Okay. Thank you for that.

Yes, of course.

Our next question comes from Linda Tsai with Barclays. Your line is open.

Hi, good morning.

Good morning.

In 2018, you guided SS NOI to above 2% and came in at 2.3%. And now you're looking for 2% growth in 2019, 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?

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 2019 due to income that we received from certain department stores. And then it takes a year or two to build, and we're going to – we're suffering from that in 2019. 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 hope to do better, but I do not under any circumstance think 2% is our steady-state.

Thanks. And then through your Simon Ventures Fund when you look at some of these nascent brands you're nurturing for 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 be grown, scaled and replicated across larger physical base?

Well, I don't think you can go from that point to the next point, I mean, I think the 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 over levered, so they couldn't turn left or right. And you just can't have too much leverage in any industry and any business when 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 would stood this pretty successfully. On the other hand, I might scare you. So, I prefer not to scare you at this point, okay. But it's something that we've been able to withstand. And so, I think, that whole – that's where and the retailers 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 then the product and whoops guess what they had great results. So, 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…

Thanks.

Sure.

Our next question comes from Michael Mueller with JPMorgan. Your line is open.

Thanks. 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?

Well, actually. Puerto Rico came in lower than we thought in 2018. 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.

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

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.

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

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

Got it. Okay. That’s it. Thank you.

Our next question is from Nick Yulico with Scotiabank. Your line is open.

Good morning. 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?

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.

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?

Those are the numbers.

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?

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.

Okay. Thank you.

Our next question comes from Ki Bin Kim with SunTrust. Your line is open.

Good morning all there. 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?

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.

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

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?

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.

All right. Thank you.

Sure.

Our next question comes from Wes Golladay with RBC Capital Markets. Your line is open.

Hey, good morning everyone. 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.

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.

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

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.

Okay. Thanks a lot.

Sure.

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

Hey, it's Michael Bilerman. I just had two quick follow-ups. David, at the end of your opening comments, you talked about all the changes 2018 relative to 2019, you rattled off the FASB change, the Aero gain, the loss of FFO, the sale of the German operations, lower Houston fees. The impact of rising rates and the rising dollar on your international operations, and then you talked about, and you mentioned it a couple of times was this impact of the lower department store NOI, as you take those boxes back and you redevelop them. Are you able to at least recognize your large company, we should think about you differently, but are you able 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, impact of that 2% growth rate?

Well, I guess, if material 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 did say…

And I do that, right?

Again, so, I guess, and I answered it exactly how I would answer. 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're not going to, 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 is going to be better, but if there is maybe one or two, we're going to have the best dividend growth probably in the industry. We had 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 facts.

Listen, I always take when company say. Well, if you exclude this – and then as we produced 10% like well shareholders don't have that choice, shareholders will know the whole damn thing, right. I was just trying to focusing on you brought it up and I was just trying to figure out what sort of headwind it was creating on that 2% number?

It is, again, I'll answer it exactly how I should, which is the..

You don't need to answer the same way.

Okay. Again I just think, we got – we all want to, 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's not too shabby, and again tenant reimbursements, okay. Well, the real, look, let's talk about tenant reimbursements, real estate taxes go up because the municipalities want to attack the golden goose, they don't want to attack the internet sales, yes, they are like figuring it out. So, let's just see how it all evolves, we know what – we know how to – we know how to deal with the stuff, and we will continue to produce, I think, industry-leading results, if we don't do it in one year, call us where you want to call us.

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

Again, it's – we pointed out because it's an investment. It's not going to be, let's assume, we earned $12.35. We're not going to be at $12 because of that, okay. We are 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.

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

You are dealing with the guys who knows accounting. So, the reality is both, right because you have to depreciate the stuff, you don't add it back for FFO, sums investments, sums and 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 of both, the amortized certain cost, it's IT spend. So, sums and amortized, we can sit down and go through the P&L, if you're really interested.

It would be scintillating.

It will be scintillating.

Okay. I appreciate it, David. Thank you. Have a good rest of the year.

No worries.

The next question comes from Derek Johnston with Deutsche Bank. Your line is open.

Good morning.

Good morning.

Could you help us understand the retail leasing environment today versus six or 12 months ago. Any category standout from a lease term or store closure versus store opening perspective and has rising sales per square foot over the past year plus translated into higher demand for space?

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 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.

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

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

What I mean it for all 25 projects, it's a large densification effort, maybe not justified for all markets, right. So you might 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 lifetime and some co-working. Just wondering who else is kind of out there?

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

Okay, thanks.

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

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.