Good day, ladies and gentlemen, and welcome to the Q4 2014 Simon Property Group Earnings Conference Call. My name is Tawanda, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Tom Ward, VP of Investor Relations. Please proceed, sir.
Thank you, Tawanda. Good morning, and welcome to Simon Property Group's fourth quarter and full year 2014 earnings conference call. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer, Andy Juster, Chief Financial Officer, and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K 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 had strong results to wrap up an exceptional 2014. We opened Premium Outlets Montréal, started construction on two new premium outlets in strong and growing markets of Tampa and Tucson. We announced our first new full-price development project in the last several years with The Shops at Clearfork in Fort Worth, Texas, anchored by Neiman Marcus. Most importantly, we continued to produce strong operating and financial performance. Results in the quarter were highlighted by FFO of $2.47 per share. On a comparable basis, excluding the operating results from WPG Properties in the prior year period, our FFO per diluted share increased 12.3% for the quarter, or $0.27 year-over-year. As a reminder, our FFO per diluted share is calculated strictly in accordance with the Nareit white paper, and we encourage the industry to acknowledge the importance of using this long-standing measure without modification.
Our fourth quarter FFO per diluted share was impacted by approximately $0.04 from our share of Klépierre's cost related to both their bond tender offer and their tender offer for Corio, as well as unfavorable effects of foreign currency devaluations. For the year, on a comparable basis, excluding the operating results from the WPG properties, the spin-off transactions, and the debt extinguishment charge, FFO per diluted share increased 13.9%. After taking into account the spin-off and debt charge, we beat our initial guidance of 2014 that we provided to you by an impressive $0.40. We continued to record strong key operating metrics and cash flow. Occupancy increased across the portfolio and our malls and Premium Outlets combined occupancy ended at the year at record 97.1%. Leasing activity is healthy. The malls and Premium Outlets recorded re-leasing spreads of $9.59 per square foot, an increase of 16.6%.
Comp NOI increased 4% in the fourth quarter of 2014, compared to an increase of 6.1% in the fourth quarter of 2013, and an increase in total of 5.1%. We had an increase of four over an increase of six one last year. As a reminder, approximately 95% of our domestic property NOI is included in our Comp NOI calc. Total sales in our portfolio increased 2.3% in the fourth quarter compared to last year, even with major redevelopment occurring at several of our premier properties. As I said, we opened Montréal October 30th to great excitement. We commenced construction in Tampa and Tucson, and the construction in New Jersey, with the Gloucester Premium Outlets, Philadelphia Premium Outlets, continues to move forward.
All of those will open in 2015. We are slated to begin construction of four new domestic Premium Outlets in 2015, which include Columbus, Ohio, Clarksburg, Maryland, Norfolk, Virginia, and Tulsa, Oklahoma. During the quarter, even with all that new development, we completed several redevelopments, including the addition of Nordstrom and small shop expansions at St. John's Town Center, the relocation of Bloomingdale's at Stanford Shopping Center, as well as the expansions at Premium Outlets in Mexico City and Toki Premium Outlets in Japan. We started construction in King of Prussia. We are underway with the expansion to connect the plaza and the court that will add approximately 150,000 sq ft to Pennsylvania's top retail destination, and is expected to be completed in August 2016.
At Phipps Plaza, we are adding an AC Hotels by Marriott and luxury residence, both expected to be completed in 2016 as well. Construction continues on major redevelopment expansion projects at some of our most productive mall properties, including Roosevelt Field, Houston Galleria, Stanford, and our Premium Outlets in Woodbury Common, Las Vegas North, Livermore, San Francisco, and Chicago. These major redevelopments are to be completed in late 2015 and 2016. Redevelopment and expansion projects are ongoing, that is under construction across all three of our platforms in the U.S. and Asia, and have a total committed spend of $2.1 billion. Again, that's under construction. Acquisition. We closed on Jersey Gardens and University Park Village for $1.09 billion on January 15th. We are excited to include these great properties in the portfolio. Both Jersey Gardens and UPV have sales per square foot of $850 per foot.
Let me turn to Klépierre. We are pleased with our investment in Klépierre. Our net equity investment is up $850 million, even with the weaker euro. As their largest shareholder, we are excited for them as 94% of all Corio shares were tendered in support of Klépierre's acquisition. Once the merger is completed, expected by the end of the first quarter, the integration of the two companies will begin. Let's talk about our balance sheet. We ended 2014 with a debt-to-market capitalization ratio of 29%, industry-leading. Our interest coverage was 3.8 times, industry-leading. Net-to-EBITDA of 5.4 times, industry-leading. Our long-term issuer rating of A and A2 continues to be industry-leading. Let's not lose sight of the significant differentiating and positive attribute of our balance sheet as compared to our peer group. A few of the capital market activities.
By the way, this replaces Rick's listing of tenants. We retired $2.9 billion of senior notes at an average coupon, they were at 5.76%. We issued $2.5 billion in new notes with a weighted average term of 12 years and a weighted average coupon of 3.32%. We amended and extended our $4 billion revolver until 2019. We closed 16 new mortgages with a weighted average interest rate and term of 3.29% and 8.4 years, we became the first U.S. REIT to establish a global commercial paper program, issuing $400 million of CP at a weighted average interest rate of 18 basis points. Let's turn to the dividend. We announced our dividend this quarter of $1.40 per share, an increase year-over-year of 12%. We will pay at least $5.60 in dividends of 2015, which is an increase of 8.7% compared to last year in totality.
If we include WPG's dividend, we've more than doubled our dividend since the Great Recession. Let's turn to guidance. Our guidance of FFO is $9.60-$9.70 per share. This range represents 8%-9% growth compared to our reported FFO per share of $8.90 for 2014. Our range is based on comparable NOI growth of approximately 4% for our malls, Premium Outlets , and mills platforms. It also assumes no additional acquisition or disposition activity beyond what we just completed with Jersey Gardens and UPV. It also includes the unfavorable impact to recent currency devaluations, which should approximate $0.10 compared to the currency levels that existed in 2014. Let's conclude. We produced another exceptional year with our results for the fourth quarter and the full year 2014, beating guidance for an unprecedented 10-plus years in a row.
We achieved record levels in occupancy, FFO per share, and dividends, despite the loss of approximately $1 per share of FFO from WPG and the debt extinguishment charge. We continue to improve our portfolio and consumer and customer services for the benefit of stakeholders, and we're very excited about 2015. We're ready for any questions.
Thank you. Ladies and gentlemen, if you have a question, please press *1 on your touch-tone phone. If your question has been answered or you would like to withdraw your question, simply press star followed by 2. You may press *1 to begin, and please stand by. Your first question comes from the line of Ross Nussbaum with UBS. Please proceed.
Hey, David. Good morning. I guess since I'm first, you know what's coming. I guess I get the honor of asking you what the heck is going on with Macerich.
Well, I thought we were going to talk about your headline that said mixed bag. What was mixed bag? Our record revenue growth, our record Comp NOI growth, our record balance sheet, our record occupancy, our record rental rate. I wanted to talk about your headline first. Can we do that?
We can all read the note, but the guidance coming in below the street is an offset to beating for the quarter. One would call that perhaps a mixed bag, but we can talk about it all.
I think on the guidance, look, first of all, those are your numbers, not ours. Obviously, that's predominantly driven by the currency devaluation that's occurring both with respect to the yen and the euro. The good news is, even with that, because of at least our hedge in Europe, we're up $850 million in Klépierre. Yes, we're going to have some volatility. Where the rates are today versus where they are, it's about 1% of our earnings, which to me is somewhat immaterial. I do think we need to put that in perspective. I'm not sure that should have generated your headline, but you certainly understand our position. I understand yours.
Appreciate that. Back to the elephant in the room.
Yeah. What's your question?
A little California-based mall company called Macerich. What can you tell us about what's currently going on? What was going through your head a couple of months ago when you put out the announcement that you did? What can you say about it?
Well, look, as much as I'm sure you'd love to talk about, we disclosed our stake. It was 4.1, then got diluted down to 3.6% in Macerich. We still hold that position. At this point, it's really not appropriate for me to add anything other than the fact that we still own it. There's not a lot more I can say. Actually, let me take away the clarifying statement. There's nothing more I can add to that.
You may not want to answer this. I'll ask it anyway. If there were nothing going on, one might assume you'd be happy to tell us that you own a position in another company, that you thought the stock was undervalued at the time. If you can't comment on it would suggest that there's something going on other than that.
Well, look, we never comment on M&A activity. We still own the stake. As you know, we're significantly in the money on the stake. There's been no P&L impact on our stake, as I know some people have asked Tom that question. It is what it is. There's nothing really I can add other than that. I'm sorry I can't. There's nothing more that I can add to that.
All right. I and my mixed bag will get back in the queue. Thanks.
It's all right. Listen, it's a two-way street. You give it to me, we're going to give it back a little bit anyway. That's what you like about us.
Your next question comes from the line of Christy McElroy with Citigroup. Please proceed.
Yeah. It's Michael Bilerman with Christy. David, let me just try a different angle, which when you made the stake, you said you may seek a waiver. You put that out publicly. At least can you comment on whether you've made the ask for the waiver and if there's been a response, and if you haven't made the ask, why haven't you? The second part is just the intent of taking the stake. Was it solely for the purpose of a passive investment, just you thought you have a lot of cash hanging around, so buy something that you think you can't buy assets in the private market, so buy something that you know really well, that you think is trading at a discount to make money and go home? Or was it made for the purpose of moving forward with a non-passive agenda?
Well, Ross asked a question. I can't add to that other than we have managed to find investments, as evidenced by the little over $1 billion that we just spent on January 15th to buy two really good assets with really good growth potential that we think this year will yield terrific results. I'm still an old-fashioned real estate guy. I like the current yield going in, and the current yield going in is very attractive. Once Rick and the Mills team, certainly with Jersey Gardens, works their magic, I think we got a lot of upside. Not to say that I think Michael Glimcher did a great job with that asset. There's nothing I can add other than what I said to Ross just earlier, Michael. I'm sorry, but as you know, it's just inappropriate for me to comment further.
Hey, it's Christy McElroy here with Michael. Just following up on the currency and the impact to 2015. You mentioned it's a $0.10 impact embedded in your guidance. How are you thinking about hedging that exposure potentially? Would you expect to take on more debt to provide a natural hedge or maybe put in place any other foreign currency hedges? Just want to get a sense for how that's rolling through the numbers. Just related to that, I'm wondering if you've seen any impact at all from the stronger dollar in terms of a change in traffic or sales at any of your centers that have a higher international tourism component to the customer base.
Sure. Happy to answer those. Let's just talk about the net. We are pretty well hedged on the Klépierre initial stake. We are not as hedged with our McArthurGlen investment. The problem, as you know, to get the perfect hedge, and with rates as low as they are in the EUR, you're never going to make up that. I would say generally, we're reasonably hedged in the EUR in kind of the 80%-90% range. Since rates with debt are so low there, the math is such that it's still going to have an impact on us. The good news that I see at least, is that the business there is not necessarily reflecting the devaluation. I think the consumer there is still shopping and doing that. I think it's kind of more of a temporary thing.
It's going to impact us for next year, and it is what it is. The same thing with the JPY in a sense that from a book value point of view, we're basically completely hedged. Again, the JPY's rates are so low there's just no way to do it. Now, we've locked in some forwards on the dividend yields, I'm sorry, on the dividends that we both get from Klépierre and from Japan. As you know, we equity account for both. That doesn't impact That's just cash flow, which is important to be hedged on cash flow, don't get me wrong. Still, at the same time, as we take our share of the equity income in those businesses, we're going to have exposure, and it is what it is. I assume that answered your question on that front.
From an investment point of view, book value, we're essentially hedged, but it's not going to mean a lot. We're still going to have some volatility. Not from a cash flow point of view, but from an earnings point of view. Did that answer your question on that front?
Yes, it does. Thanks, David.
On the sales, I think it's very interesting because of some commentary around it. We did see a little bit of flattening out in the Florida area, kind of first as you know, in terms of devaluation, the Latin American customer happened quicker than, say, the euro devaluation. We don't have any earnings impact on that. That just might impact sales. Christy, as you know, we are undergoing huge transformational redevelopment in King of Prussia, Roosevelt Field, even the Forum Shops. We're changing a lot of the tenant mix, changing the transition hall from phase 1 to phase 3 that's out on the strip. As well as we had this unusual anomaly that we had one retailer that's in a state that doesn't pay sales tax.
They had an extraordinary amount of sales in 2013 that didn't repeat because of their own constraints that they posed for 2014 that also may have flattened sales in terms of how you were thinking about it. I would generally say, you put all those things together, our portfolio does what? $620 a foot, still industry-leading, given size and scale. We're adding to the mix. We're doing a lot of great stuff. You know how generally I feel about retail sales, okay? You have seen, even with flat retail sales, generally over the last two or three years, you've seen our Comp NOI increases. You know my argument on that. At least I hope that gives you some color as to how you might think about our number compared to others out there. The portfolio has never been stronger or better.
I appreciate the color. Thanks, David.
Sure.
Your next question comes from the line of Craig Schmidt with Bank of America. Please proceed.
Well, thank you. I was wondering if you could comment on the trend of the outlet sales.
They actually were slightly better than the malls because the malls had those kind of two or three things, Craig, that I just discussed. Our premium outlets from a comp point of view, had better results than the mall business.
Okay, great. How far is the ground-up development Shops at Clearfork from the University Park Village that you just acquired?
How far along is it?
Well, how far are they from each other?
Oh, three miles or so. Three miles, Rick, roughly three.
Yeah. About three.
Yeah, it's different trade areas, I'd say three because there's a river that runs through it's one of those things.
Okay. Is there any further things that you could do with Cassco, just given the size of their project beyond The Shops at Clearfork?
Hi, Craig, it's Rick. Right now, we are obviously focused on the first phase. There are a number of elements to that phase. They do have some additional land, and depending on how this goes, we'd obviously be open to try and do some additional development. Right now, the first phase has our attention.
Great. Finally, just, and maybe this is for Rick, are you seeing what you think might be a change in pace in either store openings or store closings in the mall space for 2015?
Basically, obviously, we've had the announcements that everyone has seen, there is a little more pressure on some closings. Conversely, we're at record occupancy. We've just come out of our meetings in December, we've got a lot of momentum in the business because there are a lot of people that are looking for space. We certainly anticipate we're going to be able to hold our market share, there's always going to be the churning that we've had historically, we're going to basically be able to keep things pretty much where they are now in terms of occupancy. Everybody we replace is going to be replaced by someone who is more creditworthy and more productive on a sales per foot basis.
Craig, we clearly have, at this point in time compared to last year, more retailers in bankruptcy. As you know, we're not sure how many stores we're going to get back. Some have already announced it's really closing stores. Some, in fact, are even liquidating. It doesn't change the fundamentals of our business, 2015 is going to be a lot of work in re-leasing those retailers because, depending on when we get it and how much time we have to lease it up, there could be a little gap there.
Thank you.
Sure.
Your next question comes from the line of Paul Morgan with MLV. Please proceed.
Hi, good morning.
Good morning.
Your same store numbers have been bouncing sort of in the 4%-6% range over the past 3 years, and your lease spread's kind of in the 15%-20% range. I mean, your guidance for same store was 4%. How should I think about that in the context of the past few years, where the average is sort of above that? Then, kind of related to that, where you're at in terms of occupancy, is that what you think of as maybe approaching a kind of a frictional ceiling and whether that could constrain your same store growth at all?
Well, look, we've always tried to be realistic and conservative. I forget, Steve, what we announced last year, what our Comp NOI was, but 4%, maybe?
4%.
We were fortunate to outperform that. Paul, we are taking into account, we do have more bankruptcies this year. I think it's appropriate for us to be conservative, because as you know, we don't get the space back, and then we can have downtime and so on. If there's a conservative element to it, I'd say it's a little bit because of just the bankruptcies that we're having to deal with in 2015 versus 2014.
Okay, thanks. Maybe if you think about investments, you've got $3 billion in developments, redevelopments at what you target as a 9% yield. On acquisitions, the cap rates for today are kind of half that for decent properties. How do you think about that spread, both in terms of kind of evaluating acquisitions, what makes an acquisition, whether it's a single asset or a portfolio or an M&A deal at a much lower yield than you're getting on your redevelopments? What makes it compelling from your perspective?
Well, look, there's nobody been more active in new development and redevelopment than we have been. It's not like, "Oh, let's just do a redevelopment." There's a lot that's required to get there. New development, we want to build stuff that is, at the end of the day, going to fit certainly in the top half of our portfolio over the long run. We have a hell of a portfolio, that's hard to achieve. We're going reasonably quick, when we get to new development and redevelopment. At the same time, we are not going to buy anything or anybody unless we feel like we can add significant value to it. Let's take a couple of recent examples. It's not bad for my net investment in Klépierre to be up 4x. Okay? Not bad.
We felt like we could add value to that business, and thankfully, we have. The same thing on the going-in yield with the two deals we bought for Glimcher is around five. We think they're A assets, A+ assets, and obviously, we think we'll be able to grow those. That's a great opportunity. The one thing that I think the market has lost sight of is just everybody's balance sheet again. It's like, forget about it. Our balance sheet is 5.4x EBITDA multiple. It's 3.8% interest coverage, despite having. I still look at those 10 and three quarters that I got outstanding till 2019, right, Andy? 2019?
Right.
We still have room that, depending on where rates are, to roll that down and even to make a stronger coverage ratio and balance sheet. We've always looked at everything. We'll look at everything. We're not going to chase deals. When it comes to acquisitions, unless we feel like we can add value to that property with either our infrastructure or our leasing know-how, development know-how, we just don't do it.
Does your leverage and your balance sheet advantages, do you think of that as an important lever to pull when you're looking at bigger deals, capitalizing on that?
Sure. Look, let's just go back to 2009. The fact of the matter is, in the retail real estate sector, there's nobody, because they were so levered, and we did some tough financings, including equity. There's nobody in our sector, other than maybe, say, Taubman, that has outgrown whatever dilution. Not only have we outgrown it, we've just blew it away. Everybody else is still trying to get back to their record FFO per share that they had in 2006, 2007, and their dividend. We're blown through those dramatically. Look, that balance sheet that we had, even though we panicked like a few others, allowed us to be conservative, yet signal the market that we were alive and well, blow through the growth that we had.
We had a year or two of flatness or a step back, we were able to use that to find good investments that have fueled our growth. I would hope, even in capital rich times, we're able to do that as well. We're pretty conservative. We don't want to blow the balance sheet. As you know, my background in the real estate world, besides being an M&A banker, which was outside of real estate and in all sorts of industries, was directly involved in restructuring real estate workouts. It ain't no fun, and we are never going to get there. We have a great asset. We've worked hard to achieve it. It's a great thing, but you can't take it for granted.
Okay, thanks.
Sure.
Your next question comes from the line of George Auerbach with Credit Suisse. Please proceed.
Thank you. Just to follow up on Christy's question. Dave, have you quantified the impact of redevelopment at King of Prussia field, and I forget the other asset you mentioned, but just sort of what that's done to the overall sales growth. Trying to think about your portfolio on a more normalized level-
Yeah
adjusting out some of the noise.
Look, yeah. I'm not making excuses, and you know how we've all had this discussion about our tenant sales and how I think about it. If you take these anomalies, I'd say generally, we'd be around 4%. Again, our number is our number. You know how management feels about it. I appreciate you may have a different point of view. We have nothing to hide. We had a few anomalies. We're not making excuses. We'll accept being dinged on it if you want. There's a lot of transforming. We do have exposure to certain markets when Brazil takes a little breather, and we had this strange thing in a state. I'm giving you enough, but we tend not to talk about specific retailers. You could figure it out with a state that doesn't have sales tax. It is what it is.
Same time, we do FFO per share into the white paper. The number is the number. We pointed out the $0.04 only because we thought maybe the market didn't know that we had to pick up our share of Klépierre's transaction costs associated with both tenders, as well as the currency dropped pretty precipitously quarter-over-quarter of last year. We thought it was important to do it. The number's the number.
No, I was asking because in the Macerich Investor Day, they mentioned that I think there were 3 big redevelopments they had that lowered their same store growth on the whole portfolio by 100 basis points. I know one or two assets can really move the number. That's why I was asking.
Yeah, no. It's a legitimate question. I was talking more about tenant sales. On our Comp NOI, they're all in our number. All of those that I talked about are in it, even though we're taking some immediate step backs as we redevelop it. Those really aren't affecting our Comp NOI, at least those assets that I talked to you about.
Right. I guess just the last one from me. You and the board have increased the dividend pretty meaningfully over the last couple of quarters at a pace above FFO growth. I guess, as the redevelopment spend maybe tapers off into 2015 and 2016, should we anticipate that the dividend growth will continue to outpace FFO or AFFO growth for the foreseeable future?
Yeah. Look, our taxable income's got a lot of variability. As you know, we paid out 100% of our taxable income last year. I did underline, I hope you saw that at least $560. I will underline that. That's at least $560. The answer is our taxable income is growing significantly as our earnings are. It's very conceivable that that could be an outcome of that.
Great. Thank you.
Sure.
Your next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed.
Hello?
Mr. Sakwa, your line is open. Your phone may be muted.
Hello?
We'll move to the
This is Steve.
We'll move to the next question. Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed.
Good morning. Good morning, Dave.
Hi.
Hey. I know you're not commenting on the Macerich, but it is interesting. The market is cheering you guys and your stock's outperformance. Clearly, the market seems to be suggesting that it wants something to happen. Just as far as Macerich in the guidance, Andy, are you saying there's no impact, the way you're accounting for it, there's no impact to the 2015 numbers, or we should be picking up something?
No impact.
Okay. Then, David.
Let me do clarify that. Let me just clarify that. They do pay us a dividend, so we do have the dividend income in our numbers. Okay.
Okay.
Obviously, the movement up and down goes in the comprehensive income or loss. In this case, it's income because it's up. That's not an FFO number. The only thing in our FFO guidance is their dividend income. Okay, Alex.
Yeah. I just want to make sure that's the way you're accounting for it.
Perfect.
The next thing, David, is right after the world woke up to lower oil after Thanksgiving, you announced two projects down in oil country. Just sort of curious, obviously, tenant demand was unaffected by it. Should we just take away from this that the retailers are unfazed by the drop in oil, and they just see continued strong sales down in those markets? Or is your view that maybe some of the tenants who initially indicated that they would be interested in both of these projects may start to have second thoughts?
Well, Houston Galleria has been under construction for quite some time, well over a year. Texas itself is so diversified than it used to be 20-plus years ago. 20-plus years ago, it was oil and basically real estate. Today it's tech. Houston is very diversified. Obviously, oil and gas is important, but it's got the medical focus, all the universities. Dallas-Fort Worth, that's less and less oil and gas completely. The answer is, we don't think it'll have any impact. Fort Worth, we're excited about because Neiman Marcus is obviously huge in that area. They're relocating from one mall to this to be their flagship store in Fort Worth. We think the demand for that is great. No issues in Houston Galleria, which is one of the top five centers in the country.
When you put it all together, long run, there's no issue at all.
Okay. I guess the same applies to Tulsa.
True. Yeah.
Final question is, as you guys start to do more of these mixed use or added density to some of the projects, some of your malls, how do you underwrite the projects as there's a return from obviously adding apartments or adding hotels, and then there's hopefully the additional return of just added traffic to the mall that allows you to drive higher NOI and cash flows. If we think about the returns as you guys pencil out densifying some of the sites, how should we think about the incremental return from just boosting NOI versus just adding an additional use to a center?
Hi, this is Rick. Basically, when we add an apartment or a hotel, those stand on their own. It's a separate analysis. If there is some incremental benefit, great, we do not theoretically create any kind of incremental return based on adding more mass or densifying an asset.
Okay. Rick, is there an incremental that we can expect or you guys expect, or you don't underwrite that in any way, shape, or form?
We do not underwrite that.
None.
Okay.
Zero. Don't give my guys any ideas.
To sandbag the numbers, never would cross our minds.
No, don't give my development guys, when they come in, and they want a project approved, don't assume. They'll come in and say, "It's going to do this to the mall. We should approve." No, forget it. It doesn't happen that way.
Okay. Thanks a lot.
Yeah, no worries.
The next question comes from the line of Carol Kemple with Hilliard Lyons. Please proceed.
Good morning.
How are you?
Good. Have you all noticed any change within the last three months in your conversations with Sears and J.C. Penney's about buying some of the boxes back?
No.
Okay. Are there any new concepts that are coming into your malls or outlet centers that you're excited about, that you can share?
Well, here we go again. All right. Rick, he loves this part. Rick, let her go. Okay, here we go. Here's the list.
Unleashing the fury. In the outlet sector, literally every month, we're finding more and more retailers that understand that this is a very valuable and profitable distribution channel. Just Alice + Olivia, Citizen Watch, Jonathan Adler, Helzberg. Literally, we could go on, the answer is there's a great deal of new entrants into the outlet sector. Into the mall sector, we're doing stuff with Athleta, DAVIDsTEA. NYX is a new concept from L'Oréal. Uniqlo is very actively looking. Interestingly, it's lost in the sauce, L Brands is dramatically growing PINK and Victoria's Secret. There's a lot of very good dynamic demand for our properties.
Okay. Thank you.
Yeah, thank you.
Your next question comes from the line of Omotayo Okusanya with Jefferies. Please proceed.
Hi. Yes. Good morning, everyone.
Good morning.
I would like to go back to the 2015 guidance and again, the point of guidance relative to where consensus is. It sounds, based on your comments, is about 1% of earnings, which is about $0.09-$0.10, that's FX related. I'm wondering, what else is in guidance that maybe The Street is not fully appreciating, which is why our numbers seem a little bit high. Is it, again, some of the working through of some of the retail bankruptcies that have happened.
Yeah, I don't know what your Comp NOI is. I also think a lot of it has to do in maybe how you're factoring in our development spend, because most of 2015 and a lot of 2016 is back-end weighted.
We've got our share around 2.1.
That would be our only other guess, but I'm sure Tom can walk you through how you do it. Maybe you have a little bit higher Comp NOI. I mentioned we are conservative on that number because we're looking at a little bit higher bankruptcies than we looked at last year. We obviously always try to do better.
Our development spend tends to be back-end weighted, depending on how you factor that in, and then obviously, the currency delta from the JPY and the EUR is around $0.10 from 2014 to 2015. You add it up, and it is what it is.
Got it. Could you just talk about, in 2015 guidance, what average occupancy is baked into those numbers?
Pretty consistent with what 2014 showed.
Great. Okay. That's helpful. Then in the supplemental, when we just take a look at the development page, the yields on the outlet business, on the outlet development is up to 11% versus 9 previously.
Yeah.
Is that just a mix change?
Yeah. Montreal was a little lower yield, Tampa is much higher. Tampa, we think will be a great outlet center. At the end of the day, one of the leading outlet centers in the country. It absolutely is that mix change.
Great. Then lastly, with Jersey Gardens, just curious what your thoughts are in regards to what NOI growth could look like once rents start to reset for a lot of the tenants.
Look, this is Rick. We have already set the baseline overall on our NOI growth, and Jersey Gardens should be in excess of that once we start doing what we think can be done there. As David said, they did a great job before. We're just now taking it to the next level and allocating space and bringing in incremental, more productive tenants that's going to drive rent and sales.
That's very helpful. Thank you, gentlemen.
Yeah, no worries.
Your next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed.
Hey, everyone. Maybe thinking about the Comp NOI guidance slightly differently. As we think about the 4% versus the 5.1, and also in light of the comments about the higher levels of bankruptcies, and how much of the higher level of bankruptcies is sort of the difference between the 5.1 and the 4?
Well, look, again, we're factoring that in. Like I said, last year, our business has certain level of volatility to it. Not a lot, because we don't have to go sell all our product at the start of every year like a lot of other companies. We have mostly contractual rents, the big variability is unanticipated bankruptcy, the timing of which that occurs, when we get it, and then how long it takes us to lease it up. I said last year, Steve Broadwater, we projected, what was our NOI projection, like?
4%.
4%. We got 5.1. Again, we're factoring that in. We'll see. Obviously, we've got variability to some extent, marginally on expenses, we have certain variability on overage rent, that we have a long history of kind of modeling that, but it does create some variability. We also have a lot of redevelopment work where we're not necessarily taking out a Comp. The big projects like Roosevelt Field and King of Prussia, and those where we're moving a lot of tenants around in the forum shops. We've got Copley. I think Copley, if I remember from our budget sessions, is going down $2 million this year, really pissed me off in our budget meetings because we're re-tenanting into a better group. That's the nature. You got to re-tenant, you got to improve the mix. When you're bringing in a better tenant, they have a longer build-out.
All of that takes time. We hope to do better. It's not too shabby. We move on.
Okay, thanks. Just one other question on the FX. I apologize if I missed it, the $0.10 headwind. What euro rate and yen rate is that based on?
It's based upon our view of it over a period of time. This is really in comparison to 2014.
Okay, thank you.
Sure.
Your next question comes from the line of Haendel St. Juste with Morgan Stanley. Please proceed.
Good morning.
How you doing?
A few questions for you. First, David, on Klépierre here. I was curious if you could help give us a broad sense of the magnitude of upside you think you might have there, perhaps in terms of percentage of G&A expense, portfolio upgrading, closing the valuation gap with Unibail. Just curious for your thoughts there.
It's better that the management team there does that. I will say generally, just from my perspective, they've done a really good job over the last couple of years with our strategic help to continue to move in the right direction, reduce the smaller assets, focus more on the bigger ones, upgrade the marketing tenant mix, et cetera. I think Corio's got a better portfolio than a lot of people think. The integration there is a little more complicated than it is, say, in the U.S. when it comes to integration because of the rules out there, and I won't bore you with all the technicalities about it. I think net net, over a period of time, there's great upside in running a better, more efficient company after the Corio merger's completed.
I would expect that that gap would continue to narrow, which it has dramatically, but will continue to narrow. Like I said, the most important thing in all this is great, but are you making money? Our net investment is up $850 million in two years, two and a half years. Maybe it's three years now. Okay. I'm sorry, it's three years now. I still think they've got upside there to move forward.
Appreciate that. Following up on, I guess, some of the earlier stronger dollar questions, clearly makes your purchasing power better overseas. Wondering if that perhaps might make you more, perhaps aggressively inclined on expanding your international portfolio.
We only want to do it if we think we can make money. I have no desire to expand international unless we think it's a profit opportunity for us.
Fair enough. Last one. Wondering how much of your energy costs are variable, and just trying to get a sense of if there could be a positive impact to margins.
Not really because we tend to charge that to the tenants, we just pass on that savings to them. To some extent, the share that we pay for ourselves will have an added benefit, it's not overly material.
Okay, thank you.
Your next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed.
Thank you. Just turning to your expenses, if I look at just the trend in operating expenses as a % of your revenue, it's been trending down for a very long time, which has helped, obviously, your expense recoveries and whatnot. Just curious if, is this a trend? I mean, it's hard to imagine it going more favorable towards versus the perhaps run rate. Given like rising expenses and rising taxes, where do you think this settles out? How does that impact your expense recoveries going forward? Maybe should we expect some kind of reversion to the mean at one point?
I think we're always trying to improve our operating margins. Every once in a while, there'll be modest changes from year to year. Obviously, 2009 recession, we took a very tough view of that. We're still getting the Comp NOI growth, even though we're less focused on that, like we were in 2009. I shouldn't say less focused. We're not trying to wring every nickel out of it. We also have marketing expenses, customer relations, consumer relations expenses that we're focused on doing. There'll be year-to-year variability to it, but we're still trying to improve it.
If I maybe I can ask it in a different way. For 2014, you ended with about 32%-33% operating expenses as a % of rents. In your guidance, are you implicitly modeling in that stays flat or improves or reverts back?
Relatively the same.
Okay.
Relatively flat.
Just last question. How do you compare the quality of, and I know it's different regions, but Klépierre with Corio versus a Macerich? How would you describe the quality between those two portfolios?
Well, that's a good one. I would say it's hard to necessarily compare one to the next. In Europe, the supply and demand is reasonably favorable. On the other hand, the U.S. has really caught up on that front because there's been, as we all know, no new really full price development for a number of years. The occupancy costs are a little higher in Europe for a retailer than they are in the U.S. I don't know. I'd have to give that a little bit more thought. I look at it more in that specific market as opposed to one country to another country. That's a little tougher comparison to do, but let me give it some thought.
Yeah. The reason I ask that is, when you have your choices of capital, where to deploy capital, and you have Macerich trading at 4.5%. I know if you take it further, there's probably some operating margin you can pull out of it if you did take down the whole portfolio. When I compare it to maybe a Klépierre with Corio's quality, when would that portfolio trading at maybe a 5% cap rate, and this is just rough math, by the way, or higher. How do you make that relative comparison in terms of where to deploy that capital?
The most important thing is you got to risk adjust. In the U.S., you don't have currency risk. As you can see-
Right
no one's really happy about our currency risk today. I'm not overly worried about it, but we do have a little bit of risk. The U.S. is safer. We should get a higher return when we go outside of our natural borders. It is slightly harder to underwrite. It is a little more complex. There are more rules and regulations to do what you want. Even though we've had a profound impact on Klépierre, we know U.S. investing better than we know outside U.S. investing. You certainly would want a higher return anywhere outside the U.S. for those and other reasons. In your question, you got to factor that into it. The rates there are really attractive. If you can take into account the higher risk-adjusted rate of return, you may have a better investment opportunity.
At this point, we don't look at them mutually exclusive.
The U.S. or Europe or Asia. We like to look at each individual idea or investment on its own, and then stress test it with our own corporate opportunities and our own internal opportunities and see what it means for our balance sheet and our management bandwidth.
Okay. Thank you.
Sure.
Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed.
Oh, hi. Just a quick one. What sort of yield are you looking at for the Clearfork development, and is there any update on any thoughts on plans for that Oyster Bay site?
Clearfork, it hasn't started construction, but we'll outline that once we put it into service. It's not in our 8-K yet because we haven't actually started construction. It's going to happen, but we're finalizing our cost numbers, and the leasing plan and all that. It should start in the next two months or so. There's some grading going on in the site now. We'll let you know on that. It'll be attractive value-enhancing return. Your Oyster Bay. Oyster Bay, I think will be a very active year. We have an unbelievable plan and vision of what we want to do with the properties. We're working now with the town and the various agencies about going through the approval process. I'm sure you'll see more of that this year as it comes out.
We've actually developed a plan, a very unique lifestyle, mixed-use center, that we think will have great appeal to us financially as well as all of the community groups there.
Okay, great. Thank you.
Sure.
Your next question comes from the line of Linda Tsai with Barclays. Please proceed.
Hi. How would you characterize holiday sales overall? Does the outcome say much to you about the underlying strength of the economy? Then also in the context of recent store closure announcements, I realize a lot of these retailers were already struggling, but how much of an impact did the holiday season have, or were they likely to close anyways in your view?
I think on the latter question, the arc of the retailers that have already announced bankruptcy or closings was really beyond a given quarter at a given result in the holiday. They have been struggling for an extended period of time. In terms of the holiday sales, in some places, they were stronger. The stronger retailers reported better sales. There were a larger percentage that were weaker. Overall, is the economy stronger? It is. Is the lower oil and gas prices putting some incremental disposable money in the consumer's pocket? It is. Confidence is up. Overall, the macro factors are encouraging.
Thanks.
Sure.
Your next question comes from the line of Caitlin Burrows with Goldman Sachs. Please proceed.
Hi. I guess good afternoon now. This is getting a little long, so I'll try to be quick. If you could just comment on your capacity and interest in issuing more euro-denominated debt, given Bund is at 0.3%.
Yeah, good question. I think the answer is we're going to seriously consider it. Right, Andy?
Yes, absolutely. We always look at both currencies. Right now, we could issue 10-year euro debt at under 1.5%, significantly under. That's something we'll look at. The basis play has become a lot more favorable in the last couple of months.
Okay, great. Thanks. Also just acknowledging that you've already spun off your lower-tier malls within the portfolio you have now, could you just describe any differences between tenant productivity in your top-tier versus lower-tier centers and also tenant interest?
Within the existing SPG portfolio after spin?
That's correct.
I would say not dramatically different, in terms of tenant demand. Sure, the top 20 centers always are going to have somewhat more demand than the next 20. Generally, no great variation there.
Okay, great. Thanks.
Sure.
Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.
Hey, guys. Good afternoon. I wanted to just make sure I understood. The redevelopment pipeline you guys have right now is pretty much completed in 2015 and 2016. As you look forward, what kind of annual spend in redevelopment do you think you'll have as you go out to 2017, 2018, et cetera?
Well, Rich, the $2.1 is directly from our 8-K, and that is only projects that are actually started and then corporately approved through our approval process. For instance, it doesn't include Clearfork yet. It doesn't include Oyster Bay. It doesn't include Copley. It doesn't include a whole host of other deals. The number that we've said, generally, is around $1 billion a year for the foreseeable future. I still, Rich, would generally say that's probably a pretty good number.
Okay, good. You feel comfortable with that. That's great.
Yeah.
Thank you. I also wanted to ask you, usually early in the year, maybe by the middle of the year, you've pretty much covered a lot of the leasing risk that is going to happen for the year. 2015, by middle of the year, would pretty much be handled. I'm curious with occupancy as high as it is that moving up? Are you done with more leasing at this point in the year for 2015 than you might normally be?
We are ahead this year over last year. We're about 65% through our renewals in 2015, and we've obviously made a major focus on getting as far out ahead of it as we can so we can be responsive and
Because our occupancy is higher, those tenants that are looking for space understand that if they don't commit, someone else is going to get the space. That obviously is also encouraging people to accelerate their decision-making as well.
Okay, good. Gotcha. Normally this time of year, you'd be maybe half done, something like that, or less?
Yeah.
Okay. All right, good. Thank you, guys.
Okay, thank you.
Your next question comes from the line of Scott O'Donnell with MetLife. Please proceed.
Yes. Hi, good afternoon. I've got a quick question. You guys have been a great steward of the balance sheet for bondholders. I guess I have to ask the question, why the commercial paper program? How does that make sense from a strategic standpoint? Can you explain the strategy around exposing yourself to the short-term money markets?
Well, Scott, we go back, it's Andy, we go back a long time, as you know. We've got a $70 billion equity market cap. It's less than 1% of our total market cap. It helps us. One of the things we're looking at is as we significantly want to roll down our debt costs, we have a huge opportunity over the next two years as our average interest rate is about 5.65% on the $5 billion of debt that comes due. It allows us to look at potentially, one, prepaying some of our secured debt where we can borrow at, was it 15 to 16 basis points, there's absolutely no risk. It also diversifies our investor base.
We've had significant strong investors, there's really no risk because it's like in the olden days, as you know, when we used to have the banks bid on a competitive bid line, now we've just replaced that with, as you know, commercial paper. The regulations in the market is far, far different than it was five, 10 years ago. We had no problem. We started in October. There were some volatile markets. We had absolutely no problem rolling over any of our, if you would, EUR paper or our USD paper. It's, again, something in a small way that we're going to continue to do, to be proactive, and opportunistic.
All right. I get that. You're viewing it more from a transactional flexibility standpoint rather than a strategic part of your capital structure because I think we've talked over the years about this. You guys have long-term assets, you tend to want to fund them long term, right?
Yeah, absolutely. That's why we've significantly increased our average weighted term as we reduce the rate, and that'll continue to be the case.
Okay.
Thank you.
Any other questions, operator?
At this time, there are no further questions.
All right. Thank you, ma'am. Thank you, everybody. Have a healthy new year, happy new year, and we'll talk to you soon.
Thank you for joining today's conference. That concludes the presentation.