Good day, ladies and gentlemen, and welcome to the Q4 2014 Simon Property Group Earnings Conference Call. My name is Towanda 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. 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, Towanda. Good morning and welcome to Simon Property Group's 4th 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 ks 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 Montreal, started construction on 2 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 Clear Fork and Fort Worth, Texas anchored by Neiman Marcus. And 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 importance of using this long standing measure without modification. Our 4th quarter FFO per diluted share was impacted by approximately $0.04 from our share of Clay Pier's costs related to both their bond tender offer and their tender offer for Corio as well as unfavorable effects of foreign currency devaluations. 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 point 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 Q4 of 2014 compared to an increase of 6.1% in the Q4 of 2013 and an increase in total of 5.1%. So we had an increase of 4% over an increase of 6.1% last year. And 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 4th quarter compared to last year even with major redevelopment occurring at several of our premier properties. As I said, we opened Montreal October 30 to great excitement. We commenced construction in Tampa and Tucson and the construction in New Jersey with the Glaster Premium, Philadelphia Premium Outlets continues to move forward. All of those will open in 2015 and we are slated to begin construction of 4 new domestic premium outlets in 2015, which include Columbus, Ohio, Clarksburg, Maryland, Norfolk, Virginia and Tulsa, Oklahoma. Now 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 Stamford Shopping Center as well as the expansions at premium outlets in Mexico City and Tokai 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 square feet to Pennsylvania's top retail destination and is expected to be completed in August of 2016. And at Phipps Plaza, we are adding an AC Hotel by Marriott and Luxury Residence both expected to be completed in 2016 as well. Construction continues on major redevelopment and 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 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 $2,100,000,000 So again that's under construction. Acquisition.
We closed on Jersey Gardens and University Park Village for $1,09,000,000 on January 15 and are excited square foot of $8.50 per foot. Let me turn to Klepierre. We are pleased with our investment in Klepierre. Our net equity investment is up $850,000,000 even with the weaker Europe. And as their largest shareholder, we are excited for them as 94% of our Chorio shares of all Chorio shares were tendered in support of Clay Pier's acquisition.
And once the merger is completed expected by the end of the Q1, the integration of the 2 companies will begin. Now let's talk about our balance sheet. We ended 2014 with point eight 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.
So let's not lose sight of this 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 $2,900,000,000 of senior notes. At an average coupon, they were at 5.7 6%. We issued $2,500,000,000 of new notes with a weighted average term of 12 years and a weighted average coupon of 3 0.32%.
We amended and extended our $4,000,000,000 revolver until 2019. We closed 16 new mortgages with an weighted average interest rate and term of 3.29 percent 8.4 years and we became the 1st U. S. REIT to establish a global commercial paper program issuing $400,000,000 of CP at a weighted average interest rate of 18 basis points. So 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 totality. And if we include WP's dividend, we've more than doubled our dividend since the Great Recession. Now let's turn to guidance. Our guidance of FFO is $9.60 to $9.70 per share.
This range represents 8% to 9% growth compared to our reported FFO per share of $8.90 for 20 14. 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. And it also includes the unfavorable impact to recent currency devaluations, which should approximate $0.10 compared to the currency levels that existed in 2014. So let's conclude.
We produced another exceptional year with our results for the Q4 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 WP and the debt extinguishment charge and we continue to improve our portfolio
Thank Your first question comes from the line of Ross Nussbaum with UBS.
Hey, David. Good morning. I guess it's on first you know what's coming. I guess I get the honor of asking you what the heck is going on with me, sir?
Well, I thought we were going to talk about your headline that said mixed bag. So what was mixed bag? A record revenue growth, a record comp NOI growth, a record balance sheet, a record occupancy, a 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 that all. Well, I think on the guidance look, first of all, those are your numbers not ours. And 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 our at least our hedge in Europe, we're up $850,000,000 in Clay Pier. So yes, we're going to have some volatility.
It's about 1% of our this where the rates are today versus where they are, it's about 1% of our earnings, which to me is somewhat immaterial. So 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. So back to the elephant in the room.
Yes. What's your question?
A
little California based mall company called Macerich. Can you 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 you say about it?
Well, look as much as we I'm sure you'd love to talk about we disclosed our stake of was 4.1% then got diluted down to 3.6% in Macerich. We still hold that position. And at this point, it's really not appropriate for me to add anything other than the fact we still own it. And 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, but 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. But if you can't comment on it, it would suggest that there's something going on other than that.
Well, look we don't we never comment on M and A activity. And we still own the stake. And as you know, we're significantly in the money of this on the stake. There's no there's been no P and L impact on our stake as I know some people have asked Tom that question. And it is what it is.
There's nothing really I can add other than that. And I'm sorry I can't, but there's nothing more that I can add to that.
All right. I and my mixed bag will get
back in the queue.
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.
And your next question comes from the line of Christy McElroy with Citi. Please proceed.
Yes. It's Michael Bilerman with Christy. David, let me just try just a different angle. When you made the stake, you said you may seek a waiver and you put that out publicly. So 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? And then the second part is just the intent of taking the stake. And was it solely for the purpose of a passive investment just to you thought you have some 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
agenda? Well, I can't Ross asked the question. I can't add to that other than we have managed to find investments as evidenced by the little over $1,000,000,000 that we just spent in January 15 to buy 2 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 current yield going in.
And the current yield going in is very attractive with once Rick and the Mills team certainly with Jersey Gardens works their magic, I think we got a lot of upside. And not to say that I think Michael Glimcher did a great job with that asset. So but there's nothing, nothing I can add other than what I said to Ross just earlier Michael. And I'm sorry, but as you know it's just inappropriate for me to comment further.
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
that to get a
sense for how that's rolling through the numbers. And then 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. So let's just talk about the net. We are pretty well
hedged
on the Klepierre initial stake. So we are not as hedged with our McArthur Glenn investment. The problem as you know to get the perfect hedge and with rates as low as they are in the euro, you're never going to make up that. But I would say generally, we're reasonably hedged in the euro in kind of the 80%, 90% range. But since rates with debt but with rates are so low there, it's the math is such that it's still going to have an impact on us.
So the good news that I see at least is that the business there is not necessarily reflecting the devaluation. So I think the consumer there is still shopping and doing that. And so it's I think it's kind of a more of a temporary thing, But it's going to impact us for next year and it is what it is. The same thing with the yen in a sense that from a book value point of view, we're basically completely hedged. But again, the yen'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 Clay Pier and from Japan. But as you know, we equity account for both. So that doesn't impact that's just cash flow, which is important to be hedged on cash flow. Don't get me wrong. But still at the same time, it does as we take our share of the equity income in those businesses, we're going to have exposure and it is what it is.
So I hope I assume that answered your question on that front. I mean from an investment point of view book value were 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. Does that answer your question on that front?
Thanks, David.
Now on the sales, look, I think it's very interesting because some commentary around it. We did see a little bit of flattening out in the Florida area. Kind of first is one initial 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 have impact sales.
We also as Christy as you know, we are undergoing huge transformational redevelopment in Tingerporsche, the field. Even the Forum Shops were changing a lot of the tenant mix changing the transition haul from Phase 1 to the 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. But I would generally say, you put all those things together, our portfolio does what $620,000,000 a foot still industry leading given size and scale. We're adding to the mix.
We're doing a lot of great stuff. So you know how generally I feel about retail sales, okay? And you have seen even with flat retail sales generally over the last 2 or 3 years, you've seen our comp NOI increases. You know my argument on that. But at least I hope that gives you some color as to how you might think about our number compared to others out there, but the portfolio has never been stronger or better.
I appreciate the color. Thank you, Steven.
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 this those kind of 2 or 3 things Craig that I just discussed. And our premium outlets on from a both a from a comp point of view had better results than the mall business.
Okay. Great. And then how far is the ground up development shops at Clear Fork from the University Park Village that you just acquired?
How far along is it?
Well, how far are they from each other?
Oh, 3 miles or so, 3 miles Rick roughly 3. Yes. 3. Yes. But it's different trade areas, but I'd say 3 because there's a river that runs through it.
It's one of those things.
Okay. And then is there any further things that you could do with Casco just given the size of their project beyond Shops at Clear Fork?
Hi, Greg, 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.
But right now the first phase has our attention.
Great. And then finally just maybe this is for Rick. How are you seeing what
do you think might be
a change in pace in either store openings or store closings in the mall space for 2015?
Well, basically, obviously, we've had the announcements that everyone has seen. So there is a little more pressure on some closings. But conversely, momentum in the business, because there are a lot of people a lot of momentum in the business because there are a lot of people that are looking for space. And we certainly anticipate we're going to be able to hold our market share. And there's always going to be the churning that we've had historically, but we're going to basically be able to keep things pretty much where they are now in terms of occupancy.
And everybody we replace is going to be replaced by someone who is more credit worthy and more productive on a sales per foot basis.
Yes. But Craig, we clearly have at this point in time compared to last year more retailers in bankruptcy. So as you know that we're not sure how many stores we're going to get back. Not So it's we are I mean I don't it doesn't change the fundamentals of our business, but $15,000,000 is going to be a lot of work in releasing 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.
Okay. Thank you.
Sure.
Your next question comes from the line of Paul Morgan with MLV. Please proceed.
Hi, good morning. So your same store numbers have been bouncing sort of in the 4% to 6% range over the past 3 years and your lease spreads kind of in the 15% to 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? And then kind of related to that, where you're at in terms of occupancy?
Is that what you think of as maybe approaching kind of a frictional ceiling and whether that could constrain your same store growth at all?
Well, I think 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%. So we were fortunate to outperform that. So Paul, we are taking into account we do have more bankruptcies this year.
So I think it's appropriate for us to be conservative because as you know, we don't control we don't get the space back and then we can have downtime and so on. So if there's a conservative element to it, I'd say it's a little bit because of the just the bankruptcies that we're having to deal with in 2015 versus 2014.
Okay. Thanks. And then just maybe if we think about investments, you've got $3,000,000,000 in developments, redevelopments at what you target as a 9% yield. On acquisitions, the cap rate for today are kind of half that for decent properties. And I mean, 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 and A deal at a much lower yield than you're getting on your redevelopments. I mean, what makes it compelling from your perspective?
Well, look, I mean, there's nobody been more active in new development and redevelopment than we have been. But it's not like, oh, let's just do a redevelopment. There's a lot of a lot that's required to get there. And the new development we want to build stuff that is at the end of the day going to fit in the certainly in the top half of our portfolio over the long run. So that's we have a hell of a portfolio.
So that's hard to achieve. And we're going reasonably quick when we get to new development and redevelopment. And so I at the same time, we are not going to buy anything or anybody unless we feel like we can add significant value to it. Now let's take a couple of recent examples. It's not bad for my net investment in Clay Pier to be up 4x, okay?
Not bad. And we felt like we could add value to that business and thankfully we have. The same thing on the going in yield with the 2 deals we bought for Glimpshire is around 5. And they're we think they're A assets, A plus assets and obviously we think we'll be able to grow those. So that's a great opportunity.
And look at 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 5.4 EBITDA multiple. It's 3.8 percent interest coverage despite having I still look at those 10.75% that I got outstanding till 2019 right, Andy? 2019?
Right. We still have room to depending on where rates are to roll that down and even to make a stronger coverage ratio and balance sheet. So I mean we've always looked at everything. We'll look at everything. We're not going to chase deals.
And when it comes to acquisitions unless we feel like we can add value to that property with our either our infrastructure or leasing know how development know how. Just don't do it.
Does your leverage and your balance sheet advantages, I mean, do you think of that as an important lever to pull when you're looking at bigger deals capitalizing on that?
Well, sure. I mean, look it led to let's just go back to 2009. I mean, the fact of the matter is there's in the retail real estate sector, there's nobody because they were so levered and we did some tough financing including equity, but there's nobody in our sector other than maybe say Calvin that has outgrown whatever dilution. And 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 2006,007 and their dividend.
We are we're blown through those dramatically. And 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 2 of flatness or a step back, but we were able to use that to find good investments that have fueled our growth. So I would hope even in capital rich times we're able to do that as well. But it's we're pretty conservative.
We don't want to blow the balance sheet. We as you know my background in the real estate world besides being an M and A banker, which was outside of real estate and in short in all sorts of industries was directly involved in restructuring real estate workouts. And it ain't no fun and we are never going to get there. So we have a great asset. We've worked hard to achieve it.
And it's a great thing, but you can't take it for granted.
Okay. Thanks.
Your next question comes from the line of George Auerbach with Credit Suisse. Please proceed.
Thank you. Just a follow-up on Christy's question. Dave, have you quantified the impact of redevelopment at King of Prussia fields 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 adjusting out
some of the noise?
Look, yes, 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. But if you take these anomalies, I'd say generally we'd be around 4% -ish. But again, our number is our number. And you know how management feels about it.
I appreciate you may have a different point of view. We have nothing to hide or we had a few anomalies. We're not making excuses. We'll accept being dinged on it if you want. But 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 mean, I'm giving you enough, but we tend not to talk about specific retailers, but you could figure out with the state that doesn't have sales tax. And it is what it is. Same time, we do FFO pursuant to the white paper. The number is the number.
We pointed out the 0.04 dollars only because we thought maybe the market didn't know that we had to pick up our share of Clay Pier's transaction costs associated with the both tenders as well as the currency dropped pretty precipitously quarter over quarter of last year. So we thought it was important to do it. But the number is enough.
Well, no. I was asking because in the Matrix Analyst 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. So I know 1 or 2 assets can really move the number. That's why I was asking.
Yes. No, no, it's a legitimate question. I was talking more about tenant sales. On our comp NOI they're all in our number. So all of those that I've talked about are in it even though we're taking some immediate step backs as we redevelop it.
So those really aren't affecting our comp NOI at least those assets that I talked to you
about. Right. And I guess just the last one for 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 kind of 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?
Yes. Look our taxable income has got a lot of variability. We are as you know we paid out 100% of our taxable income last year. And $560,000,000 I will underline that. That's at least $560,000,000 I will underline that.
That's at least $560,000,000 or so. The answer is our taxable income is growing significantly as our earnings are. And so it's very conceivable that that could be an outcome of that.
Great. Thank you.
Your next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed.
Hello?
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. Hey, and it is I mean, I know you're not commenting on the Macerich, but it is interesting The market is cheering you guys and your stocks outperformance. So 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. Okay. And then David?
Let me do let me just clarify that. They do pay us a dividend. So we do have the dividend
income in our numbers,
okay? Okay.
But obviously, it's the movement up and down goes into comprehensive income or loss. In this case, it's income because it's up. But that's not an FFO number. So and the only thing in our FFO guidance is their dividend income. Okay?
Alex?
Yes, yes, yes. That's what I I just want to make sure that that's the way you're accounting for it. The next thing David is right after the world woke up to lower oil After Thanksgiving, you announced 2 projects down in Oil Country. So just sort of curious what you guys have obviously, tenant demand was unaffected by it. So 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 that 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 or so. But Texas itself is so diversified than it used to be 20 plus years ago. 20 plus years ago was oil and basically real estate. Today it's tech. It's Houston is very diversified.
Obviously oil and gas is important, but it's got the medical focus all the universities. And Dallas Fort Worth that's less and less oil and gas completely. That's more so the answer is we don't think it will 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.
And we think the demand for that is great. No issues in Houston, Galleria, which is one of the top 5 centers in the country. And so when you put it all together, it's really long run there's no issue at all. Okay. And I
guess same applies to Tulsa? True. Okay. And then 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. So if we think about the returns as you guys pencil out densify 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 densifying an asset. Okay.
So Rick is there like 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.
0. Don't give my guys any ideas.
To sandbag the numbers never would cross our minds?
No, don't give no, no, no. Don't give my development guys when they come in and they want a 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 improve. 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 Kimpel with Hilliard Lion. Please proceed.
Good morning.
How are you?
Good. Have you all noticed any change within the last 3 months in your conversations with Sears and JCPenney's about buying some of the boxes back?
No. Okay.
And then are there any new concepts that are coming into your malls or outlet centers that you're excited about you can share?
Well, here we go again. All right. So Rick, this is Rick. He loves this part. So Rick, let her go.
Okay. Here we go. Here's the list. Unleashing the fury.
In the outlet sector every literally every month we're finding more and more retailers that understand that this is a very valuable and profitable distribution channel. And so just Alice and Olivia, Citizens Watch, Jonathan Adler, Helzberg. Literally, we could go on, but 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, David's Tea. We're doing NYX.
It's a new concept from L'Oreal. Uniqlo is very actively looking. And interestingly, it's lost in the sauce, but L Brands is dramatically growing PINK and Victoria's Secret. So there's a lot of very good dynamic demand
for our properties.
Okay. Thank you.
Yes. Thank you.
Your next question comes from the line of Keayo Okusanya with Jefferies. Please proceed.
Yes. Good morning, everyone. I would like to kind of 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 to $0.10 that's FX related. But I'm wondering what else is in guidance that maybe we're not 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 that maybe
Yeah. I think I don't know what your comp NOI is. And 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. So you've got we've got our share around $2,100,000 So I mean that would really be the that would be our only other guess. But I'm sure Tom can walk you through how you do it.
But 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. But our development spend tends to be back end weighted. So depending on how you factor that in and then obviously the currency delta from the yen and the euro is around $0.10 from $0.14 to $0.15.
So you add it up and it is what it is. Got it. And could you
just talk about in 2015 guidance what average occupancy is baked into those numbers?
Pretty consistent with what 2015 or 2014 showed.
Great. Okay. That's helpful. And then in the supplemental, when we just take a look at the development page, the yields on the outlet business and the outlet development is up to 11% versus 9% previously. Is that just a mix change?
Yeah. Montreal was a little lower yield and Tampa is much higher. Tampa, we think will be a great outlet center, one of the at the end of the day, one of the leading outlet centers in the country. And it absolutely is that mix change.
Great. And 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, we have this is Rick. We have already set the baseline overall on our NOI growth in Jersey Gardens should be in excess of once we start doing what we think can be done there. And 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. Just as we think about the 4% versus the 5.1% percent and also in light of the comments about higher levels of bankruptcies, I guess, what would and how much of the higher level of bankruptcies is sort of the difference between the 5.1% and the 4%?
Well, look again that we're factoring that in. And like I said last year we had 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. So because 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. So and I said last year Steve Broadwater we projected what was our NOI projection? 4%.
4% we got 5.1%. So again we're expenses and we have certain variability on overage rent. We have a long history of 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 of comp. The big projects like Rosevelt Field and King of Prussia.
And those 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 $2,000,000 this year really pissed me off in our budget meetings because we're re tenanting into a better group. But that's the nature. We 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. So we hope to do better. It's not too shabby.
We move on.
Okay. Thanks. And then 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. So but this is really in comparison to 2014. Okay. Thank you.
Your next question comes from the line of Haendel St. Juste with Morgan Stanley. Please proceed.
Good morning.
How are you doing?
So a few questions for you. First, David on clip 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 and A expense, portfolio upgrading, closing the valuation gap with Univy? Just curious for your thoughts there.
Well, it's better that the management team there does that. But I will say generally just from my perspective, we're 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 smaller reduce the smaller assets focus more on the bigger ones upgrade the marketing tenant mix, etcetera. 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. I won't bore you with all the technicalities about it. But I think net net over a period of time there's great upside in running a better more efficient company with after the Corio merger is completed.
And I would expect that that gap would continue to narrow, which it has dramatically, investment is up $850,000,000 in 2 years, 2.5 years. Maybe it's is it 3 years? Maybe it's 3 years now. Okay. So I'm sorry it's 3 years now.
So and I still think they've got upside to move forward.
Appreciate that. And 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 can we only want to do it if we think we can make money. So I have no desire to expand international unless we think it's a profit opportunity for us.
Fair enough. And then last one. Wondering how much of your energy costs are variable? I'm 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 and so we just pass on that savings to them. To some extent, the share that we pay for ourselves will have an added benefit.
Your next question comes from the line of Ki Bin Kim with SunTrust Robinson Humphrey. Please proceed.
Thank you. So just turning to your expenses, if I look at the trend in operating expenses as a percent of your revenue, it's been trending down for a very long time, which has helped obviously your expense recoveries and whatnot. And just curious if is this a trend I mean, it's hard to imagine going more favorable towards versus the press run rate. But given like rising expenses and rising taxes, do we where do you think this settles out? And how does that impact your expense recoveries going forward?
And maybe should we expect some kind of reversion to the mean at one point?
No. I think we're always trying to improve our operating margins. So every once in a while there'll be modest changes from year to year. Obviously, in 2,009 recession, we took a very tough view of that. Now 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, but we're not as 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. So there'll be year to year variability to it, but we're still trying to improve it.
So if I maybe I could ask it in a different way. For 2014, you ended with about 32%, 33% operating expense as a percent of rents. In your guidance, are you implicitly modeling and that stays flat or improves or reverse
that? Relatively the same. Okay. Relatively flat.
And just last question. How do you compare the quality of and I know it's different regions, but Klapier with Chorio versus a Macerich, How would you describe the quality between those two portfolios?
Well, that's a good one. I mean, I would say it's hard to necessarily compare one to the next. In Europe, the supply and demand is reasonably favorable. But 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. So the occupancy costs are a little higher in Europe than they are for a retailer than they are in the U. S. Well, I don't know. I'd have to give that a little bit more thought.
I don't necessarily I look at it more in that specific market as opposed to one country to another country. It's a little tougher comparison to do. But let me give it some thought.
Yes. I mean, so the reason I ask that is when you have your choices of capital where to deploy capital and you have Mayswitch trading at 4.5%. And 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. And when I compare it to maybe a Klapia 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 cap?
Well, you got to I mean the most important thing is you got to risk adjust. And you don't in the U. S. You don't have currency risk. So as you can see, no one's really happy about our currency risk today.
So I mean I don't I'm not overly worried about it, but it is we do have a little bit of risk. The U. S. Is a 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.
And
we even though we've had a profound impact on Klepierre, we know U. S. Investing better than we know outside U. S. Investing.
So you certainly would want a higher return anywhere outside the U. S. For those and other reasons. I don't so it gets kind of in your question, you got to factor that into it. Now the rates there are I mean the rates there are really, really attractive.
So if you can higher risk adjusted rate of return you may have better investment opportunity. But at this point, we don't look at a 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.
Hi. Just a quick one. What sort of yield are you looking at for the Clear Fork development? And is there any update on any thoughts on plans for the Oyster Bay site? Clear Fork will be it's not it hasn't started construction, but we'll outline that once we put it into service.
So it's not in our 8 ks yet, because we haven't actually started construction. We're getting it's going to happen, but we're finalizing our cost numbers and the leasing plan and all that and should start in the next 2 months or so. So there's some grading going on in the site now, but so we'll let you know on that. But it'll be attractive value enhancing return. And 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 various 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, but 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? And 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 closing 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, Some the stronger retailers reported better sales. But there were a larger percentage that were weaker. But overall, if the economy is 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. So overall, the macro factors
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 giving bond is at 0 point 3%?
Yes. 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. So that's something we'll look at.
And the basis play has become a lot more favorable in the last couple of months.
Okay, great. Thanks. And then 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 our the existing SPG portfolio after spin?
That's correct.
I would say not dramatically different in I would say not dramatically different in terms of tenant demand. I mean sure the top 20 centers always are going to have somewhat more demand than the next 20. But generally nothing no great variation there.
Okay. Great. Thanks.
Sure.
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 2016. But then as you look forward, what kind of annual spend in redevelopment do you think you'll have as you go out to 2017, 2018 etcetera?
Well, Rich the $2,100,000 is directly from our 8 ks and that is only projects that are actually start and then corporately approved through our approval process. So for instance, it doesn't include Clear Fork yet. It doesn't include Oyster Bay. It doesn't include Copley. It doesn't include a whole host of other deals.
So the number that we've kind of said generally is around $1,000,000,000 a year for the foreseeable future. And I still, Rich, would generally say that's probably a pretty good number.
Okay, good. So you feel comfortable with that. That's great. Thank you. And then I also wanted to ask, Usually early in the year maybe by the middle of the year you've pretty much covered a lot of the leasing rig that is going to happen for the year.
So 2015 by middle of the year would pretty much be handled. And I'm curious with occupancy as high as it is, is that moving up? I mean, 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 space understand that if they don't commit someone else is going to get the space. So that obviously is also encouraging people to accelerate their decision making as well.
Okay, good. Got you. So normally this time of year you'd be maybe half done something like that or less?
Yes.
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. And 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 $70,000,000,000 equity market cap. It's less than 1% of our total market cap and 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 2 years as our average interest rate is about 5.65 percent on the $5,000,000,000 of debt that comes due, it allows us to look at potentially 1 prepaying some of our secured debt where we can borrow at was it 15 to 16 basis points and there's absolutely no risk. It also diversifies our investor base. We've had significant strong investors and there's really no risk because it's like in the olden days as you know when we
And the regulations in the market
is far, far different. And the regulations in the market is far, far different than it was 5, 10 years ago. So we had no problem. We 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, euro paper or our USD paper. And it's again something in a small way that we're going to continue to do and to be proactive and opportunistic.
All right. So I get that. So 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 and you tend to want to fund them long term, right?
Yes, absolutely. And that's why we've significantly increased our average weighted term as we reduce the rate and that will continue to be the case. Okay.
Thank you. Any other questions, operator?
At this time, there are no further questions. I would now
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.