Good day, ladies and gentlemen, welcome to the second quarter 2014 Simon Property Group Incorporated earnings conference call. My name is Katina, and I'll be your coordinator for today. At this time, all participants are in listen only mode. Later, we will facilitate a question and answer session. To pose a question at any time, please key star one on your touchtone telephone. If at any time during the call you require assistance, please key 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 presentation over to your host for today's call, Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.
Thank you. Good morning, everyone. Welcome to Simon Property Group's second quarter 2014 earnings conference call. Presenting on today's call is David Simon, our Chairman and Chief Executive Officer, Rick Sokolov, our President and Chief Operating Officer, Steve Sterrett, our Chief Financial Officer, and we're also joined by Andy Juster, our current treasurer and incoming CFO. Before we begin, just 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. 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 also available on our IR website at investors.simon.com. Due to the completion of the Washington Prime spin-off during the second quarter, we're providing operating statistics for the prior year period to show performance on a comparable basis, excluding the Washington Prime properties, which is in our supplemental 8-K. Now for our prepared remarks, I'm pleased to introduce David Simon.
Good morning. It was a very eventful and productive quarter. We completed the spin-off of Washington Prime Group. We relaunched our brand to create a whole new way to engage with consumers. Most important, we continue to produce strong operating and financial performance. Results in the quarter were led by FFO of $2.16 per share, exceeding the First Call consensus estimate by $0.03 per share. Excluding the operating results from the WPG properties and the transaction costs related to that spin, FFO increased 12.8% year-over-year for the second quarter. As a point of interest, if we exclude the transaction costs related to the spin, our FFO would have been approximately $2.26 for the quarter. I'd like to take a moment and put that number into perspective. I'll remind you that our second quarter 2010 FFO was $1.38 per share.
The quarterly profitability of Simon Property Group has increased by $0.88 per share or $320 million quarter-over-quarter since then. Overall, business conditions remained favorable, driving increases in our key operating metrics and our cash flow. We continue to see strong demand for space across our portfolio. Occupancy ended up in malls, premium outlets, and the mills. The malls and premium outlets recorded increased leasing spreads to $11.06 per square foot. The mills recorded leasing spreads of $12.74 per square foot. For those of you who are interested, comparable property sales were up 90 basis points for the quarter, and the movement from sales per square foot of $6.12, or I'm sorry, $612 a year ago to $608 is solely related to bringing on several new projects totaling 2.16 million square feet.
Comp NOI, of course, which I'm more interested, increased 5.6% in the second quarter and is up 5.5% year-to-date, and over 95% of our domestic NOI is included in our Comp NOI calculation. As a reminder, our Comp NOI in 2013 Q2 was over 5%. That's 5.6 over 5. These results are a testament to the strength of our assets, the desirability of our locations, and our ability to execute. Let's look a little forward. Charlotte Premium Outlets is opening on July 31st and is fully leased. Twin Cities Premium Outlets in Minneapolis will open August 14th and is fully leased. Construction continues on new premium outlet developments in Montreal and Vancouver, both high-quality major markets, Montreal will open in the fourth quarter.
Formal groundbreaking at Gloucester Premium Outlets, a new 375,000 square foot center in southern New Jersey that serves the greater Philadelphia area, is scheduled for August 7th. Other new outlet projects in our development pipeline are moving forward. We are being very selective and focused on major markets and where there is clear demand from the retailers and manufacturers that matter. Now, in the quarter, just turning to redevelopment and expansion, we did open successfully 147,000 square foot expansion at Desert Hills Premium Outlets, making it one of the 10 largest outlet centers in the world. Lenox had its re-grand opening, including a renovation of the exterior and the fashion cafes and the addition of several new restaurants, including True Foods.
Redevelopment and expansions are ongoing at 32 properties across all of our three platforms in the U.S., Asia, and Mexico, which will continue to expand and enhance some of our most productive properties. As a reminder, construction is ongoing at some of our most productive properties, including Del Amo, Roosevelt Field, Woodbury Common Premium Outlets, Houston Galleria, Stanford Shopping Center, and St. John's Town Center. We also started construction on a significant mall redevelopment at Fashion Centre at Pentagon City, which will add 50,000 square feet of small shop space, including restaurants. As you've seen recently, we've started the construction of the expansion of Chicago Premium Outlets, which will add 260,000 square feet, as well as a Shisui Premium Outlets in Japan that will add 130,000 square feet.
Put it all together, as we said, it's over $1 billion through 2016, and it's affecting some of the most productive assets, not only in this country but in the world. Capital markets. Just briefly, we did amend and extend our $4 billion unsecured multi-currency revolving credit facility with a June 2019 final maturity at LIBOR plus 80 basis points, which is the tightest spread in our industry. As planned, we retained $1 billion of cash proceeds from the debt placed on the WP assets prior to the spin. We also announced a dividend of $1.30 per share for this quarter, which is a 13% year-over-year increase.
We will pay at least at SPG $5.15 per common share at SPG, and we revised our guidance that we issued May 29, 2014, to $9.01-$9.11 from a range of $8.96-$9.06, which raises both the top and bottom range by $0.05. Just to turn to management, Andy's here, will be our next CFO. Steve Yalof will join as CEO of our Premium Outlets business. Andy has been instrumental in building the strength of our industry-leading balance sheet. He'll maintain that focus. Steve is a well-respected retail real estate executive who enhances our team and brings a unique perspective with his diverse retail background. I look forward to working closely with both of them.
To sum it up, a great first half of the year, we're absolutely focused on enhancing the value of our real estate which is being executed on daily and producing the results that we're hoping for. Questions.
Operator.
Thank you.
Questions. Thank you.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star one on your touch-tone telephone. If your question has been answered or you wish to withdraw your question, please press star two. Please press star one to begin. Your first question comes from the line of Christy McElroy representing Citi. Please proceed.
Good morning, everyone. You've been increasingly talking about potential densification of some of your assets and the possibility of adding non-retail components if it makes sense. I think Copley is talked about, but you also have a 230-unit residential project at Southdale Center ongoing. Copley is sort of fairly intuitive, but can you talk about your views on why it makes sense to add residential to a center like Southdale? What other traditional suburban regional malls of yours are you considering adding a residential component?
Well, primarily because there's demand, and we do like the interplay between high-quality residential with our high-quality retail offerings. It's an opportunity to continue to add value to the company. Southdale, and we've had very good success in places like Firewheel and Domain, to name a few. We've got both a hotel and residential going on at Phipps. We're in discussions with a well-known developer in Lenox. Obviously, the big mama is in Copley, which all our intents and purposes for that is to start construction within nine months, which will be a landmark for the Back Bay of Boston. We're very comfortable with demand. The quality of what we're going to build, we think will be terrific, and it's got the right kind of IRR for us to take that risk. We think it'll add to the value of that retail.
It's not going to overwhelm us, but it's part of our strategy to continue to make our shopping centers the place to be, both from shopping, entertainment, leisure, eating, and then eventually living and spending time with respect to the hotel business. These are great real estate, why not take advantage of it?
In terms of the larger projects that you have in the mall pipeline, with meaningful small shop expansions, David, you mentioned Del Amo, Pentagon City, Roosevelt Field, Stanford, Houston Galleria. As you think about adding additional small shop space to your better malls, what's the composition of new stores that you're putting in these expansions that you sort of didn't previously have room for at the mall where you're seeing new demand? How much is restaurants versus fast fashion versus luxury versus traditional mall retailers?
The simple answer really depends on where we're adding the space, what that center lacks, what the demand is. I would simply say, Christy, it's all of the above. In Pentagon, to take a simple example, in that case, it's really restaurants because it's out in the exterior of the center. If you've been there, the porte cochere is kind of really Humpty Dumpty. It's really terrible, frankly. We think, given its location, if you've been to Atlanta recently, you've seen what we did with Lenox, just opening up the centers, creating a sense of, this is where you ought to enter. It's great for the restaurants. We've seen a lot of synergy there. In that case, it'll be a little bit of fast fashion there as well because of the customer base.
In Del Amo, it's upgrading the mix and bringing in not the super luxury, but bringing up the kind of the better retailers, more aspirational brands, because we think that's what's missing. It depends a little bit on everything. In Galleria, the demand for luxury is immense, having the ability to take some of the existing retailers, move them toward the Saks existing store, which will be the new added small shop space, will allow us to continue to upgrade the true luxury players in kind of the Neiman Marcus wing. Again, it's a little bit of everything, and it really depends on where and what the demand is.
Thanks, David.
Sure.
Your next question comes from the line of Jeff Spector, representing Bank of America. Please proceed.
Thank you. Now that Washington Prime has been spun out, I guess, David, can you just talk to us a little bit more about your main goals, what you're going to be focusing on for the next six to 18 months? Is it really the redevs and the branding effort?
We do everything here, Jeff, and that's why our FFO increased. Again, we didn't do it by smoke and mirrors, by high leverage, but our FFO increased from 2010 to 2014, just for the quarter, $320 million. You don't do that by a little bit of this and a little bit of that. You do it by everything. At this point, we're going to continue to do everything. We're going to redevelop. We're going to release. We don't have industry comp leading numbers quarter after quarter, year after year. We don't outperform over the last 12 years, over a decade, continually beating First Call consensus estimates year after year after year. Not several years, but over a decade without being able to do just about everything. We're going to continue to do just about everything. I don't want to limit by redev or that.
If you have a good idea, I'll take advantage of it. Tell me what I should do. Obviously, I mentioned, and I want to underline it, what we've got going on at some of our big mamas. Now I've used that twice. Liz just frowned on me. What we got going on at The Field and The Galleria and Del Amo, it's pretty big stuff. That's hugely important. That's why we've added some people to help us manage that. We'll continue to do everything we can to drive this business forward.
Okay, just one follow-up before Craig has a question. Is it too soon to talk about any response or feedback on the Simon branding effort?
Well, I can tell you that the compliments we've received have been fantastic, I think from a retail point of view, the retailers that think of themselves as brands, it's been very positive at the end of the day, if you don't think of your company as a brand going forward, you're going to miss out on opportunities. It's an evolution. We'll try to revolutionize parts of it's going to continue to be something that we'll reinforce with the consumer day in and day out, our people in the field will reinforce it as well. We're in early days on it, Jeff, we're very excited about the prospects of continuing to upgrade the quality of our presentations and the quality of our service levels to our properties. That's very important in today's world.
Thank you. I think Craig had one question.
Yeah. Hi. I just wondered if we could get some comments on your involvement with digital, then possibly the extent of your involvement in holiday 2014, if you're adding malls or markets.
Well, we are focused on making strategic VC-like investments in opportunities that we think will add value to our company, both from helping our retailers as well as helping our consumers. As you know, we hired somebody, Skyler Fernandes. He's been here for three months. We've made some investments. Deliv , we will be bringing to Woodfield. We're part of that group. We're not leading that group, which is fine. We don't have to lead everything we do, though I like leading everything we do but sometimes we don't lead. It's one of many things that we'll continue to experiment with, and we'll see where it goes. We've got some expertise now. We're looking around corners for opportunities. Skyler's uncovering a lot. We're in the deal flow. We're doing it smartly, though. We don't have 100 people running around doing it.
I think the way we're doing it is smart. Like I said, we've made some small investments, and we'll continue to make them, and I like the prospects of what we're trying to accomplish.
Thank you.
Sure.
Your next question comes from the line of Ki Bin Kim, representing SunTrust. Please proceed.
Thanks. Could you quickly talk about the Mills lease price? It seems like the $12.74 equals 47% of a % change standpoint. Could you talk about how you're achieving that? I guess it's not really driven by sales per square foot changes, so maybe a little more color on that.
Well, therein lies first of all, As I've mentioned to you in the past, the fact that sales growth does not necessarily correlate to spread growth. The fact is, you can see that from the results that our Mills portfolio posted. I don't know how else I can describe that to you, but other than producing the results that we did. That's how I would answer that question. We've got an under-rented, under-market portfolio in the Mills. We're upgrading the mix, and we're charging more rent. Simple as that.
Okay. Thank you.
Sorry.
Your next question comes from the line of Ross Nussbaum, representing UBS. Please proceed.
Hey, David. Good morning.
Hey.
Can you talk a little bit about the outlet sector versus the malls, just in terms of how would you describe the strength of demand you're seeing for outlets today versus the strength of the demand for malls, and maybe how is that manifesting itself in terms of pricing power for each of those segments?
I'll let Rick comment, but I'd say there's no huge or material difference. When we were coming out of the recession, there was more trepidation with respect to full price than there was the outlet. The outlets didn't see the big dip in demand. I would say today, it's pretty consistent. The only difference is, that in the outlet sector, you do have a number of the people that have not participated in it wanting to. I would say the demand is not all that much different at all, and the gap between the demand, given that there's been no new supply and the regional mall business is basically on top of each other. Rick, I don't know if you want to add anything to it.
I just want to emphasize David's point in the outlets. There just happens to be a number of the mall tenants that, frankly, back when we got into this sector, we started talking to them about the outlet as a desirable channel for their business, and now they're experiencing that and they're experiencing great results. A company like Express is now rapidly expanding. The only other thing in the outlets is that the center sections, for the most part, are a little smaller and the spaces are smaller. Even with the same amount of demand, the supply is more constrained, and that gives you a little bit more pricing power.
Okay. Second question, David. If we look at Washington Prime, I'm curious, the stock's around $19, a little under today. Where did you think the stock was going to be when you decided to do the spin?
Well, look, I think the advice that we got was right in that range. I'm not here to talk about WP. WP will be providing an update in the next few weeks about what they're doing. I think it's right on. We've been a public company for 20-some odd years. It takes time for companies to develop what they're doing. I'm very pleased with WP from a director point of view and as a shareholder. It's very early days. It's been trading for what, six weeks? Maybe two months. Six weeks. I think it's right where we think it's going to be. I think they've got a lot of opportunities. They are much better equipped. Frankly, just from a fiduciary point of view, it's better that they do it than I do it. No great surprises on that whatsoever.
Thanks.
Sure.
Your next question comes from the line of Alexander Goldfarb, representing Sandler O'Neill. Please proceed.
Good morning.
Good morning.
Hey, how are you? David, two questions here. The first, we'll go back to the branding question. You're definitely a numbers guy, and advertising tends to be sort of a softer metric as far as being able to gauge. How are you gauging the effectiveness on a dollars and cents basis, and in order to fund this, are you cutting back other advertising that you used to do? Or in total, this represents an entirely new effort as far as. Presumably, you were advertising at the local level. Just sort of curious, have you pulled back from that and focused more nationally, or is this incremental, too?
No, look, your comment about numbers, it reminds me of a lot of people said I'm not a real estate guy yet, I go back to this quarter-over-quarter thing. Somebody figured out how to grow the business $320 million. That's not for the year. That's just for the quarter-over-quarter. Look, the fact is we did reallocate spend, took it away from outdoor, put it more toward digital and TV, less from radio. We did that kind of stuff that we tweak every year where we're getting that. There is a little bit of extra cost associated with the stuff that we've done. It's going to be a test to measure business. Ultimately, it's going to be managed within our typical budget every year that we do for marketing spend.
By having branded and consistency across the portfolio, you do get economies of scale. We'll be able to take advantage of it.
Is there a way that you're measuring the spend, or it's just something that you assume as long as you're getting positive feedback from tenants and customers?
I think you certainly have that ability. I think the initial phase is more what's the feedback. As this progresses, we are going to measure our results.
Okay. The second question is, your releasing spreads have been accelerating. Can you just give some color, whether either by mall or outlet, or if this is more new tenants coming in, or if this is more driven by remerchandising tenants, moving guys from the 50 down and moving new guys to the 50-yard line?
Well, I'll let Rick and Steve, if he wants to chime in. Point out to you that we are under market rented. That's why we're able to grow our Comp NOI every quarter. Where our occupancy cost, for better or worse, if you want to focus on that, and you know how I feel on some of these numbers, is low. Is very low. Look at it compared to our peer group. It's low. That allows us to increase our rents, at the same time, doing it in a way that our retailers can continue to be profitable in our portfolio, which is important. It's continuing to upgrade, and it's marking leases to market, and that's what it is. Rick, you want to add anything?
The one thing I would, again, re-emphasize something David has talked about. We keep talking about our redevelopment program. I don't think people appreciate how much better our properties are getting as places where retailers want to do business. We've talked in the past how there are a number of new entrants that want more square footage. It's a supply and demand business, and as our properties are getting more desirable, we have more demand, limited supply. We're able to drive rents.
Alex, this is Steve. I'd just add one comment, because you asked about the difference between new leases and re-leasing. Interestingly enough, we have the ability to parse the data and look at it and componentize it. The spread is pretty much on top of each other, whether it's a new lease or a re-lease. Which I think echoes David's comment about the portfolio is just under market, and whether it's the existing tenant and us reaching an agreement with them to stay in the space or whether it's remarketing it to another tenant, we're getting market rent for that space now.
Okay. Listen, thank you.
Thank you. Have a great day.
Your next question comes from the line of Jeff Donnelly, representing Wells Fargo. Please proceed.
Good morning, guys, and congratulations.
Good morning. Thank you.
Andy and Steve. David, just building on an earlier question and looking longer-
Well, one guy's not here, so until he posts, you never know.
That's true. I'm just curious, to build on an earlier question, looking longer than 18 months out, on top of honing the portfolio and maybe executing on the pipeline, do you think there's a role or need for something larger to be done in real estate or perhaps even assisting brands with omni-channel retailing?
Maybe I'm dense. Can you restate your question? I think I missed it. Sorry, Jeff. Can you just-
No, no problem at all. I was curious if on top of your, I guess, the blocking and tackling on the portfolio, if you feel that there's a need or a role for Simon to do something larger in real estate or perhaps assisting brands with omni-channel retailing in the next few years.
Look, I think, we're always trying to assist the retailers while at the same time grow our business. There is this natural tension between the two of us. Yeah, I think we've got to continue to upgrade the portfolio and drive traffic, if that's your question. Yeah, we certainly have a responsibility to the retailers to make our environments as productive and as exciting as possible. That's the biggest focus we have. Rick, I think we feel like we have that obligation. We have it to the consumer, too. The amount that we've done within the portfolio, just upgrading little stuff, from restrooms to play areas to seating areas to exterior improvements. We've done a hell of a lot over the last several years. We were able to shut down when the world was ending and start back up.
We were able to shut down better than anybody else. We were able to start up better than anybody else, all of that's proven because all of that's in our numbers. I hate losing WPG because now I lost $1 of FFO, we would've been at $10, roughly, right?
Excuse me if I'm rounding here or there. Everybody's going to do the calculation. "What does that mean? What does that mean?" We were going to be at $10 per share, $6 in dividends. Where were we in 2006 and 2007? Where was everybody else? Those are big numbers.
Well, David, I guess the root of my question is I think that you've certainly done well in strengthening the balance sheet and you spun off Washington Prime.
Yeah
You have a big pipeline today. I guess I'm wondering if going forward, you see more of your capital allocation going to things outside of malls and outlets and maybe into other areas.
No, we're going to always stick to retail real estate. We will densify here and there. Yeah, and we think we can do that appropriately, not get over our skis. No, we're going to always be a retail real estate company. That won't change.
Then, I guess for Rick, just a few questions. Did you guys see much of a sales impact in outlets in Japan, just because they did a big increase in their VAT tax in the second quarter? Did you see anything there?
That really should go here as opposed to Rick.
I don't leave the domestic shores.
The fact of the matter is, actually, I'm glad you brought that up, because the answer is no, believe it or not. There was a little bit of a spike ahead of that. Our Japanese partner is actually coming to-- the weather here is bad, so I assume they'll still get here, but they're actually coming here for the next couple of days. It's actually surprisingly held its own. I don't have it right in front of me, but the simple answer is no. It's actually done very well, even with the increase in that.
I think this one is for Rick, because he and I were exchanging phone calls. Can you talk about the replacement you have lined up for the Nordstrom space at Florida Mall, and maybe a little bit why Nordstrom opted to leave that market, and does that sort of foreshadow anything for that property?
Well, the property is frankly growing extraordinarily well. In fact, right now, we're in the process of adding a new flagship, Zara, American Girl. We are adding a completely new food hall with other restaurants. I'll let Nordstrom's statement speak for itself, but we are very excited about our replacement strategy for that box. In fact, there will probably be announcements forthcoming in the very near future that will show you what we have in mind there, and we believe it's going to be a substantially positive addition to the property.
Yeah. It's absolutely, unequivocally not a reflection of the mall at all. Let me make that clear. The mall does $1,000 a foot.
Yeah.
It's grown its NOI every year. It's a great mall. No issues.
Thanks, guys.
Sure.
Your next question comes from the line of Haendel St. Juste representing Morgan Stanley. Please proceed.
Good morning out there.
Good morning.
Morning.
First, a question on Klépierre. Know that you do not include in your core same store numbers, but we noticed a large drop in your share of NOI from Klépierre, NOI page 21 of the 2Q sup, down to $53 million from, looks like $67 million last quarter. Can you perhaps give us a bit of color on what caused such a big drop? Were there one-timers in either number?
Yeah. Q over Q, there were one-timers last year.
They also-
I'm speaking to, sorry, first sequentially, last quarter.
Okay. Part of that is dilution that occurred with their sale. They sold core assets.
Okay.
Okay?
Yep. Anything else there or just
They reported their numbers, no. The answer is no.
Okay.
No. They're in very good shape. Our investment, we're plus $900.
Almost $1 billion.
Almost a billion.
Up 52%.
As Adam Chandler would say, "Not too shabby." No, and they're doing a good job, and I've yet to learn one word in French, which is quite pleasing to me.
Okay. Thanks for that. One more, if I may. Understanding your views, David, on sales per square foot. I was just curious, though, on your thoughts on.
Let me just stop there. I just don't think it's Again, I'm not trying to tell you that it's not unimportant.
The question is whether we should obsess over it or not. What I'm trying to explain to the market, I obsess over my revenues. I obsess over my Comp NOI. I don't obsess over what the retailers do in my properties. Unless I'm doing a bad job, then I obsess over it. What happens in our industry is retailers, they get hot. They have great sales. They don't. It changes. We've got to develop the right mix. Sometimes that's our fault. Sometimes it's the retailer's fault. The important thing is where is our leases vis-à-vis market? What's demand? Can we increase our cash flow? That's what I obsess over. I've never had a headline saying sales are up when they're my tenant sales, because my headline is what are my sales up, and in fact, I think this quarter up 9%, right? Roughly?
Looking at my team, they're shaking their head. That's what I obsess over. That's the difference that I'm trying to communicate. As you know, other retail REITs in the universe of 30 of us More than half of them don't even report what their tenant sales are. We're just trying to say, "Yes, I hear you. It's interesting, but it's not what's going to drive our ability to increase our cash flow." Because remember, we can take the space back.
Got you. I understand. I appreciate your views and again, we understand why you think what you think. I was just curious on your thoughts on potentially creating a new category of sales productivity reporting to perhaps capture the larger in-line tenants, the H&M, the Uniqlo, that pay you rent more like in-line tenants, but whose results are not included in your reported core numbers, especially given how well they've been faring lately.
Well, look, we track total sales. I think year to date, we include everything that We don't get everybody, doesn't report. We have the department stores, some don't, some do. Rick, our total number is up-
It's almost 3.5%.
3.5%. You're right. I'm not going to do that on a per foot basis because, it includes department stores, but it does show you what's going on with market share of our properties. The total sales that we get reported are up 3.3%. Is that a number we should report? I don't know. When the strip center guys do it, call me and I'll do it. Okay? Yeah.
Fair enough. Thank you.
Yeah, no worries.
Your next question comes from line of Omotayo Okusanya representing Jefferies. Please proceed.
Yes, good morning, everyone. Just along the lines of just the retailer outlook, I was wondering if we could just get some sense from you how you're feeling about things like mall traffic and just a kind of general sense of what the mall feels like today and also in July.
Well, look, the fact is the consumer, generally, is still very cautious. We see that across the board. There's no denying that, as you know, a number of retailers, both low-end, medium, and even high-end, are all seeing somewhat of a cautious consumer. That certainly is affecting retail sales in our properties. That continues to be the case. We have our work cut out for us, with respect to that issue. We don't think it's a shift issue. We've done a lot of research here. We don't think it's a shift to online from physical. It's really more of an indicator that the consumer right now is pretty cautious. I think a lot of that is just all the macro stuff that's out there. We've seen it before.
We certainly have some retailers that have their issues, which will put focus on us to release their space. Again, those things ebb and flow. We've got our work cut out for us with regard to just the consumer that's cautious right now.
Would you hazard to guess that mall traffic is down slightly or down low double digits or anything of that sort?
No, it's not down double digits. Okay. I don't know where you get that data either. No, it's not though. I would say mall traffic is generally flat. The summer months are not big until late July and August because of back to school. June is not an important month, early part of July is not. We'll see what happens.
Right. Okay. That's helpful. Then just one more from me on the outlet side of the business. During ICSC, there was a general commentary coming out of the company about some additional developments that could be done in 2015, 2016. There was like half a dozen potential locations that were mentioned. Just wondering if there was any update on that.
Yeah. You mean from our company?
Yes. Correct.
Yeah. We do intend to, as I mentioned in my remarks, we're starting Gloucester, which is August 7th. Okay? That groundbreaking, that'll open basically a year from August. We do have one other that we will hope to start this year, and then we still have three or four that are in the pipe for next year.
Okay.
Nothing's really changed on that. Again, I won't bore the callers on my comments, but we're being very selective in where we want to go and where demand is. Not that we're always going to bat 1,000, meaning we may pass up an opportunity that turns out good or may build one that's not great, but those are the two options that can happen. Generally, I would say we're experts at understanding where the manufacturers and where the retailers that matter want to build the next outlet. Okay? Doesn't mean we're going to bat 1,000, but it's going to be pretty damn close.
Sounds good to me. Thank you.
Your next question comes from the line of Andrew Rosivach, representing Goldman Sachs. Please proceed.
Hey, guys. Don't shoot the messenger, clients just keep asking about sales, I have to shoot a couple in. You mentioned earlier that the redevs were impacting sales, which kind of makes sense because you're going to have lower sales as it's going on. Do you have any idea of what the quantity of that was?
Well, we go property by property. The fact of the matter is Look, I will just say this, we added more space. When you look at the 612 to 608, that's the primary issue there. Also, we added some centers that are not quite up to the core average yet. That's nothing new and out of the ordinary. It does take time for centers to develop their trade area and everything else. In the movement, because that's why I don't want to call it the decrease, because it really didn't decrease. The movement from 612 to 608 was really a function of adding additional space. As I mentioned to you, the comp sales were actually up 90 basis points, which would ignore that impact. We give you total sales, but the comp sales were up 90 basis points.
The total sales, just volume wise, not on a per square foot basis, was up 3.3%. That's as much as I really want to talk about sales.
I know, and by the way, nobody's going to report 5.6% NOI growth amongst your peer group.
Nobody, right?
This is what I do for a living. The 90 was actually trailing 12 months, not just the second quarter?
It was Q over Q.
Yeah. Second quarter.
Second quarter.
Second quarter over second quarter, true comp. Okay. Let me ask you a sales question that actually does matter.
Yeah.
I'm assuming as part of the Washington Prime spin, you spent some time thinking about what the growth could be on a multi-year basis, because let's face it, if sales really are flat or they're even negative for three years or five years, that actually does matter. Maybe if you could share a multi-year view, I think it'd be really helpful to the market.
Well, I guess the simple way is just look at where our expiring rents are versus what we're bringing in new rents at today's sales level. If that's what you're focused on, you can see that embedded growth is pretty significant.
Well, that's easy, right? Just even if sales stays flat, you can see where it's going to go. Do you have any thought of where sales are going to go? Any thoughts on looking at the last 12 months, not being representative of where you really think that the tenants can drive their sales going forward the next two or three years?
Look, I'm not going to give you a number if that's what you're after. I do think that the consumer has been cautious and for all sorts of reasons. The sense on the macro side is that, and part of that was a move toward durable stuff. The fact of the matter is, I do think there's a lull here, and I don't view it as a long-term lull. I do think the economy sounds, feels like it's getting better, and with that, the consumer will move forward. As I said, the GDP of last quarter was down 3%. I had nothing to do with that. I did my fair share. I built, I redeveloped, I hired people, I gave raises. I did everything I can to juice the economy. Don't look at me. Okay? We'll see. We feel good about our business.
Thank you, sir.
Sure.
Your next question comes from the line of Paul Morgan representing MLV & Co. Please proceed.
Hi, good morning.
How you doing?
Good, thanks. On occupancy, you're getting up to pretty high numbers already, and based on your typical seasonality, you end another 100 basis points higher at year end or more. Do you think you're at the frictional maximum? It's a little harder for you guys because the outlets have always run higher to comp you against the rest of the peer group. If you just think of the malls, is this where we'll end this year? Do you think there's much more upside? Is it good to push for that upside or to leave some kind of frictional wiggle room?
Well, look, I'm always of the view, make the deal, lease the space. Look, I think, Paul, at the end of the day, there's going to be a little volatility into it because we have a little bit more bankruptcies this year than we did the last couple. When you get the space back, you don't have it immediately leased. It takes time. There's going to be some of that volatility, but I think we'll maintain that kind of level of occupancy, give or take a little bit here and there.
The only other point I would make, Paul, is that we spend a great deal of time asset managing our space to get the highest yield we can out of that space in terms of rent and sales production. Much of our discussions with our tenants are getting them right-sized, which in a lot of instances is decreasing the amount of space they're in, so we can create additional rooms out of the same square footage, which drives our sales and drives our rents. There's a lot of levers still left that we can pull to generate productivity, even at these higher occupancy rates.
Sure. Yeah. That makes sense. Okay. My other question is just on development. You've got about, what, $1.6 billion, $1.7 billion, your share in your SOP listed for activity that's under construction. That's basically over the next two years, I guess. What should we think in terms of annual completions based on kind of what's in your pipeline for starts over the next 12 months? I mean, is that number going to stay about the same? Do you have some big projects that are going to come in?
Yeah. I think the best way to do it is we think, on average, we're going to, as we said, spend about $1 billion plus a year. It will spike up in that, and that's just more or less domestic. That might spike up when we put Copley in and a couple of others. There is lumpiness to it because some of the stuff that we're finally doing is big stuff, the Fields of the world, the Del Amo. You're going to have some spiky, but on average, when you look back on 2016, 2017, it's going to be $1.2 billion or so per average, more or less.
Do you think that 8% mall redevelopment yield is going to be consistent even when you add some of those kind of bigger projects?
Yeah. Look, the answer is yes, because we also have new development in there that will be at higher yields than that. When you put it all together, it's a pretty good number that we feel good about.
Okay, great. Thanks.
No worries.
Your next question comes from the line of Michael Mueller, representing JPMorgan. Please proceed.
Yeah. Hi. Following up on the last question, if you go out past 2016 and think about the next three years, five years or so, does it seem like you can maintain that roughly $1 billion a year spend based on what you think is in the shadow pipeline at this point?
It's so hard to really tell you one way or another. I don't know. I mean, the simple answer is I don't know. I think it certainly could extend a couple of years. We have a very disciplined philosophy about adding and over-improving a center because at the end of the day, if I go back to the Street 20, you know what drives our earnings is that we think about return on equity better than a lot of folks, and that's what drives the business. If you over-improve stuff and you don't get the right return on equity, you've kind of done it, and it's great, and the architects can slap themselves on the back. The question is, where's the cash flow? I don't know. I think we're so focused on the handful of big things that we have that that's the key.
Copley's a four or five, unfortunately, because I'd rather have it much quicker, but that's a four or five-year project. I think the simple answer is that, yeah, that $1 billion-$1.2 billion stretches from 2016, goes to 2017 and 2018. Then after that, it's hard to really tell you one way or another.
The only thing I would add to that is, are we looking for other opportunities within the portfolio? Absolutely. Do we have a number of things that we hopefully believe we can do to create incremental opportunities? We do, it's going to be approached with the same discipline and the same rigor of analysis, so we don't do something that's stupid.
We're starting to see a little bit of new development, not outlet, that we're thinking about. We're close to one deal. Liz brought up Oyster Bay. We've got two deals, thank you, two deals that are out there to do new development that will not be outlets that aren't in. Economy gets better, stronger, maybe there's a little bit more new development going on. It's a tough question to really give you any comfort in other than the philosophy of return on equity is what's really going to drive us. We won't waver from that.
Got it. Okay. Thank you.
Thanks.
Your next question comes from the line of Jeremy Roane, representing Hilliard Lyons. Please proceed.
Good morning. Thank you for taking our question. We noticed that tenant reimbursements as a percentage of operating expenses were higher than in previous quarters before the spin-off of Washington Prime. Is the current quarter a good run rate for tenant reimbursements going forward? Also, what led to the increase in home and regional office costs?
Jeremy, this is Steve. There are a couple of things. Because the income statement has been reclassified and the Washington Prime assets are all in discontinued operations, I do think the P&L for the quarter reflects a good run rate for the existing Simon portfolio. I would say that's fine. The one caveat, David mentioned it earlier, is we did spend incremental dollars in the second quarter related to the rollout of our branding campaign. That lumpiness won't occur quite the same way in the future.
Home?
Home.
Office.
Yeah. You want to answer that?
Yeah, I'll go ahead. The home office and regional costs, the variance both year-over-year and sequentially with the first quarter, is all one-time stuff. Some of it is related to the Washington Prime transaction, where we vested some equity and recorded the cost for people who are now Washington Prime employees. Some of it was incentive compensation, some bonuses that were paid for mid-level people here in the organization who worked very hard on the Washington Prime transaction.
No executive order.
No, that's why I used the term mid-level. Then, some of it is retirement-related costs relative to the change in leadership at the Premium Outlet Group that David mentioned.
Excellent. Thank you very much.
Sure.
Thank you.
Your next question comes from the line of Ben Yang, representing Evercore. Please proceed.
Thanks. Sorry if I missed this, did you update your same-store NOI guidance excluding Washington Prime? Just curious if you think growth can accelerate during the second half of the year.
Ben, the one thing that we did back when we announced Washington Prime, we told you that it would accelerate our same-store NOI by 30 basis points. That's the extent of the update. We have not given a forecast for Comp NOI for the rest of the year.
If your prior guidance was 4% and now it's 4.3%, should we assume that growth will decelerate during the second half of 2014?
I wouldn't necessarily assume that, no. We are a little bit ahead of our plan year to date.
Okay. Got it. Maybe switching gears, can you talk about why you guys didn't consolidate your ownership of St. John's Town Center when your partner was looking to sell? If it was price, which I believe was a 4% cap rate, was there an opportunity or consideration to maybe selling your stake along with your partner for that asset?
Well, the answer is, the reason we didn't buy it was primarily price. Just to cut to the chase, even though we think it's a great asset long term, why would we sell it? It's a great asset. We built it. We leased it. We manage it. We're adding Nordstrom. We don't need the capital. That's the business we're in owning real estate. Why would I sell a mall that we're the managing partner, we run it day to day. We had a partner in it, so it was no harm, no foul. We don't need the capital. I don't see any reason to sell it.
Got it. That makes sense. If it was a 4% cap rate for what I believe is a 700 per sq ft mall, do you think, is that a good comp for trophy assets? I believe there's some near-term lease rolls that could be potentially pushing that cap rate lower. If that is a good comp, if you have any thoughts on what that means for the value of your stock.
Well, you just put a lot in there. I'm not going to sit here and say to you what the cap rate was. We don't do that. That's a private transaction. It is what it is. The reason we didn't buy it, we owned it, we controlled it. We didn't see that with all the capital that we're putting back in the portfolio, we didn't see the real need to do it from our standpoint. From a going forward Look, if you look at the value in the private markets, and what's being paid and look at where our stock's trading, I think you could certainly make the argument that the private market is certainly more expensive than public stocks. Assuming we don't decrete from value but create value, we ought to get a little, maybe $0.20 a share for that.
Ben, I would say to you clearly, that the private market value clearly is more expensive than the public market value, when you put it all together. That ebbs and flows.
Got it. Thank you. That's helpful.
Sure.
Your next question comes from the line of Rich Moore representing RBC Marketing. Please proceed.
Hey, guys. Good morning. On occupancy costs, you guys give that in the supplemental 11.6%, of course, that's a mix of existing leases and new leases. I'm curious, what would that number be, you think, for new and renewal leases you put in place today?
Our leasing trend right now is continuing unabated. David pointed out, if you look, we're signing new leases at 66. We've got expiring leases at 41. Are you talking about the spread?
Yeah, I'm thinking, Rick, the actual occupancy cost number.
Overall-
Plus as a % of sales
for the body of work we're doing, that is going to basically be right around the same number and maybe moving up a touch based on the
I think what Rich is asking is when we look at new deals, what is our occupancy cost? I would say it's probably in the 14%-15% range, in that range. Again, it's all over the board. Again, if you look at our peer group, we've got very low occupancy cost, and the ability to drive that will continue to drive our Comp NOI in a stable economy.
Right. I got you, David. That's a significant number. I appreciate that. The other thing is, you didn't spend a lot of time on your European investments on the call here.
We did that deliberately. Not that we don't love them, okay? Not that they're not doing well. We're trying to make our remarks shorter and shorter.
I hear you. I'm curious how you see that actually going at this point, how the relationship, I guess, is progressing. Also, I'm a little curious, is there anything coming back this way? Are you finding new tenants? Are you finding any changes in organizational thoughts, anything like that comes the other direction?
Just to name two great retailers that are from Europe coming here are Primark and Topshop. Forget H&M and Zara, who have been here, but those relationships are certainly enhanced by our presence internationally. Rich, I would say simply this. We are batting 1,000 in Europe and in international. Klépierre, it's great. The McArthurGlen deal is going to be very good. We think we got in at a very good value, and there's growth opportunities. The outlets business in Malaysia, Korea, Japan, Mexico, Canada, thank you, Steve, is good. It's all good. We just figured, we're trying to shorten the presentation up, and Liz wrote it, and I took it out.
Yeah, I got you.
Okay.
I got you. On that, on Europe, is it sort of steady as we go at this point, you think, or will there be possibly new announcements coming out of the European venture?
I'm open to any ideas anybody has. Okay? Look, I think McArthurGlen's development pipeline is very active. As you know, that takes time. Klépierre, we give strategic guidance and all that stuff, but they've got a good pipeline, too, in terms of extensions and the like. Japan, we've got Yeah, we're going to continue to build on those businesses. Is there going to be anything earth-shattering? It depends what you consider earth-shattering.
Great. I got you. Great. Thank you, guys. I appreciate it.
Sure.
Your next question comes from the line of Dan Oppenheim representing Credit Suisse. Please proceed.
Hi, this is Chris for Dan. Occupancy in 1Q and 2Q has been among the highest in the last 10 years for those quarters. Understanding that you've achieved strong rent growth in those quarters, just wondering, though, that given those occupancy rates is so much higher than and typical for those quarters, is that a situation where you may have pushed even harder on those rents, or do you feel that you struck a pretty good balance between occupancy and rental rate growth?
Look, it's an art, not a science. I think we're pretty good at it. I think historically, philosophically, we've always erred on making the deal. Now, I'm sure people complain on the other side sometimes, I think we're always trying to lease our properties up. I do think if you're looking historically, you've probably got a big compositional change in the portfolio, depending on how far out you're looking, that's occurred over the last decade. That's probably what's maybe causing that to some extent. That's probably the biggest issue. It's interesting, in the Q1, we used to have a lot of fallout every holiday season because of, let's talk 10 years ago. That is become less and less of a typical event. You may be seeing a little bit of that on the margin.
That's really helpful. That's true. I went back 10 years just looking at those, and I think, yeah, there's definitely some composition changes.
Yeah.
Second, you mentioned before that you'll continue to prune the portfolio as you've always done, even after the spinoff. With the free cash flows funding most of the development and the redevelopment pipeline, do you see much in the way of dispositions in the remainder of 2014? I guess, just generally, do you have the regional mall portfolio kind of where you want it after the spinoff, or is there some still work to do there?
I would say there's always going to be assets that we're going to prune and sell. Frankly, it hasn't been a huge focus given the spinoff. We spent most of our effort, of any free time on that. I think that's something that we'll think about for 2014, 2015. I'm still depressed that I lost $1 of FFO, so I got to get over that. I hate losing cash flow like that. I've got to come to grips with that. Yeah, we'll continue to sell, but probably nothing the rest of this year of any material nature.
Great. Thanks, David.
Yeah, no worries.
Your next question comes as a follow-up from the line of Christy McElroy, representing Citi. Please proceed.
Hey, it's Michael Bilerman. I just had a couple of questions. The first for Sterrett. I guess, I don't know if Andy's in the room, but as I think about the balance sheet, which is in unbelievable shape, one thing that we haven't talked about is that you have about $7.5 billion of debt coming due in the next two and a half years at, like, 5.5%, so 30% of your debt, a big chunk of that being unsecured bonds, a bunch of that secured debt on balance sheet, and a bunch in the JVs. I guess, how aggressive can you be to pull any of that forward without paying huge charges or make-wholes to bring that cash flow, because David, I know you love cash flow, to bring that cash flow forward?
Did your liability management people prompt you to ask that question? Are you allowed to talk to them?
There's a big Chinese wall.
Okay, just checking. Well, Michael, it's fair, and I do think if you look at the expiration, the debt maturity schedule, one of the things you see is that the next couple of years out, we've got the opportunity to continue to roll down rates. It is something that we look at on a regular basis. Listen, it's essentially trading dollars because there are make-wholes or yield maintenance in virtually every debt instrument that we have. There are other ways that you can potentially hedge your bets a bit, whether it's going out and doing treasury locks or whatever. We do look at it, and we're as aggressive as we can be. Andy would tell you that we pay every debt instrument, and it's open to par date, and we're managing that as aggressive as we can.
Understanding that there's a curve aspect to this, but what is your sort of contemplate as you think about the next two and a half years and this debt rolling, where you sort of want to move that in your schedule? Obviously, I think 100 basis points is over $0.20 a share, right? Clearly where you are on a 10-year basis today, you would be at probably 3.2%, 3.3%. How should we think about how you want to roll that debt? What is that average term? 5 years, 7, 10, 15?
The simple answer, it'll be across the spectrum.
I would also say, Michael, one of the things that we focus on a lot is the asset and liability match, ours is primarily a 10-year lease business. 10-year debt is primarily the sweet spot of where we're going to do most of our financing. I'd also tell you, go back and look at our weighted average cost of debt over the last 4 years. It's come down 15, 20 basis points a year. That opportunity is certainly still out there for the next 2 years. The markets are in really good shape right now. I would also tell you that one of the reasons that you're hesitant to do a large liability management trade is that the forward curve tends to overestimate where rates end up about 90% of the time.
David mentioned in his remarks, the fragility of the consumer and the economy. It's hard to envision a scenario in the near term where rates are going to run crazy because I don't think the economy would continue to grow in a substantial rising rate environment.
Michael, I will just say this, one of the things that's interesting, our floating rate debt percentage is absolutely well below our peer group. It is 7%, if that, 5%, somewhere in that range.
Oh, yeah.
We're really not juicing our FFO by playing the floating rate debt game.
Your debt also is materially lower as a percentage of your enterprise value.
Right. Yeah
It's even of a lower percentage and you're sitting on $2 billion of cash.
Yeah.
Yeah. What do you want me to do?
I don't know. You got $1 billion of free cash flow a year.
I know.
What are you going to do?
I don't know.
I don't know.
Come talk to me. I'm lonely.
We saw that Apple's still got $120 billion in cash, we got a ways to go.
We've got some room.
Question, David, on Klépierre. BNP had to pay the U.S. government, I don't know, a $9 billion fine. They're still sitting with a big stake in Klépierre. I'm just curious whether you as Simon, you as Klépierre, or you in conjunction with a third-party investor, have gone to them and sort of said, "Hey, look, you're sitting here with $1.5 billion in this company. We can provide you some liquidity to pay your fine.
Look, they've been a terrific partner with us. We have a very good relationship. They've been very helpful in our involvement with Klépierre. Beyond that, I can't really say, Michael, anything more than that other than they've been a pleasure to work with. I have absolutely no indication at all that it's been a good investment for them. They like the investment. Other than that, I can't really say one thing or another on that front.
Should we expect status quo out of your ownership? It was clearly a good investment, Europe has recovered. You were able to manage through their sales process and focus them, Simonize them a little bit.
Well, I do want to learn French. I think for right now, the status quo.
You got to learn French to go up to Quebec.
That's true. That's a different kind of French. Look, I think, just from that company, they really are better off to speak for themselves. They have done a great job turning around. They're starting to get the mojo on the property level. The balance sheet's in good shape. The focus for them clearly will be on external activity going forward. I'm there to help them in any way I can. That's the focus. Things are going well there, and they've done a good job.
Yeah. Just clarification on the 3.3% total sales number you threw out. That's a quarter-over-quarter or trailing 12 number?
Trailing 12.
Yeah.
Trailing 12.
Do you have that number of what it was quarter-over-quarter by any chance, total sales?
We could, but I don't have it.
Don't have it in front of me. We can get it.
We have it, but call Liz, she'll give it to you.
All right. Thanks. Bye.
See you.
Thanks.
We have no further questions at this time. I would now like to turn the call back to Mr. David Simon for closing remarks.
All right. Thank you for your interest and your questions. Have a good rest of the summer.
Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.