Day, ladies and gentlemen, and welcome to the Q1 2014 Farm and
Property Group, Inc. Earnings Conference.
My name is Clinton, and I'll be your operator for today. At this time, all participants are in a listen only line. We will conduct a question and answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes. And now I'd turn the call over to Liz Zale, Senior VP of Corporate Affairs.
Please proceed.
Thank you. Good morning, everyone, and welcome to Simon Property Group's Q1 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 and Steve Sterett, our Chief Financial Officer. And we're also joined by Tom Ward, our new Vice President of Investor Relations. 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, 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 only be accurate as of today's date and 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 online at investors. Simon.com. It is now my pleasure to introduce David Simon.
Good morning. We had a strong start to the year. Results in the quarter were led by FFO of $2.38 per share, up 16.1% from the 1% from the Q1 of 2013. Once again, our FFO significantly exceeded the first call consensus estimate. Our growth strategy continues to generate significant value for our business.
Overall business conditions are positive. Demand for space in our portfolio remains strong. Leasing activity is healthy. We had occupancy growth of 80 basis points compared to Q1 20 13 to end the quarter at 95.5 percent, accelerating re leasing spreads to $9.90 per square foot. Our comp NOI growth for malls and outlets was 3.7% despite higher cost from utilities and snow removal.
If we normalize this, this affected our comp by roughly 90 basis points. And as a point of reference, comp NOI including the mills and excluding the malls to be spun off as part of WP was 5.3% for the quarter, including the high cost of snow and utility removal. Now as reported, our retail sales were essentially flat. And I would encourage you to look at our revenues as opposed to our retailer sales. As you know, if we have underperforming retailers, we have the ability to replace them with better retailers at generally higher rents, which generates higher SPG revenues.
And as I've said repeatedly, current retail sales does not correlate to our ability to grow our cash flow. And as a reminder, our consolidated revenues, the revenues that I focus on grew by 8.2% for the year. These results are testament to the strength of our assets and the desirability of our locations. Now development construction continues on new premium outlets in Charlotte, Minneapolis, Montreal and Vancouver, all high quality major markets and that remains our only focus in new development is in those kind of markets. Other new outlet projects in our development pipeline are moving forward.
We have up to 6 additional new outlets expected to start construction in 20142015. Redevelopment and expansion projects are ongoing at 29 properties in the U. S, Asia and Mexico. We started construction on 2 important redevelopment projects in our portfolio. They include the relocation of Bloomingdale's at Stanford Mall in Palo Alto and the redevelopment of its former location to add 120,000 new square feet of space for small and restaurants and the relocation of Saks Fifth Avenue at Houston Galleria to a new prototype store plus the redevelopment of that existing Saks and an expansion adding 105,000 square feet of luxury retail and restaurants.
We also started construction on the expansion of Yeoju Premium Outlets in Seoul, Korea that in the works. Desert Hills Premium Outlets is celebrating the opening of its expansion beginning this Thursday adding 147,000 Square Feet and it is fully leased. An example as an example, the annualized NOI from this expansion will add $17,000,000 to SPG's NOI as it's a wholly owned asset. Construction is ongoing to expand, enhance some of our most productive properties including Rosebel Field, Woodberry Commons, Lenox Square and Del Amo to name a few. Overall, we continue to expect redevelopment investments of at least $1,000,000,000 annually through 2016 that will contribute incremental growth in NOI and strengthen the position of our assets in the respective geographic areas.
On Klepierre, the transformative Carrefour deal selling 126 smaller assets for nearly €2,000,000,000 closed last week. And McArthur Glenn, our new investment in the outlet business in Europe is performing well. Our deal side transactions during the Q1 included our acquisition of the remaining interest in Crabco Simon, which held interest in a portfolio of 10 assets including Kingapresha Mall, which we now own 100% and the acquisition and the remainder the acquisition of Arizona Mills bringing our interest to that center of 100% as well as development land in Oyster Bay, Long Island from the Taubman Centers. Just an update on Washington Prime Group, WP spin off of 98 assets including our strip center business is expected to be completed in the Q2. Recent activities include announced members of senior management team and independent Board of Directors, including Mark Ordan as CEO.
We're pleased also today to announce that Mark Richards will be joining WP as CFO. He's well respected and has worked with Mark successfully at Sunrise Senior Living. We've received indicative investment grade ratings from 3 major credit agencies as follows S and P, BBB, Moody's, Baa2, Fitch BBB, all three agencies provided a stable outlook, very strong ratings out of the box and comparable to many REITs that have been rated for a long time, the balance sheet will be ready to enable the company in its pursuit of cash flow growth. Completed financing activities on WP-nine mortgages were closed and 2 unsecured facility comprised of a $900,000,000 revolving credit facility and a $500,000,000 term loan were completed. And now let me turn to the SPG Capital Markets update.
We completed a $1,200,000,000 senior unsecured notes offering in January with a weighted average duration of 7.5 years our credit ratings to A. We are now at the mid A level with all 3 of the agencies leading the REIT industry. We closed or locked rates on 4 new secured loans in the quarter, totaling $860,000,000 of which our share was $491,000,000 and we expect to generate the $1,000,000,000 of cash proceeds from the WP spend upon its completion. Early in April, we amended and extended our $4,000,000,000 unsecured multicurrency revolving credit facility to a June 2019 final maturity and we're able to reduce the interest rate to LIBOR plus 80 basis points from LIBOR plus 95 basis points, again, the best in the market. We raised the dividend again this quarter to $1.30 per share.
That's an increase of $0.05 per share from last quarter and a year over year increase of 13%. We will pay at SPG at least $5.15 per common share in 2014 not including the WP expected dividend. As we said to you originally, the WP expected dividend will create an overall effective dividend of 5 point $6.5 or another at least $0.50 on a one for one basis for WP spend. Now let's go to guidance. We revised our 2014 guidance upwards to $9.60 to 9 $0.70 of FFO per share.
This incorporates our strong performance in the Q1. It raises both the top and the bottom by $0.10 It's based upon an annual comp NOI growth of at least 4 percent for our combined mall and outlet portfolio. This FFO guidance is comparable basis with our 2013 results and ignores any potential impact of the WP spin. Once the spin off is completed, we will provide updated guidance through a press release reflecting what the impact of SPG will be for the balance of the year. So overall, we had a strong start to the year.
We are absolutely focused on creating value for our properties and for our tenants and for our shareholders And now we're ready for questions.
Your first question comes from the line of Steve Sakwa of Arcis Group. Please go ahead.
Thanks. Good morning. Good morning. Hey, David. I can appreciate your comment about tenant sales and how that doesn't directly impact your business kind of short term.
But I was wondering if you guys could maybe try and isolate what the weather impact was? And if you or Rick could maybe talk about regional sales performance? And did you see any differences in places like Florida, Texas and California versus the Northeast, Mid Atlantic and Midwest?
I would refute your first statement Steve. And I would suggest to you that the most important thing in terms of growing our cash flow is in fact what the market rents of our space are, which are not definitive by what current retailers are producing out of that space and what our rollover schedule looks like. And in fact, if you see our rent spreads of nearly $10 per foot that would indicate exactly sure. We do have some risk to overage rent as sales ebb and flow. But the fact of the matter is recurrent retail sales generally don't have an impact.
And take an example, there are a number of teen retailers that are really not performing that well for each one have a variety of reasons. That's in our sales numbers for our retailers. Yet that has nothing to do with what the market value of that space can be. And so again, the obsession you should be obsessed with our sales. I'm obsessed with our revenues, the SPG revenues.
Retailers come and go. If we were worried about retail sales, this company was originally built. We had Kmart as our anchors. And if we had looked at Kmart sales, we would have suggested that our sales our revenues could never grow. But in fact, what we do here is we're able to replace underperforming retailers with better retailers and we're able to garner the market rent of what our space should be and that continues to go up.
So it's not a short term this is not a short term issue. This is an issue that existed for the balance of this 50 year history of this company. So now Rick can mention regional. Fact of the matter is sure the weather this company will never use weather as an excuse. It certainly affected our comp NOI by 90 basis points because of higher utility snow.
We all can talk about the winter. That's in our rearview mirror. It certainly had an impact on our retailers that exist in our buildings, but it doesn't change the fundamentals of the fact that our business is solid, has the ability to grow its cash flow. We have a long demonstrated track record of being able to do that and we'll continue to do that. But the markets that didn't have snow etcetera, I mean they were not as affected in terms of those retailers that report.
And I do remind you that the strip center REITs don't even report tenant sales. So but Rick, I don't know if you want to add anything to it.
The one thing I not only do we not use weather as an excuse with you, we do not allow our operating teams and any of our platforms to use weather as an excuse and we expect those results to be delivered. You will not be surprised to hear that the better markets were the Pacific, Florida, the Southwest and Las Vegas. And the markets that were most impacted by the weather were the Plains, the Great Lakes and the Mid Atlantic. No great insights there, but as David said, we're managing through.
Okay. Thanks. And then just on the leasing front, I know most of the leasing is done for this year. But Rick, can you give us some insight as to what kind of leasing is kind of done for next year?
We're right on track with our leasing renewals and leasing the space this year. And as we sit here today, we're right where we were last year's this time for this year. But there is increasing demand. As David said, our job is to curate our properties and bring in the most productive and the growing tenants and eliminate or downsize the tenants that are least productive and that's what we do on an ongoing basis.
Okay. Thanks.
Thank you. The next question comes from the line of Christy McElroy of Citi.
Please go ahead.
Yes. It's actually Michael Bilerman here with Christy. David, I said one question just in terms of global expansion and I wasn't sure if your British conference call coordinator was on purpose or not. But where sort of the Elvis business is clearly global. You've moved that global in all the regions.
How do you sort of feel about traditional retail? And where your thoughts are about that side of the business and pursuing more global expansion?
Well, look, I mean, we always we have a great outlet platform in Asia. In fact, Stanley is over in Asia, I guess tomorrow. It's tomorrow, right? So technically, he's a day ahead of us. So we are looking at other Southeast Asia markets to take to expand our platform.
We've been really successful everywhere in Asia in the outlet business, Japan, Korea, Malaysia. There's a number of Southeastern markets, not China that are very interesting to us. So I would expect Michael to hopefully be able to build some new centers there. We have a good outlet potential in Mexico where we've got a couple of new sites that we're pursuing aggressively opportunity is somewhat dormant at this point. I couldn't find the right sites and the market we were fortuitous and that the market obviously is correcting there.
So we have no capital at risk and we have nothing necessarily planned there. And then we've got the McArthur Glen, which very excited about not just the not just the assets that we have interest in, but also the development and management platform as well as some of their new expansion opportunities and new development. I was over there a couple of weeks ago looking at one of their opportunities. So we think that that business will become more important to us over time. And turning to the full price, I mean, I think our model will continue to be opportunistic.
We love in retrospect what happened with Klepierre. We went in there before anybody thought about investing in European real estate based upon 2 fundamental beliefs. One is that the cash flow is very sticky, so far so good ex Spain, which in fact was not very sticky, but it means less and less to us now that we sold this huge portfolio to Carrefour. And we can help the company from a strategic point of view and get them retail focused and all the other things that we've been doing, help them become better operators, all of which have in fact scarily gone according to plan. So we want to be opportunistic.
There's a lot of capital now in Europe. The U. K. Is not a real focus for us. Prices are not necessarily cheap and they're not opportunistic.
And we've had a disappointing experience there. In retrospect, the shareholders and the Board should have thought why the shareholders technically never got an opportunity, but the Board should have probably thought about its response a little bit more thoroughly than it did. But that's it. We're going to continue to be opportunistic. We're not doing this is not glamorous and it's primarily the focus is if we can add and export our ability and the number one goal is to make money.
I have no interest in building monuments.
Hi, David. It's Christy here. Wondering if you could talk a little bit about your new Simon Venture Group. Are you spending any time on this personally? How much capital would you anticipate investing over time?
What sort of returns are you looking at? And can you give some examples of the type of types of companies you're looking at?
Well, sure. We have just hired Skyler Fernandez who has early stage VC experience. We've made a couple of small investments before Skyler's involvement with Jafiti and Shoppe I'm sorry, Shoppe Kick, I almost said Shopper
Trek,
which has been small investments. And it's really the primary focus is in areas where we think it's going to apply the investment and the business model will apply to our physical environment. It could be a new retailer. It could be a new restaurant. It can be a new technology that is important to our consumer and our retailer.
And I think over time, we could invest anywhere from $25,000,000 to $50,000,000 We're going to do it very small. We don't want to have a big staff. If Skyler is listening, Skyler you're going to have to do most of this on your own. I'm involved. He and I met a couple of hours yesterday.
We've got a couple of these are $1,000,000 up to $5,000,000 investments apiece. But it's really trying to focus on bettering our product. And we can do that through new retailers, restaurants. We can do that through new technology. We can do it through new services.
And we can do it in a way that can help our retailers like to live, which in fact is on the forefront of ultimately providing same day delivery services to our consumers, which seems to resonate with a number of our consumers. So that's the theory. It's going to morph. The good news is we've only had really 2 investment mistakes over time that I call material not material, but in China, we only got $0.75 on our dollar, but we learned that in China, you got to be very careful. We also invested in technology in the late 90s.
We learned a lot from that. The whole model has changed now because that servers,
you had to build everything. Now you can
essentially rent it all out. Servers. You had to build everything. Now you can essentially rent it all out. The economics are such that you're never going to have that kind of capital at risk to see whether or not a new idea, a new technology can germinate to something that's meaningful to our portfolio.
That's helpful. Thank you.
Thank you. The next question comes from the line of Dan Oppenheimer of Credit Suisse. Please go ahead.
Thanks very much. I was wondering if you can talk about the issue with the tenant sales talking about previously the tenant sales doesn't really matter, but it's really the cash flow. Presumably the cost of occupancy over time does matter. You've highlighted to the teen retailers. Should we assume that given the comment on teen retailers that ex that you're feeling quite good and confident about sort of cost of occupancy overall?
Well, yes, look our business has over its 50 year history in 20 years as a public company where we produced unbelievable results. It always has retailers that get hot, get cold, new concept, old concept. It's just the nature of our business. And again, occupancy costs are determined at a particular point in time, but it doesn't necessarily equate to what the market value of that rent is or that space is because again that sale that's being generated out of that space is that particular retailer. And that particular retailer could not be generating the sales that that particular space should be generating.
That's where it relies on us to either relocate them or replace them with a newer better retailer. So again, if you looked at our ability to if you looked at our top 10 tenants 20 years ago versus today and if you looked at our cash flow growth 20 years ago to today, despite all of the noise about particular retailers here and there, there is such strong evidence to support my statement. So occupancy cost is interesting, but it's not a factor in what our ability to generate cash flow growth is. You have to look at the rollover schedule and how that equates to market rents. And market rents are determined based upon supply and demand.
So in the office sector, you do the same thing. In the strip center cash flow growth as the important determinant in what the value of our company is and more what are the existing retailer sales. I don't buy that and I've never run this company based upon that. And our track to under
to underline David's point about supply and demand, there is virtually no new supply. If you look over the last 6 years, supply has been growing 50 bps a year lower than the rate of our population growth. So we're in a very good supply dynamic for the foreseeable future.
And again, retailers some and that adds and it flows. Sometimes there's more retailers that are under pressure than sometimes not. But you cannot replicate our buildings. You cannot build it. There is no new supply and supply and demand is in our favor otherwise we couldn't grow our cash flow.
It's that simple. And I encourage everybody, I hope this doesn't sound defensive, but I encourage everybody to understand how we run the business. We run it over a long period of time. We're always replacing retailers. Some of the toughest calls that Rick and I get are the ones when we move an underperforming retailer out for a better performing retailer.
And the retailers that are underperforming fact is they could be there for 5, 10 years and their rents are way under market. And it may look bad in their sales, but the fact is it's welcome from us because we can replace them with a better tenant. Let's take lease settlement income as part of that discussion. The fact is that if somebody like we had some recent settlement income, Sony is exiting the mall business. Sony is in A malls.
If they pay me the present value of being in that space and I get that space back and I can lease it for current market value, you and me as you're not maybe a shareholder, you're an analyst, but you in a sense represent shareholders, you and me have just done a good deed. We now get the present value of that space obligation. I get the space back. I can lease it for market rent. That's a win for us.
And again, you've seen that over a period of time with retailers. And the lease settlement income is being generated by our top centers. For whatever reason, certain retailers are not wanting to get out of the business or not performing well at this center has nothing to do with that center.
Thank you. And I guess one question in terms of the cash flow. There's a comment in terms of the NOI growth ex WP being 5.3%. Should we compare that 5.3% to 3.7%? And I guess it would seem then that WTP had much lower NOI growth, but presumably a lot of the assets being in the Midwest and some Mid Atlantic would have had some impact there.
Well, the real important thing we did was we put in the mills there, which generated one of the things we're thinking about comments are welcome is that we have not historically put the mills comp NOI growth in our overall comp NOI. But as we're once the spin is done, it's likely we're happy to get input on this. It's likely that we will then put that in our comp NOI, because these are big cash flow generating assets. And it's probably the bigger assets, which is consistent with what SPG is doing going forward focused on the bigger assets. And it will probably be in our comp NOI pool.
So we wanted to give you a flavor of what that comp NOI growth would be including the mills. And there is some marginal benefit of the fact that if you were taking out the WP assets, but it's marginal. And you are correct in saying that because of the snow and utility cost and a lot of those centers are located in the areas that got whacked in the Q1, You are correct in saying that that had some impact on that comp NOI as it did for SPG as a whole.
Thank you.
Sure.
Thank you. The next question comes from the line of Paul Morgan of MLP. Please proceed.
Hi, good morning. I mean David, I think your comment about market rents for space not being related to what the existing retailer is doing. And I think maybe one of those a great example of that might be just replacing department store space with small shops and the upside you see there kind of like what you're doing at Stanford. But
do you
have a sense of could you give us any sense
of kind of how many of those opportunities are in your pipeline? I mean you announced a couple of projects at Pipps and Pentagon City. But I mean, is this something you're having discussions with department stores increasingly where they can maybe downsize and you can recapture space at much higher rents
or any color?
We're always looking for that and I'll let Rick comment on that. The it's interesting though while that neither one of those guys are leaving. They're actually getting new stores in that process, but we're able to make the economics work because of the supply and demand of those particular assets. They're both in antiquated physical plants. So we're able to make kind of a win win out of it and that we reclaim, redemize their existing space, turn it over to small shops, they get a new brand new prototype store and it's a win win.
But part of the lease settlement income that we generated in the Q1 was the full present value of the Saks obligation at Florida Mall, where they paid us. They're leaving shortly, right, Rick? We're under construction. And we're going to reclaim that for small shops that that's a mall that does close to $1,000 a foot something like that. And but there's a handful though those Rick you want to add, I mean, a handful of those kind of opportunities.
And we are announced David just talked about Florida Mall. And both of those are just in addition to all the things we've completed over the last year. And obviously, we're always talking with our department stores about where they've got space that we believe can be better deployed and we're in constant conversations about whether we can put it to better use. And sometimes it happens the King of Prussia that was basically done inside the Sears store, but that's going to make that property substantially more productive by having Dick's anchor one level and Sears consolidate into a more productive box on one level.
My other question is related, but I mean I think there's obviously been a lot of headlines about not just sales, but mall traffic and then we've had a tick up in bankruptcies and store closing announcements. And so but what you don't hear as much about is kind of the back the retailers who are looking to backfill that space. And maybe I don't know Rick you have some color about people who for example would be looking to take the Coldwater Creek stores that are liquidating or folks like that who are have upped their store opening targets?
David always makes fun of me when I rattle off the list of the tenants. But the good news is that there is a very vibrant group of tenants that are looking to expand Lego, Athleta, H and M, Zara, Uniqlo, just a few and all and Topshop. We're adding Top shops in 3 places in the portfolio. There are to David's point historically, there have always been tenants that
are looking to do business
in productive properties. And to the extent the space we're getting back is in productive properties and happily that's the vast majority of our portfolio. We have users and we have demand at better rents and the opportunity to right size the state.
Great. Thanks.
Yes. And just to comment on traffic. I would suggest to you that when a retailer talks about traffic that may be their particular stores and may not be endemic of the malls traffic. And I would also caution throw significant caution to the wind that there are a couple of one company in particular that holds themselves out as the barometer of traffic in the mall industry and their data does not include any common area or entrance data from the Simon Property Group and many other mall owners of quality real estate and we don't know how and in fact what that traffic is that they report. So I just want you to I want to throw caution to the wind when you hear these general statements about traffic.
Now was traffic affected by the winter? And fact is that malls we have some statistic, which I don't even remember, but how many days our malls were closed compared to last year was 10x of what it was. But so that can happen. It happened. I just want you to throw caution to the wind when the media quotes traffic numbers understand the source of that and its accuracy.
So you're saying your portfolio is doing better than what they are saying for the industry?
I'm saying our traffic was affected by the weather. And I'm saying you look at our results and that gives you an indication of what's going on with our portfolio.
Thanks.
Thank you. The next question comes from the line of David Harris of Imperial Capital. Please proceed.
Hey, good morning, everybody. The Carrefour sale from Baiclopier, does that prompt any consideration
of the special dividend under
the French REIT rules, David?
No. The answer is no, because they can they have the ability to straddle years a little bit like this as well.
And they have
they're also unwinding some hedges as part of that because they were over hedged. So there's some losses associated with that. And the fact is it will not end up in situation where there's an unusual dividend spike. I mean the dividend has been growing. We expect that to probably continue, but there won't be something extraordinary associated with that sale.
So the proceeds will be essentially used to delever the company in at least the initial thought?
Correct. That's correct.
Okay. Does that leave you looking for acquisitions in that company now as we go forward? Or are you happy with a lower level of leverage?
No. I think the company is now in a position that it can look for opportunities, whether new development expansions, some acquisitions here and there. But they are clearly focused on given the significant change, they're very focused on growing the business now, which 2 years ago when we got there, I would say it was a different scenario. So thankfully, they've executed extremely well and they are looking for growth similar what all major retail owners do, some development, some expansion, some potential acquisitions here and there.
Now your estimable CFO has not been yet been given a speaking part, but I just wondered if there is any update on his replacement?
Well, I don't think he unfortunately, you've asked a question where he can't respond to that either.
I don't do great quarter guys, but I wanted to throw in a
Sometimes pat on the back never hurts from anybody.
Right.
So in any event so as you know, we have been it's very interesting this company. Again, it gets there's a lot that gets lost in the sauce. On one hand, this week, we're going to open Desert Hills. It's going to be 100 percent leased and it's going to add $17,000,000 of cash flow to the company. At the same time, we hired a new venture guy.
Europe is doing well. You got all the redevelopment. We're doing the WP deal, right? And then obviously, I've got to focus on Steve's replacement. So just from a my point of view here and this is probably I'm telling the people here they're probably looking for me to say what am I going to say.
So I have been thinking long and hard this. And as you know, the biggest focus we've had over the last 2 or 3 months has been WP. That management team is basically set, done, which is very good news and it's a great team. They're young, energetic. It's got a mix of Simon trained folks.
It's got our strip center entrepreneurial group. And then it's got the outsider and a couple of his colleagues that I think ultimately will create very unique dynamic company that's really going to be hustling for growth. Now that that said and it looks like the spin is again subject to Board approval, winding around the last corner. I've been thinking more and more about this and I'll probably have an opinion in a month or 2. But right now, I am seriously considering internal candidates as the first line of defense.
And the good news is we've got a great bench. We've got guys that are savvy veterans, younger people that want to move up. We have a great culture here. And I think we can do it internally, but I want to I just want I don't want to rush to judgment. I want WP to get done.
And then I think once that gets done, I think something could happen in the next 4 to 8 weeks. That's probably news to everybody in this room, but therein lies my thinking. So I hope you appreciate the honesty of my response.
Yes. Very good. Thank you.
Thank you. The next question comes from the line of Kai Bin of SunTrust. Please go
ahead. Thanks.
I just had a couple
of follow ups. In terms of traffic data and your tenant replacement commentary. Could you just talk a little bit about this we're midway through April almost May now. And I wouldn't say it's been very warm, but have you seen some kind of catch up in the past couple of months in terms of tenant traffic or sales or anything like that that might be a better indicator going forward?
I think we can say that April is off to a much better start. We obviously had Easter moving from March into April. March was better than February. February was better than January and that trend is continuing into April. And we certainly anticipate that we will have some catch up.
Okay. And the second question. I'm sure you guys look at this all the time, but if you had to estimate, how many more outlets do you think in the U. S. That we absolutely could use?
And how does that number compare to some of your like in Europe where you're trying to expand?
Well, again, I don't there's a if you look at some of the general industry publications, there's a pipeline of 50. And I would just say, I don't believe that that whole pipeline will be built. I do think you're going to last year 2013 2014 was it is going to be an act of the year. So I think you'll see 5 or 6 or so in the next 2, 3, 4, 5 years. So if I had to guess, I think you're going to see probably 20 or so added over the next 3, 4, 5 years.
I don't think it's going to be quite as frenzied as everybody thinks. I think we have a really good handle as you might imagine on this industry. So that's my own personal view. But I don't control. I mean developers are always pushing the limit whether 4 or 5 or 6 bad outlets get built.
It doesn't impact our outlet business and what we do. And as you know, we're looking to only build in major markets where there really is unquestionable demand for the premium outlet product. And if it's a marginal market, we're just going to we're going to pass and we have passed on a number of sites. Rick, you can add to anything.
So the one thing that I would emphasize and David talked about in the context of Desert Hills, we're spending as much time and money expanding our existing great premium outlets as we are trying to build new ones. Desert Hills opens Thursday. We opened an expansion in Orlando, opened an expansion in Seattle. We're under construction in Las Vegas North Downtown 147,000 feet. We're expanding Woodbury.
We're expanding Chicago. And these are all among the best outlets in the United States. We're expanding Livermore and all of those expansions taken together are probably 2 or 3 new projects, but they'll be dramatically more productive, dramatically better returns and they have the benefit of enhancing what we already have.
Okay. And similar question, but how about for Europe? Do you see that potential being just a lot bigger?
Yes. I think Europe the right to build there is much more difficult. But there is a pipeline that we have at MGE that we're going to pursue, but it's a lot tougher. It's a lot harder to get done. There's a lot more restrictions in terms of how outlets get viewed in Europe in terms of laws there.
But if you do get the right to build there, it's a terrific, terrific opportunity. So there'll be more, but I think it'll be measured. And we'll have our fair share of that. But there's definitely part of what we wanted to do with MGE was in fact build some new centers in Europe.
Okay. Thank you, guys.
Sure.
Thank you. The next question comes from the line of Jeff Spector of Bank of America Merrill Lynch. Please go ahead.
Hi. It's Craig Schmidt for Jeff Spector.
I was just wondering if we could spend a little time talking about the mills. It seems like it has the highest return on redevelopments. Its minimum rents are growing well. And it's also seemed to have done the best in terms of sales per square foot productivity since 4Q, 2009 in terms of its lift. I know you're doing a lot of things at a lot of different mills, but what's meeting with the biggest success to sort of drive this?
I think that Craig, it's Rick. The mills have been performing great. And I think that some of it hopefully a lot of it is attributable to us being able to broaden their appeal. What we've been able to do through our relationships is bring tenants that have been successful in premium outlets in the mills to operate off price concepts and bring tenants into the mills from the mall business to operate full price concepts. And that combination has been very compelling.
So tenants like Victoria's Secret Bath and Body Works are operating full price concepts and tenants like Michael Kors, Coach, Express are operating off price concepts. And that combination has created, as David said, properties that are 1,500,000 to 2,000,000 square feet, doing 100 of 1,000,000 of dollars of sales and providing unique franchise in each of the markets where they operate. So we've been very pleased with it and we're growing. We've got expansions underway at Sawgrass. We're working on redevelopments at Great Mall.
We are working on expansion at Orange and there's
a lot
of growth runway built in that platform.
Is there any potential for a ground up development of a mills project at this point?
I think that's going to be more difficult. Frankly, there are not many markets left in the United States that can support a 2,000,000 square foot ground up development that does $500,000,000 to $700,000,000 from day 1. So I would not look for that.
Okay. And then the Izu expansion, the premium outlet, is there any direction that you want
to take the new tenants
that you're bringing into that project?
It will continue to be the high end tenants there. I mean, we the existing center has a great tenant mix, so it will continue to be kind of all of the American as well as European brands and the international companies. I mean, it is an international retail mix. I mean, there are some Korean retailers, but by and large, it's all the brands that you're familiar with.
Okay. And then hopefully this is Steve Sterek question. The pickup in other income, will we see that going forward? I mean will we have as active a land sale and or the lease settlement? Or should we assume that that starts to resemble 2013?
No. Craig, Rick and David talked a lot about the lease settlement income. And I think we did have a fair bit of activity in the Q1. I wouldn't expect that level of activity to go through the rest of year. And land sales, as you know, are pretty lumpy, but I certainly wouldn't expect that level of activity for the rest
of the year.
Okay, great. Thanks a lot.
Thank you.
Thank you. The next question comes from the line of
Hey. Just two questions here. First up on the line of credit, you guys now have I think almost $7,000,000,000 if you include the accordions of capacity. So which seems like an awful lot just given that if you guys want to do anything, I would assume that you'd have a line of bankers outside of Indy and 399 Park in less than an hour. How much capacity is more of this insurance?
Like as you guys pay the facility fee, is more of this just the comfort of knowing that you have that? Or is there something else like just preparing for the next credit crisis or something just to know that God forbid you had to put on major mortgages or refinancing so you just had that available?
Well, I mean, Alex, it's Steve. I do think if you look at our debt maturity schedule, we do have $2,000,000,000 to $3,000,000,000 of debt maturing a year. We're a large company. We did have people tend to forget that we did have an instance not all that long ago in this country where the capital markets were pretty dysfunctional for an extended period of time. So we've been operating under a philosophy that we want $5,000,000,000 to $6,000,000,000 of liquidity kind of at all times and call it insurance, call it what you but I think that's
prudent
for a company of our size.
Okay. And then
yes?
Yes. Okay.
And then just the second question is, what's the what are the next steps or what else needs to be done before the Board can declare Washington Prime good to go?
Well, we just have to become effective with the SEC, which we're getting closer and closer. The Board's got to review all the final things and then we make an announcement. And so we're it's moving quickly. And so it's just a process that's essentially just becoming effective with the SEC and then Board approval and then we're off to the races.
And you saw Alex, we filed another amendment to the Form 10 yesterday, Amendment 3. So we are, as David mentioned, kind of getting down to the short strokes.
Okay. So this is just all the back and forth where they give you comments and hopefully that list of comments is getting smaller and smaller than it's good?
Yes, sir. Yes.
Okay, perfect.
You're excited to read the 600 pages of total documents. Do you have nothing to do this weekend?
My kids were saying, Daddy, we like you doing boring daddy work. We don't like playing with you. So I'll do that. Listen, thanks.
All right. No worries. Thank you.
Thank you. The next question comes from the line of Daniel Bosch of Green Street Advisors. Please go
Thank you. David following the WT spin off of the smaller open community malls and strip centers, will there be any other remaining malls in the portfolio that you would consider non core and could be potential candidates for disposition?
Well,
they're certainly always we're always going to portfolio manage our assets. So the answer to that is sure. I mean there's we have partners in some assets, partners may want to sell, we may agree with them. So, yes, sure. We're always going to portfolio manage our asset base.
Okay. And it appears like there's a growing number of B and C malls coming to the market. Do you have a sense of what the demand is for that type of quality that's similar to the quality that WP is? Well, I don't want to look, again, WP's malls are I see all sorts of references from the analytic community. My view of WP's malls are there's the one overriding point is that they're smaller.
They're just not big malls. And I'll let you decide whether that's a B mall, a C mall, an A mall. I don't think about it like that. I look at the cash flow. What's the sustainability of the cash flow?
Is that a market where you can grow the cash flow? And the one thing that I will agree with is that they're smaller than our average mall. And we think those assets because as we've gotten bigger over time and focused on the bigger assets, they tend to lose the day in and day out focus that they deserve. So with that preamble said, I mean, look, there's a lot of capital in the real estate industry generally for all sorts of assets. And money wants to put to work in the top quality assets, in redevelopment assets, new development across the spectrum in hotels, retail, office, etcetera.
And I think WP will be able to take advantage of whatever strategy ultimately they put together. But there are buyers for everything right now in any assets. I mean, the I look at your NAV analysis and I can tell you our partner is selling a mall and the cap rate is blowing me away in terms of what in terms of how low it is. So there is a lot of capital for retail real estate in every bucket. And to some extent there's product available and to some extent there's less product available, but I expect a lot of trades to happen.
Great. Thank you. Sure.
Thank you. The next question comes from the line of Vincent Chai of Deutsche Bank. Please go ahead.
Hey, good morning or afternoon to you guys. I just want to
go back to the releasing spreads.
On a
percentage basis, they have been improving for quite a few quarters here now in a row. I'm just curious if you could break that down between sort of what's driving that? Is it more market rent increases? Or is it just the base of the malls that are or the spaces that are closing is maybe not growing or is going the other way?
Fundamentally, we just have a very good supply demand dynamic. I would tell you that when you look at our spread calculations, they include almost 8,000,000 square feet of space. So it is less susceptible to specific project influences and much more representative of overall trends throughout our business. And we're just able to lease our product at higher rents because frankly I do believe our properties are taking market share and we're having a more desirable portfolio for the retailers to want
to operate it. But simply put, the expiring rent is just lower than the market rents. And so that's got a lot there's a lot of reasons for that. But I mean that's the simple answer. So if you look at our expiring rent schedule and you see where our market rents are, therein lies why we have the spread, which therein lies why we have the ability to increase our cash flow year after year after year.
I mean, again, Steve, you may notice, I believe Q1 comp last year was 5%, something like that. Yes. So our 3.7% was off of a base of 5% and that 3.7% as I mentioned was hurt 90 basis points by extraordinary costs associated with the harsh winter. So you can normalize it, you can do whatever you want with it, but that's just how we would look at it. And but that it's that simple, okay?
Now notice I didn't talk about retail sales. I talked about market rent.
Right. And that's what I'm trying to
get at. I guess maybe
I asked another way, I mean, how market rents for your portfolio gone up say over the last year or so as opposed to the spread which Yes.
I mean the good news is that it's clearly gone up because you've seen the spread accelerate.
Okay. And then maybe just another topic. I know it's early days in your ownership there at the on the Oster Bay development. But is there any update on how the development planning process is going over there?
It's very early days. So really nothing to add there other than than we're excited about the opportunity. Our partners are excited about the opportunity. We very much look forward to working with the town to find a win win. So we think it's a great opportunity for us and will be a high priority for us over the next year or so as we go through the process.
Okay. Thanks.
Sure.
Thank you. The next question comes from the line of Tayo Okusanya of Jefferies. Please go ahead.
Yes. Good afternoon. Going back to development and redevelopment yields, also noticed that you took up the yield on the outlet development to 10% from 9% last quarter. Just wondering what was driving that?
2 things. One, we've been able to bring in our costs at a little below budget. And 2, we've had a lot of demand and we've been able to lease it at higher rents. Hence, we got higher returns.
I would say it differently. I would say typically they sandbag us on the rents they charge, but we let it get approved in any event. So
it's all about setting
expectations, isn't it?
Very much so. Were there any particular assets that was that kind of drove the average up? Or was it is this kind of happening across the entire development portfolio?
Pretty much across the board we're seeing those trends.
Okay. That's helpful. And then just staying on the outlet side and then there was some news out there a few days ago about Charlotte, North Carolina and the whole and then the whole process of your development there some pushback from local residents? Just kind of curious if you could opine on that?
It's opening on July 31 of this year. And it's very well leased and we're in very good shape there.
Okay. That is helpful. And then last one for me. This one's for Steve. Credit provisioning levels also went up during the quarter.
Just kind of curious what you're seeing from that perspective and what we should be modeling going forward?
Tayo, we've talked a lot over the last few years about bad debt expense being really low. I think what you saw this quarter is just a bit of a reversion to the mean. If you look at the in the context of $5,000,000,000 plus of consolidated revenues, I think we bill north of 7,000,000,000 dollars a year to tenants. Having $5,000,000 of bad debt expense a quarter is still pretty de minimis. But I think that's probably more reflective of the run rate that we're going to see this year.
Is that reflective just you're just updating your estimates? Are you actually seeing more issues with the tenants themselves that's actually causing an actual increase in that number? No. It's a bit of
a combination of both. Our overall receivable level is
still pretty low. But interestingly enough, our bad debt
reserve is pretty much
announce store closings or in a more tenants either announced store closings or in a couple of cases go into bankruptcy, we reserve a higher percentage of outstandings against those types of tenants and it generated a slightly higher bad debt expense this quarter.
Great. Thank you very much.
Sure. Thank you. Thank you.
The next question comes from the line of Ben Yang of Evercore. Please go ahead.
Yeah. Hi. Thanks. Maybe just building on the earlier lease spreads question. I believe your spreads are based on openings and closings.
So I
was just wondering if you
could maybe talk about spreads based on signed leases maybe what the trend has been in? Also maybe how that compares with that 19.5% that you report in your supplemental?
Ben, you're right in that the spread is based on cash closing rent compared to cash opening rent. But because the population as Rick mentioned is so large, I mean it's 8,000,000 square feet kind of at any one point in time. Looking at it on a signed basis relative to the actual openings isn't going to move the number a lot. But I will I'll echo what Rick said earlier that demand for space is good, deal quality continues to improve overall. We've been pleased to see the continued acceleration in the leasing spreads.
But looking at it from a signed basis to an actual opening basis isn't going to materially move the number.
Okay. Got it. That's helpful. And then also you talked a little bit about the lease termination income. Was that all Sony or were there other retailers in that mix?
The lease termination income. Was that all Sony or were there other retailers in that mix? And maybe also
if you sense it's a lot higher, can
you offer what your guidance is for the full year on that line item? Yes.
Don't like to do that, but we had the Sony and then I mentioned to you about the other department store scenario. So but that gives you the bulk of it more or less.
Yes. And commenting Ben on the volume of it, if you look back over our last several years, we have averaged $25,000,000 a year of lease settlement income. We just happen to have a larger chunk of that in the Q1. Could it be more significant in 2014 than been in the last couple of years. Well, we're certainly off to a start.
And as David and Rick mentioned, because a couple of the lumpy things that have occurred in the Q1, it could trend a little higher. But it's certainly not going to trend at the same level we saw in the Q1.
Yes. And again, to emphasize, this is a It's a good thing. It's a good thing. Because again, I don't lose the space. I just get a present value of the lease obligation or very close to it.
And then I have the ability to lease the space up. So it is not something we got to get the right values. We do lots of analysis. As you might imagine, we're very sophisticated in this front.
Well, typically, we don't execute it until we've got a replacement antenna in place.
So but this is not a bad thing at all.
Yes. I totally get it's not bad. But I mean could it fit higher to that $20,000,000 to $25,000,000 that you've historically reported in
the past?
It has a chance this year primarily because we did the one big deal with the department store, which I would say is kind of somewhat out of the ordinary.
I mean was that a big deal? Was that kind of baked into your earlier guidance? I'm just kind of wondering if that was okay, got it. Yes. Absolutely.
That's been in the
works for 2, 3 years.
Okay. Okay. Helpful. Maybe final question. You talked a little bit about the other income in your consolidated.
Why exactly did the other income in your joint ventures also go higher?
As part of that lease settlement the big lease settlement that I mentioned was in it's a JV property.
Yes. The biggest driver of the movement in that number though Ben is the nature of some of the income that flows through from McArthur Glenn. A lot of it is service related income. As you know, we own half of the economics of the development and management business. And so that's the primary driver of the delta.
Got it. Thank you.
Sure. Thanks a lot.
Thank you. The next question comes from the line of Michael Mueller of JPMorgan. Please go ahead.
Yes. Hey, thanks. Just following up on that real quick. So the $11,000,000 is consolidated. What is the overall pro rata number for lease term this quarter?
And when you talk about $20,000,000 to 25,000,000 dollars normally, is that a consolidated number or is that the pro rata number?
The $20,000,000 to 25 number would be the annual run rate kind of on a pro rata basis, Mike.
Got it. And what was the full pro rata in Q1 then?
It was high teens.
Got it.
Okay. And then last question. I guess historically you've talked about development spend having at least about $1,000,000,000 a year for the next few years. As you look out from this standpoint, how many years out does that generally account for at this point?
Well, we've said through 2016, but we'll it's not set in stone.
Got it. Okay, great. Thanks.
All
right. Thank you.
Thank you. The next question comes from the line of Jim Sullivan of
Cowen Group. Please go ahead.
Yes. Thank you. Just one quick question, I guess for David and Rick. The so called fast retailing tenants have been growing pretty dramatically in your properties for a number of years now. And I think it shows up with Forever 21 being now a top 10 tenant and average store size just looking at the metrics in the SOP of more than 10,000 square feet.
Historically, of course, you've excluded stores of more than 10,000 square feet in the sales productivity number. And I just wonder if given the ambitious plans of cohorts like H and M and Uniglo, whether you've given any consideration to perhaps including the fast retailing productivity and the reported productivity given how important they seem to be and look like it's going to increase in importance?
Well, Jim, if you've listened to my
I heard every word.
If you listen to my my discussion on tenant sales, I would suggest to you, I mean, it's an interesting derivative. There's no correlation. And the fact is there's no other industry that I know that's focused retail sales. Therefore, this is what's going on with your property. I before saying look at our cash flow and measure us on that basis.
So and I think somehow the industry has gotten off track here by being the most important metric. I look at the analyst reports that came out today even though we beat consensus by $0.14 or something like that. We've unbelievable historical growth. Our comp NOI has grown year after year. It was up marginally in the great recession.
The balance sheet's AAA. We're adding all this new development. The one constant dialogue I got was the tenant sales, right? And so you want more of that, so I can read more of that. So I somehow I'm happy to have this discussion with you and other shareholders, but somehow we're losing track that retailers come and go.
We used to this company was built based upon Kmart leases, okay?
No, I understand all that. I just think the point is that fast retailing as a format does seem to be in terms of its size. It's Forever 21 is an in line tenant. And I have no idea by the way what their productivity is. It's simply that they're now a top 10 tenant.
And H and M and Uniglo have pretty ambitious expansion plans as well. And I was just all I'm doing is suggesting that the original reason for excluding tenants of over 10,000 square feet. I just wonder if it still applies when we think about those that type of retailing.
I don't think as the mix is broadened in these centers, that metric is probably less and less important. What ends if we bring in service tenants or we take a department store down and put it in an office building or an apartment complex. I don't think I think we're losing sight of it's real estate and it's about organic cash flow growth. And it's not about what particular person is doing in a particular space. Because again, we own the real estate, They don't perform.
We get it back. And then the next question is what can we do with that real estate? So I'll tell you what, I'll put it in there if you talk about it on page 10 and not on page 1, okay?
Well, I'll just say for my note by the way, I stressed if people want more space and are willing to pay more for it that's the key driver. So not guilty as charged here at least in that respect. And just one other question I have for you and this maybe is a Rick question. The development activity number went up close to $300,000,000 first at the end of the Q1 versus the end of the year. And am I correct in assuming Rick that as far as the mall category which is where it all took place that that number didn't the the Simon post spin malls that we're talking about there?
Well, you shouldn't presume the latter because we're reporting everything on a combined basis so far. So in that regard, there is capital attributable to those post spin assets who are doing things. Houston Galleria. Yes, Houston Galleria has started. We've mix.
But it is not a mix, but it is not a function of spin or post spin or pre spin and it does not yet include Pentagon or Phipps. We just announced those. Those will be starting construction this quarter. Yes.
So the sorry.
Go ahead, Jeff.
Sorry, go ahead. Yes, I was just going to say post spin, I just want to make sure I understood the comments you made earlier regarding the level of development activity that we should expect from Simon post spin. Obviously, it sounds like it's going to be the same kind of number as we've been thinking about historically for the company. Obviously, the contribution should be relatively greater given that the post spin company base is going to be a little bit smaller. But is there an opportunity in these malls that there could be an accelerated and increased level of major expansion spending given that where you're spending the money and the big money seems to be on the biggest strongest assets where the demand is really very strong?
Certainly, that is going to come about and we're we've got several other projects that we're working on that we hope to announce that we've already talked about the connection to King of Prussia. So there are other non figure projects coming down the road including Copley that are going to certainly continue that level of spend in the post spin cycle.
Okay. Very good. Thank you, guys.
And I was just going to add Jim just to make sure everyone that's still on the call, all of our numbers that we reported are all include the WP assets, occupancy, sales Comp NOI. Comp NOI. NOI. Comp NOI. All of the 8 ks stuff is all including WP.
So all of that just to make sure everybody understands it.
Thank you. I would now like to hand the call back to management for closing remarks.
Okay. Thank you. Before we conclude today's call for our stockholders that may be on this call, our annual meeting is May 15. And hopefully you have seen our proxy statement that we filed on April 10. Your vote is very important to us and the Board has unanimously recommended that stockholders vote for all of the proposals.
And I would ask you to please vote for all of the proposals. If you have not seen the proxy statement, then you can download a copy by visiting annual meeting. Simon.com. And thank you everyone for your time today.