Good day, ladies and gentlemen, and welcome to the Q4 2013 Simon Property Group Incorporated Earnings Conference Call. My name is Alison, and I'll be your operator for today. At this time, all participants are in listen only mode. We will conduct a question and answer session towards the end of this As a reminder, this call is being recorded for replay purposes. I'd now like to turn the call over to Liz Zayo, Senior Vice President of Corporate Affairs.
Please proceed ma'am.
Thank you. Good morning everyone and welcome to Simon Property Group's Q4 2013 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 Stearart, our Chief Financial Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private 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 also note that this call includes information that may only be accurate as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8 ks filing. Both the press release and the supplemental information are available on our Investor Relations website investors. Simon.com. With that, we'll start the call and I would like to introduce David Simon.
Okay. Thanks, Liz. Good morning. We had strong results to wrap up 2013, which also is our 20th year as a public company. First, let me talk about the quarter.
Strong performance given the growth in our core business. We continue to see a positive impact on our growth strategy, which basically is comprised of investing in our existing assets to expand them to meet the retailer demand, enhance productivity, continue to develop new outlets and make smart, thoughtful, accretive acquisitions. FFO was $2.47 per share, up 7.9% for the 4th quarter compared to 2012. Our FFO exceeded the 1st call consensus again by $0.05 per share. For our mall and premium outlets, comparable property NOI growth was 5.5% for the quarter driven by base minimum rent increase, occupancy up 80 basis points to 96.1% and the continuation of positive sales from 2012.
Our releasing spread continues to grow was a positive 16.8 percent or $8.94 per square foot with much of the improvement driven by better leasing execution in the malls, while premium outlet spread continues to be robust. Mills comparable NOI was up 11% for the quarter, 10.8% for the year, driven by all the other factors I just went through. For the year, our FFO in total was 3,200,000,000 dollars an increase of $321,000,000 from 2012. This resulted in a per share FFO growth of 10.9% to $8.85 per share. This was $0.46 above where the consensus started in early 2013 at $8.39 Our performance was driven by thoughtful allocation and I'm proud of the execution of the team.
We opened 5 new premium outlets this year, 3 in North America and 2 in Asia. We invested in total $942,000,000 in new and redevelopment projects in response to retailer demand and customer needs. These projects are all off to very good starts and will increase the productivity of our assets. We completed $1,050,000,000 of acquisitions including the expansion of our European presence with the investment in McArthur Glenn's Designer Outlet assets in the management development company. We also, in January, acquired our joint venture partners remaining interest in Krapco Simon, which owns 10 assets.
We now own 100 percent of King and Prussia Mall, which is an iconic asset with a major expansion in the works. We strengthened and we also disposed of 14 non core retail assets as well as announced our spin off transaction, which we'll talk about in a moment. We see strength across our portfolio and platforms. Occupancy continues to rise, which is a sign of retailer demand. The majority of our existing leases are under market.
Ongoing NOI growth is supported by our ability to replace underperforming retailers. And as a final note on the operations, our operating profit margin grew by 60 basis points to 71.7 percent in 2013. In the quarter, the 4th quarter that is we broke in Montreal in early October and construction is underway. It's cold up there, but it's still we're still working. Construction also continues on new developments in Vancouver, Minneapolis and Charlotte less cold.
And our pipeline includes 6 additional new outlets expected to start construction in 2014, 2015. Redevelopment expansions are ongoing at 25 properties in the U. S, Asia and Mexico. We opened 2 in the Q4. The shops at Nanuet, Walt Whitman and Long Island, please go visit.
Well executed. Thank you for the team. Thank you to the team. Also open expansion number of other properties in the Q4 including Orlando Premium Outlets at Vineland and Johor Premium Outlets in Malaysia. Construction is ongoing to expand enhance some of our most productive properties, which please do not lose sight of, Roseville Field, Woodbury Common, Houston Galleria, Lennox Square, Del Amo and Desert Hills just to name a few.
Overall, our multiyear pipeline of new development and redevelopment expansion projects will continue to drive growth in NOI and in the future. And our pipeline continues to we expect to invest Clay Pierre will report next week. But I'm proud of the fact that the company with our help has implemented a very thoughtful strategy. We strengthened the balance sheet. We've improved operations and focused on cash flow growth.
We have now signed and we were instrumental in the deal with Carrefour to sell smaller assets in order to focus on larger and more productive centers. We are exiting the office business. That will be completed shortly, including selling the headquarter building. We strengthened management with the hiring of Jean Marc and Justin as COO and we're focused on capital allocation among their different markets and continue to work on leasing and marketing opportunities. Together, the European Retail Recovery is stable and continuing.
And then just to finally mention that we did close McArthur Glenn. I was actually there at both places this week a day with McArthur Glenn, 2 days with Klepierre. The McArthur Glenn are there. We've got development and expansion projects to consider and continue to be impressed with where Clay Pier is headed. Now just to talk briefly about SpinCo.
We have as you know, we won't go into much detail today about it, but we plan to spin off our strip center in 40 4 smaller enclosed malls. We believe this will create additional value for Simon Property Group shareholders and be a good investment vehicle for SpinCo. We have yet to name a name. SpinCo is not the name, okay? SpinCo is not the name.
And we're open to any ideas out there for any names. Please send them to us. We expect the transaction to be effective in the Q2 of 2014. We'll provide further updates as available, but everything is moving absolutely according to plan there. 4th quarter capital market activity, we were busy.
We closed or locked rates on 10 new secured loans, totaling approximately 2,200,000,000 dollars Our share of that is roughly $1,000,000,000 including in the 4th quarter activity is the $1,200,000,000 refinance at Aventura Mall at a rate of 3.75. In January, as you know, we announced and closed the debt offering of 1,200,000,000 dollars of senior notes with a combined weighted average duration of 7.5 years and the average coupon rate of just under 3%. Demand was very robust for these bonds. We're using the proceeds for general corporate purposes and to repay debt including the unencumbering of $820,000,000 mortgage on Sawgrass Mills. Dividend, we increased the dividend again in the Q1 $1 to $1.25 that's a year over year increase of 8.7 dollars SPG, which not including SpinCo, will now pay as you know at least $5 in 2014.
Now let me just take a moment to talk about something and then I'll turn to 14. I'd like to make an announcement regarding our management team. Steve Stearitt, our long term CFO will be retiring in March of 2015. So he'll be staying on board through another full fiscal year in order our for everyone when I say we will be sorry to see him go. As many of you know, Steve has been with the company for 20 years during a period of extraordinary growth.
Throughout it all, Steve's contributions have been immeasurable. We will conduct a search during the next few months for Steve's replacement. Expect to consider both internal and external candidates and having Steve available for the rest of 2014 and the audit cycle will help and ensure a smooth transition. And he will still not be able to beat me on a consistent basis in golf. Now, let me just talk about 2014.
I'm sure he'll have a response to that by the way. But let's talk about 2014. Guidance is in a range of 9 point $5.0 to $9.60 This represents at the midpoint growth rate of 8%. This is based on comparable NOI growth of at least 4% for combined mall and outlet portfolio. This FFO guidance is on a comparable basis for 2013 and ignores any potential impact of SpinCo.
When SpinCo is effective, we'll provide updated and adjust the range for SPG as well as provide a range for SpinCo. And then let me conclude, we had a great year, a great Q4. We continue to prioritize the creation of the value for our properties, our retailers and our shareholders. We believe we have very great prospects for 2014 and we're now ready for any questions.
Thank And your first question comes from the line of Ross Nussbaum of UBS. Please proceed.
Hi, guys. Good morning. I'm here with Jeremy Metz.
Hi. Can you speak up? Can you speak up? Yes. I'll try to
yell if that's any better. Much better. Okay.
Good. Can you break out the terms for the Kravco purchase as well as for Oyster Bay and Arizona Mills, how you broke out the consideration for those?
Well, the CraftCo purchase was a basically we had to put in the call at a combined cap rate of A little bit over 8. A little over 8.
And it was 113. 113.
We and what was your next question?
On Oyster Bay and Arizona Mills, how did the consideration break out between those assets?
Well, that was a private negotiation and we will not be going through that.
Okay. And then lastly, when can we expect an update on SpinCo management?
Can you talk a little bit about that?
We got initial comments from the SEC. So we're in that process. We are have identified both an internal and external candidate that we're having serious discussions with. And we would hope to conclude that over the next few weeks. And as soon as we do, I'm sure it will be part of our filing.
The Board is pretty much set. And it's going according to plan.
Thank you. Sure.
Thank you. And your next question comes from Nathan Espie of Stifel. Please proceed.
Hi, good morning. The portfolio continues to perform very well, but there's clearly a lot of questions swirling around shopper traffic, shopper habits, etcetera. Could you maybe comment on what you're seeing? Are we seeing a sea change in retail as characterized by Starbucks last week? And what do you think this impact could have on your business over the next few years?
Well, look, we've been doing this for quite some time. And I think we have to put the 4th quarter sales into perspective. First of all, and these are just some thoughts off the top of my head. We are absolutely believers that our business will continue to grow. But let me just talk about the Q4, because I do think we're at the point of a little bit of overreaction.
Clearly, in 2013, there was a move toward durable goods, which happens in certain cycles. And as the second half of the year came about, I do think the consumer was relatively cautious. We had a short season. There was obviously lots of weather issues for certain parts of the country. And I don't think what's put in perspective, which I listen to the pundits on TV and elsewhere, not just on TV, but elsewhere.
But between the confusion of Obamacare and taxes did raise pretty materially for the consumer. You had what I'll call a I don't know if it was a perfect storm, but you had a lot of this stuff all come together that basically resulted in the consumer being very cautious. The pundits, I've heard this stuff about malls and the Internet. Obviously, having the right retailers, the right customer service, the right look and feel of the properties, we'll continue to hold our own in that space without question.
Okay. So you're not seeing anything at the ground level that indicates shopper traffic has dropped off by 50% over the last 3 years or anything like that?
50%? Well,
that's what shopperTrak says.
Well, let me talk about I'm not going to name names, but we don't use them and we don't know how reliable a lot of those traffic numbers are. And we'll leave it at that. The answer is all I can tell you Nate is look at our results. That's all I can tell you is look at our results. I think you know at this point doing this for 20 years and continuing to beat everybody's expectations about the profitability of what this company can produce.
I would suggest to you that things are not what others say
they are. And I'll leave it at that.
I mean, over the last few years, you have discussed various initiatives of helping and embracing online and developing something at the Simon level? Any update on that?
Well, it would take 30 minutes on this call, but we're happy to go through that in great detail. We have a significant amount of initiatives that we're embarking upon to improve the consumer experience, whether pre mall or during mall visit. And we are absolutely embracing technology and how it can be used effectively to make the consumer more satisfied during their visit or as they come to the mall. The retailers feel the absolute same way. And there's probably 20 plus things that are ongoing in this company individually, collectively with the mall industry, as well as in conjunction with retailers that we're working on.
But it's there's so many that I can't do it at this call, but we're happy to share those as they get rolled out.
Thanks. Sure.
Thank you. And your next question comes from Josh Petitken of BMO Capital Markets. Please proceed.
Hi, good morning. I'm trying to get a better sense of what the opportunity to consolidate Macarthur Glen Managed Funds looks like. So it's obviously not programmatic, but can you give us a general sense for the total size of the enterprise and what could come up in the next few years?
They're a leader in that industry. I think we'll have opportunities to grow that business through new development and extensions of existing assets, as well as acquisitions of assets that either they manage and own a small piece of and or others that do. But it's really I'm not in a position to give you a specific number. But as you know, we've taken our platforms over the years and grown them significantly. Reminds me of the outlet business when we entered into it in 2004.
We have roughly grown we have if I could put the numbers correctly, we have increased the cash flow of that business roughly 4x. And needless to say, you take the 4x plus the reduction in cap rate and you've seen the value created there. I think it's harder to develop in Asia, but a great team, good people, and we'll just take it a step at a time.
Okay. And then more globally on outlets, You've built a lot of centers last decade. And so is there a big sea change in the leasing conversation as you approach 10 year rollovers? And do you think higher occupancy costs will become more acceptable to merchants in that business?
I'll turn it to Rick because
on. Absolutely, we are seeing an ability to increase our rents. We have significant demand in the outlet sector. If you listen to the retailers, there are many retailers that are entering the sector for the first time as an additional prong of their growth strategy and where you have a lot of demand, you're able to drive rates. Our properties are very productive.
We're making them better and that does give us pricing power.
Very good. Thank you very much.
Sure. Thank you.
Thank you. And your next question comes from Christy McElroy of Citi. Please proceed.
Hi. Good morning, everyone. How
are you?
I wanted to go back to Nate's question and maybe ask Okay.
So, I wanted to go back to Nate's question.
Okay. So, wanted to go back to Nate's question and ask it a little bit of a different way more from a leasing perspective. As we sort of hear more from retailers about the integration of the bricks and mortar business with their e commerce business, so in thinking about the longer term omnichannel initiatives. I'm wondering if you could give us some perspectives on how the changes are impacting sort of the leasing process and how you would expect it to evolve over time? So first in terms of how the retailers are thinking about occupancy costs, you adjusted a little bit in terms of the outlook.
Well, I
got it. When thinking about the walls and you have the walls and
just thinking about the sales within the four walls of the store versus sort of the value of that location
to the overall? I think the good news for us as mall owners is I expect them to drive traffic and distribute through their store. So, what it means, I believe over time is that that store location will become more valuable because instead of building a bunch of distribution a bunch of distribution centers or trying to figure out how to get various online purchases to the consumer, the most effective and perhaps cost effective way for them to do it is by using their existing store. Now, that means that they're going to have to have a better handle on store and create algorithms in terms of what can be distributed out of the store or not. But I think what it's going to ultimately mean is that they're going to drive purchase drive sales through those stores, which as far as we're concerned and what's in our leases and will continue to be is those sales will be generated from that store.
So I don't now if they have a store that's losing money, they're not going to keep it open. But that's been that way for 30 years, 40 years. So but that's what I anticipate.
The only other thing that I would add and I think it's a very significant advantage to our retailers and then David and my discussions with them, they're very focused on it is the ability to fulfill their orders online out of their stores and reorient it to whatever store has the appropriate inventory that's going to have in their opinion significant margin enhancement possibilities because they will be able to have less markdowns by selling at full price goods that might otherwise have to be discounted in various locations. And they're all spending a great deal of time getting that backbone in place to effectuate that.
The one thing that people have questioned is whether they're going to turn these stores into showrooms. And the fact of the matter is, I talked to a very prominent retailer CEO about this issue. They lose sales when they do that, okay? So, especially when it becomes apparel. So, I don't believe that if they want if this retailer continues to have a viable bricks and mortar strategy that they are going to get in the point where it's a showroom because people want to continue to want to make sure that the size looks right on and all that other stuff, okay?
So as it becomes more of a supply demand of that location issue versus an occupancy cost when negotiating the rent. And how do you attribute as they further integrate their business with e commerce, how do you attribute the specific sales of that store when reporting up to you?
It's easy. They have to keep track of it. That's simple. If it goes through their POS and it's going to have to if the stores in the if the inventory is in the store, that's a simple exercise. We have auto rights.
I mean, we have auto rights. Okay?
David, I have one quick question just in terms of and I recognize the deal with the Taubmans are it's a private transaction. But there certainly was a time where they didn't want to take your stock pretty forcefully. So I'm just curious how that transaction came about and what your plans are now that you own those parcels of land in terms of the timing of potentially doing something on that site?
Look, we even though we obviously have had issues over the years with Talbot, we've always had a, what I'd call, a good professional relationship, certainly as the dust has settled from several years ago. So, again, I can't really comment on that other than let me talk about the property. We're very excited about it. We are very interested in working with the town of Oyster Bay and our partner, Castagna Realty. We're going to work with the residents, come up with a development plan, also with the property that we own with Castania Realty.
Together, we think there is an absolute way to create a win win for the community and for us and our partner. And it's great real estate. How we got there is really not important. I'm convinced it's in the best interest of our shareholders and I'm convinced that Taubman feels the same way. So, that actually can happen where you can have a win win for both companies.
Thank you. Sure.
Thank you. And your next question comes from Alexander Goldfarb with Sandler O'Neill. Please proceed.
Thank you. Good morning. And Steve, congrats. It sounds like the stakes for whole just went up between you and David.
Thanks. He talks a good game.
I would just check to make sure his ball is truly inbounds when he drives. Just two questions here. The first is the other big story apart from the Internet this past season was the penny closure. And if you look at the 33 stores they closed, you could say, okay, they went through the whole thing and they could only find 33 stores. And Sears for all the years they've been talking and rationalizing the Sears are still open.
So should we read this as the various department stores have done these big reviews and these are all the stores that they've closed? Or your sense is this is the start of a wave and over the next several years we're going to see a lot more of these big type announcements?
Well, I mean, I think it's a function of what the retailer ultimately is able to do. But the store closures for us is a kind of a normal standard operating procedure that we deal with. We've had retailers clearly not necessarily the scale of a couple that you mentioned, but we've had retailers coming out of business for years. And so again, yes, it does add to the workload, but we find a way to get the job done. And I think you're right though, Alex, is that they went through the portfolio generally.
And what we understand, which I'm not sure is that for us to say, but we understand that that was the list that was actually generating negative cash flow. So I think you're right in the sense that a number of these retailers continue to have profitability and even in stores that are not as overly productive because for whatever reason. So as an example, and I don't know, maybe we'll have this, but people talked about small B malls, the Internet. But our comp in the Q4 of our comp NOI increase for the SpinCo malls was 4%. So that speaks to the ability to continue to move the needle forward despite all the noise.
Now look, the 4th quarter sales, I gave you that. I do think a lot happened all in the 4th quarter. But the consumer between the uncertainty of Obamacare, the increase in taxes, wage growth continues to be anemic. They spend on durable goods. They slowed down in the 3rd Q4 across the board.
I mean, whether it was the high end, the middle end or the lower end consumer and that happens. Don't panic That but that's we'll deal with that. So
at the end of the day, I can't
speak for the future of those 2 that you mentioned in terms of store closing. But what we understand is that that's the analysis that led to the 33. But we're not I'm not 100% certain on that, okay?
Okay. And then the second question is regarding SpinCo, is Simon I mean Simon is going to be the platform for the initial I believe 2 years. Simon Brand Ventures the income that's generated from that is that something that SpinCo will have access to beyond that? Or is the understanding that SpinCo is going to sort of have to try and replicate that NOI stream after the if in fact it ends the relationship with Simon as the supporting mall platform?
Well, all of those revenues are at the property level. So they'll continue. Now ultimately if they remember just to give you a SpinCo, the strip center business will be in SpinCo. SPG will do some back office activity for the strip center business. The SPG will act as 3rd party property manager for SpinCo Malls.
And all of that revenue that those that group generates goes to the property. So, ultimately, it would be the decision for that team to decide whether or not they want to continue after the 2 year period to continue to use SPG as a property manager. But there's no reason in my mind that they couldn't if they chose not to do that and that will be up to the team and the Board there that they could replicate the vast majority of that income.
Okay. Thank you.
Thank you.
Thank you. And your next question comes from Jeff Donnelly of Wells Fargo. Please proceed.
Good morning. David, maybe I think you should name SpinCo, Cerit in honor of Steve's service to you.
Yes. That rolls right off the tongue.
It does. It does.
Hey, actually, Dave, do I
hear you? Honestly, I probably shouldn't say this publicly, but the and I'll go ahead and sometimes I get into that box. But the hardest thing about SpinCo is coming up with the appropriate name. So Yes. So if you have any suggestions, please send them our way.
I don't have any good ones. But actually did I hear you correctly that you said NOI growth at SpinCo was 4% in Q4. And maybe are you able to share other operating metrics like leasing spreads and occupancy
quarter. So we had that number for the Q4. But that kind of stuff will all be in the filing. And
I guess maybe building on Alex's question about the pennies and Sears closure risk. When you look at those two situations, I mean, I think people are trying to ultimately handicap, I'll call it ultimate exposure. Do you guys have a sense of what percentage of those stores that you have might not be, I'll call it, cost effectively retentive?
I didn't catch your last part.
What percentage of the stores we think may not be cost effectively retendered if they close? I would tell you that we're spending a considerable amount of time and as we've said before on these calls, we have our plans in place. We have identified replacement tenants. For example, We have one tenant already lined up to occupy 1 of the penny closures yet this year at a positive economic impact on that property and a positive sales impact. So we are as prepared as one can be to take advantage of any opportunities that present themselves through the activities of the department stores when they decide they don't want to do it.
Over the years, we've dealt with over 80 of these things. So as David said, this is not new to us. We'll just keep doing what we've been doing historically.
Maybe I can stick with you Rick on sort of following up on Christy's earlier question. Just historically retailers kind of wanted the landlord to stay out of their way as it relates to retail sales. Are you seeing retailers become more receptive to working with their landlord around their e commerce and retail sales platform? I mean is that part of the leasing discussion or even specifically addressed in the lease? Or is the role is that sort of a separate conversation sort of an add on if you will?
Two parts to that. In our lease negotiations, we're incredibly mindful of the role that our stores play in the distribution of their goods whether online or store based. And frankly, if that store is any part of the distribution channel for that sale, it's going to count in our sale. The retailers understand that and the retailers are emphasizing the convenience and location of their stores as a significant advantage in their ability to maximize their contacts with the customers and their sales. So they very much view their stores as an integral part
of their business going forward
and they are working with us in a cooperative way to try and maximize.
Well, I would just say, Jeff, simply that we have both mobile and desktop, etcetera. We have a system called the retailer showcase that basically presents offers from the retailers to our consumers. They can get it in mall and they can go on our website or whatever. We do that. I think the last number that I saw probably 50,000 offers over the year that we present to our consumers.
We get those offer. We don't make them up. We get them from the retailers. So absolutely, there is a significant amount of coordination as you would expect between us and the retailer to improve and enhance their business. I believe we're just at the scratching of that surface.
That is part of our job to facilitate more productivity from the retailers' stores. And at the same time, trying to do that and increase rent. I mean, it's not the easiest thing, but they know that we want them to be very productive. We work hand in hand with them. And I think technology generally will be a wonderful opportunity to make that relationship easier to execute.
Just one last question. I'm curious internally when you guys are handicapping, I'll call it exposure to anchor closures, what are the metrics that you guys look at internally? Is it 4 wall profit? Is it sort of store format or market size or proximity to their distribution centers? I mean is there I guess a better methodology than maybe just sort of overall sales productivity that you find in forecasting?
Well, sure, because you don't know how many what how they cover historically, the department stores advertise in a major in a market and they allocate that advertising certain way. So you've got to have a handle on that. But again, on a specific store, we're going to have a sense as to where that is based upon lots of discussions over lots of years. Thank you. Corporately and where they're headed, we have some insights, but it's no different than people that follow them and cut and cover them.
I mean, we're not necessarily privy that all that's going on and what they're doing. We have obviously good relationships with our major anchors. But we're not privy to anything that's probably not common knowledge. But we have a sense over years years of dealing with them what they how they feel about certain stores.
Great. Thank you.
Sure.
Thank you. And your next question comes from Steve Sakwa of ISI Group. Please proceed.
Thanks. Good morning. Just a couple of questions David and Rick. As you kind of look at the rent spreads, those dramatically improved over the course of 2013. And as you look at the rollover for the next really 3 years, your ending base rents are just a shade under $40 And when you add in the CAM, you're probably close to that $53 So it would seem that your re leasing spreads ought to continue to accelerate.
Is there anything that would outside of a sales decline, which just doesn't seem to be happening, is there anything that suggests that leasing spreads wouldn't continue to tick higher from here?
We certainly anticipate that we'll be able to continue to grow our rents as we have historically. The other thing I would tell you is that we're spending a lot of money making these properties better. And so when you look at a very gross sales number that's made up of a whole lot of individual stories and as we renovate our properties, bring in better tenants, our tenants we believe are more productive in our properties and that gives us some incremental ability to drive rents. So we don't envision that slowing down.
Okay. And maybe sticking with you Rick, just kind of on the tenants and how you're thinking about repositioning the properties. I don't know if you have a specific number. But as you look at the mix of tenants in the mall today, what percentage is apparel? And what percentage do you think that will be 3 years from now?
At this point, I think our apparel percentage is going to remain fairly stable. Now the tenants that make up that apparel percentage could change dramatically. We have some tenants that are reducing the size of the stores and we have entrants coming in like ZAR, H and M, Uniqlo that are in slightly bigger formats, but there's not going to be a sense of a significant decline in the amount of space allocated to apparel. We are allocating space differently. Look, last year we opened 36 restaurants across the portfolio.
That's a major focus to be able to extend and stay in our properties, give the consumers a wider range of dining alternatives and just make the properties more experiential which is obviously a focus of our retailers and us. So the mix may change, but I think apparel is going to stay fairly stable while the components may change.
And let me I probably shouldn't say this, but it's interesting as I've traveled the world to understand probably not as much as I should do. But the occupancy cost that we have in the U. S. Is relatively benign compared to when you see it elsewhere in the world. So, it's an interesting thing for us to pause to think about what the opportunities to continue to grow that rent are.
But we've got to be absolutely sensitive to the are. But we've got to be absolutely sensitive to the retailer and making sure they profit in their environment as well. So, but our occupancy costs generally in comparison to kind of where the other shopping centers owners have in the world are relatively below at least what those would indicate the rents are. So, we'll see how that evolves over
That may have been relatively stable for the last 3 years even though we've been able to drive our rents.
Okay. Well, let me ask, I guess, one last question for maybe the newest member of the senior store, Steve. Hopefully, you'll get your qualifying card here and get something new going. I went to the balance sheet and kind of debt refinancings. Obviously it's been very favorable.
Just how are you thinking about kind of the balance of debt this year and into 2015? And what's your thought in terms of laddering and where you want to be on the debt curve?
Well, Steve, it's pretty well laddered already.
As you know, as part
of the SpinCo announcement, we did state that we expect to raise $1,000,000,000 of debt through SpinCo with those proceeds coming to Simon before the effective date. So if you couple that with our bond deal in January, that's the majority of our capital raise in terms of dealing with bond expirations. We also unencumbered Sawgrass Mills as part of the use of those proceeds. So we're in really good shape for 14. We've accomplished most of the capital plan.
And in 20 15, we're ordinary course of business. We have bonds coming due every year. You should expect us to be a regular issuer in that market. But obviously, the secured debt market is also important to us as well. So you'll see us in both.
Okay. Hello.
Thank you. And your next question comes from Ki Bin Kim of SunTrust. Please proceed.
Thank you. And Steve thanks for all your help over the years. Given just some of the clouds around 4th quarter consumer activity in the malls, I know you guys don't typically do this, but would you be able to provide a pure Q4 2013 over Q4 2012
tenant sales trend?
Yes, it was flat.
Okay. Thank you for that. And just a follow-up. I know you mentioned this being closing NOI, but from a tenant sales perspective, how does that look like when you split out the outlets A malls and B malls? It doesn't have to be Q4, but maybe the year over year the total trailing 12 months.
I'm sorry? Well, I didn't
really understand the question, Ki Bin. Yes.
Okay. So the trend in your tenant sales of 2 0.5% year over year trailing 12 months, how does that look like if you had to stratify it between outlets A malls and D malls?
Well, I mean, we shared some of that with you when we announced SpinCo. That gives you a general direction for that answer. And as you'll see, once SpinCo is done and effective, you'll have the SpinCo data and you'll have the SPG data. So that will all be there. But that gives you a sense of direction of where it is.
Okay. And just last point. Should we expect negative sales at all for SpinCo in the 4th year?
No. I mean, we gave you that at whenever it was December. Yes, we showed you. Several years of history. Yes, it was up.
Okay. I can't remember the exact number, but it's right there. It's public document. It's on our I assume it's on our investor website. It's all there.
Yes.
Okay. Thank you, guys.
Sure.
Thank you. And your next question comes from the line of Vincent Chao of Deutsche Bank. Please proceed.
Good morning, everyone. Just want to go back to the retail side here for a second. A lot of talk about the sales trends, but obviously profitability is very important. And just given the number of pre announcements that we've heard this season, just curious if you think we should be expecting a higher level of seasonal occupancy decline in the Q1 here than we've seen over the maybe the last few years where perhaps the plans were a little bit more conservative?
We don't see that at this moment. Things change over the year, But we don't see that necessarily. Obviously, we have a good handle on that. The only thing we don't have a handle that could change that is bankruptcies. But based upon our existing status of the where we are with our discussions with retailers, we don't see that.
Obviously, a bankruptcy here or discussion around
discussion around e commerce, we hear a lot about Macy's and Nordstrom and companies like that that are very forward thinking about their strategy. And I'm just wondering how you think the smaller retails that maybe don't have the same scale or infrastructure can evolve in a new environment to be able to kind of compete with the e commerce?
Well, I mean the fact of the matter is and you can see it in technology companies results is that it is relatively a lot less expensive to create because of the cloud and the way apps work and so on. It's relatively less expensive to create the combination of become more technology oriented than it has in the past. Lots of ability to share services in the cloud that you wouldn't otherwise have to invest in. So I think maybe the mom and pop has
a harder
time. But generally, any retailer that has a kind of a reasonable store base can compete very effectively because the cost of technology is you don't need routers, you don't need servers, you don't need a bunch of software guys cranking this stuff out like you used to. The fact is if we had done merchant wire today with different technology, we'd probably be successful, but we overpaid for the hardware. So I think as long as they have a reasonable store base, they're going to be able to create the appropriate coordination between their bricks and mortar stores and how they want to deal with online shopping.
And frankly, there is no retailer that we meet with that is not very focused on doing precisely that. Some of them are further along in their implementation of those strategies, but every one of them is focused on more effectively integrating their online with their stores.
Okay. Thank you.
Sure.
Thank you. Your next question comes from Cedric Leshance of Green Street Advisors. Please proceed.
Thank you. Just staying on the footprint in order to better distribute goods that they would be selling online?
So I'm thinking about of course
the footprint and the models.
It's a good point. What I have seen them do is think about their stores as a distribution point of distribution along with as a store. So whether they're now looking at stores just for the sake of having a store and a distribution, I don't I wouldn't say that that thinking is there yet. But clearly existing stores are being thought as a way to distribute in kind of the e commerce platform. So I do think that thinking and that's at a different level for many different retailers, but I actually do think they're thinking about it very seriously.
So how many such distribution centers, if you will, would a retailer need in a large metro area?
Yes. It depends. Yes.
I'm not in a position to say that, but it depends on the retailer. And the funny thing is they're not talking about using drones to ship their goods.
I'm sure that's going to be an interesting transition. Just going back on the dispositions of 14 non core assets, can you give us a little bit more details in terms of which property type and cap rates?
There were I don't have in front of me, but a few smaller shopping centers, a couple of outlets. So we'll continue to do that as well.
Okay. Were any of those considered to be spun out into SpinCo?
The answer is none of those were in the SpinCo because we already had contracts. There is a couple of strip centers that may or may not be sold before SpinCo is done. So if that's the case, we'll just we're going to just amend. We're going to ultimately the portfolio as we said to you in December when we announced it will change a little bit. Part of that will be because of a couple of sales here and there.
And a couple of them will be because we may or may not get a consent. So but that's but that could still happen.
Okay. And maybe a final question on the relationship with Anchors. So a couple of weeks ago, I think Sears announced that there would be leasing space to Dick's Sporting Goods at King of Prussia. That's obviously by far the best mall in the Philly area. When you think about your ability to recapture stores from Sears and Penney in particular versus the decision that they may ultimately make to lease to what is effectively a power center tenant into what is by far the best mall in particular metro, how do
you think about what is the right price for
you to pay to recapture that box? And what can you do to influence the decision on the retailer that will come into their center or into their box?
Well, I mean, the simple answer is it depends. Each case is different to be honest with you. So, in that case, we cooperated with Sears given the location of that store and what our plans were on the future redevelopment, we thought it was a win win for us. We're happy to have Dick's in there and it was a good transaction for Sears. In some cases, because of location of the stores, we may want to do the development on ourselves, by ourselves.
In some cases, we'll let them do it. If in fact, we may in most cases we have approval rights. So each case is very different. Believe me, we have understanding of each one to a great level. But in that case, we just saw it as a way to be cooperative with Sears, way to help them all, great for the consumer.
And as you know, we think Dick's is great. We do a lot of business with him. So in that case, we said, perfect, let's go. We'll help you. We'll cooperate.
So you didn't try to acquire the box back from Sears?
No, we did not. And Sears will continue to operate there as well. So Dick's has taken the upper level and Sears is going to actually we understand kind of create the store, the future, so to speak, in the lower level. So, that's great. We'll continue to work with anchors like that as well.
And there's lots of little tactical things that are going on with all of our anchors about getting rights to put restaurants in on some of the frontage of the buyer. Just to bring up an example in Brierwood, we're putting a couple of restaurants and we do that all the time right in front of Macy's. So all of that stuff is out there to do. Some cases we facilitate them if they want to do a lease. So the simple goal is let's make the property better for the consumer.
And it will take all sorts of different forms. We wouldn't rule out partnering with somebody on a redevelopment of their box if that circumstance made sense for both parties.
Okay. That's great. Thank you. Sure.
Thank you. And your next question comes from Michael Mueller of JPMorgan. Please proceed.
Hi. Congratulations Steve first of all.
Thank you.
Yes. And I guess going to the mills for a second. I was wondering can you give us a little more color on the 11% comp NOI growth? I mean was it a handful of assets? Was it broad based?
I mean, what was really driving those numbers?
Look, they have a they're major markets. It's 16 assets. As you know, the focus on value for them, value oriented retailers has been tremendously successful. You've got the outlets at Orange, that conversion from more of an entertainment center to an outlet center has been terrific. Ontario is on fire.
Sawgrass, needless to say, is continues to be a behemoth. Potomac Mills, we brought a couple of restaurants in. Opry, though that's not in
the comp.
It's not in the comp. Opry has been fantastic. You know the rental. The casino in rental. So lots of things go there, just a lot of things happening there to make the portfolio better.
We added Macy's at Gurnee Mills as an example. So
But Mike, this is Steve. It is rent. It's re leasing. It's higher occupancy. It's growing
rents. Okay. So it sounds like if we're thinking about 2014, 2015, you're probably still getting above average growth out of that part of the portfolio?
I think it will be good. I'm not going to do 10 we're not going to do 10.8% for the year. So don't put that in your numbers.
Okay. That was it. Thank you.
Sure.
Thank you. And your next question comes from Tayo Okusanya of Jefferies. Please proceed.
Yes. Good morning. Steve also let me add my congratulations. It looks like we already have 1 year left to finally go shoe shopping before you lose your steady paycheck.
Tayo, if I'm going to go shoe shopping, I'm going
to go with you. That's for sure.
Sounds good. Two quick questions. First of all, just again around commentary of a lot of retailers saying Christmas was weak. Then for bankruptcies or things of that nature. But I just and for everything you're seeing right now, are you seeing kind of on the fringe tenants talking like that about potentially closing shops or things like that just based off the tough holiday season?
Not really. This is always the general time where you may see a few of these pop up. But no one in fact, there's
a few that have been
in the edge for a number of years and actually turned their business around even last year. Look, I think the consumer I read something yesterday on the plane back from Europe that the consumer is still under a pretty decent amount of pressure. Higher taxes, more regulation, uncertainty of Obamacare, spending on durable goods a little bit in the first half of the year, higher rates potentially they were thinking. They took it easy in the 3rd Q4 as you've seen across the board. So we are still in a tepid recovery.
The fascinating thing I read, last year, forget the federal government, in the state and local governments, there were 40,000 new rules and regulations in the United States of America. So that is going to slow the growth of America. 40,000 new regulations throughout this country at a state and local level. That's going to slow us down. So we have a tepid recovery even though some of the broad based numbers looked better, the fact is it's still a very cautious environment.
But we're producing terrific results in that environment. And that's the facts. We produced great results in the great recession. We had cash flow that was flat. So, despite all of that noise out there, we can only do what we're capable of doing.
We can't control the outcome of an anchor business plan or not. We can just be ready to go to work if in fact these things are thrown in our way.
Got it. That's helpful. And then the second thing is we also heard that Matt Lentz had also kind of left the company. Just wondering if that role was going to be a replacement for him or if there's going to be any changes around the CIO position?
The answer is we brought someone in to help me internationally where Matt was helping Stanley Chuchot, who's been terrific. Stanley is great, speaks 5 languages, maybe 6. Unlike the team here, he can actually speak English. But he's great and he's helping me. And in a sense, he really took Matt's role on our international business.
Got it. Could you talk a little bit more about
the family's overall background and what he's kind of done in the past?
He worked for both real estate and investment banking Companies. So, he's been a young guy compared to me probably, but he's been he's got great experience and he was instrumental with the MacArthur Glenn deal. I had to put him on that deal because of the complexity and he really helped us get there with another kind of great guy here who actually came from the mills, but moved to Indianapolis when we did that deal. Brian McDade, the 2 of them grabbed that along with our General Counsel grabbed that deal and took it to the finish line. And so, the good thing about the we have kind of the what I'll call younger folks that are really taking a lot more responsibility in the organization and doing a great job.
Great. Thank you very much.
Sure.
Thank you. And your next question comes from Haendel St. Juste of Morgan Stanley. Please proceed.
Yes. Good morning. Thanks for taking my question. A couple of questions on SpinCo. So several
of the SpinCo properties are encumbered with CMBS debt that have near term maturities, Westridge Mall in Tobeka, Chesapeake Square, Chesapeake Virginia. Yes.
Those are all being refinanced As we speak. As we speak.
Okay.
Does that answer your question?
Well, I was getting to it, right?
So there's 4 or 5 on
that list with near term debt maturity. So should we assume that all 5 are in that list to be refinanced or the candidates for disposition?
No. They're all going to be refinanced. Absent one may not be one is further out there. I don't know. I don't yes, but they'll be refinanced.
Okay. And you've quietly gone about pruning your U. S. Portfolio in recent years. I'm trying to get some how that process slows down post spin.
How do you think about U. S. Portfolio or disposition strategy after the spin off of spinco?
Well, for SPG, we'll continue to call properties like we have for year after year SpinCo. I think again, I'm not going to be in charge there, but I think I would expect SpinCo to sell a couple assets here and there. And I think that's business as usual. I mean, we'll always continue to sell assets at both companies. I can't necessarily as a Director, I'll have certainly my point of view on capital allocation and reallocation.
But I would expect both companies to continue to sell
Thank you.
And your
Thank you.
And your next question comes from Dan Oppenheimer of Credit Suisse. Please proceed.
Thanks very much. I was wondering, I guess, there have been enough questions about the seasonal trends here. We'd normally see some closings in the Q1. Based on the other side of that, at over 90 6% occupancy here, you likely have some sort of backlog in terms of retailers wanting to get in. Just wondering if you can comment a bit in terms of conversations with retailers looking ahead in terms of Del Amo as that opens up next year and just others.
Just how you think about that in terms of demand in terms of just if there were to be any vacancies in terms of some backfilling or adding there?
We still have very strong demand. And in fact, the response to Del Amo has been terrific. We are going to be able to move that up significantly in price point and with the quality retailers. And retailers still want to expand. Retailers still want to have great real estate that will help their brand and we're seeing no real slowdown in that conversation.
And in fact, and we've said this in other calls, a great amount of the time that David and I spend are basically dealing with retailers that we cannot accommodate in the size they want or in the space they want at our property. So demand remains high.
Dan, this is Steve. I'll just add one point. We tend not to get into the 27 different variables that go into our forecast for the year. But I will say that our plan in 2014 is that occupancy year over year will be up at the end of 2014.
Great.
Thank you.
Sure.
Thank you. Your next question comes from the line of Ben Yang of Evercore. Please proceed Ben.
Hi, great. Thanks. David, you've talked in the past about the disconnect between sales and NOI that for 1 you can replace the
underperforming tenants. So I was just hoping
I mean, Steve made the comments about occupancy being 14. Would you guys consider at all just disclosing what same store NOI growth is implied in your 20 14 guidance? Because just seems like it could help alleviate some of the concerns surrounding core growth in spite of client sales, pressure
to customer? Yes. Let me interrupt you there. We did actually.
Did you?
I must have bored you by the time I got to that. It's quite all right. I understand that our opening comments may in fact bore some. We are projecting for 2014 to have comp NOI up 4% or above. So that answers your question, 4%.
Got it. Sorry, I missed that.
That's all right. I am not offended in any stretch of imagination.
Maybe I missed this one also. Did you disclose the cap rate for the Arizona Mills transaction?
We in fact, we said we would not and we did say that earlier.
Okay. That's so far. That one too. And maybe final question, maybe going back to Cedric's comment on Sears. Do you think the tanker subleasing dynamic will accelerate in the coming years?
And also is this a model that only works at the A malls? Or do you think we could see this type of activity ramp up at the B malls? I think that there is going to be a concerted effort by Sears. They've done it historically over the last few years and they're continuing to be focused on it to try and get their stores to where they're most efficient. That doesn't and I think that is frankly not specifically
limited to any particular
quality spectrum of their mall's best interest or the consumer's not in our best interest or the mall's best interest or the consumer's best interest, we'll try and influence a different direction in Sears part. But I don't think their efforts are being focused on any particular quality type. Got it. And are you in current negotiations to do this in any other of your malls with Sears or maybe even a penny currently? We're having a constant dialogue with both companies about all the real estate.
And with them to come up with positive outcomes. Great. Thank you.
Sure. Thank you.
Your next question comes from Craig Schmidt of Bank of America. Please proceed.
Thanks. Just given Steve's retirement date, I'm wondering if that's a good indicator when he thinks the debt markets are going to get tougher?
I don't know. I see the tenure coming back down.
So Craig, I will say that
the debt markets are in really good shape right now for us. Now I always caution that by I think about the little commercials. Your results may not be the same. But for us, the bond market is wide open. The mortgage market is very good.
The bank market is wide open. So and having already put away now quite a bit of our 2014 maturities, we can start to tackle the 2015 stuff and feel good about the opportunity to continue to roll down our weighted average borrowing costs while increasing our duration. I think it is interesting in a debt portfolio that's $28,000,000,000 $29,000,000,000 we've lowered our borrowing costs 23 basis points in each of the last 2 years. And that's a pretty meaningful contribution to profitability.
With no reliance on floating
rate debt?
Yes. It was almost no floating
rate debt.
I mean, that's the important part of it. If we wanted to reduce our earnings growth, we would have 20%, 30% of floating rate debt. We basically have virtually nil.
Thanks. And I guess one other thought on the cost of occupancy. I know that's been touched on, but $11,500,000 still seems low even when considering its premium outlets combined with malls. Where do you think and I realize it's a moving target, but where do you think that could normalize out your cost of occupancy? Or do you think it's going to remain sort of in the mid-11s?
Well, this is the $64,000 question. Like I said earlier, I mean, it is interesting to me that occupancy costs outside of the U. S. Are much, much higher. And so, answer is I don't know other than it does give us some very good feeling that we still have a ways to continue to grow our NOI because essentially the biggest opportunity we have is to marking our leases to market and being able to replace underperforming retailers with better ones besides the obviously and I know Craig you've been out seeing a bunch of properties And I appreciate that you have because you get a good sense of what's going on here, which I do think because of the size of the company, sometimes people lose focus, but all that's going on.
But that's going to drive our business. But, I can't put a number on it. And we're here to create the right partnership with our retailers because look, we believe in repeat business with them. But, it gives us confidence that we still have the ability Yes.
Yes. I would just say in the properties I visited, I've been very impressed and you sort of forget sometimes that there really is skill to managing these assets. And some of the things I've seen in the last couple of weeks have been very impressive.
Yes. Look, I mean, I know you went to Del Amo, right? And I'm sure you didn't really believe we were redoing Del Amo because I know you've been asking about this for I'm sure you asked the Bill's pre acquisition for years. And then I know once we bought the Bill's, it took us a few years and one great recession to overcome, but it's going to be a great, great mall.
I think what you're doing and just bringing in Nordstrom's could be a real game changer because
there's
clearly an unserved audience there.
Thanks. Sure.
Thank you. And your next question comes from Jeff Spector of Bank of America. Please proceed.
Good morning. Just I guess a follow-up to Craig's question. I guess when you're sitting down with tenants and negotiating new leases, I mean, is there a target occupancy cost?
The answer is that we're very focused on the maximizing of rents and it's less about a target occupancy cost because it takes into account the size of the space, the use of the tenant, the quality of the mall, where is the space located in the mall, what's the sales projection for that tenant and all of that goes into setting the rate that we think is appropriate. And believe me the process is granular and we spend a great deal of time on the nickel making sure that we try and get it right. But we don't go into any given space saying we won 12.5% of sales from this space and 18% from this space. All those factors go into how we set the ramp.
Okay. Thanks. That helps. And then, Rick, I guess, I know there's been a lot of discussion on JCPenney Spears, but just one thing I was thinking about when I was going through the sup on anchor big box openings. It is interesting when you look at the list compared to let's say years ago when we a number of department store closings, I mean do you feel better today there's more options?
I mean I really haven't heard yet great evidence if some of these anchors are definitely a benefit to the mall, but I would imagine it just seems like a pretty good list including like I noticed Wegmans at Montgomery Mall.
Yes. Well, look, we have a whole dedicated team and frankly David and I have been pushing all of our people to go out and cast as broad a net as possible. So we have as many options identified Nanuest been great. Fresh Market at the fall. But that's just one category.
David mentioned Dick's earlier. Our house furniture reached to have a lot of different users. And as we said earlier, we've gone through our portfolio and have these users identified, so that if an opportunity presents itself with an anchor box, we can move efficiently and quickly and effectively to get it filled. Yes. And
the difference, Jeff, also is that when we had a significant turmoil in the department store business, say in the late '80s, early '90s, I mean, there's been episodes of a lot of turnover. There's also a lot of new stuff that was being brought to the market. In today's market, you essentially have no new I mean of a significant quantity, no new development, whether it's strip centers or malls. They have a little bit in the outlet business as we all know, but you have no new product coming on the market. Yes, I know there are a few, but in the real sense of stuff.
And you also have obsolescence occurring, which is by the way we have been telling folks for several years that we expected obsolescence. When you put together, the inventory is tight and sure there will be some headaches associated with that, but that's a better spot to be in if in fact there is significant anchor turmoil than say in the early 90s and a couple other episodes that Rick and I had to deal
with. And then the last thing I'll say on that is that frankly success breeds success. So once we're able to get one of these new anchors in our properties, they open a store, what invariably we have found is they've been more successful than they thought they'd be and that makes the next conversation for the next opportunity much more easy to have and finalized.
Thanks. And then I just want to clarify, I know at the beginning of the call, David, you're talking about traffic counts. I think it's important to clarify, I think you used the word you don't participate with the company mentioned. When you say that are you saying just to confirm Simon does not provide data to these companies. Is that correct?
They are yes, they first of all, we don't use them. We rely primarily on parking accounts. We do not use them. I think they're I'm not sure about their sample base. We'll have to ask them.
I think it's narrow. And I don't the retailers that use them, I think it's a small subset. But I mean, look, there are lots of people that make pronouncements and tell you this, tell you that. All we can do is just report quarter after quarter what the results of our business produce.
Okay. And then my last question, I know you may not be able to answer it, but in the discussions with Taubman, I guess, did anything was there any discussions on the 2 different St. Louis outlet centers?
I think, Jeff, everything I've told you about our deal has been disclosed.
Okay. Thanks. And congratulations, Adeep.
Thank you.
Thank you. And your next question comes from Nathan Isby of Stifel. Please proceed.
Yes. Just a quick follow-up a technical question. You mentioned that online sales fulfilled at your malls will count towards sales. On the flip side, if somebody buys 6 pairs of shoes online and returns 5 of them at your malls, is that a net deduction to sales?
The answer is no, because it didn't occur at the POS.
So even if they return it in your mall, it would not? Correct. All right. Thanks.
Thank you. Ladies and gentlemen, I'd like to now turn the call back over to Mr. Simon for closing remarks.
Okay. Thank you. Sorry the call dragged on that long. Steve has been a great part of the group. We've got another year to torment him.
So I'm sure you'll see him around and we'll make sure that we'll undergo the extra torment for the next year. So anyway, thank you. Have a good one.
Thank you. Ladies and gentlemen, this concludes the presentation for today. Thank you for your participation in today's conference. You may now disconnect.