Good day, ladies and gentlemen, and welcome to the Q3 2013 Simon Property Group Incorporated Results Conference Call. My name is Gwen and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will be conducting a question and answer session. I would now like to turn the conference over to Ms.
Liz Vail, Senior Vice President of Corporate Affairs. Please proceed.
Thank you. Good morning, everyone, and welcome to Simon Property Group's Q3 2013 results conference call. Presenting on today's call is David Simon, our Chairman and Chief Officer Rick Sokolov, our President and Chief Operating Officer and Steve Starett, our Chief Financial Officer. 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 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 this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the company's supplemental information included in today's Form 8 ks filing. The supplemental information is available on investors. Simon.com. I would now like to introduce David Simon.
Good morning. We had a strong quarter with excellent performance in our core business. We had strong progress on our growth strategy, which includes redevelopment and expansion of existing properties to meet retailer demand and enhanced productivity, development of new premium outlets and our continued smart acquisition strategy. FFO was $2.21 per share, up 11.1 percent from the Q3 of 2012. Our FFO exceeded the 1st call consensus estimate by $0.05 per share.
For the malls and premium outlets, comparable property NOI growth was 4.9% for the quarter, driven by tenant sales up 3% to $5.79 per square foot, occupancy up 90 basis points to 95.5 percent. Our re leasing spread was a positive 15.2% or 8 point $0.05 per square foot. Retailer demand for space in our properties remains strong and healthy driving our occupancy increases. Our retailer sales continues growth continues to be ahead of GDP. And more important to us, our existing leases are under market rent.
And keep in mind, we see almost no or very little correlation between tenant sales growth and our NOI growth due to our ability to replace underperforming retailers. We have good visibility for strong NOI growth over the near term. New development, just quickly, we opened 3 new premium outlet centers during August, all of which have exceeded expectations. All were nearly 100% leased at opening and sales per square foot of all three properties are trending above our portfolio average. The total net development cost of the 3 were $400,000,000 That's not our share.
But in total, we expect a 1st year return of 10.5% on our cost. We broke ground on premium outlets in Charlotte and Montreal. And we finalized joint ventures are under construction in Eagan, Minnesota, which is in St. Paul, Minneapolis and Vancouver, British Columbia, Canada in our new partnership with McArthur Glen. On the redevelopment expansion highlights, the shops at Nanuet opened in October, a complete transformation into an open air environment providing everyday shopping and activities, plus dozens of fashion and specialty retailers unique to the area.
It's 98% leased. Community acceptance and early reports on sales have exceeded expectations. We also opened 105,000 Square Foot expansion of Orlando Premium Outlets in October. It's 100% leased redevelopment and expansion projects ongoing at more than 35 properties in the U. S.
And Asia. Overall, our multiyear pipeline of new development and redevelopment and expansion projects is key to driving growth in NOI. We continue to expect development investment at least $1,000,000,000 annually from 2013 through 2016 GO Projects GO Projects include Roosevelt Field, Houston Galleria, Woodbury, Stanford, Del Amo just to name a few. In other words, they are under construction. International, just let me mention a few things.
Finally, we completed the closing of our joint venture with McArthur Glenn. It includes ownership interest in 5 McArthur Glenn designer outlets located in Vienna, Venice and Naples, in the Netherlands near Dusseldorf and one in the U. K. Near Kent. We also own a 50 percent interest in their management and development company, which has a strong pipeline of future projects and opportunities.
We're excited to partner together great platform for high quality retail real estate in Europe and a strong team of professionals. This partnership supports and extends our international growth strategy. Important industry synergies will be taken advantage of in upcoming years. Similar to what we've been accomplishing with Klepierre. Total consideration for the recent investments is approximately $500,000,000 at a cap rate of slightly north of 6.5%.
Klepierre announced their revenues a couple of days ago. We continue to believe we are well positioned to assist them in delivering greater value from their platform. European Retail Recovery is just getting started and they are beating financial and operational expectations. Capital Markets, Moody's Investors Service upgraded SPG's senior unsecured debt to A2 with a stable outlook. We are one of only 2 REITs with an A ratings from S and P and Moody's.
We completed a €750,000,000 bond offering to complement our McArthur Glenn and Clay Pier investment. It taps into a broad market, expands our access to capital, provides a natural hedge and strong demand enabled more favorable terms for lending for leading European real estate players rate of 2.375 for 7 year notes. Dividend quickly, we increased our quarterly dividend from $1.15 to $1.20 per share as a result of continued strong performance and a raise of our taxable income estimate, a year over year increase of 9.1%. Total dividends paid in 2013 will be $4.65 per share compared to $4.10 in 2012, an increase of 13.4%. We will again raise our 1st quarter dividend after our taxable income estimate is complete in the Q1 of 2014.
Today, we're raising our FFO guidance to a new range of $8.72 to $8.78 of FFO per share. The primary driver of this increase is strong operating performance across all platforms. This increases the midpoint by 0 point $0 from our last one in July and 0 point Our commitment to shareholder return and our ability to execute has built an unprecedented track record of meeting or exceeding expectations on a quarterly and annual basis for at least the last decade. Our nearly 20 year history as a public company since IPO in 1990 in December of 1993 is as follows: total shareholder return of approximately 19 75 percent or 17% annually for 20 years Our FFO grew in 1993 from $150,000,000 to over $3,150,000,000 in 2013 using the midpoint of our guidance range. Our equity market cap grew from $1,800,000,000 to approximately $58,000,000,000 today and we're not resting.
The range of opportunities in front of us is exciting and we'll continue to focus and work very hard to produce strong results. We're now ready for questions.
Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed.
Good morning.
Good morning. Are you awake?
Yes. The coffee is kicking in and it's Friday, so it's always a good thing. To use a favorite metaphor for Steve, we're going to tee off with you. On the euro bonds, just sort of curious what the reception was over there as far as is there a dedicated REIT bond community? Or do people are they generalists?
And do they look at you guys as a real estate company? Or they look at you as a corporate America Fortune 500 company?
Alex, it's really the latter. The real estate market over there, the investment grade real estate market isn't deep enough that there are people who are dedicated real estate bond investors. So the interest was very high. I think we met with almost 50 investors during a 4.5 day roadshow. Almost all of them ended up coming into the deal.
They are money managers, insurance companies, pension funds, really sticky, good, patient money, but they are they certainly viewed us not only as a best in class real estate company, but as a major U. S. Corporate who has a presence in Europe, but also gets 90% of its income from the U. S. Which was an important diversification element for them.
Okay. And just as a follow-up to that, should we expect you guys to issue in Japan, if you're looking at outside the country for long term capital?
It's a good question, Alex. I mean, I would say this. Right now, we have a multi currency tranche on our credit facility and we do have yen outstanding that acts as a hedge against our equity investment in our premium outlet and portfolio in Japan. No plans at the present time to go to the bond market in Japan, but that's certainly an option that would be available to us.
Thank you. Sure.
Our next question comes from the line of Michael Bilerman with Citi. Please proceed.
Yes. Good morning. Good morning. David, a question on the outlet business. So with the recent openings, you're up to probably 25%, 30% of NOI with housed within outlets.
And I'm sort of curious, 1, will you sort of reevaluate at this point sort of breaking that out as a standalone in terms of metrics, in terms of performance, just given the size and how good it's performing? But also as you think about the pie of Simon on page 19 of your supplemental, where does sort of outlets go over the next 5 years from what you can see relative to the other pieces in there? And maybe you can talk about sort of that range of opportunities that you see that you ended your comments with?
Well, no, the fact is we really run this together. Even though we have separated some personnel, the fact is we really run the business as one entity on the outlets and the malls. So we don't see any reason to separate it out. And the fact is both are we couldn't produce these results if both weren't producing the the fact of the matter is this is our numbers are a real good indication of what's going on in our business, whether you want to just look at malls or outlets. It's really it really is requires to deliver both have to produce these kind of results to have it shown together.
Now with respect to the outlet business, look that's where our new development is focused. As you know, we just opened 3 which is pretty good work. We've got a good pipeline of 4, 5, 6 others, a couple of which are already under construction. We've got another 3 or 4 that are in the pipeline. So that's going to continue to move the outlet business percentage up.
On the other hand, as I mentioned to you, we are under construction or about to be under construction in Stanford, The Field, Del Amo, Houston Galleria just to I won't I know Rick wants to list them all, but I will not let them. So just to name a few and I think that will start to kick in, in 2015, 2016, 2017 that will probably rebalance the pie chart as we look back in 3, 4 years from now. You there? Yes. You can go ahead and ask me something else even though I know we instructed you not to.
Rod, I was just saying the range of opportunities as you sort of you ended your comments with that you're not resting on your laurels. You see a range of opportunities. Obviously, you've talked about the development in the outlets and all the redevelopment that's happening. What other sort of scope should we think about and how it impacts that your pie chart or the company terms of opportunities? I just wanted to dig into it a little bit.
If I told you then you would upgrade somebody and the price would go up. So I'd rather just keep that to myself.
Hey, Michael, this is Steve. Just to put a pin in it though, over the last 4 years, we've spent over $12,000,000,000 in acquisition of assets. So not an insignificant number.
Yes. Look, I think as Steve said is as we look back since 2010 and these are gross numbers. We've purchased about $12,800,000,000 These are gross. So it includes debt assumption all this other stuff, not necessarily our share. But we've acquired about $12,800,000,000 We've disposed about $2,700,000,000 and we've developed 1,000,000,000 dollars of new stuff ground up.
So again, I know it gets lost in the sauce, but we're always very focused on upgrading and reconstituting the portfolio. And we see it look we see international growth ahead of us Michael, if that's what you're asking. And in the U. S, we've got the expansion pipeline, which is overwhelming. I mean literally nobody in our industry is doing what we're doing expanding our existing great assets.
Nobody. And also complementing that is all the new development we're doing in the outlet business of which as you know we're executing consistent with the returns that we've done historically. Toronto is great. St. Louis is great.
We're under construction in Charlotte. Montreal based upon Houston is great. Vancouver now that we're in the McArthur Glenn partnership that's going to be good. We got a couple of new sites that we're working on some ourselves, some with partners, Tampa as an example so on. So there is a lot to do.
And how the pie chart changes, we'll see. But the fact of the matter is we see pretty good growth organically just assuming we can execute the way we have in the past.
Great. Thank you. Sure.
Our next question comes from the line of Ross Nussbaum with UBS. Please proceed.
Hi, good morning.
Good morning.
David, we understand that you've joined some of your mall peers to do a beta test of same day delivery with Deliv. And I'm remembering back to a conversation we had maybe 10 years ago where you had talked about Domino's Pizza and the fact that they weren't in the pizza business, but they were really in the 30 minute logistics business and wouldn't that be cool if the mall could figure out how to do that? Is that effectively what you're trying to accomplish here with this beta test? And is that really the future of the mall in order to compete with the Amazons of the world?
Well, look, I do think the mall has a unique advantage in that. It's already got the infrastructure physical infrastructure to satisfy consumers that want same day delivery. Now it sounds great. It's a little more complicated than that. But to the extent one of the things having spent yesterday with our mall team just kind of going not property by property that we look forward to in a couple of weeks.
But the thing that I am focused on in our mall business and when I say mall business, I include the outlets is that we have to make we've always made retailer service a priority. So Rick and I are as good as sucking up to retailers as possible, okay? Sometimes Rick's better than I am, but we both can suck up when required. The one thing we don't do the way I would like us to is I really want to provide better service to our consumers, the actual shoppers. And whether that's something we instituted last year was just surprise and delight come to the mall and we're going to give you a free cup of coffee.
We're going to schlep your bags. We're going to make your visit really better. Think about the hotel level of service at a good hotel when you're checking in and they're taking care of you to make your stay pleasant. With that said, we do think delivery or schlepping, you remember we started your Sherpa probably not politically correct, but whatever. But we started this years ago.
We were actually too far ahead of our time. But the fact of the matter is we want to increase the level of customer service that we provide to our shoppers. We think this is consistent with that. Whether this venture will do that or not, we don't know. We're going to continue to experiment.
We've got a whole smorgasbord of things that we're investing to do that. And the sole purpose is to make the consumer visit more pleasant, which is a huge focus for us this year, next year and the year after.
That makes sense. As I thought about I said to myself is the next evolution that I go to your website for whatever mall I'm shopping at and I can do a search for white shirt and then instantly your website brings up every white shirt that's being sold in the mall, I can click on which one I want and buy it. Is that the next evolution that you have to get to the integration of inventory of all your retailers onto your website so that is the interface?
I would say that's that would be terrific if we could ultimately get to their store level inventory and be able to communicate that to the consumer much like the mall aggregates all the physical stores. If we could figure out how to do that that would be great. It's not that easy because you have to essentially get into the customer or the retailer's inventory. But the one thing I want you to do when you do go to the mall, I want to be able to tell you when you go to the mall, here's what's new in retailer XYZ. Here's what promotion XYZ retailer has.
Here's who does have a white shirt to go to what retailer. So you have a your first stop at the mall is going to be able to communicate to you what's new and what's exciting. So that makes your visit that much more pleasant if in fact we can do that and more profitable for you. So I think it's as interesting to do it while you're in the physical environment as it is whether you're at home or on your mobile
device. Appreciate it. Thanks. Sure.
Our next question comes from the line of Jeff Spector with Bank of America. Please proceed.
Thank you. It's actually Craig Schmidt. I'm noticing the new development blended stabilized rate of return is 9%. Is that more due to higher costs? Or are the rents unable to be pushed as much as say maybe a year ago?
Hey, Craig, it's Steve. It's really neither. It's that number, the mix changes from time to time. We opened some projects as David mentioned the 1st year return on the stuff that is open which is no longer on the list was 10.5%. So it's simply a mix change.
But there's been no real fundamental change in our ability to get rents or cost control or our expectations for our development pipeline.
Okay. And I just I noticed the leasing spreads have been up 4 quarters in a row and on a dollar basis have gone from $4.86 to $8.05 I'm wondering where can they go from here? And is that from limited supply of quality space or just a growing demand from retailers?
Well, it's a function of demand is solid and you got to look at what's expiring. So as I said, we there's this huge focus on our retailer sales. We've tried to explain the correlation is slight if at all and it's in a lag. Fact is as you know retail sales have gone up dramatically since the Great Recession. And you look at what's expiring and you look at the supply and demand characteristics, you put it all together, it's more of an art than a science.
And that's why we're able to have pretty good re leasing the matter is $8 is pretty damn good. We're finishing our budget for next year. We're going to see good comp NOI growth just like we had the last 2 or 3 years. And that ultimately does not take into account when we look at what the Houston Galleria's and The Fields and the Alamos are going to do after those developments are done. And those malls have been transformed to take the rightful position in the 21st century of great real estate that can't be duplicated.
So I can't we're not going to give you a number, but things are okay and we'll continue to pound away. Thanks. Sure.
Our next question comes from the line Mike Mueller with JPMorgan. Please proceed.
Yes. Hi. I was wondering did you see anything change in terms of traffic during the Q3?
Well, generally September was a pretty bad month in terms of traffic and sales for all retailers. And we're starting to hear and feel that traffic is bouncing back in October. But clearly, the general economy has slowed. And we're no the fact is we get impacted by that less than most others because of where our properties are positioned and the depth and breadth and the diversity of our properties. But the fact is we're not denying that the world or the U.
S. Has actually slowed. We could talk philosophically about why, but it's nothing with what we're doing. But we certainly have seen that from our retailers generally across the board both high endmiddle and the more moderate customer base.
Got it. And then I guess going back to one of your answers before where you mentioned if I mentioned the stock it would go up you'd upgrade it blah, blah, blah. Off the cuff comment there?
Yes. Probably a stupid one. Yes, off the cuff and stupid. It's a little earlier. We're usually at 11 o'clock, 9 o'clock we're trying to get our group on.
So, in fact, it's probably off the cuff.
Got it. Okay. Thanks.
Sure.
Our next question comes from the line of Cedric Lachance from Green Street Advisors. Please proceed.
Thank you. I just want to think about outlets for a second. And when we look at some of the recent projects, some of them have been just in the industry in general, some of them have been more urban, far more correlated with population centers rather than being further outside. What do you think it means for the projects you must develop over the next 10 years? And what does it mean for the existing real estate in the outlet business that tends to be at the outskirts of town?
Well, again, Cedric, I believe there's been one that's been built that's more infill. So we do not hear I will just tell you this. Our outlet business is great. We're building terrific products. We will not make pronouncements about what the future of the world is going to be.
We're not that good or arrogant. We're going important metro markets, usually suburban important metro markets, usually suburban locations, Toronto, St. Louis, New Hampshire, go down the list all of which have been very successful. We're continuing to do that. There may be 1 or 2 built that's more urban, but one does not make a trend.
We will not make pronouncements here. We're not in that business. We're in running our business day in and day out to increase our cash flow, make smart investments, smart developments. And our track record indicates so far knock on wood we're pretty good at that. But I will not make pronouncements that that's the new trend.
1 does not make a trend.
Okay. And what do retailers say about their preferred locations in terms of outlets? And whether or not they do have an interest in trying to move more infill?
Well, the fact that we're 100% leased on every outlet that we open gives you an indication of what to tell on us.
I think Cedric the retailers want to be where they can be as productive as possible. And what you're finding in all of our properties is that we continue to add high impact retailers making them more and more attractive to consumers which drive sales which drives retail interest. There's no magic to this business.
Okay. Thank you. Sure.
Our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.
Yes. Hi. Good morning, guys. Hi. Thinking about dispositions for a second, I don't think you addressed those Dave.
You sold off 2 this quarter. And I'm curious have you given more thought to maybe selling off a bigger chunk or spinning out a group of your lower tier regional mall assets in the U. S?
Well, Rich, the fact is we're always looking to do as much portfolio management as we can. And as I mentioned to you earlier, I mean since 2010 basically $12,800,000,000 of acquisitions, dollars 2,700,000,000 of dispositions, dollars 1,000,000,000 of new development not including the redevelopment. So that's part of our focus day in and day out and that will always be an important thing in terms of what we do. And the form of which that takes will depend on market conditions, but we'll continue to do portfolio management. It's very important, very vital.
It's been something that we've been pretty good at over 20 year history of a public company. So we'll continue to do that Rich.
But no real thought Dave to a big chunk I guess of assets as opposed to 1 or 2 at a time as opportunities rise?
Again, I'm not going to share exactly the internal workings that we do day in and day out in terms of how do you do the best portfolio management possible. But needless to say, if you look at our history, it's an important thing that the senior management team needs to do and we'll continue to do it to the best of our ability. So I'm not saying one way or another exactly how that will be done. It is just we will portfolio manage to the best of our abilities.
Okay, good. Thanks guys. Thanks.
Our next question comes from the line of Tayo Oktanya with Jefferies. Please proceed.
Yes. Good morning, everyone. I just wanted to go back to along the line of Craig's questioning and again releasing spreads ability to keep raising rents going forward. Steve, could you give us a sense of where occupancy costs are right now relative to historical levels? And how much that gives you confidence about pushing rents going forward?
Tayo, the occupancy costs are 11.4%. I think we give you about 5 quarters of in the supplemental on Page 23. And that's down 100 to 150 basis points from where it would have been going back to 2010.
Okay.
But I think the other point I would add is that it's been very stable over those 5 quarters. So we are we've been at that 11.3% to 11.4% range and we still have momentum in our business and that bodes I believe very well for our ability to hopefully continue our performance going forward.
Okay. That's helpful. But with your with the tenants at this point when you're going through lease negotiations like how much are they really kind of bringing up this issue of slowing tenant sales in general and a tough retail outlook when they're negotiating with you? Or they just want the space so badly it doesn't really come up?
Well, let me answer that. I mean, the perception that retailers negotiate, let's take an example. Let's say their comp NOI is up 4% and they're willing to pay $11 And the comp sales are flat, they go to $10 is not reality, okay? They look at it over a longer period of time what they're going to do, what the return on equity and profitability in that store is. So again, we try to give you a sense of these numbers generally what's happening in the from our retailers.
But the fact is comps the immediate ups and downs of comps have no bearing on what rent we can charge
overall.
And so over a long period of time potentially. But the one thing you have to remember is our comp sales also includes retailers that are going out of favor. And if they were in favor 5 or 7 years ago, sometimes they're able to negotiate whatever rents, because we think they're a new and exciting retailer. If that wanes or waxes, the fact is we're able to replace that retailer with someone else that's there. So there is no boy, I had a bad quarter sales.
Therefore, I'm going to I want to pay you less rent. It doesn't work that way.
Well, that's definitely helpful color. I think I was just along the lines of if you have 3 quarters of bad sales, that's kind of what I was kind of thinking what happens at that point. But I think the explanation has been very helpful. So thank you.
Sure. No worries. Yes. Don't lose sight of the fact that between 201020 12 over that 3 year period sales were up 25% in our portfolio.
Great. Thank you, gentlemen. Sure.
Our next question comes from the line of Vincent Zhou with Deutsche Bank. Please proceed.
Hey, good morning, everyone. Since no one else has asked us here, I'll just throw it out there. Just wondering if you could give us your latest thoughts here on what you're seeing from JCPenney? And given that they are discounting pretty heavily to try to claw back some share and sales, just wondering if you're seeing or noticing any impact on other parts of the mall as a result of those efforts?
No, I would say generally it's not there's not a real impact on the mall environment both with the old penny, the potential new transformed penny and now the recovering to back to basics penny. I mean, if you go through kind of the 3 cycles, the way they were doing it, the radical change now back to basics penny. The fact of the matter is, it really hasn't impacted kind of the entire mall environment than what we have. If they get back to the basic penny, having them they do broaden the mix generally in the environment and they appeal to a more moderate consumer, which we'd love to have in a number of cases in a number of malls as well as the higher income consumer. And that market is there for them to appeal to that consumer in the mall environment, which they've done historically for 100 plus years.
So and even before the mall environment. So we'll wait to see how they do that. But it's really had no impact on the what I'll call the mall environment.
Okay. So I mean so as they
I mean they are making some progress on the sales decline. So I was just curious if that's hurting anybody else, but it sounds like not.
Well, look we're glad that they are. But again it's not a huge impact on what's going on in the mall.
Okay. Thank you. Sure.
Our next question comes from the line of Ben Yang with Evercore. Please proceed.
Yes. Hi. Thanks. Maybe for David, I'm just curious if you have any thoughts on the B Mall or even C Mall sales market, which has been surprisingly active this year, maybe in terms of the prices being paid for these type of assets, what that might mean for the value of your stock, if do you think spinning out the BMO portfolio would or not some value for you guys?
Well, there is a lot there. So and you broke up at the end. Did you hear the end part?
The Well, I guess maybe just starting just what your thoughts are in terms of the price being paid for BNC malls and what that might mean for the value of your stock if anything at all?
Well, I'm not going to comment on the value of our stock other than you look you need to look at us as a company that can increase its cash flow and its dividend and it has a lot of future very high returns on equity investments, under levered ability to execute its game plan. We get caught up too much on A malls, B malls, tenant sales, all of that stuff. Put it all in a blender, you allocate it, you figure out what's most important to you. What's most important to me is cash flow growth and return on investment and equity. And that's what we strive to execute And the ability to finance our business appropriately, making smart investment decisions, which all kind of factors in.
And then the market decides what the value of the stock should be.
I
don't get carried away one way or another. And the fact is we look at every asset as it's very important to our business. We look at the future growth prospects. If we might dispose of it, we look at what the price we might get. We factor in the taxable income, what we might have to do in terms of dividends if we sold it, because as you know we're at our taxable income number.
It's growing rapidly. Our dividend is going to grow. We put all those things in. We try to do the best we can. And we see where it takes us.
So it's good that the big picture I'm not going to comment on price other than it's I think it's very positive generally speaking that there's a lot of activity in if you want to call it B or C malls call it B or C malls. I think that never hurts us as an owner of if you want to say we're an owner of B and C that's fine. It never hurts us that there's a lot of capital activity in that business.
Okay. That's helpful. And maybe for a follow-up instead. Can you maybe talk about your expectations for cash flow growth in your A malls versus the B malls and whether you think that's going to compress in the coming few quarters or even years?
Well, I think historically the better the center or the more let me say it differently. The more market share any piece of real estate has the better its cash flow growth characteristics they have. So whether it's A or B, it's irrelevant. It's really a question of does it have market share? What's the competitive outlook?
And those that have that position have better growth characteristics generally speaking. Great. Thank you. Sure.
Our next question comes from the line of Josh Hadzik with BMO Capital Markets. Please proceed.
Hi, good morning.
Good morning.
Thinking about McArthur Glenn in the European outlet business specifically the leasing side, We have upside exposure in the U. S. With overage rents. Is it similarly structured there? Or any other nuances we should be thinking about?
It's very much structured towards sales, but it's even more clever in the sense that they have in their leases, they get a percent of sales, but the high watermark is then fixed at kind of their base rent. So you get the best of both worlds in a sense. And these centers on average do just to if you convert you all can convert, but we'll do it. These things average about $900 a foot. So it is a the ones that we've invested in and as we think over time we'll be able to invest in other outlets in Europe through McArthur Glenn.
We think it's a very productive portfolio and extension opportunities and the like. So we think it's we like it. And we expect it to be a very good investment for us over time. And I think we're coming in at a decent valuation. So again, that's our ability to assess real estate, handle handle the complexity of a partnership like this, different countries, different personalities and we're one of the few companies that are able to do a deal like this.
And that is a respectfully I say a competitive advantage for the company.
In terms of growth there, penetrated do you think Europe is with outlets relative to the U. S? I mean, what's the opportunity set in your view?
It's good because the right to build in Europe continues whether it's an outlet or even a pulp price continues to be very high or very hard, I should say.
Okay. Thank you.
Your next question comes from the line of Haendel Stajjus with Morgan Stanley. Please proceed.
Yes. Good morning. So we see quite a bit of mall trades here in the past couple of months. And given your activity in the market, I was curious on your assessment of recent A and B mall asset pricing. Has there been a notable change in cap rates or return expectations given rising rate expectations and slowing sales trends?
No. Okay. One more follow-up if I may on the re leasing spread questions. You guys also had a pretty good pickup in CapEx spend this quarter versus prior quarters. How much of this improved re leasing spread would you say was bought this quarter with the higher CapEx spend?
None. None. Yes, you really yes, none. I mean that there's some always going to be some quarter to quarter volatility, but no issue there. We don't buy we're very frugal as you know when it comes to tenant allowance and the like.
Great. Thanks.
Thank you.
Your next question comes from Dan Oppenheimer with Credit Suisse. Please proceed.
Thanks very much. I was wondering if you can talk a little bit about the comments in terms of upgrading the assets and you've done a great job over time and very strong redevelopment pipeline now. And when you go through the mall portfolio mall by mall in the next couple of weeks, how much do you have in terms of a shadow redevelopment pipeline where you look at and say, we'd love to do this redevelopment, but don't want to do so until we as we look at these struggling anchors here, if this were to happen we do it. Just trying to think about sort of that the opportunity in terms of that shadow pipeline there.
Well, look let me just if I could just comment generally on it. We are in the midst again of doing the biggest extensions and the biggest redevelopments that we have. So as an example, I'm not going to do the list. We are under construction in the field, Rosebel Field. We are under construction in Stanford.
We are under construction shortly in Houston Galleria. And we're getting the approvals in King of Prussia to create the extension between the 2 big assets. We just got approval from the BRA at Copley. We still need another hurdle. So we are literally we just finished Nannuette, Shops at Nannuette, which if anybody that has seen the mall prior to what we've done before, you would be pleasantly surprised not only just with the transformation, but with the lease up.
So we are I'm sure Del Amo to name another one we're in the midst of huge construction there bringing Nordstrom in and all the rest. So right now, the biggest focus is executing these huge big redevelopments that are going to be really exciting. And there's a lot of opportunities beyond that. And our pipeline in terms of redevelopment is in the $4,000,000,000 to $5,000,000,000 range. But beyond discussing it, because everybody can have the shadow, the fact of the matter is it's happening right now.
Right now it's happening. So this is no longer we're going to do this. It's actually happening. And I've got the picture to prove it, if you're interested.
And the only thing I would add is David touched on the major redevelopment adding that every year and each of those additions just make our properties stronger. We also have an ongoing renovation program where we're renovating a number of projects every year. And all that is just part of what we're doing to keep our products relevant and enhance their market share.
Thank you. Sure.
Your next question comes from the line of Jeremy Rohn with Hillel. Please proceed.
Yes. Good morning and thank you for taking my question. I was wondering if you could speak on what has driven the property operating expenses down and maybe shed some light on if this type of expense reduction can be expected going forward?
Jeremy, it's Steve Steara. It's a couple of things. One is, as David mentioned earlier, we have sold some assets. We also had a wholly owned asset that converted to a joint venture in 2013. So there are fewer properties, which is causing part of the decline that you're seeing.
The rest of the decline is caused by the fact that insurance costs are a little lower. It's really those two items that are driving it.
Okay, great. Thank you. Sure.
Your next question comes from Michael Bilerman with Citi. Please proceed.
Yes. Rick, I got a just question on sort of occupancy. 95.5 percent, I recognize that includes the outlets, but I think that's a peak overall certainly ahead of where you were even in the Q4 of last year. And so I'm just curious as you head into the holiday season when you start including some of the temp spaces, how should we think about occupancy and how full the portfolio is? How you're balancing that with rent, which continues to move up in terms of the spreads?
And then as you think about 2014, given the fact that you've already leased a lot of that space and done your renewals? And what's that visibility that you have into 2014 in terms of occupancy? It seems like a great place to start from at 95.5 today.
Well, first, we don't include temp space in the occupancy. Secondly, what we're doing is making our space more efficient and we are going to be able to continue to generate increases in NOI because we're constantly looking to see how we can make our space more effective by bringing in more productive tenants. David made the point earlier by decreasing the amount of space allocated to given tenants. And frankly, we still have leasing going on in the pipeline. So we're never going to be satisfied and never get to the point where we say to you, well, we're fully occupied.
The bottom line is look we're doing more effective leasing, more effective space allocation to more productive tenants.
So where does occupancy go then? I'm just I know you don't include temp. So what does that mean for the Q4 in terms of
I would certainly hope that we continue to show advances over where we are.
And your 20 14 outlook in terms of how much you've already done relative to that
role? We're certainly going to anticipate that we're going to be able to increase it in 2014.
Okay. Thank you.
Sure. Go ahead, man.
Your next question comes from David Harris with Imperial Capital. Please proceed.
Hey, good morning. This is still a little early for us old folks.
You know what? No doubt, okay?
Hey, I know you talked a little about sales on this call. But if I look at your percentage rent growth line, in the first half of the year, it was growing about 30% or more and we're down to 10% year over year growth in the Q3. That seems consistent with the slowdown that we're hearing from a lot of the mall retailers. Is that I mean, can we assume that you are thinking that's a temporary slowdown and that we'll pick up even in this quarter?
Well, the fact is that some of our percentage rents, we've had certain tenants that have run into harder sales and then some that have picked the lot. But we'll see how the next couple of months pan out David. It's very hard for us to give you a really specific answer to that question. We do have certain earnings risk tied to percentage rent. We gave we took that into account in raising our guidance.
And but it's clear and we're not it is clear that the and it's not Simon Property Group. It is clear that the economy has slowed. You've seen it with wages. You've seen it with employment. Needless to say, we don't have to get into what's going on in terms of leadership in our country, none of which we use as an excuse, because we put blinders on to the best of our abilities when it comes to that kind of stuff.
But we're operating at a high level in a very slow growth economy. And we're outpacing the growth in the economy and that's all that we can do. But we are affected by the economy. I mean I wish I wasn't, but we are.
What period did this most remind you of in say the last 10 or 15 years David?
Good question. Good question. The fact is I don't have an immediate usually I would just make something up, but I can't even come up with that at this point. But I would say a little bit like coming out of my initial reaction would be coming out of the when we were public coming out of kind of the 97 that era where it was just kind of we weren't we hadn't ended. We had survived and it it was just kind of grinding we were grinding about.
Now by the way, when we're grinding, I got double digits FFO okay? So just keep that in perspective. But kind of like that David would be the initial off the cuff reaction.
Okay. Can I sneak in with a quick one for Steve?
Sure.
Steve with with the issuance of the Eurobond, it reminded me, are you embracing have you used any of these tax reductions that are sort of coming under greater scrutiny like Double Irish or using the Netherlands Luxembourg to structure your offshore interests?
Not really David. It's pretty plain vanilla. We record as an example, we record a tax expense as it relates to the Klepierre earnings that we pick up our share of every quarter. So relatively plain vanilla structure.
Yes. In fact, it's just to reinforce what Steve said. If you look at our we did as we've made more international investments, we're having to pay taxes in those jurisdictions. And if you see your P and L, we actually
separated that out, so that
you can see that impact, because it's becoming less than trivial.
Right. Simon is not Apple.
No. I wish I were. I like his cash flow. But I don't want Carl Icahn on me, but I do wish I were happy.
Well, isn't he urging share buybacks and dividends? So you're kind of halfway there. All right, guys. Thank you.
Thank you. Our
last question comes from the line of John Kim with CLSA. Please proceed.
Good morning and thank you. I just wanted to follow-up on your comments on international opportunities. Right now international is about 8% of your NOI. At what level do you feel comfortable of this going to in the next few years? And then also geographically, where do you see the most compelling opportunities between Europe, Malaysia and South America?
Well,
we don't our only goal is to make smart investments and investments that we can add value to. So the fact of the matter is if our international business stays the same or goes up slightly, it doesn't it's not that's not how we think. We're only looking to make smart investments where we can add value. And we have a higher threshold in international investments because it's a lot of work. And it's got to be there's no desire here just to do international for the sake of international.
The desire here is to make international investments because 1, we can think we can add value and 2 is because we think at the end of the day, we're going to make money and Clay Pierre is a perfect example of that. So I don't have in my mind it ought to go from X to Y. And each jurisdiction that we're in is different, but we are doing new development in Asia. We're not an acquirer of assets in Asia just because it's a tougher market. We're sticking to the outlet business and in markets that we're in where we can develop and it meets our threshold return requirements, which has been certainly a real challenge in China as an example.
And that's why we though we did an investment in 2008, 2009 we got out of it and we haven't done anything
since. Thank you. I was just going to ask you a follow-up on that. In fact, would there have been any
opportunities there in the outlet sector. Opportunities there in the outlet sector. A few sites that we're in, but nothing really imminent in that marketplace.
Great. Thank you.
Sure. Thank
you. That concludes the question and answer part of today's call.
Okay. Thank you. I know you have a number of calls to go to. So thanks for your participation.