Good day, ladies and gentlemen, and welcome to the third quarter 2013 Simon Property Group, Inc. 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. If at any time during the call you require operator assistance, please press star zero, and we will be happy to assist you. I would now like to turn the conference over to Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.
Thank you. Good morning, everyone, and welcome to Simon Property Group's third quarter 2013 results 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 Sterrett, 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. 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 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-K filing. The supplemental information is available on investors.simon.com. I would now like to introduce David Simon.
Good morning. 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 enhance productivity, development of new premium outlets, and our continued smart acquisition strategy. FFO was $2.21 per share, up 11.1% from the third quarter of 2012. Our FFO exceeded the First 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 $579 per square foot, occupancy up 90 basis points to 95.5%. Our re-leasing spread was a positive 15.2%, or $8.05 per square foot. Retailer demand for space in our properties remained strong and healthy, driving our occupancy increases. Our retailer sales growth continues to be ahead of GDP.
More important to us, our existing leases are under market rent. 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 three 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 three were $400 million. That's not our share, but in total, we expect a first-year return of 10.5% on our cost.
We broke ground on premium outlets in Charlotte and Montreal. We finalized joint ventures that are under construction in Eagan, Minnesota, which is in St. Paul, Minneapolis, and Vancouver, British Columbia, Canada, in our new partnership with McArthurGlen. 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 sq ft 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 multi-year pipeline of new development or redevelopment and expansion projects is key to driving growth in NOI.
We continue to expect development investment at least $1 billion annually from 2013 through 2016. Go projects include Roosevelt Field, Houston Galleria, Woodbury, Stamford, 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 McArthurGlen. It includes ownership interest in five McArthurGlen designer outlets located in Vienna, Venice, and Naples, in the Netherlands near Düsseldorf, and one in the U.K. near Kent. We also own a 50% 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 Klépierre. Total consideration for the recent investments is approximately $500 million at a cap rate of slightly north of 6.5%. Klépierre 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 two REITs with an A ratings from S&P and Moody's. We completed a EUR 750 million bond offering to complement our McArthurGlen and Klépierre investment.
It taps into a broad market, expands our access to capital, provides a natural hedge. Strong demand enabled more favorable terms for lending for leading European real estate players. Rate of 2.375% for seven-year notes. 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 first quarter dividend after our taxable income estimate is complete in the first quarter 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 $0.10 from our last one in July and $0.30 from the midpoint of the range from the beginning of the year in February. 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 December of 1993 is as follows. Total shareholder return of approximately 1,975% or 17% annually for 20 years. Our FFO grew in 1993 from $150 million to over $3.15 billion in 2013 using the midpoint of our guidance range. Our equity market cap grew from $1.8 billion to approximately $58 billion today. We're not resting.
The range of opportunities in front of us is exciting. We'll continue to focus and work very hard to produce strong results. We're now ready for questions.
Ladies and gentlemen, if you wish to ask a question, please press star one. We ask that you keep the questions down to one per person. Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed.
Good morning.
Good morning. Are you awake?
Yeah, the coffee is kicking in. It's Friday, so it's always a good thing.
Please do.
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 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. The interest was very high. I think we met with almost 50 investors during a four-and-a-half-day road show. Almost all of them ended up coming into the deal. They are money managers, insurance companies, pension funds, really sticky, good, patient money. 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, 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 would say this. Right now, we have a multi-currency tranche on our credit facility, 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, 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.
Yeah, good morning.
Good morning.
David, a question on the outlet business. With the recent openings, you're up to probably 25%-30% of NOI housed within outlets. I'm sort of curious, one, 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? Also, as you think about the pie assignment on page 19 of your supplemental, where does sort of outlets go over the next five years, from what you can see, relative to the other pieces in there? Maybe you can talk about sort of that range of opportunities that you see that you ended your comments with.
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. We don't see any reason to separate it out. The fact is, we couldn't produce these results if both weren't producing very favorable results. They're both material enough, the fact of the matter 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 really requires both to produce these kind of results, to have it shown together. With respect to the outlet business, look, that's where our new development is focused. As you know, we just opened three, which is pretty good work.
We've got a good pipeline of four, five, six others, couple of which are already under construction. We've got another three or four that are in the pipeline. 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 Stamford, the Field, Del Amo, The Galleria. I know Rick wants to list them all, I will not let him. Just to name a few, I think that will start to kick in in 2015, 2016, 2017. That will probably rebalance the pie chart, as we look back in three, four years from now. You there?
Yes.
You can go ahead and ask me something else, even though I know we instructed you not to.
Right. I was just saying, the range of opportunities as 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 your pie chart or the company in terms of opportunities? I just wanted to sort of dig into it a little bit.
If I told you, then you would upgrade somebody, and the price would go up. I'd rather just keep that to myself.
Hey, Michael, this is Steve. Just to put a pin in it, though, over the last four years, we've spent over $12 billion in acquisition of assets, so not an insignificant number.
Yeah. Look, I think as Steve said is, as we look back since 2010, and these are gross numbers, we've purchased about $12.8 billion. These are gross, so it includes debt assumption, all this other stuff, not necessarily our share. We've acquired about $12.8 billion, we've disposed about $2.7 billion, and we've developed $1 billion of new stuff ground up. Again, I know it gets lost in the sauce, but we're always very focused on upgrading and reconstituting the portfolio. We see it. Look, we see international growth ahead of us, Michael, if that's what you're asking. 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.
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's great. St. Louis is great. We're under construction in Charlotte. Montreal, based upon Houston, is great. Vancouver, now that we're in the McArthurGlen 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. There is a lot to do. How the pie chart changes, we'll see. 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. 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, 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, 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 physical infrastructure to satisfy consumers that want same-day delivery. It sounds great. It's a little more complicated than that. 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. The thing that I am focused on in our mall business, when I say mall business, I include the outlets, is that we've always made retailer service a priority. Rick and I are as good at sucking up to retailers as possible, okay? Sometimes Rick's better than I am, 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. Something we instituted last year was just surprise and delight. Come to the mall, 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 YourSherpa, probably not politically correct, whatever. We started this years ago. We were actually too far ahead of our time. 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 this, 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?
Well, yeah
that is the interface?
I would say 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 would be great. It's not that easy because you have to essentially get into the retailer's inventory. 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.
Your first stop at the mall is going to be able to communicate to you what's new and what's exciting, that makes your visit that much more pleasant if, in fact, we can do that, and more profitable for you. 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 Jeffrey 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. That number, the mix changes from time to time. We opened some projects, as David mentioned, the first-year return on the stuff that is opened, which is no longer on the list, was 10 and a half. It's simply a mix change. There's been no real fundamental change in our ability to get rents or cost control or our expectations for our development pipeline.
Okay. I noticed the leasing spreads have been up four quarters in a row and on a dollar basis have gone from $486 to $805. I'm wondering, where can they go from here? Is that from limited supply of quality space or just a growing demand from retailers?
Well, it's a function of demand is solid. You got to look at what's expiring. As I said, 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. 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 releasing spreads. Now, the fact of the matter is eight bucks 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 two or three years.
That ultimately does not take into account when we look at what the Houston Galleria and the Field and the Del Amo are going to do after those developments are done, and those malls have been transformed to take their rightful position in the 21st century of great real estate that can't be duplicated. 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 of Mike Mueller with JPMorgan. Please proceed.
Yeah. Hi. I was wondering, did you see anything change in terms of traffic during the third quarter?
Generally, September was a pretty bad month in terms of traffic and sales for all retailers. We're starting to hear and feel that traffic is bouncing back in October. Clearly, the general economy has slowed. 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. The fact is, we're not denying that the U.S. has actually slowed. We could talk philosophically about why, but it's nothing with what we're doing. We certainly have seen that from our retailers generally across the board at both high-end, middle, and at the more moderate customer base.
Got it. I guess going back to one of your answers before where you mentioned, if I mentioned a stock, it would go up, you'd upgrade it, blah blah blah. Off-the-cuff comment there?
Yeah. Probably a stupid one. Yeah, off the cuff and stupid. It's a little earlier. We're usually at 11 o'clock, nine o'clock, we're trying to get our group on. That is probably off the cuff.
Got it. Okay. Thanks.
Sure.
Our next question comes from the line of Cedrik Lachance from Green Street Advisors. Please proceed.
Thank you. I just want to think about outlets for a second. 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, Cedrik, I believe there's been one that's been built that's more in-filled. 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's going to be. We're not that good or arrogant. We're going to continue to do what we do. We've always picked over the last several years, major 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 one or two 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. I will not make pronouncements that that's the new trend. One does not make a trend.
Okay. What do retailers say about their preferred locations, in terms of outlets? 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 they're telling us.
I think, Cedrik, the retailers wanna be where they can be as productive as possible. 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 drives sales, which drives retail interest. There's no magic to this business.
Okay. Thank you.
Sure.
Our next question comes from the line of Richard Moore with RBC Capital Markets. Please proceed.
Hi, good morning, guys.
Good morning.
Thinking about dispositions for a second. I don't think you addressed those, Dave. You sold off two 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.?
Rich, the fact is, we're always looking to do as much portfolio management as we can. As I mentioned to you earlier, since 2010, basically $12.8 billion of acquisitions, $2.7 billion of dispositions, $1 billion of new development, not including the redevelopment. That's part of our focus day in and day out, and that will always be a important thing in terms of what we do. The form of which that takes will depend on market conditions. 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. We'll continue to do that, Rich.
No real thought, Dave, to a big chunk, I guess, of assets as opposed to one or two at a time.
Well-
opportunities rise.
Again, I'm not gonna 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. 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. I'm not saying one way or another exactly how that'll 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 Omotayo Okusanya with Jefferies. Please proceed.
Hi. Yes. Good morning, everyone. Just wanted to go back to along the line of Craig's questioning, and again, re-leasing 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 five quarters of trailing-
in the supplemental on page 23. That's down 100 to 150 basis points from where it would've been going back to 2010.
Okay.
I think the other point I would add is that it's been very stable over those five quarters. 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. 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 tougher retail outlook when they're negotiating with you? 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 gonna do, what their return on equity and profitability in that store is. Again, we try to give you a sense of these numbers generally, what's happening from our retailers. The fact is comps The immediate ups and downs of comps have no bearing on what rent we can charge overall.
Over a long period of time, potentially. The one thing you have to remember is our comp sales also includes retailers that are going out of favor. If they were in favor five or seven 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. There is no, "Boy, I had a bad quarter sales. Therefore, I want to pay you less rent." It doesn't work that way.
That's definitely helpful color. I think I was just along the lines of, if you've had three quarters of bad sales, that's kind of what I was kind of thinking, what happens at that point. I think the explanation has been very helpful, so thank you.
Sure. No worries.
Don't lose sight of the fact that between 2010 and 2012, over that three-year period, sales were up 25% in our portfolio.
Great. Thank you, gentlemen.
Sure.
Our next question comes from the line of Vincent Chao with Deutsche Bank. Please proceed.
Hey, good morning, everyone. Since no one else has asked this 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?
I would say generally, there's not a real impact on the mall environment, both with the old Penney, the potential new transformed Penney, and now the recovering to back-to-basics Penney. If you go through kind of the three cycles, the way they were doing it, the radical change, now back-to-basics Penney, the fact of the matter is, it really hasn't impacted kind of the entire mall environment that well we have. If they get back to the basics Penney, 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.
That market is there for them, to appeal to that consumer in the mall environment, which they've done historically for 100 plus years, and even before the mall environment. We'll wait to see how they do that. It's really had no impact on the, what I'll call the mall environment.
Okay. They are making some progress on the sales of J.C. Penney, 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.
Yeah. Hi, thanks. Maybe for David, I'm just curious if you had 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 types of assets, what that might mean for the value of your stock, if anything? Then also maybe building off of Rich's question, do you think spinning out a B mall portfolio whether or not some value for you guys?
Well, there was a lot there. You broke up at the end. Did you hear the end part?
The potential of I guess maybe just starting, what your thoughts are in terms of the pricing being paid for B and C malls, what that might mean for the value of your stock, if anything at all?
Well, I'm not gonna comment on the value of our stock other than 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. That's what we strive to execute. The ability to finance our business appropriately, making smart investment decisions, which all kind of factors in. Then the market decides what the value of the stock should be.
Got it.
I don't get carried away one way or another. 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's going to grow. We put all those things in. We try to do the best we can. We see where it takes us.
It's good that the big picture, I'm not going to comment on price other than, 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. 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. 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?
I think historically, the better the center, or let me say it differently. The more market share any piece of real estate has, the better its cash flow growth characteristics they have. 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? Those that have that position have better growth characteristics, generally speaking.
Great. Thank you.
Sure.
Our next question comes from the line of Josh Petry with BMO Capital Markets. Please proceed.
Hi, good morning.
Morning.
Thinking about McArthurGlen Group and 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. It's even more clever in the sense that they have in their leases, they get a percent of sales, but the high water mark is then fixed at kind of their base rent. You get the best of both worlds, in a sense. These centers on average do, just if you convert, you all can convert, but we'll do it. These things average about $900 a foot. 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 McArthurGlen Group. We think it's a very productive portfolio, and extension opportunities and the like. We like it. We expect it to be a very good investment for us over time. I think we're coming in at a decent valuation.
Again, that's our ability to assess real estate, 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. That is a, respectfully, I say, a competitive advantage for the company.
In terms of growth there, how penetrated do you think Europe is with outlets relative to the U.S., and 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 full price, continues to be very high. Or very hard, I should say.
Okay, thank you.
Your next question comes from the line of Hendel Stu with Morgan Stanley. Please proceed.
Yes, good morning. We see quite a bit of mall trades here the past couple of months, and given your activity in the market, 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.
Yeah.
None.
Yeah, none. There's always going to be some quarter-to-quarter volatility, but no issue there. 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 Oppenheim with Credit Suisse. Please proceed.
Thanks very much. Was wondering if you can talk a little bit about comments in terms of upgrading the assets, and you've done a great job over time and very strong redevelopment pipeline now. 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 it and say, "We'd love to do this redevelopment, but don't want to do so until, as we look at these struggling anchors here, if this were to happen, we'd do it." Just trying to think about sort of the opportunity in terms of that shadow pipeline there.
Well, look, 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. As an example, I'm not going to do the list. We are under construction in the Roosevelt Field . We are under construction in Stamford. We're under construction shortly in Houston Galleria. We're getting the approvals at King of Prussia to create the extension between the two big assets. We just got approval from the BRA at Copley. We still need another hurdle. We are, literally, we just finished Nanuet, Shops at Nanuet, 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. 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. Right now, the biggest focus is executing these huge, big redevelopments that are going to be really exciting. There's a lot of opportunities beyond that. Our pipeline in terms of redevelopment, is in the $4 billion-$5 billion range. 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. This is no longer, we're going to do this. It's actually happening, and I've got the pictures to prove it, if you're interested.
The only thing I would add is, David touched on the major redevelopment projects. We're also adding 39 new anchors across the platforms this year, and we've been 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 Roane with Hilliard Lyons. 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 Sterrett. 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. 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.
Hey, Rick, I got a just question on sort of occupancy. 95.5, I recognize that includes the outlets, but I think that's a peak overall, certainly ahead of where you were even in the fourth quarter of last year. 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? As you think about 2014, given the fact that you've already leased a lot of that space and done your renewals, 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, 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. Frankly, we still have leasing going on in the pipeline. 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 in the premium outlets that are 100% for all intents and purposes, we're still driving our NOI and driving spreads because we're doing more effective leasing, more effective space allocation to more productive tenants.
Where does occupancy go then? I know you don't include temp, what does that mean for the fourth quarter in terms of
I would certainly hope that we continue to show advances over where we are.
Your 2014 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.
George.
Your next-
Go ahead, ma'am.
Your next question comes from David Harris with Imperial Capital. Please proceed.
Okay, good morning. This is still a little early for us old folks.
You know what? No doubt, okay? No doubt.
I know you talked a little about sales on this call, 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 third quarter. That seems consistent with the slowdown that we're hearing from a lot of the mall retailers. Can we assume that you are thinking that's a temporary slowdown and that we'll pick up even in this quarter?
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 balance up, it's all over the lot. 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 took that into account in raising our guidance. It's clear, and we're not denying this, 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. We're operating at a high level in a very slow-growth economy. We're outpacing the growth in the economy, that's all that we can do. We are affected by the economy. I wish I wasn't, but we are.
What period does this most remind you of in, say, the last 10 or 15 years, David?
A 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. I would say a little bit like coming out of, my initial reaction would be coming out of when we were public, coming out of kind of the '97, that era where it was just kind of we hadn't ended, we had survived, and it was just kind of grinding. We were grinding about. By the way, when we're grinding, I got double digits FFO increase, okay? Just keep that in perspective. 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 the issuance of the euro bond, it reminded me, are you embracing or have you used any of these tax structures 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. As an example, we record a tax expense as it relates to the Klépierre earnings that we pick up our share of every quarter. Relatively plain vanilla structure.
Yeah. In fact, just to reinforce what Steve said, as we've made more international investments, we're having to pay taxes in those jurisdictions. If you see in our P&L, we actually separated that out so that you can see that impact. It's becoming less than trivial.
Right. Simon is not Apple.
No. I wish I were. I like his cash flow. No, I don't want Carl Icahn on me, but I do wish I were Apple.
Well, isn't he urging share buybacks and dividends? You're kind of halfway there. All right, guys. Thank you.
Thank you. We'll talk to you.
Our last question comes from the line of John Kim with CLSA. Please proceed.
Yeah, good morning, 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? Also geographically, where do you see the most compelling opportunities between Europe, Asia, and South America?
Well, our only goal is to make smart investments and investments that we can add value to. The fact of the matter is if our international business stays the same or goes up slightly, that's not how we think. We're only looking to make smart investments where we can add value. We have a higher threshold in international investments because it's a lot of work, and there's no desire here just to do international for the sake of international. The desire here is to make international investments because, one, we can think we can add value, and two is because we think at the end of the day, we're going to make money, and Klépierre is a perfect example of that. I don't have in my mind it ought to go from X to Y.
Each jurisdiction that we're in is different. 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. That's why 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 follow up on that. Has there been any update on your views of China and Brazil?
Well, China, I gave to you. Brazil, we continue to look at opportunities there in the outlet sector. A few sites that we're in. Nothing really imminent in that marketplace.
Great. Thank you.
Sure. Thank you.
This 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.