Good day, ladies and gentlemen, and welcome to the Second Quarter Simon Property Group 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 conference. As a reminder, this call is being recorded for replay purposes.
I'd now like to turn the call over to Ms. Liz Zayel, Senior Vice President of Corporate Affairs. Please proceed, ma'am.
Thank you. Good morning, everyone, and welcome to Simon Property Group's Q2 2013 earnings conference call. I'm Liz Dale, Senior Vice President of Corporate Affairs. Joining me on today's call is David Simon, our Chairman and Chief Executive Officer Rick Soscolov, our President and Chief Operating Officer and Steve Sterett, our Chief Financial Officer. Before we begin, I would like to remind everyone that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors.
We refer investors to today's earnings press release and SEC filings for a detailed discussion of forward looking statements. Please note that this call does include information that may be accurate only as of today's date, July 29, 2013. And reconciliations of our non GAAP financial measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information including this morning's Form 8 ks filing. The supplemental document is available on simon.com in the Investors section. And with that, I would like to now introduce David Simon.
Good morning. It was another productive quarter. FFO was $2.11 per share, up 11.6% from the Q2 of 2012. Our FFO exceeded the 1st call consensus by $0.04 For malls and outlets comparable property NOI growth was 5.9% driven by occupancy up 90 basis points to 95.1%, a growth in re leasing spread to $7.49 per square foot or 14.1 percent base minimum rent per square foot 3.6 percent higher than the year ago period and our tenant sales were up 4.2 percent to $5.77 per square foot. Now let me turn to just some deal activity.
On May 30, we acquired a 3 190,000 square foot outlet center in Portland, Oregon $447,000,000 This is a very productive center with sales in excess of $600 per square foot. It's 99% leased. It's a great tenant lineup. It's terrific with our outlet portfolio and it's been rebranded Woodburn Premium Outlets. And as you would expect, it's immediately accretive to FFO.
On June 3, we announced our JV with McArthur Glenn to invest in certain of their designer outlets and become a partner in the property management development companies. They have a terrific and one of the best performing portfolios of high quality retail real estate in Europe and a good strong team of professionals. The transaction supports and extends our international premium outlet strategy. We completed the initial phase of this transaction and are now fifty-fifty partners in the management and development companies. And we also will become a partner in their new designer outlet project in Vancouver and are working to close our investment in several of their existing centers.
On May 7, we sold Laguna Hills Mall for $110,000,000 Now let me turn to new development. Phoenix and Shisui opened in April, both 100% leased, both strong openings and we're pleased with the performance. The 3rd quarter this Q3, we have 3 new premium outlet centers that will open Toronto this week, August 1, you're all welcome St. Louis, which is 100% leased on August 22, you're all welcome. Busan, Korea maybe a little bit out of your way, but it is 99% leased and opens on August 29.
Construction started during the Q2 at our Premium Outlets Montreal, which is our 2nd Premium Outlets Center in Canada. Vancouver will be our 3rd. And let me just turn to redevelopment activity. A lot going on. I won't go through everything, but some highlights.
In April, we completed the redevelopment of an existing limited building at Dadeland Mall. It's great. Go look at it. The redevelopment of Walt Whitman opens this September with the addition of retailers and restaurants on the exterior of the building. The shops at Nanuet in suburban New York City opens in October.
At this project, we actually demolished the existing mall and created a new open air center. The redevelopment of Lenox Square continues as does the transformation of Del Amo Fashion Center among several other centers that are all listed in the 8 ks. And on the premium outlet front, we completed expansions at PODU I'm sorry PODU and Seattle during the Q2. Expansions are underway at Orlando Premium Outlets in Vineland and Johor Malaysia. Both of these projects will open in the 4th quarter.
The significant expansion of Desert Hills continues. We'll open in April of next year. And finally on that front, we started this quarter the $170,000,000 redevelopment redevelopment expansion of Woodbury Commons in New York. The mill Sawgrass Mills reopened the expansion of the Colonnade outlets during the Q2 as well as the redevelopment of the former Wanadu space. Macy's opened at Gurnee Mills last week.
In addition, we have significant box activity throughout the mills and mall portfolio with numerous stores under construction. Our pipeline of new development and redevelopment projects is significant and growing. Stuff is coming online. We're also under constructions in with several projects. We expect this continue at least $1,000,000,000 annually through 2016.
And I'll remind you that we're funding this primarily with $1,000,000,000 of our free annual cash flow generated by the company. Just quickly on financing, we're pleased with the Standard and Poor's upgrade in May with our corporate credit rating and senior unsecured debt ratings were increased to A level. We believe this reflects our conservative balance sheet strategy, the quality of our portfolio and the ongoing focus of being a good steward of capital. We're continuing to be active in the debt markets. So far year to date, we did 17 new loans, approximately $2,400,000,000 of which our share is $1,700,000,000 The average rated average interest rate on the loans is 2.9% and the average term is 8.1 years.
Clay Pier reported solid first half results. I won't go through them in detail. They're available. Shopping center gross rents were which represent 94.4 percent of total rents were up 4.1% or 2.5% on a like for like basis. They increased their 2013 guidance for net cash net current cash flow per share and they continue to upgrade the portfolio through development, redevelopment as well as the disposition of non core assets.
Today, we increased the top and the bottom of our 2013 FFO guidance once again to a new range of $8.60 to $8.70 of FFO per share. This is an increase of $0.20 from our initial guidance or over $70,000,000 And as always, we are extremely focused on the successful execution of our plan for 13 from the effective leasing and management of our high quality existing portfolio to the successful delivery of our new and redevelopment pipeline and the achievement of the returns that we have outlined. We're now ready for any questions.
Thank And your first question comes from the line of Craig Schmidt of New York.
Thanks for not reporting on Wednesday afternoon. I look at the supplemental and it says the openings projected for 2015 and beyond and list the Lamo and Rosebel Field, but it doesn't list Copley Place and Houston Galleria. Is this just because those projects are starting later? Or is there a change in plan for those assets?
No change at all. We are we actually once they are formally approved within our internal process, they go on the schedule. Copley, we're actually going through just a little bit more permitting approvals, which we expect to have by the end of the year. And then the Galleria, we have an announcement coming shortly. Stay tuned.
We approve it internally. They'll both be on our list. No real change of plans on either one.
Okay. And I also noticed in the anchor section you're adding Wegmans to the Montgomery Mall. May you be adding supermarkets to other centers? And was there any change that you made in terms of parking or access to make Wegmans work with the rest of the mall?
Hi, Craig, it's Rick. The Wegmans is being built on the site of a former Boscov's, which we demolished and the land was suitable to be able to have all their parking accommodated. We are putting several outside uses in Montgomery just to be accommodative to that. So we're having some uses we think will work well with the supermarket and we're also adding a fairway market at Nanuette. So these types of high profile, high volume users are we think very additive to the properties.
Craig, I remember you used to ask about Nanuet all the time. So now thankfully
It's happening.
It's opening in October. And we're basically virtually leased. Not everybody will open by this year, but by spring of next year the all 100% will be opened.
I was actually by the site a couple of weeks ago. It looks like it's pretty transformative.
Yes, it should be. We're excited about it.
And one last thing. Are you able to give a cap rate on the Laguna Hills Mall you sold in May?
Well, I'll let you do the math. The NOI if I remember correctly was around $6,500,000 or something in that range $6,500,000
Great. Thanks a lot.
Sure.
Thank you. And your next question comes from Quentin Vallee of Citigroup. Please proceed.
Hey, good morning. Just on the McArthur Glenn acquisition, can you just talk broadly about the opportunity in Europe with outlets and how involved Simon senior management will be with the management and growth of that business?
Well, I think there is a significant opportunity both within their existing portfolio and the ability to add extensions to them as well as continue to upgrade the tenant offerings and add to the footfall of those centers through tourism efforts and the like. In addition, McArthur Glenn does have a significant pipeline of additional opportunities in terms of new development. So when you couple those as well as we do think there'll be acquisition opportunities within their portfolio and others. We think it's going to end up being a significant platform for our growth over the next several years. It's a complicated deal, not only because it's in Europe and you're in different countries, but also the ownership of the assets are owned not by just one individual, but by various partners and funds.
I think over time as we solidify the platform, bring our expertise to the table along with their assets and their people, it should be a very good deal for us. So we're excited about it. And the sales productivity of these centers is very high and there's not a lot of them and they're very well accepted. And there's not that many players in Europe that do it at such a high level. So we think ultimately it's going to be a good transaction for us.
I think you still own a stake in value retail, the other outlet developer and owner in Europe. Are you now a seller of that stake?
You have an offer offer for me?
I don't have the money.
Okay. No, we're happy with that stake, But we're always interested in whatever we can do to benefit our shareholders. But that investment has been good for us. We anticipate continuing in it. As you might know, I mean that was a kind of an investment that the former Chelsea made.
We've added to it over the years. We've got a significant embedded gain compared to our book value of it. And they do a very good job in terms of operating their centers as well. So we think we're a long term owner of it. But I never rule anything out.
Okay. And then just lastly, there's been a lot of media speculation on the Colonial Investment Management in Australia. I know you guys are constantly looking at global opportunities. Is the Australian mall industry one that interests you?
Well, maybe. Haven't ruled it out, but we'll look at anything. I mean, Westfield does such a good job. We've always been a little bit reluctant to enter that market. On the other hand, it's an interesting market.
It's very stable. We like the people there and it's the malls there do very well. So I wouldn't rule anything out. Just like we've monitored Brazil for years, haven't found the right transaction, we would rule any one particular place out. The one place we continue to be the most concerned about as we look internationally is China, just because it's a tough place figure out who's on 1st.
Australia to some extent has a lot of benefits that it's a very transparent market.
Thank you.
Sure.
Thank you. And your next question comes from Christy McElroy of UBS. Please proceed.
Hi. Good morning, guys. Just a quick follow-up on McArthur Glenn. With regard to the property management development partnership, will there be any immediate impact to cash flows? Just thinking about any fees or is that further down the road?
Well,
it's a profitable management company. So we'll our investment will have a return associated with Now that will just end up flowing through our JV line. So it's not going to be in our management company. But so it'll be hard for you to see. But they're profitable and we expect to have a pretty good return on our investment in the management company.
What was the investment?
Well, it's really separated into 2 pieces, but both for the management and the development was £25,000,000
Okay. Are you able to disclose the Q2, 2013 only year over year change in sales?
Say it again?
Just the quarter change in sales. So if I were just to isolate the 2nd quarter sales and look at it on a year over year basis?
We don't do that, but it was up about 1%.
Okay. And then just lastly
Go ahead.
Just lastly regarding some of the new sort of in store customer tracking technology that some retailers are using today, are you having to do any upgrades for the technological infrastructure of your malls such as increasing bandwidth or other changes? Well
Well, look that whole area we are treading very, very carefully because it is lots of privacy concerns. So we have not we've looked at it all. But the fact of the matter is until the folks in Washington feel good about it, we are watching it and we are not really playing in any of that stuff because we really don't know what kind of privacy violations it may generate. So I would tell you that we're treading very, very carefully and have done nothing along the lines that would be able to track anything like that period end of story. Now with respect to I think the big effort generally in the mall industry is we're all investing in Wi Fi networks throughout our malls.
We're doing that as well. We're starting at the bigger ones first. And that's really primarily for the benefit of our consumer, but to the extent that it can help facilitate our retailers, we're happy for them to participate. But again, I would tell you on the privacy front, we're not doing anything. We're treading very, very carefully.
And from a CapEx perspective, what are the sort of per mall costs associated with adding the WiFi?
It depends. It's I'd say generally it's around $150,000 a mall, but it really depends somewhere in that range.
Okay. Thank you.
Sure.
Thank you. And your next question comes from Alexander Goldfarb of Sandler O'Neill. Please proceed.
Good morning. Steve, you've been a little quiet so far, so maybe I'll lead off with you. As far as the A rating, is this a blessing or a bit of a curse? In any way, does it limit your ability whether it's on the redevelopment front or on the overseas investment front? Does being an A student, does that overseas investment front?
Does being an A student does that hinder your guys' flexibility? Or would you rather be A minus?
It does not hinder it at all, Alex. And in fact, one of the additions that we made to the 8 ks this quarter was to give you some look at some credit metrics over a 5 year look back period. And you can see how the metrics had improved. The coverage has gotten better. Leverage went down.
Debt to EBITDA went down. So I think if anything it's just a reflection of the continued strengthening of the balance sheet. And to the extent that we can absolutely borrow at cheaper rates than anyone else in our sector, I think that's absolutely a good thing.
And I'll just add that S and P, they're pretty smart folks. They've seen what we've done historically both in redevelopment and M and A activity. So they have every expectation that that will continue. And they don't necessarily just rate you based upon being a status business. They rate you on what you've done and what they expect for you to do going forward.
And our redevelopment pipeline of $5,000,000,000 thereabouts as well as our continual activity in finding smart external investments is part of our history of our company. And that they actually like that stuff because it's obviously increased our return on equity and increased our cash flow and made us a better company. So that's all factored into how they look at us going forward.
Okay. And then the second question is going on to the MacArthur, Glen and Klepierre. The first part is just when you were talking David earlier about buying out in McArthur Glenn presumably that was buying out some of those individual ownership stakes so that it would be JVs that you would own McArthur Glenn assets with McArthur Glenn and Simon as the ownership structure?
And then
separate Correct. Okay.
That's correct.
Okay. And then separate is it's early on, but down the road do you see synergies between Klepierre and McArthur Glenn? Or in your view these are 2 totally separate platforms that each have to stand on their
own? Well, I think initially there are definitely 2 separate platforms certainly could be cooperation. But I do think with time, there certainly could be cooperation between the 2. But it's not necessary, but I would expect the 2 to cooperate over time. And especially in France where McArthur Glenn has at least 3 in the pipe of new potential developments.
Given the history of Klepierre and developing in France, there's no reason why some sort of cooperation wouldn't make sense for both companies. And we'll certainly encourage that. I happen to know both guys are running, so it will make it a little bit easier.
Okay. Listen, thank you.
Sure.
Thank you. And your next question comes from Cedric Lechanc of Green Street Advisors. Please proceed.
Thank you. David, when I look at some of the recent acquisitions, they always seem to be largely strategic. You think about the big picture, you look at heading outlets to Europe where you obviously have the full price presence that's got similarities with what you've done in the U. S. The approach always seems to be primarily strategic.
Do you also look at plays where you would find more distressed real estate, or you would find big discounts to NAV or asset value? Or is this still on the back burner and you keep looking for strategic acquisitions?
I can't tell you. There's nothing more than buying something cheap that excites me and the team here. So we love to buy things really cheap. And if that can be done on a distressed basis, We like it as long as ultimately we've got to believe in the real estate because we're not what I wouldn't say we're traders. So at the end of the day, we've got to have a long term view that we like the cash flow that's being generated from the real estate.
But to some extent, I mean, if you go back to the Klepierre deal and look Europe is still squishy to put it mildly. That was a I wouldn't call it a distressed situation, but it was certainly at a pretty decent discount to NAV and an uncertain future. And not many people are investing in Europe when we talk about McArthur Glenn. There are not many people that are at this point taking the position that Europe is a good place to invest in. So to some extent both of those transactions are somewhat contrarian.
And if we see those as capital ebbs and flows throughout the world, I mean, I would hope that we would be able to take advantage of it. So we certainly love to try and do that. It's not what we do every day. We've got to believe in the real estate at the end of the day. But I would tell you that we've done it historically.
So we would hope to continue to find those kind of opportunities.
And when you look at it currently are those investment possibilities primarily outside of the U. S? Or do you see potential either distress here, distressed properties or even companies that might be at prices that are of more interest in the United States?
I would say Cedric generally those kind of opportunities are outside the U. S.
Okay. Would you be able to share the cap rate on Woodburn?
You won't believe it, but it was 10.5 percent only because we had a long term option to buy it at a 10.5% cap rate. So it's not a reflection of market value, but it just goes it's a long history there. But it's a pretty good deal for us.
Yes. How did that option how was it put together?
It was really by the outlet guys with Craig over a number of years history of kind of that whole relationship. I really it's not really all that material how it got there, but it's just it's a good deal for us. And importantly, it's a very good center.
Okay, great. Thank you.
Sure.
Thank you. And your next question comes from Steve Sakwa of ISA Group. Please proceed.
Thanks. Good morning, David. Hey. I was hoping that you guys could focus a little bit on the core portfolio since that's the primary driver of I think growth here. You guys are now 95% occupied.
The business is really kind of hitting on all cylinders. When I look at the re leasing spreads and look at kind of where ending rents are for next year, they actually are lower in 2014 than they are for the balance of this year. So I'm just curious how are you and Rick thinking about kind of the leasing the discussions with tenants and kind of what are you guys doing differently today given where you're sitting with the portfolio as well leased as it is?
How are you doing, Craig? It's Rick. Basically, we are spending a lot of time just focusing on our mix, focusing on getting the right tenants in the right spaces to maximize the productivity, to maximize the rent that they can pay. And I will tell you that a lot of the calls that David and I received are tenants worried about whether they're going to be renewed in their spaces as opposed to having new solicit interest in the space. So we're still in a pretty dynamic market.
All of the improvements we're making to this portfolio in the renovations, the redevelopments, I think over the last 4 years, we've probably added 200 different anchors to these portfolios. We're just taking market share and making them better. And I think that the thing you can focus on is the fact that our occupancy cost is 11.3%. And as you see with our spreads and you see with the momentum we have, we're going to be able to continue to grow that NOI because of all those reasons.
Steve, I would just say, look, I mean, the fact is supply and demand is a little bit better. But our philosophy on how we operate the business is not all that different. I mean, we've seen cycles ebb and flow. At the end of the day, what's best for the creating the win win with the retailer. And we've done that.
We don't get to where we are today if we hadn't taken that philosophy better to be better to be in this kind of environment where supply and demand is in the owner's favor. But that changes too. And so at the end of the day, it's all about just trying to create a win win, which I think the history of our company suggests we know how to do.
Okay. Maybe a quick question for Steve. On page 22 of the supplemental, you've obviously got a fairly large decline in the other income. And even if you strip out some of the things like being gain on land sales, the other was down about $10,000,000 and it's down about $12,000,000 for the year. Can you sort of just talk about that and how do we think about that business in the back half of the year and into next year?
Sure. Steve, there are a
couple of things that were in other income in 2012 that aren't there in 2013. If you remember, we talked from time to time on prior calls that we were owners of some mortgages. So there was some income flowing through from that debt. That debt has all been paid off. Likewise, we were the mezz lender to the mills.
That debt was obviously retired as part of the transaction in 2012. And then we have had as mentioned both lower land sales as well as on a year to date basis much lower lease settlement income.
Yes. Just to reinforce because I saw your well just to reinforce, the core business of the what's in the other income sponsorship, all the ancillary things that are generated from the ball business is up this year compared to last year. So there's no loaning folks, buying mortgages, sometimes we loan developers money to where we get an option to buy. As Steve said, we bought mortgages. Last year, we sold our investment in The Domain Residential.
So that also category represents kind of the other activity that the company does that's not its what I'll call its operating business and it's a little bit lumpy. No big deal. But the important point is, it is other income which is good. It's not other losses. That's point 1.
Point 2 is that the core business sponsorship etcetera is all trending up this year compared to Q2 of last year year to date. Now I don't have exactly that number what it's up, but we can certainly give it to you pretty quick unless you have it. What is I don't know, but we don't have the core business number. But we can get that for you no big deal.
Okay. Thanks. And then lastly, David, just talk maybe a little bit about the Brazil situation, your relationship with BR Malls and sort of what's going on in terms of looking for deals down there and kind of the weakness in Brazil? And how you think that sort of plays out over the next year or 2?
Well, look, the joint venture that we have with BR, the first deal we were looking to build an outlet center in was in Sao Paulo. And as you know it ran into right to build issues. Those still to this day have not been satisfied at least to our comfort level. So at this point, it's a no go deal until that gets satisfied. And if it does get satisfied, then we'll have a decision to make.
And we'll have to assess the climate, both short term and medium term in deciding whether or not to go forward. But the condition precedent to that decision is not yet there and that's the right to build issue. There's a couple of other sites that our team went down to look at that may be in the pipe in the future. So let's put that aside. I mean the macro stuff there is concerning all of the supply in the market is concerning.
That's why we kind of like the outlet business because it was different. It was new. It was going to get ahead of a lot of the supply that came on, on the full price. Obviously, you got to weigh the macro in. But long term Brazil is a great, great country with a lot of dynamic growth to it.
But we're very cautious on a market like that. We haven't found the right deal. And thankfully, in hindsight, our decision not to invest aggressively there has been the appropriate one. So we'll wait to see. I've always worried about the cash flows from the buildings that have been built there and whether that was sustainable with all the new supply, the fact that a lot of the cash flow comes from parking.
There's a whole host of things. The cost of the goods down there significant. The high end malls there, whether they're profitable for the retailers or not still is a question mark. So there's a lot there to underwrite and essentially that's you should assume that those questions have been factored into the fact that we have not made an investment in Brazil.
Okay. Thanks.
Sure.
Thank you. Our next question comes from Caitlin Burrows of Goldman Sachs. Please proceed.
Hi. Just a question on sales growth with regards to the increase from $5.75 a square foot reported in the Q1 to $5.77 reported now. Do you think the sequential increase of 35 basis points is a sign for concern as it's somewhat weaker than the other recent quarters?
No. No? Okay. And
then can you comment on which areas of retail seem to be doing especially well versus the ones that are keeping that number from increasing as much as it had been in the previous 2 quarters?
Yes. I'll let Rick talk about that. But I will say this. I mean, the ups and downs of retailers and retail sales is a historical fact. And but the increasing of our cash flow year after year is also a historical fact.
And so we don't get over And so we don't get over excited whether sales go up 5% or down 5%, because we know that the cash flow that we generate from our buildings has a long history of increasing given that we've got tenants in there that are very profitable and we have leases that are below market. So when we look at we give you this information. I don't I have never pulled my hair out
based upon or jumped
up for joy when sales have increased. I mean, we're just comp NOI is going to grow because our market rents are well below what leases are rolling over as someone pointed out earlier. So I just want to reinforce that point and then Rick can go ahead and answer your question.
Just to add a little more color to that. The stronger regions for us were New England, the Mountain States, Southwest and South Atlantic, little weaker with the Plains, Mid Atlantic, Great Lakes. The stronger categories were juniors, women's specialty accessories, men's shoes and women's better and the weaker areas were women's popular home furniture and women's special side.
Okay, great. Thank you.
Sure.
Thank you. And our next question comes from Ki Bin Kim of SunTrust Robinson Humphrey. Please proceed.
Thanks. Just a couple of quick follow ups. Should you guys talk about the yield expectation for your investment in McArthur Glenn?
Well, we're going to when the whole deal closes, we'll give that to you. But as we said initially when we announced it in May that it will be accretive. And it's going to be a we believe it's going to be a profitable transaction. But until all the elements of it close, we're not going to get into those details.
Okay. And you guys made investments in interest in their malls. They own about I think about 20 or more. Was it just because of the structures in individual malls? Or was it more selective buyout?
Well, again, we haven't closed on 4 of the 6 yet. But when those close, some of those interests are held outside of MGE, which again over time I think we'll have the opportunity to the extent that we want to buy interest in some of those assets. But they're not really at this point owned by MGE other than a couple of which we kind of collectively both agreed that we didn't want to buy at this particular point. So again, this is a long term transaction that we feel we'll be able to increase our investment in, but in a methodical thoughtful way. And we're just focused on finishing the first deal and then we'll be able to look at other opportunities going forward, not just with some of the assets that they manage, but don't own or own very little, but also other opportunities out there.
Okay. And the 5.9% same front end wide growth, could you help us could you break it out a little bit? Just maybe how much of it was on the revenue front versus expenses? And it looks like your tenant reimbursements increased pretty significantly. How much of that was driven by that as well?
Ki Bin, this is Steve. You hit the 3 components. Minimum rent was over half of it. The a contributor was also the net increase in recoveries if you will and then percentage rents. If you look at our overage rent line on both the consolidated financials, but then also our share of the JV income, overage rent was a contributor as well.
And is that the increase in recoveries, what brought about that? It seems this is higher than it's been before on a year over year basis.
Well, I don't think it's higher than it's been year before, but it's we're 90 plus percent converted to fixed CAM. We have annual escalators of that fixed charge and that annual escalator has been at a higher rate than expenses have been growing. And in fact, we've done a really good job of holding expenses relatively flat. So that's been additive.
Okay. And last question, I'm not going to leave it open ended. Surprised that you guys didn't include the outlet development in Philadelphia with Pen REIT in your I guess it's too new in your development pages or disclosures. So I guess I'll leave it open. Maybe you could comment a little bit about that.
Yes. I mean, it's once we approve it internally, it will go on our schedule. We expect it to go forward. It's still finalizing the permit. We're actually rushing, I hope, to start this year, so we could open next year.
That's going to be touch and go just because we have to go through some permitting stuff. Once we do it and approve it, it will be there. We expect it to be a good deal. Henry approached us with the site, I don't know, 1.5 years, 2 years ago, Rick, probably.
Not a year.
We looked at it. We did a little bit of tentative pre leasing with the retailers. They expressed an interest. We're going to build it once we get permitted, not overly complicated. And then hopefully, if we do get jump through the hoops that we need to jump through, we could actually start this year and then have the chance of opening next year.
But like I said, that's right on the bubble. If not, it will be a 15 opening. 75. We have and they own 25 and we have a small partner in our piece. So I think our effective, I remember, is around 65%.
Our effective ownership is 65
percent. Okay. Thank you, guys.
Sure.
Thank you. And your next question comes from Paul Adonato of BMO Capital Markets. Please proceed.
Thanks. Good morning. I guess this morning Hudson's Bay was talking about spinning off their real estate into a Canadian REIT. And so the question is not on Hudson's Bay or Canadian REITs, but really just the longer term trend of the anchors trying to capture the real estate value for their own shareholders. Was wondering if you had any thoughts or comments on that dynamic and how you might see it playing out going forward?
Well, I will tell you that the attractiveness of a company like ours versus a captive REIT are a completely different set of institutional investors. What people look to in our investment is the growth, rising dividends, the dynamic nature of our company. And by investing with us, they've been well rewarded by our ability to increase our earnings and our dividend and obviously resulting stock price increase. In those captive REITs, they're basically a different set of investors. They're bond like investors.
So it's a whole different thing. And if a retailer wants to do it, I mean God bless them. I mean, if it makes them ultimately a better retailer and they can use that capital to reinvest in their business, it's no big deal from our standpoint. So there are some that are also trying to redevelop some of their boxes. I think they have found that to be really difficult.
And I think what they'd rather end up doing is trying to figure out what the fair market value is and then look for the developer, I. E. Us to make the profit. And that's been the nature of the development business for years is that the developer tends to get the development profit because they know what they're doing. So I don't think any of this is really all that different.
I think it's potentially an attractive way for them to raise the capital to fund Saks. And if they can do that and make the combination a better and more profitable business, we're all for it. Okay. Thanks very much. Sure.
And your next question comes from the line of David Harris of Imperial Capital. Please proceed.
Good morning all.
Good morning.
Hey, it looks as if we ended the 30 year decline in long term interest rates in the first half of this year. So if rates could be going up, what do you think Simon might have to do differently over the next 3 to 5 years in order to generate returns as attractive as the returns you've been able to generate over the last couple of decades, David?
Well, look I think the plan is put has been put in place David which is for us to generate the kind of returns that we want to generate that we've done historically. It's really the redevelopment new development pipe that we've produced. And that's bigger than it's ever been. A lot of the returns that we generated historically was because we bought a lot of stuff at good prices and the values went up and we added value through increasing the cash flow. The arbitrage that we have in the redevelopment and new development business And as large as it is, it's actually higher even with higher interest rates.
So as long as we can execute and that's assessing retailer demand and making sure the costs are right, I think we can still do what we've done as we've shifted more toward redevelopment and new development as opposed to acquisition in terms of how we look at all the capital that we're plowing back into the business. So I don't think we have to do anything extraordinary. And other than and it is extraordinary, other than execute our pipe, which is huge and complicated. But if we can do that, I think we're in good stead.
David, I'd also remind you as I think David mentioned in his opening remarks, we fund that pipeline with free cash flow. So in theory, the cost of that capital is 0, so the arbitrage is very good. But I'd also remind you we have $2,900,000,000 of debt coming due next year. The weighted average interest rate is 6%. We've got $2,900,000,000 coming due the following year at a weighted average interest rate of about 5.25.
So even with the spike in interest rates that we've seen today our bonds trade in the 3.75 range for 10 year. So there still should be a very positive pickup as we refinance that debt over the next couple of years.
Steve, you read my notes that I put out a month ago or so and I suggest made 6 suggestions that CREETS might adopt by way of strategy and tactics to generate performance in a rising rate environment. Would you just care to expand on why you think that managing leverage over the cycle would perhaps not be the right way to go?
Well, David, I listen, I think one of the things we should have all learned coming out of 'eight, 'nine is that the world changes.
It's a volatile
place. The price we pay for being a REIT is that we don't fund self fund our debt from cash flow. So we should all run with a fair bit of liquidity. And I think we should all run with relatively conservative balance sheets. So you and I might disagree on that particular point.
Okay. And then just a point of detail on the McArthur Glenn deal. If we think about the return expectations you underwrote there, on the existing assets, do you think those assets are going to produce higher returns than dollars invested in the existing outlet centers in the U. S? And so we're looking really at this transaction that was offering the better returns from development as we go forward?
Or do you think it's going to be you're going to get attractive returns out of the existing assets as well?
Well, look I think the returns that we're able to generate out of the U. S. Outlet business are pretty damn good. So there's not much out there that we're going to do that's going to rival the returns that we get from new development and extending our existing U. S.
Premium outlet business. But that doesn't mean that that should eliminate us making other good investments. And we are as busy as we've ever been in the U. S. Premium outlet business.
We're not doing every deal. I mean, there's lots of other outlet developers doing lots of new business in that space, both redevelopment and new development. So we're focused on what we can do and that's great. And we're planning a lot of capital on that as evidenced by the new development and the extensions at Woodbury and Seattle and Desert Hills and Orlando and Vegas, etcetera. But that doesn't mean that the stuff that we're doing in Europe is not going to be attractive over both the medium and the long run.
Having seen a couple of
It's not quite as good as the U. S.
Right. I mean having seen a couple of those McArthur assets over the years, I mean, I think they're pretty well they've been pretty well managed. I'm not suggesting that you couldn't squeeze some more out of them, but it's not like there's a huge amount being left on the table I don't think.
Well, people have said that about other stuff that we bought and we figure out how to do that. So I'm hopeful we can do the same thing here as well.
Okay. Good luck. Thank you.
Thank you.
Thank you. And your next question comes from John Kim of CLSA. Please proceed.
Thank you and good morning. I wanted to follow-up on your potential interest in CFS Retail in Australia. Internationally, your acquisitions have primarily been through joint ventures. But regarding CFS, I was wondering if your preference was again to go this route or would you entertain the idea of fully owning and managing the assets given the high quality of the portfolio and given the fact that the management rights are for sale?
Well, we didn't say any of that. So I think someone asked a big picture question about Australia. And that's all I said was that we haven't ruled it out. We've so I don't I really can't add anything more to that than what I just said.
Okay. And then maybe I could just clarify. Is management rights and interest in CFX, is that something that's that heightens your interest in Australia than a normal investment?
Well, again, we haven't we're looking at opportunities worldwide and that would to the extent that that surfaces, we'd look at it just like anything else. I mean, I can't really expound on it. There's nothing really to add at this point.
Okay. Just turning to another Aussie company. There are market reports that Ben Lease who you've transacted with in the past is looking to sell its ownership stake and management rights of Bluewater in the UK. Would a single acquisition like this be appealing to you in complementing your European investment? Or do you still prefer a platform in entering a new market?
I would say one individual asset would have this is a generic statement. It would have to be a unique individual asset in a market that we're familiar with for us to do it to do that as opposed to just I'd prefer a platform. Certainly, an asset like Bluewater is unique and it's a very good asset. But generally, you would have to just this is a generic statement. For us to enter into a market that we don't have any presence, it would have to be the best of the best in terms of an asset.
I'd prefer a platform and that's basically a generic statement outside of it being the kind of the best asset in that market.
Can you comment on whether or not the U. K. Is within Klepierre's domain? Or is it sort of an open market for either one of you to invest in?
Well, first of all, we there are no restrictions that we have vis a vis Klepierre Pierre other than I'm Chairman of the Supervisory Board and I've got to obviously act accordingly. They are not in the U. K. I don't there's never been any discussion that they'd have any interest in the U. K.
And I don't foresee that at all.
Great. Thank you. Sure.
And your next question comes from Jeff Donnelly of Wells Fargo. Please proceed.
Good morning, guys. Maybe a follow-up to an earlier question for both David and Steve. What sort of interest rate environment are you guys
Well, are we? Sure. I wish I could tell you what the rate is, then I'd I would also be trading treasuries I guess. But fact of the matter is we're being as aggressive on refinancing our business as we can. We're not all that excited doing trading dollars, which essentially is to some extent our secured debts got obviously don't necessarily believe in funding they'll make whole premium.
It's basically trading present value dollars, creates lumpiness in the earnings, blah, blah, blah. I'm not a big fan of it. We may do it in one particular context on one deal. But I mean we're as active as we can Steve on refinancing?
We are. And not only that Jeff, we have despite the fact that LIBOR is at 20 bps and hasn't moved and there would be a temptation to float, The fact is 90 plus percent of our debt is fixed rate debt and we've done the match with long lived assets and long term fixed rate debt. I mean, Jeff, I think David's right. I think rates are likely to rise. Having said that, they've already moved 75 bps to 100 bps and we don't have a lot of robust economic growth in the economy today.
But I do think it's probably likely that we'll see a higher rate environment going forward.
Have you guys seen already any demonstrable impact on asset pricing either deals being re traded? Or do you expect a better acquisition environment ahead?
No. I mean, I don't think there's been a really reaction on the transaction side because of rising rates at all. I have not seen that at all.
And maybe this one is for Rick on just on occupancy costs. I'm curious the pace of sales growth is decelerating, but releasing spreads have been been fairly healthy. Why haven't we seen an increase in occupancy costs? And do you think that's going to ratchet up in the next 12 months?
Well, one of the components of occupancy costs are sales and rents. Frankly, we're only rolling a relatively small percentage of our square footage every year moderate considerable rooms that grow our rents even in a moderating sales environment.
That's helpful. And just maybe in understanding percentage rents. I know overall the portfolio does about $577 a square foot. But when you guys look at who actually pays percentage rents, does the sales productivity of those tenants vary much from the portfolio average? I'm just curious if the productivity of the percentage rent payers is sort of higher or lower than the portfolio as a whole?
It is all over the block. We've got over 1200 tenants that pay us percentage rent. So we have a very wide and diverse base and really there's no particular color between how you would say sales productivity and the payment of percent rent?
And to amplify Rick's point about 1200 dollars a lot of our percentage rent payers are actually department stores that pay a 1% or 2% or 3% depending on the vintage of the original deal. And I would tell you that that's a big component of our percentage rent. And as you might imagine, it's been kind of static over the last several years and in some cases down when you're talking about a penny.
Just one last question actually for you, David. I recall that I think Simon or Chelsea had bought in Craig's interest in their Carlsbad outlets years ago for I think around a 10% cap. There any more of those purchase options still lingering with Craig?
We're looking. I would I'd like to find a few more, but I don't believe so. But if I stumble upon it, I'll let you know.
Thanks.
Sure.
Thank you. Your next question comes from Nathan Isby of Stifel. Please proceed.
Hi. Good afternoon. Just focusing on the same store growth, you're in the mid-5s through the first half of the year against some pretty tough comps in 2012. And you had mentioned earlier in the year that some of the redevelopment might weigh on the 13th 2013 growth. Would you say you've navigated through that better than expected?
Or should we expect some of that to rear its head in the second half of the year?
Well, I think our I have been very, very pleased and it's above our own internal budgets on our comp NOI growth. So it's we've the team the folks, the leasing, the management folks have done a fantastic job year to date and beaten my own own internal expectations. So they've done a great job.
Okay. And I mean and so looking ahead to the second half of the year, I mean, you do have some pretty easy comps from last year. Is there anything out there in the redevelopment that should make us think that you would not continue what you've been doing here in the second in the first half?
Well, again redevelopment we exclude. So it's really that's not in that number. So let's put that aside. I mean, look, there are unknowns in the business environment, right? Sales, I hate blaming the weather.
I will never blame the weather. Even if we miss 1 quarter because of the weather, you will not hear the weather excuse here.
Will you take credit for it though?
We won't take credit. We will not blame an early Easter or late Easter, early Halloween or late Halloween. But there are lots of things, Nate, out of our control, tenant bankruptcies, lousy sales, lousy weather, whatever, international politics, U. S. Politics, whatever changes the consumer mindset.
So I mean, we're still in an uncertain environment. That's why we try to be very cautious in how we look at things. And I've been as I said, I wish I could give you a number, I won't. You know we don't. But I've been very, very happy with the way the team's executed operationally.
They've done a great job thus far.
All right. Thanks.
Sure.
And your next question comes from Vincent Chadde, Deutsche Bank. Please proceed.
Hey, everyone. Just wanted to clarify just on the McArthur Glenn deal. I know you're going to provide more details when it finally closes. In terms of the guidance update though, I mean is there anything baked in for accretion for McArthur Glenn and also any transaction costs baked in?
No. Not at all. It's not in our numbers, correct.
Okay. Thanks. And then just going back to the interest rate commentary, I mean, appreciate the color on not wanting to prepay some of the mortgages. But just curious if you're thinking about prefunding some of the unsecured debt that's coming due given where rates are today, how they've backed up in light of your rating increase or improvement there?
Yes. That's a distinct possibility as we look out in the 3rd and 4th quarter that I would Steve can add to this. But we always are trying we always get ahead of that schedule. So it wouldn't surprise shouldn't surprise you if we do that sometime this year.
Yes. I mean Vince, I mean the bonds are like mortgages and that there is the equivalent of a yield maintenance. There's a make whole. So to some extent you are trading dollars. But having said that, much like we did in December of 2012, we went to the bond market to prefund if you will our 13 maturities because we knew what they were.
If you look at our debt maturity schedule, we've got about $900,000,000 of bonds coming due in 2014. So as David mentioned, we do look at the market. We monitor the market. One of the great things about the bond market is that you can go relatively quickly. And so we do have that option to prefund that at some point in time.
Okay. Thanks guys.
Sure.
And your next question comes from Michael Mueller of JPMorgan. Please proceed.
Yeah. Hi. Just two quick ones on MacArthur Glenn. Sorry about this. But the $435,000,000 is an equity investment.
Can you let us know what the associated debt is that goes along with that?
We will outline all of that when we're closed on the transaction. Okay. But the leverage on there is nothing extraordinary about the leverage amount on these assets. So but we'll lay it all out with all the once all of the elements get closed.
Okay. Do you think that's Q3 or is that Q4?
Let's see. When Q3 I would think that it should be completed by the end of this quarter.
Okay. Great. And then last question. What was the trigger to sell the Laguna Hills Mall?
It's very interesting. We had a redevelopment plan. Even after that redevelopment plan given all of it what the assets are if you've been to Laguna and you know kind of the what we own in Orange County, Braham Mall, even with the redevelopment, even though it's well located, it was never going to be a really good core asset like Brea or Mission or Orange, the outlets at Orange. So we said, you know what, we can reinvest we can take that capital and reinvest it in what we think will be a core opportunity at the end of the day. And it was really that kind of thinking.
Got it. Okay. Thanks.
Sure.
Thank you. Your next question comes from Ben Yang of Evercore. Please proceed.
Hi, thanks. David, you mentioned having no additional purchase options with Craig Realty. But I do recall you did have some prior agreements with Prime when you ended up buying Livermore in Grand Prairie. So maybe based on your comments, is it fair to assume that you have no prior agreement option or other with any private outlet owners at this time?
Well, I'm just trying to think. Don't put me on the spot like that. I can't remember everything. We will do we are about to do another deal with Prime that actually will probably sign up this week. So and they've announced it's no secret.
I mean, it's in the Minneapolis St. Paul area, which we think is going to be a terrific investment for us. And so you're putting me on the spot, I mean, but we've got a couple of other opportunities. So I just want to be careful how you characterize that. But there's other stuff that we're working on that we'll have options to get in on.
So I shouldn't unilaterally say, yes, you're right. I think there are other stuff out there.
All right. Sorry for putting you on the spot. But maybe that deal with Prime in Minneapolis, I mean, can you talk about the pricing and the cap rate on that potential deal? And are you going to buy the entire center outright at this point?
In that case, there's no option to buy it frankly. But it's we're a development partner. So we're just going in on the development side. So the returns are consistent with kind of what we've developed over the years in the outlet business.
Okay. But you are going to be an owner of that project, right?
Correct.
And I'm just curious why is the expansion at Woodbury Premium Outlets so expensive given the relatively modest expansion of physical space there. Is there anything unusual going on with that that would lead to that $170,000,000 investment that you're looking at?
Well, we're upgrade 1st of all parking is really expensive, because we have to deck the parking to create the additional space. We have a tight site to start with and we've got a lot of infrastructure work terms of the parking and a lot of we're redoing all of the ingress, egress, all the roads around it. And then I mean as much as we love the center, it is long in the tooth. So we're also bringing it keeping it consistently with consistent theming, but it does need to be renovated. But at the end of the day, even with that said, so you have the parking, you've got all the road work, it's going to make it better for the consumer to get in and out of.
We're renovating the mall. We got to demolishing a couple of buildings. You put it all together. New York ain't cheap. It's not like building in the Midwest.
You put it all together. Yes, I had the same reaction frankly, but I still like the returns. And it's it is the world's best outlet center. So if we're going to spend money anywhere, it ought to be in the world's best outlet center. And so you put it all together, it's a good return and it is what it is.
We're actually very excited. It's progressing. We actually originally were going to do it over a 3 year period. I told the guys to go back, figure out how to get it done in 2015 and they've come up with a plan. So we're going to this thing is going to be hot and heavy for 1.5 years.
But I think afterwards, it will reinforce its position as the world's best outlet center. So we're couldn't be more excited about a project than that one.
Okay. But a lot of non income producing work that you're doing there. So a good return to you, but below the 12% that you're getting on some of the other redevelopments in the outlet space?
Correct.
Correct. And then just final one. I know it's a small potential investment, but can you maybe comment on your intentions at that land at Oyster Bay that you're trying to buy with some of your partners?
Nothing really to say other than than to the extent it moves forward. Us and our partners will look at it and come up with a plan that's got that's subject to zoning and we would expect to come up with a responsible development plan, but it's all going to be something that's going to be subject to getting zoning approvals. But we hope to benefit the community there and work with the community there to come up with the appropriate plan. But it's going to be driven not just by us, but our 2 highly regarded partners.
Is the goal to build a regional mall at that site longer term?
No, no, no. I don't see that at all.
Okay. Thank you.
Sure.
Thank you. Our next question comes from Rich Moore of RBC Capital Markets. Please proceed.
Hi. Good afternoon, guys. Back way back to the recovery ratio question, Steve, the JV recovery ratio is up pretty extensively in the 1st and second quarter of this year. Is that going to continue at that kind of rate you think? I mean are we level 2Q for recovery ratio in the joint venture
platform? Well, Rich, it's just
I mean ultimately it's math. It's a function of where the expenses go relative to the contractual increases that we have built into our leases. Give me your view on where you think inflation is headed and where costs are headed. So far over a period of several years now, we've been having expenses grow at a slower rate than the escalators in the leases. So it's been additive to the comp NOI growth.
In any event, Rich, I would say that the pace of the additives will probably slow down.
Okay. Good. That's fair. Then the you commented David on the on what's going on in Brazil as far as outlet centers go. What do you think for North America in terms of how many you can build annually or some number that addresses that sort of concept over the next 5 years?
Well, I can't put a number on them. I mean, there's a big pipeline out there. We're going to do a handful. Lots of other guys are involved in trying to do a number of them. And we'll see.
I mean, I not clear to me that they'll all get built. But obviously, it's the flavor of the month. There's any center that's out there that is not meeting its performance expectations turns into an outlet center. They're all harder to do than what people think, but there's a lot of obviously very capable competent developers out there trying to build outlets. The important thing is what we build is good and I can't worry about what others build.
I can only worry about what we build and it's every intention on our front to only build what we can lease and generate a positive return on. And thankfully, Rick, we haven't really screwed up yet in the new development side. So, hopefully that will continue.
And the only thing that I would emphasize and David touched on it earlier is in addition to new development, these expansions that doing are at some of the best outlet centers in the world and they're not small. Desert Hills is 147,000 feet. Las Vegas North is 147,000 feet. Seattle is 90,000 feet. These are big substantial expansions that were bringing in great retailers making some of the best in the world even better.
And that shouldn't be lost sight of.
Okay. While you're on that Rick, I have a question for you on Desert Hills. I just was in the area and saw that one and it's always been a great center. And I'm curious, I didn't quite get exactly what you're doing there. It looks like you might be building a golf course in the middle or something.
Even though Steve wanted us to.
Yes, I thought it was finally time to have
a golf course at an outlet
Just a part 3.
What's going on now is there's really 3 things going on simultaneously. We are as David alluded to at Woodbury, we're building a parking deck behind the existing larger section of Desert Hills plus we've already built additional grade parking behind the smaller section. And now what you're seeing in the interior of the larger section is the actual development of the retail space that's basically going to be an inner ring. So we're going to maintain our racetrack layout, but now instead of being single sided with parking in the middle, it's going to be double sided with parking in the decks.
Okay. I got you. So how many retailers do you add there anything?
Well, we're adding 147,000 feet. And frankly, one of the things we've been able to do to drive our NOI is to try and be a lot more disciplined on the size of the retailers and maximizing our revenues by trying to fit as many new retail concepts into the space as possible. So I would hope that it would be several dozen, but it remains to be seen because people want as large a store as they can get there.
Okay. Good. Got you.
And last thing guys, do you have any updated thoughts on J. C. Penney and how they're doing I guess over the past quarter?
The only thing that I would comment on is that we're obviously in the stores. The stores look good. We know as much about their sales as you do. I will tell you that through our channel checks, the debt's trading at par. I think this is just a matter of giving the management team time to position it where they want to position it.
It's still a formidable retailer with considerable gross sales and we certainly hope they can recapture market share and resume a growth profile.
Okay, great. Thank you.
Sure.
Thank you. And your next question comes from Tayo Okusanya of Jefferies. Please proceed.
Yes. Good afternoon. Two quick ones for Steve. First Steve the reversal of the provision for credit losses. I'm just wondering how much of that is a signal to The Street about how confident Simon is feeling about tenant credit?
Well, Tayo, it's not really a reversal of a provision. It's just the fact that there were some receivables that we had reserved and in essence written off that in fact were subsequently collected. But I will say this, as we look at our credit profile of our tenants and as we look at our receivables every month that we do, number of outstanding receivables, number of tenants on, the watch list is pretty muted right now. And I would say the overall health of the retailers is pretty strong right now.
Yes. Other than I just there are a few out there that don't ask me to name names because I won't. But there are a few out there that still have some clouds around them. So we are we're focused on 2 or 3 out there that are relatively decent sized for the mall business that we'll have to just monitor how they ultimately turn their business around.
Okay. That's helpful. And then just the JV income, Steve, Q1 that number was about $54,000,000 but I think you mentioned that number was on the high side because of some mark to market on the Clapier leases. But in 2Q the number comes in at $56,500,000 Just kind of wondering from a run rate perspective what makes sense for us to be modeling?
I would say Tayo the run rate is probably
more in line with what we saw
in the Q1 backing out that one time thing that we talked about. So it's in the high 40s to about $50,000,000 a quarter I think.
Okay. So what happened this quarter again to make it still elevated?
There was a gain a small gain that flowed through related to Klepierre's sale of their home office headquarter building.
Okay. Thank you very much.
Sure.
Thank you. So we have no further questions at this time. So I'd now like to turn the call over to Mr. David Simon for closing remarks.
Thank you very much. Have a great rest of the summer. See you soon.
Ladies and gentlemen, thank you for your participation in today's conference.