Good day, ladies and gentlemen, welcome to the first quarter 2013 Simon Property Group earnings conference call. My name is Dominique, and I'll be your operator for today. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session. If at any time you require operator assistance, please press star followed by zero, and we will be happy to assist you. I would now like to turn the conference over to Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.
Good morning, welcome to Simon Property Group's first quarter 2013 earnings conference call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. You may refer to our SEC filings for a detailed discussion of forward-looking statements. Please note that today's call includes time-sensitive information that may be accurate only as of today's date, April 26, 2013. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information package that was included in this morning's Form 8-K filing. The supplemental is available on the Simon website in the investors section. Participating in today's call will be David Simon, Chairman and Chief Executive Officer, Rick Sokolov, President and Chief Operating Officer, and Stephen Sterrett, Chief Financial Officer.
I will now turn the call over to Mr. Simon.
Good morning. Our results for the quarter were strong. FFO was $2.05 per share, up 12.6% from the first quarter of 2012. Our FFO exceeded the first call consensus at quarter end by $0.05 per share. For our malls and Premium Outlets, comparable property NOI growth was 4.8%, and that was off a 5.7% increase in Q1 of 2012. Tenant sales were up 5.3% to $575 per sq ft. Occupancy up 110 basis points to 94.7%. Base minimum rent per sq ft was 3% higher, and our re-leasing spread was a positive 13.4%, or $7 per sq ft. We were very active in the debt markets during the quarter, closing or locking rates on 13 new loans, totaling approximately $2 billion, of which our share was $1.3 billion. The average rate was 2.92% and a weighted average term of a little over eight years.
Let me turn to the all-important development activity. First of all, we opened the Phoenix Premium Outlets in Chandler, Arizona on April 4th. The center is 100% leased, opened with an impressive collection of stores. I will not name them. Rick will if you're interested. Several high-profile stores will be opening in the coming weeks, and the good news is the shopper response has been very strong and many merchants reporting as one of their best outlet openings in the last couple of years. Gotemba Premium Outlets open on April 19th. This is our ninth center in Japan. It's located 15 minutes from Narita International Airport, serving greater Tokyo. The center opened with large crowds and 70 media outlets opening, and we expect this to be a terrific center serving the area visitors to Tokyo, given the proximity to the airport.
Significant redevelopment projects were completed during the quarter at Apple Blossom Mall, Quaker Bridge Mall, and South Hills Village. Several significant projects are on track for completion in 2013, including expansions at Sawgrass Mills, Dadeland Mall, Seattle Premium Outlets, Orlando Vineland Premium Outlets, Walt Whitman Shops, and the re-grand opening of The Shops at Nanuet and University Town Plaza in Pensacola. Redevelopment expansion projects, including the addition of anchors and big box tenants, are underway at 44 properties in the U.S., two in Asia. Our share of these costs is approximately $1 billion, and the blended estimated rate of return is approximately 11%. We have three premium outlet centers under construction opening in the third quarter of this year. St. Louis Premium Outlets in Chesterfield, Missouri, opening August 1, which is 96% leased. Toronto Premium Outlets in Ontario, Canada, opening August 22nd, which is 85% currently leased.
Busan Premium Outlets in Korea, opening in late August. As we highlighted in the press release, demand for space in all of these centers has been exceptional, and we expect to be fully leased at opening. We also have at least eight additional new premium outlet projects in North America in various stages of pre-development. Klépierre reported its first quarter revenues this week. You can read about them, so I'll be brief other than to say that rents were up for the quarter, a total of 3.4%, reaffirmed 2013 guidance. We've now owned our stake for 13 months. Progress has been made in several aspects of the business. They have sold €760 million of assets. They've simplified their business with the elimination of the Ségécé sub-brand, as well as the ongoing sale of the office portfolio. They're focused on operations. We've added a new CEO.
They're generating additional Simon Brand Ventures-type revenues, as recently evidenced by the Coca-Cola partnership. They've strengthened their balance sheet through recent financing activities, and they've opened two great malls in Saint-Lazare, Paris, and Emporia in Malmö, Sweden. I think, if anyone has had the opportunity to visit those centers, you'll see that the company has clearly the capability to build first-class 21st century retail. Today, we announced a dividend of $1.15 per share for the quarter. Over the past six quarters, we have increased the common stock dividend each quarter as we've been playing catch up to our taxable income. Our growth rate in our dividend has been over 31% over the last two years. Importantly, we anticipate, subject to review and board approval, increasing our dividend as we anticipate our taxable income continuing to grow.
Guidance, today, we increased the top and the bottom line of our 2013 FFO guidance to a current range of $8.50-$8.60 per share. This is an increase from $0.10 from the initial guidance in February of $8.40-$8.50 per share. Strong operating performance is the driver of this increase. Occupancy, reasonable mall and premium occupancy cost of 11.3% and strong rent spreads give us good momentum. Finally, 13 is off to a good start and we're ready to answer any of your questions that you'd like to pose.
Ladies and gentlemen, if you would like to ask a question, please press star one on your touchtone telephone. If your question has been answered or you wish to withdraw your question, press star two. Again, that is star one to ask a question. Your first question comes from the line of Jeffrey Spector of Bank of America.
Hi, it's Craig Schmidt here.
How you doing?
Real good. It sounds like you've made real progress on your dispositions at Klépierre. Maybe you could give some more color on what's left to do, as well as maybe some of your refurbishings that you've done in the portfolio, and any successes you've had in bringing new retailers to your Klépierre portfolio.
Well, first of all, they will continue to sell non-core assets as well as the office portfolio. They've got a couple of the office deals that are close to being signed up, including their headquarters. They'll continue to sell the smaller non-core assets, which frankly are very stable and solid centers, but they don't have the extension capabilities that we're interested in pursuing. They've done a great number of extensions like Plaisir in Paris, on the east side of Paris near the airport, that I think represents the ability to take a smaller center and expand it. On the retail front, we're continuing to solidify that. The operational side of the business is the true upside. The coordination among retail, what we do at Simon Brand Ventures, how we operate the centers is the next chapter in the story. Obviously, that takes some time.
We've had to add to the personnel ranks. We've had to set the strategy and we're pleased with what's going on there, and I think there'll be more to come.
Are you surprised at your ability to push rents given the general difficulty in Europe?
Look, I don't run this day to day. Some of these questions are better asked for them. We are not the ones pushing the rents. We're providing strategic advice and helping them focus on what is important in their business and also showing them how we run our business so they can run their business. I'm not surprised that a number of those countries have stability in cash flow in tough economic times. I think what you've seen here in the U.S. is that the same thing happened here for us in very tough economic times. The one area where they're having the most difficulty is in Spain. That is a focus for the company, but that continues to be something that is affecting their cash flow to some extent.
It's because Spain continues to be under pressure for basically all retail real estate owners that have real estate in Spain.
Great. I was impressed with your 96% leased in St. Louis. Do you know how much will open in August?
We should be in the 90s. There's always a few laggards. That's a real number, and we should be in the 90s. Even though we'd love to open every center at 100% leased and operated, sometimes it does take time. Phoenix is a great example. We're 100% leased. We were in kind of the low 90s to be at opening. In the next couple of months, we'll be 100% occupied. Same thing will happen in St. Louis. There may be a couple of slow people, but we are 96% leased.
Okay, thank you.
Sure.
Your next question comes from the line of Christy McElroy of UBS.
Follow up on Craig's question about the outlets. Can you disclose the expected yields at Chandler and St. Louis for 2013, and maybe discuss some pre-leasing progress at Columbus and Charlotte?
Well, look, our yields in the outlet business continue to be attractive. These will be double-digit yields unquestionably. Chandler will be probably north of 10%. St. Louis will be at or above 10%. In addition, as many probably know, we're looking at phase 2 now. Obviously, as we bring that online in St. Louis the yields will go up. They're both north of 10%. On your question on Columbus, let me just say this, Columbus is a very competitive market. There's a lot of folks that have competing real estate there and sites. We'll see. We may or may not be the victor in that competition. We're working to continue to try and move that forward. Charlotte is basically a go deal. With us and Tanger, we expect to start construction in the next two months. We're very excited about that project.
I'm not going to tell you what the yield is because I don't know what Tanger does, but it'll be very good. The retailers are very happy that we have put together our joint venture. They're very excited about going it, and it's got to be at least over 50%, 60% pre-leased. Not that we really need it, because the one thing that we know is we have 80 Premium Outlets in the world, I think. Christy, we don't really need to pre-lease like some others that might, because we kind of know whether or not we can lease it. Charlotte's go, starting construction here shortly, and we're racing to do a 2014 opening.
I know that you continue to do quite a bit of anchor and big box repositioning. Can you talk a little bit about what the retailer demand is like today for mall anchor space, how you think about getting that space back from a re-tenanting perspective, and are sale leasebacks of anchor space something that you would consider if a major tenant came to you looking to raise capital?
Hi, Christy, it's Rick Sokolov. The demand is as good as it has ever been, and I think that that can be referenced by the number of spaces we have available. In our mall portfolio, we literally have 635 department stores, and 1% of them, or six or seven, are vacant. That's the lowest it has been in as long as I can remember. We actively deal with every one of our malls to keep a running list of people that have demand to get in there, and we are in a constant dialogue with our anchors that we've identified that we have the potential of getting back to try and make them better. If you look over the years, I think we've added almost 175 boxes and anchors over the last four years in the portfolio.
We've been very active, and it's making them a lot better. I do not believe we would really be interested in entertaining sale leasebacks.
Are you able to sort of quantify maybe a range of what you might pay for vacant anchor box space, a Class A mall versus Class B mall?
Well, each deal depends on a lot of individual characteristics of each deal. It's not really something that you can generalize about.
Hey, guys, it's [Frost & Nelson]. One final question. The 4.8% same store NOI growth you generated this quarter, if I think about that relative to the occupancy gains you had and the re-leasing spreads over the last year, it kind of feels like there's something else that's helping that number. Is there a piece there that I'm not thinking about?
Well, partly is good sales growth. Partly is that we're very focused on operating to the best of our ability. I would point out, last quarter, Q1 2012, we had 5.7% comp increase. To have 4.8 on top of 5.7 is just running the company as well as we can. We're never satisfied, we're always trying to improve, and that's what we're all about.
Appreciate it. Thanks.
Your next question comes from the line of Paul Morgan of Morgan Stanley.
Good morning.
How are you?
Good, thanks. On your re-leasing stats, the opening number went from $53 to $59, I guess it's a 12-month trailing average. Is there a disproportionate share opening in the first quarter? Because I'm trying to see, kind of forecast that number out, and it was a big jump given that it's a rolling average.
Yeah, Paul, this is Steve. Some of it is mixed. In the mall business especially, there are more leases that are tied to traditional retailers' fiscal year-end, which is January 31. In fact, I think if you look at the supplemental, as I recall, the remaining square footage that we have expiring in 2013 is in the 3 million to 4 million sq ft range, where over a normal year, like 2014, 2015, it's 8 million to 9 million sq ft. We have dealt with a lot of the especially regional mall expirations that occur January 31.
Okay. Great. That makes sense. Can you maybe just characterize. You list all your redevelopment projects, and it looks like there's 37 in there, and you have about $700 million listed in the sup, which is only about $20 million per project. But it looks like there's some that are kind of adding new space and should represent, I guess, a more sizable chunk of that. I'm trying to see, should we expect to see more expansions of malls given the demand and given your spreads resulting in some lumpier projects that pull that number up? Are there lumpy projects in there that represent a big share of that $700 million?
The lumpy projects are basically hopefully ready to start shortly. I'm not going to list you, I'm just from recall. The lumpy ones you'll start to see later on this year and in 2014, and they include Roosevelt Field, Copley, Del Amo-
King of Prussia
Woodbury, King of Prussia, Houston Galleria, to name four, five, or six lumpy, bigger, chunkier ones. You're right, a lot of what we have now is they run the $20 million, $30 million, $40 million. You have something like Nanuet, which is a $150 million project, and Walt Whitman's around $80 million. You got it all over the board. The lumpier, bigger ones, we are essentially in our first phase of Del Amo. We will begin our first phase of Roosevelt Field here in the fall. Stanford, Rick whispered to me. Thank you. We're finalizing everything there to, as many of you probably know, to relocate Bloomingdale's, build them a new store, and then we take over their existing Bloomingdale's store and carve it up for small shops.
The bigger, lumpier ones really are hopefully beginning to start the second half of 2013, and 2014 will be a huge year for us, 2015 as well, as these bigger, lumpier ones come on stream.
Hey, Paul, it's Steve. I would just add one thing to that, because it gets lost in the sauce sometime, between, David mentioned Woodbury, he didn't mention Desert Hills, Orlando Premium, Las Vegas North. Those are four premium outlets that all do north of $1,000 a foot in sales, where we are adding significant amount of space. Those are projects that'll come on in the next year too, as well.
as Steve said, those on average, are about $100 million a pop.
Yeah. that number
Yeah
should really double probably in a year from now.
It's going to balloon, I think, what we have said and will say again, is that this is our number one priority. This is the huge focus for the company. This is where we spend most of our time. The good news is we recognized this, that the world was not going to end, a little bit ahead of others. We're in the midst of doing this now. Woodbury's going to start right after this. Most people, after their first quarter earnings, take the afternoon off. Right after this, Rick and I are going to spend 2 hours on the final approval of Woodbury. It's a $168 million deal, and it's going to really be cool, and it's really going to start, and we've really got the approvals and blah. Then in the afternoon, we do take a lunch break.
Rick demands to go out to lunch. I like to eat at my desk. It's a source of much conflict in the organization. Right after that, we're approving, I don't know, 20 some odd different mall deals. Number one priority, we're glad we're right in the midst of this now, and a lot of good stuff to come.
Would you think those blended, stabilized returns are going to be around-- You've got 9, you've got 14% for the Premium Outlets in there. Is that going to change much?
Yeah. Look, I think they'll all be very accretive to our company. As soon as the project gets approved and we put it in there, you'll see the return.
Okay, great. Thanks.
Thanks.
Your next question comes from the line of Cedric Lachance of Green Street Advisors.
Thank you. David, we look at occupancy that continues to grow in your portfolio, and we're past some previous peaks. Where do you think is stabilized occupancy?
Actually, I've been very impressed with our leasing team that they've been able to achieve these occupancy levels. I think the focus now is, it's always good to, on the margin, to continue to increase occupancy. Cedric, I do believe that the focus now will be making sure that the mix is the best that it can be. I've actually been very pleased and impressed with our leasing team and their ability to drive occupancy. I don't tell them because then they'll take the afternoon off where Rick and I won't. No, seriously, I've been very pleased with the results that they've been able to produce.
Cedric, the only thing I would add is that the number that I'm thinking about is higher than I would have told you perhaps a year ago. What has emerged in our sector now is you have a number of very high fashion, highly productive tenants like Zara, H&M, Uniqlo, Topshop, that are demanding bigger spaces. Because they're all bigger spaces, that's going to create incremental demand for our space that could enable us to perhaps drive the percentage higher than would otherwise be the case absent that demand.
As you look at your ability to change the mix, what can it do for your ability to push rent in the centers?
Well, look, it's relatively straightforward. The better the tenant does in terms of sales per square foot, the greater they have the ability to pay rent. It's really that simple. As we do that, we're hopeful that rent will follow or be part of the initial equation.
Okay. Turning maybe to densification, you talked about Copley earlier. It seems that you could add non-retail uses depending on the city. How many more malls do you own where you think you could add non-retail uses and densify the sites?
Cedric, it's Rick. Right now, we're working on adding hotels at five different projects, and we're working on adding multi-family at four additional ones. We're under construction with a multi-family project at Firewheel in Garland, Texas. We still think there is very good demand for it. What we have found is that when we add these hotels or multi-family or condo components in our projects, they are yielding the higher room rates for hotels and monthly rentals for multi-family because people very much enjoy the mixed aspects of the community. We think we bring an incremental value to those components, and we're going to continue to pursue them.
Just roughly, put Copley aside because that's the big one. There are at least 12-15 in each area that are of immediate focus. That doesn't mean it's limited to those, say, 24-30. There is a list of those 12 or so in each category, being hotel and/or multifamily, that we're very focused on. In fact, we're going to approve this afternoon, Southdale, more than likely. I'm still struggling with the returns, because our returns are higher than the multifamily guys get. I'm still struggling with some of those deals. I do think there is a pipeline to take advantage of that, and it's good for the real estate too, generally.
Just final question. In your annual shareholder letter, you talked about continuing to lead the industry and promoting the mall as a marketing medium.
Yep.
How much more can you do? How much more income can you generate from that aspect of the business?
Well, I think it's also just more than income in that, I could be wrong here, but I do think we're on the verge of a technology backlash. Our focus is creating the mall environment where people. We had a meeting on this, kind of a brainstorming meeting on this Monday, and something was said that was very clever, is that people today are looking down, they're not looking up. What happens in the mall environment is we do give them the opportunity to look up and around and not just down. Down meaning at your mobile device and everything else. I do think the mall has a unique ability to be part of that, maybe next wave of trying to create social responsibility, community relations, community feel, and part of a process where we actually look up as opposed to look down.
It's a big focus for our company. The revenue side, obviously we love cash flow, we're cash flow junkies, so we're going to look to that too. There's a unique ability for us to really kind of create community in our properties. Beyond that, I think that's a huge mission for us to try and achieve. It's a long-term prospect. Lots of ideas there. Very hard to sort out exactly how we will execute it. The good news is, just to segue into the e-commerce, you're seeing more and more pure e-commerce companies opening stores because they know that people, frankly, want to look up, they don't always want to look down. A great example is this Warby Parker, this eyeglass thing, and it was kind of the new hot dotcom thing, and they're opening physical stores.
Whether they go to the malls or not, who knows? The fact of the matter is, I think they recognize that people want to touch, feel, look up. Our mission is to get people to look up, not look down.
Great. Thank you.
Thanks.
Your next question comes from the line of Quentin Velleley of Citigroup.
Hey, good morning.
Good morning.
It's been a while since you combined the operating statistics of the mall and the outlet business together. Can you maybe talk a little bit about how each is performing, some of the similarities and differences? As we look at the 79.6% of your NOI that comes from malls and Premium Outlets, could you sort of give us a rough sense as to what the % is coming from outlets versus malls?
Sure. I'll just say this. Steve can answer the second one. In the real estate recession, or I should say, not the real estate recession, because frankly, having lived through 1990-1993, this was child's play. If you look at the general economy, our outlets clearly outperformed the malls during that 2009, 2010, and 2011 period. Now I will say, Quentin, generally, in terms of sales growth and comp growth, they're relatively close. The outlets are still marginally better, but the difference between those two has narrowed considerably. Now with respect to the breakout.
Yeah. Quentin, if you actually, in our year-end tune that's posted on the website, we do break it out for you, and I don't have it in front of me, but as I recall, the malls are 55%, and I think the outlets are 25%, because when you put the outlets and the mills together, essentially about a third of our NOI comes from the value side of the business.
Okay. Then maybe just in terms of the ongoing success that you're having with Klépierre in terms of improving operations and capital and asset sales and so forth having an influence, are you spending a lot of time looking at a similar style of public company investment where you take a similar minority stake and get some board representation? Is that something that's increasingly attractive to you given the success of Klépierre?
We have thought about it from time to time. It's not a big focus for us, but it could lend itself to a situation here or there. Klépierre was the reason we made the investment the way we did was for all sorts of reasons, including risk management. Really it would depend on the circumstances. It's not something that we're out looking to do, but in the right kind of context, it's conceivable.
David, it's Michael Bilerman speaking. How are you? It sounds like if you're really a cash flow junkie, you should put advertising in the floors. That way you can get more money when people are looking down.
We tried that. We've done that. We did vinyl footprints.
Right.
Didn't go over well. It was great for the kids. When I saw the adults using it, I thought it was a little tacky.
Thinking about Klépierre, I guess we've elapsed the sixth status for them to effectively go private. How should we think about your stake, and how you want to evolve over time? Whether you want this to be a stub outstanding, whether you want to bring it in-house, whether you want to bring a joint venture partner in. How should we think about how that evolves now that at least the French REIT issue is elapsing?
Well, Michael, I would love to answer that question, I respectfully won't. We are pleased with the investment. We're making good strides. We need to make more strides. I said the big problem with the company today is somewhat out of their control, and that's just dealing with the Spanish economy. We're pleased, but as much as I'd like to talk about that kind of stuff, I really can't. It is a public company. I've got to respect that situation. We're pleased. They're making very good strides. I would say operationally, things do take longer there than they would, say, here. We've been pleased with the blocking and tackling that the company is undertaking, though they still need to do a lot more. We've been pleased with the progress they've made to date.
Just going back to the rental spreads on page 19 of your stuff. Steve, you answered that the retailer calendar year end, the January 31st. But I guess I'm still having a hard time if March 31, 2012, you had $7 million of trailing at $54, 49 expiring, and now you're March 31, 2013, 7.4 million sq ft at $59 versus $52. Even December 31, 2012, 8 million sq ft at $53-$48. It just seems like the opening and closing are just much, much higher this quarter. Whatever happened in the first quarter of 2013 was dramatically higher rents than at any point over the trailing 12, any other quarter.
Michael, that's true. If you also look, there were dramatically higher closing rents as well. Some of it is clearly mix driven. Some of it is clearly the fact that over the years, our portfolio continues to get better. The rents that we were able to do leases at three years ago, five years ago, eight years ago, were better, and those are all now rolling off. Mix is clearly an issue or a component of it.
I would just point out that we have in our portfolio, U.S. portfolio, not including the mills, or actually, it does include the mills. We have 121 properties that do over $700 a foot.
121.
What?
That average $700 a foot in sales.
121. As Steve said, Rick said, we're really trying to make those properties better and better in all sorts of different ways. That's going to lead to more rent growth. Again, I would not overreact to one really good-looking statistic in one particular quarter. Just like I would ask for forgiveness to the extent that one quarter we have a statistic that looks bad. I'm sure part of it's mix. We can drill down to it a little bit more, but demand is good, and we got a reasonably good portfolio.
Thank you.
Sure.
Your next question comes from the line of Alex Goldfarb of Sandler O'Neill.
Good morning. Just going, I guess, sort of back to Christy's question on department stores and just thinking about JCPenney in particular, especially as they brought in AlixPartners. Your sense of as you guys obviously speak to them, other department stores, how much do you think the massive Ala Moana trade has warped department store managements in thinking what their boxes are worth? Do you think most people are pretty realistic in what they think their real estate is worth?
Look, I can't speculate what Ala Moana, how that has affected the judgment of department store or retail CEOs. I would point out, though, since Ala Moana, there just hasn't been a lot of box trades. You can come to your own conclusion as to why. Maybe because they don't want to sell or maybe there's a spread between the bid and the ask. I don't know. I can't speculate on how they think about that at all, Alex.
Okay. Going to Klépierre, while I know that you don't want to comment directly on their operations, can you just give us a sense as you guys think about the growth and what Simon can bring to their platform, the split between improving NOI versus the bringing in the Simon Brand Ventures-type revenue stream and increasing that ancillary income? How would you think about the growth? Is more of it just going to come from NOI or is there a big opportunity, you think, to really improve the ancillary income, the fact to be a meaningful contributor?
Well, again, I'm not going to quantify that. It's not something I can do. Look, I think the important thing to put in perspective there, Alex, is that we don't run the company. We own a stake. We're pleased with the stake. We can show them how we run it, then they need to apply it. The company has brought in some talented people to learn from what we do, assuming we do what we do reasonably well. I'm not telling you we do what we do is great because I always think it can get better. Assuming we do what we do reasonably well, we can show them how we do it and how we think about the business, but they've got to do that. They're the ones that need to do it.
It's not easy to do when the economy there is sputtering along and in some cases still contracting, i.e., Spain. They get what we're doing. They want to run the company better. They are running the company better. I think as I said in my letter, I do think there's growth there as soon as the economy of Europe generally stabilizes, and I do think the economy of Europe will stabilize. Despite my personal view of it's not going to continue to contract as it has over the last year or two. It was a long-winded answer, I'm not going to speculate exactly how much NOI growth there is. I do think there's improvement in how they run the business, and I think they would agree, and I think that's their big focus in the upcoming years.
Okay. Then just finally for Steve, thank you for the new supplemental. On page 23 in the CapEx and development page, there's an item called conversion from accrual to cash basis. If you don't have this offhand, we can discuss offline. Just curious what that is.
Well, it's simple, Alex. We give you a CapEx number, but there are CapEx numbers where we have accrued obligations, like we've got a construction bill, but we haven't paid it yet.
Okay.
All we're doing is giving you both the accrual number and the cash number because some people look at it and want the accrual number, some people want the cash number.
Okay. That makes sense. Thank you.
Sure. By the way, that's been in there.
A long time
a long time.
Your next question comes from the line of David Harris of Imperial Capital.
Hey, good morning. Got us out of bed early this morning, guys.
I know. We're off our rhythm. We're usually at 11:00, but we deferred.
Yeah. Hey, listen, this is a question, David. See how comfortable you feel answering this. Any thoughts as to what Simon might look like if we were to lose the tax break?
I don't worry about that at all, David. REITs have been around for 60 years. It's not going to happen. I just can't imagine it's going to happen. As you know, it's revenue neutral. If, in fact, there was some change, I think most politicians understand the importance that commercial real estate has in stabilizing the general economy. The last thing in the world they would want to do is create some kind of economic uncertainty. They've seen the fact that the downturn and what commercial real estate, how it handled itself and the amount of liquidity that REITs brought to the table to stabilize pricing and not create what happened in the early '90s. As I said, I have lived through that, as has Rick.
Me too.
You too. Some others. It's not going to happen. By the way, if it did, we would
We would be best positioned to take advantage of it because, as you know, our cash flow is significantly above our dividend payment. Look, I've always fantasized, I probably shouldn't say this, we pay out $1.5 billion a year in dividends. $1.6 billion?
Yep.
What is the number now?
$1.6 billion.
$1.6 billion. Imagine if I had that amount of capital for two, three, four years. We would do some great stuff with it. David, that's an aside, it's not going to happen. REITs have performed, they've been very important to the economy. They've been great for individual shareholders. They've helped stabilize pricing. No way.
Okay, no plan B planning at this point?
Well, we don't need to. Like I said, if the sun hits the moon and hits another galaxy, we will be better positioned than anybody else.
Well, tax breaks aren't granted in perpetuity, so I think the question's out there. A similar question actually related to Klépierre. Obviously, there's been a lot of talk about tax increases and public policy responses that may be somewhat more fluid in Europe today. Any notion at all that the tax status of a company like Klépierre is being questioned?
Not at all.
Okay. All right, very good. Good luck with the hoops, Steve.
Oh, thank you, David.
Okay.
Your next question comes from the line of Michael Mueller of JPMorgan.
Yeah, hi. I want to go back to the leasing spreads again. Not to beat a dead horse here, the 13%, so the 300 basis point pickup. When I first looked at that, what went into my mind was you're starting to roll some shorter term post downturn leases, and you're going to get the benefit there. I guess what I'm trying to get at is, does it feel like this increase, whether it's 200 basis points, 300, or whatever it is probably going to be sticky going forward? Or is it just purely an anomaly where Q2 rolls around, and for some reason we're back down to 10%?
Mike, it's Steve. Let me take a shot at it, Rick can weigh in, or David. I think if you look at the-- we give you five quarters' worth of information, the one thing you can see from the five quarters is that the spread has increased over each of the five quarters. The magnitude of the increase this quarter was substantial relative to the trend that we had been seeing, we had been going from the low fours to the mid fours to $5 a foot. As I said, some of that is lumpy because of first quarter expirations. The fact is, deal flow has been getting better, quality of deals has been getting better. Occupancy costs have stayed relatively low.
As you want to think about it, as mark to market or however you want to think about it, there should be an upward bias. Is the upward bias from $5 to $7? I think that's hard to say, the trend has been good.
Okay. Then, I guess secondly, just curious about what are the thoughts on the pace of rolling out outlets in Brazil today compared to what you were thinking six months or a year ago?
Let me answer that, if I could. I think both, as you know, we've looked diligently in Brazil and diligently in China. Both markets for us have proven to be very, very difficult to find the right project with the right risk-reward ratio. Hence, we're still looking with BR Malls. We're still hopeful that eventually we'll be able to do something there. China has proved to be a market that I continue to really question whether or not anybody can make money investing there, especially us. So I'm hopeful that over time, we'll find the right opportunity with BR in Brazil. That's taken longer than we anticipated, then China's really on the back burner. I have no regrets about it being on the back burner.
All right. Okay. Thank you.
Sure.
Your next question comes from the line of Vincent Chao of Deutsche Bank.
Hey, everyone. Thanks for taking the question. I just want to go back to JCPenney real quick. Obviously, given the transition at the top there, just wondering if you could share your thoughts on that move itself. Also, given their sort of return to more traditional marketing tactics that they've been known for, at the ground level, have you seen any change or in traffic levels and that kind of thing since the move?
Let me just mention, we're pleased that Mike Ullman is back. He's obviously a very competent, seasoned, thoughtful CEO, and leader. Given all the turmoil that Penney was going through, a perfect choice to help stabilize the company. We have great respect for him and his ability.
I would say, generally, having walked a number of Penney stores with David Contis and Rick over the last month or so, the stores are looking better. I think they're headed on the right track. It's very hard for me to speculate exactly how it's all going to shake out. The bottom line is, the organization needed some stability and thoughtfulness, and I think Mike's perfectly the right guy to provide that.
Okay. Thank you. I want to go back to some comments you made about the departments or the anchor space. I think it's 135, only six or seven vacant, so some of the lowest vacancy you've ever seen there. You also kind of said that, I think I heard no interest in sale-leasebacks. Curious if you could comment on what kind of demand is out there for additional anchor space. Obviously, with the vacancy low, that's good. Are you seeing much demand for anchor space? It just seems like most people are moving to the outlet channel in terms of the traditional anchors.
This is Rick. There is a great deal of demand for the space, if you look at the kinds of tenants that we're adding to the properties, we're adding Wegmans, The Fresh Market, Dick's, theaters, health clubs. There is a substantially broader number of categories of retailers that want to take advantage of all the traffic and math that we are creating at these properties. We have, again, more demand today than we have had historically from a broader collection and variety of retailers than we've had in the past. All of that is helping drive, I think, the growth of our properties and the lack of vacancy among our anchor boxes.
Okay. I guess, do you have enough data points at this point for some of these non-traditional anchor malls as far as how the performance of those malls compares to historically, the traditional setup or mix?
I think that all of our anchor components are part of the mix that we have at the property. They are not going to be game changing, but they obviously want to be at properties that are consistent with their growth. In some instances, it's merely a function of whether we can accommodate the physical configuration. Wegmans needs almost four acres of land for a single-level building. Well, in a lot of instances, that can't happen. It's really less a function of that kind of correlation and more a function of, can we continue to give our trade area shoppers more reasons to come to our properties? That's what we're all about.
Okay. Thanks, guys.
Sure. Thank you.
The next question comes from the line of Rich Moore of RBC Capital Markets.
Hi, good morning, guys.
Morning.
On the bankruptcy front and the lease termination front, and that sort of side of the equation, it seems that things are pretty good. I guess, Rick, how would you characterize the outlook for lost tenants over the next, I don't know, three to nine months?
If you look historically, our bankruptcy numbers have been up a little in 2013 just because of Bakers. Overall, the credit profile of our tenants has never been better. Our receivables, as Steve can elaborate, have never been in better shape. Our bad debt is stable, we're feeling good about the credit profile of our tenants, and more importantly, their rent-paying ability, which continues to be pretty strong.
Yeah. Rich, this is Steve. Just to put numbers on kind of Rick's overall statement. I think at the end of the third quarter, we were chasing $42 million of receivables that had been billed but not yet been paid, and that's on about a $7 billion annual base of revenue that we bill either on the consolidated or the JV properties. You're literally talking about less than two days worth of revenue. The credit profile, as Rick said, is very strong right now.
I don't think my calculator decimals go out that far, Steve. Okay, good. Thanks. On the outlets, I think, didn't you guys do the development of Houston and Tanger's doing Charlotte? How do you split up Columbus? I guess who's driving Columbus is what I'm curious.
In Charlotte, we actually switched the roles that we had in Texas. In Texas, we were the developer, we jointly leased, they run the center. In Charlotte, they're the developer, because it was their site. We are going to manage the center, we'll jointly lease. In Columbus, again, Columbus is a competitive marketplace. In Columbus, we're switching back to the other deal. Partnerships are very common in the real estate industry. All sorts of people have partnered. Developers over the years have always partnered. We have a very good relationship with Tanger, it's just kind of been natural to say, "Okay, this is the way it was here. We're going to swap there and then go back here." If there's another deal to do, it would probably swap back to the way we're doing Charlotte.
Long-winded, but Charlotte will be the Charlotte Premium Outlet, and then Tanger will be branding Columbus, if in fact, we're the successful developer.
Okay, thanks. David, how many more do you think of the eight that you have going, that you're thinking about for North America, you'd do with Tanger?
Two are in the eight, and that being of the eight North America, that includes Canada, by the way, and we are actually looking at another site in Mexico. Of the eight, two of those are Charlotte and Columbus is of the eight.
Okay, no more planned yet with Tanger?
No, sir.
Okay, good. Thanks. The last thing, Steve, the recovery ratio, I think it was pretty much high this time, this quarter. Is it going to stay up where it is?
Well, I mean, Rich, I tell you in a weird sort of way, the recovery ratio, the way those of us who have been around a while have historically thought about it, is kind of less relevant now because we're 90-plus% converted to fixed CAM. The CAM charge is just another fixed charge that the retailer looks at in the calculation of the total occupancy cost that they're paying for the landlord. Our fixed CAM all have individual annual escalators. If you look at our operating costs, they've been pretty flat. As long as that's the case, you're going to see the recovery ratio, the way developers have traditionally thought about it, continue to increase.
I will tell you, just in terms of our ability to drive rents, if you go back, and we've given you some of the quarters in the K, our occupancy cost is down over 100 basis points since 12/31/2010. We're still providing very good profitability and value for our retailers.
Okay, great. Thank you, guys.
Sure.
Your next question comes from the line of Ben Yang of Evercore Partners.
Yeah. Hi, thanks. David, you made some comments last quarter that demand is picking up in the B-mall category, that sales were actually okay. Three, four months into the new year, is that still the situation generally that the B-mall segment continues to perform okay?
Yes.
Okay.
Yes, it is.
Okay. Also maybe for Steve, based on some of your recent conversations with lenders, are the lenders taking a more conservative approach maybe to the B-mall category, given obviously what's happening at JCPenney?
Well, Ben, I would just say the lenders, I assume you're referring to the secured lenders, generally speaking, have kept a more conservative posture. Loan to values are still relatively modest. Underwriting is still relatively conservative, that's true regardless of the quality of the asset.
Okay. No significant change over the past few weeks, given, obviously, the new management team at JCPenney's and a lot of uncertainty going on with that particular anchor. Is that fair?
That's fair.
Okay. Maybe switching gears, you made some comments on China just now. On the back burner, tough to find opportunities, tough to make money. Can you just elaborate a bit on some of the challenges that you see in China today that makes you a little more cautious? I do recall that you guys did go into China a few years ago, doing some mall and anchor centers, and I'm curious what you see today that makes it still very challenging for you guys.
Well, that was a very good experience, [we brought 70]. Look, anytime you invest capital and you only bring 70% of it back home, you learn a lesson. I would say, Ben, generally, the ability to underwrite the product there in terms of what the tenants are going to pay, what the costs are, what the approval process is, all the elements of the P&L and a pro forma, including construction cost, land cost, permitting. Not to say that people can't make money there, but it's all very difficult to really have a high degree of confidence. When you think of the risk associated there, you would hope that the returns are better, at least on the piece of paper that you're ready to make the investment on. Frankly, they're not. That's where the big gap exists.
A lot of it is build it and they will come. That plays out pretty badly in real estate development. I mean, it certainly, build it and they will come in the U.S. As Rick knows, and I know, Rick's older, so he knows a little bit more than I know. Building they will come did not make every mall successful. There were a lot of malls that frankly shouldn't have been built. It's just very tough to have the level of precision that we want and if there were margin for error, i.e. returns on investment that were higher, you would take the risk. I just don't see it in everything that we look at on a piece of paper in China. Brazil is a little bit different. You can pencil better returns there.
Again, finding the right site and the ability to build and so on is a little more difficult, you do see much better returns, at least on a piece of paper.
Okay. Very helpful. Maybe just one final one on China. What type of returns would make it more attractive for you to go into China, given all the risks that you kind of elaborated on?
You'll know it when we do it. Right now, I don't see anything on the drawing board. Again, please, the fact of the matter, somebody could be very successful, and we could miss an opportunity, but for whatever reason, whatever we're looking at, it's just not making sense for us. That's not to say others might not be successful.
Great. Thank you.
Sure.
Your next question comes from the line of Josh Dennerlein of BMO.
Hi, good morning.
Josh, good morning.
A couple questions on Toronto Premium Outlets and the broader opportunity set for the premium outlet brand in Canada. Hudson Bay is opening their first outlet store there. Are you in a position to announce any other merchants?
Yeah, we will. I don't know when we're going to do that, but we normally have done that throughout the process, but we will. This should be, by all accounts, a very successful outlet center.
We're already 85% leased and committed. We will be putting out a press release in the next month or so. It's opening in August, so it's happening. It's gotten very good response from both Canadian-based retailers, but also the U.S. retailers that are operating in Toronto already.
Yeah.
Okay. That was my next question. The American brands, I'm trying to assess their level of interest in Canada. Are the Canadian brands that are going in there, are they developing a made-for-outlet merchandising strategy similar to what's happened?
Some are. Now Hudson Bay is a perfect example. We have a wonderful relationship with the parent, which is, as you know, Lord & Taylor. We picked up the phone and said, "You're doing Lord & Taylor outlets in the U.S., a few here and there. You ought to do it with Hudson Bay." Really, we generated that idea. They thought long and hard about it. They were very interested in doing that. I do think it'll start a trend there, no question about it. The U.S. folks are very interested, assuming they have a full price presence ahead of that. Canada generally is very attractive to most U.S. retailers, but not all are there. Some of their outlet concepts will be delayed to the extent that until they have the full price there, which is coming.
For us, with Toronto Premium Outlets, the luxury brands are starting to hit Toronto. What we think over time, as they hit there, we have the natural place for them to do the outlet. Again, that's going to take time. In the meantime, we're going to have a terrific center. We have a phase two there that will allow us to bring in the luxury guys as they hit the Greater Toronto market.
Okay. As you look at Canada, how many Premium Outlet caliber malls are there to build in Canada, do you think?
Well, look, This was a great secret. Now you've got three or four of the eight, but-
One in Mexico.
Anyway. One of the eight, at least eight, is in Montreal, which we expect, again, another meeting today on it, but we're going to start construction on that in July. We think that's a good market, a very good market. Now, it poses a little trickier leasing because a number of the U.S. brands won't go up to Quebec, but we think that's offset by some of the international brands that really do like Montreal. The fact is, Montreal is a great fashion city, and they have great malls there, and we think it's going to be a great long-term project. We've got Montreal. Obviously, Vancouver is a very interesting market as well. We're focused on those kind of bigger gateway areas up in Canada.
Okay. Thank you.
Sure.
Your next question comes from the line of Nathan Isbee of Stifel Nicolaus.
Hi, good morning.
Good morning.
David, you've updated your FFO guidance after the first quarter for stronger operations. Just going back to the first quarter call, you said on that call it was going to be tough to match the 4.8% same-store growth you did in 2012. Can you perhaps give us an update on those thoughts?
Well, look, the first quarter was very good. What's really impressive to me is that it was off a really good first quarter in 2012. That's pretty significant cash flow growth when you add the 5.7% plus the 4.8%, or on top of the 4.8%.
Agreed.
I am conservative by nature. I think the organization generally is, even though we probably don't compliment them as much as we should, they're really doing a good job. I would be very excited if we maintained it. We are not anticipating that. We also kind of trended down for the year. First quarter was better. Last year, if you look, I don't remember where we were overall for 2012.
4.8%.
Four eight. I think 2013, we're heading in the right direction. I'm really not answering your question. It's off to a good start is all I can tell you.
Okay. You talked about some of the fundamental strengths in the B-mall market. There seems to be some new entrants into the B-mall category, people looking to buy some of those, the major assets, et cetera. What are your thoughts in terms of perhaps accelerating your sales out of that group and taking advantage of the new entrants to that market?
We're still going to prune the portfolio. I'm pleased that there are new people coming into the market that are looking at deals. I think that's good for us generally.
Okay. Just finally, on St. Louis, you have 97% spoken for at this point. Now that you're getting closer to the open, can you give us a little bit more, perhaps, the insight into the negotiations with the retailers on why they chose your site over the competing, and what type of sales are you expecting to get out of-
Look, I really am not going to get into that, Nate, other than to say we presented to them what we thought the center was going to be like Cincinnati Premium Outlets. This was kind of how we envisioned the productivity and the mix. It's a quiet center, but it's been well received by the community and by the retailers. That's how we sold it to the retailers. Now they have a lot of confidence that we say we're going to build Cincinnati, they did. We did that. That's how we kind of sold it to them in terms of how they should think about their productivity. The pricing was similar to that. We took it from there. Nothing beyond that, really.
It was competitive, at the end of the day, I think retailers have a level of confidence with us in terms of the outlet product. I will say this, though, because pricing in new deal, the outlet retailer, generally, they know what they can afford to pay. As much as we'd like to say there's this great, huge negotiation on rents, they're used to saying, "Here's what I pay on a new outlet center," and that's what they pay. They're in a very good position to bargain what the rental rate is. The one thing they really wanted to do, they really don't like competing centers. They really like when there's one site and then they all go because they know what they can afford to pay, and then that's what they pay.
In Charlotte, as much as the market might think, boy, Charlotte, looks like we're going to build that one center, the retail community loved the fact that they didn't have to worry about a competing site. They really liked it. Now, in St. Louis, I'm sure a number of them felt that way as well.
Okay. I guess your success there hasn't wetted your appetite for another site, huh?
No. Look, we've lost plenty of those, too. Like I said, it's common to partner and just get a deal done for the community and for the retailers and be done with it. In this case, it didn't happen.
All right. Thanks so much.
Sure. Thank you.
This concludes today's question and answer session. I would like to hand the call back over to Mr. Simon for closing remarks.
Okay. Thank you for your time and your interest, and we'll talk to you very soon.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a wonderful day.