Good day, ladies and gentlemen. Welcome to the Quarter 3 2012 Simon Property Group Earnings Conference Call. My name is Julianne, 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 the conference. If at any time during the call you require assistance, please key in star and zero on your phone, and an Operator will be happy to assist you. As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Shelly Doran, Vice President, Investor Relations. Please proceed, ma'am.
Good morning. Welcome to Simon Property Group's Third Quarter 2012 Earnings Conference Call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the SEC for detailed discussion. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time-sensitive information that may be accurate only as of today's date, October 25, 2012. 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. This package is available on the Simon website in the investor section.
Participating in today's call will be David Simon, Chairman and Chief Executive Officer, Richard 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 excellent. Here are some highlights. FFO was $1.99 per share, up 16.4% from the third quarter of 2011. Year-to-date, FFO was almost $2.1 billion, or $5.70 per share, up 14.7% over 2011. FFO once again exceeded the first call consensus by $0.07 this quarter. For our malls and premium outlets, comparable property NOI grew 4.7%. Keep in mind, our comp NOI growth in the third quarter of 2011 was 3.8%. Our comp NOI growth year-to-date was 5.3%. Tenant sales were up 9.3% to $562 per foot. Occupancy was up 80 basis points to 94.6%. Base minimum rent per square foot increased by 3.8%. The re-leasing spread was a positive 10.4%, or $4.86 per square foot. Capital market activity.
As you know, on July 20th, we redeemed for cash 2 million units of our operating partnership owned by an affiliate of JCPenney at $124 per unit or share. We've been active in the secured debt markets. Year to date, we've closed or locked rate on 24 new mortgages, totaling $2.6 billion, of which our share is $1.7 billion. The weighted average interest rate on the loans is 4.1%, and the weighted average term is 8.1 years. Subsequent to quarter end, we disposed of our investment in Capital Shopping Centres and Capital & Counties Properties, generating total proceeds of approximately $327 million. Development activity. Last Friday was the grand opening of our new outlet center in Texas City. Very strong opening, 97% leased. Traffic was great on opening day with backups, long lines. Coach, Nike, Michael Kors and several other tenants have reported very strong sales numbers.
Construction is underway on five additional premium outlet centers, all scheduled to open in 2013. Two are in the U.S., Chandler, Arizona, which is a suburb of Phoenix, and Chesterfield, Missouri, a suburb of St. Louis. One is in Canada, in Toronto. We have one in Japan, and our fifth is in Busan, Korea. Our share of the development cost of these assets is expected to approximately $325 million. As you know, there have been a select few markets where competing new outlet centers have been announced or identified. This is not unusual in the long history of shopping center development, 60-plus years, as ours is a very competitive business. Rest assured, we know what we're doing. We have opened 19, 1-9, premium outlets in the U.S. and Asia since our acquisition of Chelsea Property Group, delivering high returns and high-quality assets.
We will not waver from this approach. We shouldn't think, given our track record, that the market should overreact to a couple of competitive situations. Progress continues on our first outlet center in Brazil. Our joint venture partner is the well-respected BR Malls. We expect to start construction shortly for a November 2013 opening, which will bring our total of under construction outlets to six openings for next year. We've also identified a couple other sites with BR Malls for Brazil activity. Construction is underway on 24 redevelopment and expansion projects throughout our portfolio, all with 2012 and 2013 completion dates, several which are quite significant in size and scope. This redevelopment pipeline was identified in 2010. The scope of projects range from addition of department stores, restaurants, specialty store tenants, to the redevelopment of the entire asset.
We identified these opportunities very early in the recovery phase of our economy. More than half of the projects will be completed in 2012 and 2013, increasing our cash flow growth. As projects are completed, a new group of redevelopment properties, which have already been identified, will take their place in the pipeline. This program is big and ambitious and impactful to our future growth. It should not be overlooked. We also continue to strengthen our franchise assets with the addition of strong anchor tenants. Recent announced examples include Neiman Marcus at Roosevelt Field on Long Island, a new Bloomingdale's at Stanford Shopping Center, which will lead to the redevelopment of that asset, a new Nordstrom at St. Johns Town Center in Jacksonville, and additionally, a Target at Coddington Mall in Santa Rosa, California.
We expect our share of development or redevelopment spend to approximate $1 billion in 2012. Rents for the shopping center segment were up 4.1%, or 1.7% on a comparable basis. They are ahead of schedule on the disposition program, with more than half of a billion euros sold, which is above their target. During the quarter, they completed a seven-year, EUR 500 million bond issuance at 2.75% coupon. They are on track to meet their 2012 targets, and their liquidity has never been stronger. Additionally, we added to the leadership team in hiring Jean-Marc Jestin as COO. He previously ran Unibail's EUR 5 billion office portfolio. Prior to working at Unibail, he was the COO of our successful Simon Ivanhoe venture. He understands our culture and our expectations. Let me turn to dividends. We announced the fifth consecutive increase in our quarterly dividend from $1.05 to $1.10.
The total dividend paid in 2012 is $4.10, as compared to $3.50 per share paid in 2011. That represents an increase of 17.1%. Our dividend is now 22.2% higher than it was immediately prior to the Great Recession. This is the highest increase among SPG's retail REIT peers, the second highest among all S&P 500 REITs behind Public Storage. Current dividend levels, as you know, for many REITs remain well below their 2008 levels. Let me turn to guidance. We increased our guidance again from a range of $7.60 to $7.70 per share, to our current guidance of $7.80 to $7.85 per share. As you recall, our initial guidance for 2012 was $7.20 to $7.30 per share. Primary factor has been our continued strong operating performance.
Our 2012 FFO is expected to be at least 21% higher than SPG's 2008 FFO immediately prior to the Great Recession. This is a significantly higher percentage than any of our SPG retail REIT peers. Let me conclude. We're pleased with the strong performance. Our operating metrics at our properties remain fundamentally sound. We're producing industry-leading growth. Our investment activities year to date with Klépierre and The Mills have been immediately accretive and additive to our franchise and also providing future growth. Our development, redevelopment activities are significant in size and scope and are delivering double-digit returns on investment. All of this has been accomplished while maintaining an industry-leading balance sheet. We are now ready for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question, please key in star followed by one on your touch tone telephone. If your question has been answered or you wish to withdraw your question, press star followed by two. Press star one to begin. Please stand by for your first question.
Hello.
Your first question comes from the line of Quentin Velleley. Please proceed.
Hey, good morning. Just in terms of the outlets, I know St. Louis and Charlotte are only going to be a very small proportion of your gross assets. Given the competition that we're seeing, it feels like there could be more projects where you're competing head-to-head with some of the other REITs and potentially private guys. Can you just sort of give us a sense of how many there might be out there, how many more announcements that we might see where there are sort of these competing projects?
Look, there's potential for a couple of more of these situations to arise. I know we've got Quentin, we've built 19 of these since we have acquired CPG. We have been extremely successful. We're also expanding a handful of our industry-leading shopping centers. Again, we have a very good perspective of this. If we didn't think we could lease and produce quality projects, we would not do it. We have all the confidence of our track record and our team to continue to produce the results that the market, and more importantly, what I have grown accustomed to, and if there's one or two of these things that might pop up, so be it. That's the nature of real estate development for 60 years. It used to be Simon and DeBartolo competed for malls. It's not all that different.
I think we have earned the respect and the confidence of our retailer partners, and when we announce a outlet center development, we expect to lease it, and they have all the confidence in the world that we'll be able to do so. There is none that come to mind immediately on that front, Quentin, and we'll just see how the next couple of years move forward.
Okay. Then just in terms of the strength of your operating metrics, sales up almost 10%, leasing spreads gaining momentum up over 10%. Is this consistent across both the malls and the outlets, or are your premium outlets outperforming the malls a little?
No, it's relatively consistent. The mall, I'll turn it to Rick, generally, since 2009, 2010, the demand for the outlets has been relatively strong. What we're seeing in 2011 and 2012 and 2013 is that the malls have caught up from the retailer base and demand for our mall activity has been very strong. Rick, do you want to add anything to it?
The only thing I would add is to David's point about where all of our development dollars are going. If you look where most of the anchors are being added and most of the boxes are being added and where we're doing our redevelopments, they're in the mall portfolio where we are having an increasing amount of demand. It's pretty equal in terms of the momentum in the platforms.
Perfect. Thank you.
Thank you.
Thank you. Your next question comes from the line of Jeff Donnelly, Wells Fargo.
Good morning, guys. David, if I could actually ask Quentin's question maybe from a different angle is that the outlet industry development pipeline does seem bigger than ever. Rather than just the question of bumping into one another, how do you think about the risk of overbuilding in this business? Do you think it's one where metro markets can ultimately sustain two, three, four outlet centers and we just haven't scratched the surface here on new unit potential?
Well, look, I can only answer from our perspective. We will not make any outlet mistakes. Okay? The reason we won't is because we're the leader in the business. We have 70 premium outlets in the world. We have the best franchise in this business. I just know that we won't make a mistake. I can't say the same thing for others. That's not my job to worry about what others do. Undoubtedly, there will be development mistakes made. They've been made in the lifestyle business, in the power center business, in the mall business, but they won't be made by us. I've said this for the last year or two, I do not think there will be as much built as people think.
There's been a list of 50 potential deals that have been kicked around. There's still going to be three or four of these things built a year, maybe, not as much as you think. It's not my responsibility to opine for others. They'll make mistakes. We won't.
We are not going to You can lease something too if you give away the building. We're not going to do that either just to get something built.
Just a follow-up for Rick. Thanks, David. What are retailers, I know it's a little early, but maybe telling you about their expectations for this holiday season? I guess, how do you think that affects their unit expansion plans for 2013 and 2014? Does it influence it heavily?
I don't think there's much of a connection. I think people are cautiously optimistic for this holiday. I don't think they are bullish. The sales have been holding up. Consumer confidence is back above levels where it was in 2007. Studies are showing that the consumers have a higher percentage of disposable income now than they've had in the recent past. All that augers pretty well for the holiday. That said, I think the retailers' balance sheets, their growth plans are still very well articulated. We're still seeing pretty substantial demand. I don't think that will be materially impacted by whether holiday sales are 1% or 2% plus or minus expectations.
Thanks.
Thank you.
Thank you. Your next question comes from the line of Craig Schmidt, Bank of America.
Yeah, I was wondering, I know that you're looking at your options, but what's happening with the Del Amo asset?
We are making terrific progress. The redevelopment of that will commence in 2013. I think we'll have some very positive announcements to make in the not too distant future. Pretty much all systems are go there. We finally have turned a corner on what we want to do there, and we're getting the right kind of commitments from the right retailers.
Okay. Then in terms of the level of activity that's actually seems to be accelerating in terms of new anchor, are we still on the ascension of that, or is that starting to plateau in terms of demand for new anchors to take new space?
It is accelerating. If you look at our announced anchor activity from quarter to quarter, just as an example, in the 8-K we had for the second quarter, there was 69 listed, now we're at 76, and there's still a whole lot more we're working on. We are still seeing demand in the portfolio across all the platforms from the anchors.
Would you say the private people running malls have access to capital to accommodate maybe that increase, or is that an advantage just to hold?
I'm not sure, Say it, we missed it.
I guess, one of the advantages it would seem to be that you obviously have constant access to capital to be able to pursue these kind of projects, $1 billion it looks like, for the next three possible years. Are the private players able to take part in this expansion of new anchors to the same degree?
No way. No, I don't think so. No. It's more than just capital, it's operational expertise. No, I think that's why we're able to secure these kind of commitments from these terrific retailers. Capital is part of the equation, but it's also the ability to execute. Capital clearly governs a lot of activity, and that's why you've seen not a lot of redevelopment, but essentially no new projects done by kind of the typical group of folks that might be able to have secured capital prior to the Great Recession.
Okay. Thank you.
Sure.
Thank you. Your next question comes from Alex Goldfarb, Sandler O'Neill.
Hi, good morning.
How are you?
Doing well. It's a busy earnings day. First question is just to go into the big picture on Pershing Square, and if you look year to date through August when they put out their letter, you guys were outperforming. Subsequent, you guys have been underperforming. Steve was at a conference, was very clear on what he said. Yet the stock is still underperforming and Ackman is talking, or media reports suggest he may launch a proxy battle next year. Is there any way for you guys to be more clear of your position so that this weight over the stock can be lifted, and that you don't have to deal with it, or is this one of these technical things, and you guys just have to run your business and do the stuff that you do, and there's not much that you can do with this external?
Well, look, Steve speaks for the organization, and that's not to say that If we had a problem with what anybody said, we would clarify it, but Steve speaks for the organization, and Steve spoke. I don't know what else we could do other than what we've done. Additionally, just to make it clear, we have
We have no dog in that hunt. This is a discussion between GGP, Brookfield, and Pershing Square, and we're focused on running our business. There's nothing other than what I just said that I could add to that. We hope the market understands that.
Okay. That's helpful. Then a question for Steve. Is there an opportunity for you guys, now that you have the Klépierre and you're doing a little more stuff in Brazil and Asia, is there an opportunity to do a multicurrency offering? Or the complexities and the pricing means that just keeping it U.S. only is more than sufficient and gives you the cheapest cost to capital?
Well, it's a good question, Alex. Our base currency is the U.S. Most of our activities are in the U.S. As you know, we have euros outstanding on our line that are acting as part of the hedge for our equity investment in Klépierre. We could certainly raise capital in a currency like euros. That window of opportunity would be open for us.
Is that something that's attractive as you think about the next few years of growth, or the U.S. is deep enough, and with the floating rate, line of credits, et cetera, that you have overseas, there's not really a need for it?
It's certainly something that we'd give consideration to, sure.
Okay. Thank you.
Look, I would just add, there's a lot of multinational companies that are tapping outside the U.S. to broaden their investor base.
Vice versa.
Right.
You have Europeans that are coming here.
it's not.
It's not inconceivable
It's not inconceivable.
Thank you.
Sure.
Thank you. Your next question comes from the line of Steve Sakwa, ISI Group.
Thanks. Dave, this is a bit of a technical question. I don't know if you guys can answer it here, but when you guys look at the re-leasing numbers and the actual starting rents and the ending rents on page 20 of the 8-K, those had actually been going down in just kind of absolute terms from almost $56, I guess, back in the first quarter of 2011.
That's just a mix. That's an absolute mix issue. That's happened historically before, and that's just a function of what properties are rolling over.
Is it a function of the properties? I would think law of large numbers would take care of that, or is that more a function of putting anchor deals in that might have lower rents?
No, there's been no change in definition. It's just a function of the mix.
One of the other things that would be driving it to a degree, Steve, is that over the years, the percentage of the outlet business as a percentage of our total business has been going up. As you know, the historical occupancy costs there have been lower, even with comparable sales productivity.
Right. Okay. Then Steve, just a question for you. I think the regional costs were down fairly sharply quarter-to-quarter, second quarter to third quarter. Were those fees that were in there from, say, Klépierre, or was there something else pushing that decline down? Is third quarter a good run rate?
No, Steve, that's just the cost side. It's just our costs were $3 million lower this quarter than a year ago. That cost structure that flowed through in the third quarter of 2012 is a decent run rate.
It's a good idea, though. We should get fees for Klépierre. I like that idea. I'm not sure all the shareholders would like that. We certainly would. There are no fees from Klépierre.
I was talking more of professional fees that maybe you guys had incurred as opposed to fees you were collecting.
No.
No.
Thanks.
I'm free of service over there.
Thank you. Your next question comes from the line of Cedrik Lachance, Green Street Advisors.
Thank you. David, how many regional malls do you think will be built in Europe over the next decade? How well-positioned do you think is Klépierre in capturing its fair share of those developments?
Well, I think just like the U.S., the idea of new development in Europe has got to be reevaluated. One of the things that we're focused on in Europe is just how do you improve the yields on new and extension-oriented projects. I've always found them to be not where they should be. One of the things we've been working with Klépierre is to really try to drive the returns higher on anything, and primarily now going forward, it's going to be extensions. I just view it as the U.S. in a sense that the ultimate new projects will more than likely come from extending existing centers. There's a couple of them on the drawing board. Unibail is, I think about or about to start a mall in Stockholm. Gecina's got their deal in Paris.
A lot of that stuff's already kind of was in the pipeline. I just don't see a lot of new stuff. I think it ought to mirror the U.S. for quite some time.
Okay. Going back to the U.S., when I look at page 31, you've got a number of outlets listed as your other properties, which I assume will probably be gone over time.
Yeah.
How's the market for selling lower quality outlets at this point?
These are factory stores. These are so small. They're basically single unit boxes that Chelsea got when they did one of their deals. These things produce half a million dollars of cash flow. That market is very thin, but we're slowly selling those out.
And-
I wouldn't even call them.
Outlets
outlet centers. They're basically factory stores that are single purpose buildings.
Okay. That's great. Thank you.
Sure.
Thank you. Your next question comes from the line of Michael Mueller, J.P. Morgan.
Yeah, hi. A couple of questions. First, I was wondering, could you just talk a little bit about dividend policy? I mean, the way you've been raising the dividend every quarter this year, it seems like an efficient way to do it. Is that something you plan on continuing as you move into 2013, or are you considering putting in place more of a normal increase to dividend once a year or so?
Well, it's hard to say. We're in the process now of doing 2013 and what our taxable income is projected to be. The likelihood right now is probably to continue to what we did in 2012, but we're still evaluating that. We expect, again, obviously, we have a board to deal with, but the board is constrained by our taxable income, and we want to maintain our REIT status. Our taxable income is projected to be higher than what we're paying out today. Our dividend's still on that trajectory. My guess is we might do it quarter by quarter. That remains to be discussed with the board.
Okay. Second, I guess, kind of following up on the last question, how focused are you on asset sales at this point? I'm thinking a little bit more on the mall side as opposed to the smaller remaining quasi outlets.
Yeah. We're going to try and sell a few assets. It still is very challenging market to do. I think there's more and more players coming into the market. There's more and more financing that seems to be available to some of these entrepreneurs. I would hope that we would continue to kind of get back and selling a few non-core assets, like we did before the financing market bottom fell out.
Got it. Okay. Thank you.
Sure.
Thank you. Your next question comes from the line of Carol Kemple, Hilliard Lyons.
Good morning. With your new outlet you announced last week in Charlotte, why did you all decide to go with a partner on that instead of keeping it to yourself?
It wasn't our site.
Okay. Well, that makes a lot of sense then.
I think if we had the site, we probably wouldn't have partnered with anybody, but it's just not our site.
Okay. With the sale of the Capital Shopping Centres securities and the Capital & Counties Properties, how much will your dividend income decrease?
Oh, from that?
Yeah, from the other income component.
Capital & Counties, they pay, what, GBP 0.10 a year? It's $0.01 maybe. One, yeah.
It's kind of $0.01-$0.02 in the aggregate.
Yeah
Carol.
Right.
How much is Capital Shopping Centres?
That's all.
That's everything.
CapCo did not pay any dividends.
Okay. Thank you.
Of course, if it did, it was de minimis.
De minimis.
Okay, thank you.
Sure.
Thank you. Your next question comes from the line of David Harris. Harris, please proceed.
Guys, here's a question related to your French connection, David. I wanted to ask it in French. A couple of weeks ago, the French industry minister talked about raising taxes on the property sector. This is an issue we kind of aired a couple of quarters ago, but my question is related to this. As you sit there thinking about allocating dollars either domestically or overseas, what sort of premium do you think is justified for overseas investment to try and capture these sort of risks, which I think are implicit in allocating that dollar overseas?
Well, the good news since we last talked, David, the stock is above where we bought it, and the euro is above where we made our initial investment. Look, I think the value that we got in helps to deal with those risks. Business has risk wherever it goes. We certainly have tax risk in the U.S. of America, if you haven't been reading the newspapers lately, for individuals and all sorts of things. I think at the end of the day, there's been a lot of studies on the SIIC structure there, and how it's helped the French treasury, and I don't expect any material change. The point is that in any jurisdiction that you're in, Brazil, France, Japan, Korea, just to name a few places that we are in, you have to underwrite what your true tax cost is.
That's got to be implicit in the returns that you want. I think the returns that we're generating there with the future opportunities that I think will exist in the continent, at this point, we feel comfortable with it, and I wouldn't necessarily overreact to comments here and there about what certain French authorities might do. There's been a lot of studies that supported the French SIIC, and I just don't see any change whatsoever on that front. They need to maintain competitive balance. There's been talk in the U.S., but we don't overreact to that as well.
Okay. A couple of weeks ago, I read that Amazon is in discussions with a number of brand names. Some of those brand names seem to be very big occupiers of outlet space. If I throw out Coach, Burberry, Ralph Lauren, and they seem to go upscale on some of these. Prada and Gucci were also mentioned. Any thoughts as to what that might do to bricks-and-mortar demand in the outlets, which I suspect many people have not really thought of being as vulnerable as it may be if some of that business gravitates to the internet.
Well, again, I don't know what papers you're reading. I think all of those retailers want to control their brand. I would be really surprised if they delegated that responsibility to Amazon.
The article that I read, it was actually in the "Financial Times," said this is the hottest button issue for high-end brand retailers at the moment.
Yeah.
That was an independent third-party consultant. They know a lot more than I do, I'm sure.
Yeah. Listen, we know these retailers very well. I would be really surprised if they were going to give up control of their brand and be umbrella-ed under an Amazon model. I just can't imagine it. They're very selective in how they deal with their outlet operations. It's got to be brand positive. It's got to fit with their wholesale accounts. Very complicated equation that they have. That's why I think a number of these outlets that are being bandied about in terms of the full demand will be very selective because they're just not going to go to any and all centers. I think those retailers want to control. They want to be omnichannel. I just can't imagine they're going to end up delegating, losing control over that.
Good. Okay. Thank you.
Sure.
Thank you. Your next question is from Rich Moore, RBC Capital.
Hi. Good morning, guys.
How are you?
Going good. Going back to that page 31 that Cedrik was talking about, I noticed from last quarter that in the list last quarter, we had Discover Mills and Lake Forest Mall.
Yeah.
I think Discover was maybe Yeah, go ahead.
Yeah, again, they're still in TMLP, we didn't buy all the assets out of TMLP.
Yeah. Were those underwater, David? Are you giving those back to the lenders?
No, Discover Mills.
It's renamed, isn't it?
I'm sorry, it's renamed. It's now Sugarloaf Mills because the marketing contract with Discover expired. That's all that happened there.
No, good. I was going to ask you what Sugarloaf was. Yeah, good. Thank you. Is that one you're trying to sell? Is that the idea?
No, we're leasing, managing it. It's on our books for nothing. It's levered. The deal's been extended. We think over time it'll get better and better. We didn't want to buy it out of the partnership. It's no harm, no foul kind of deal.
Got you. Lake Forest, is that one you got rid of?
Yes.
Not a sale. That was a give back to the lender.
Actually, it was a sale.
It was a sale. Okay, great. Thanks.
Yeah.
Steve, the credit line has a balance, and it's a big credit line, but it does have a couple of billion USD of outstanding debt on it. Is there any plan to take that out, or are you comfortable with where that's at?
Well, it's actually two credit facilities, Rich, there's $6 billion of aggregate capacity. Someone asked earlier about the potential of raising capital in EUR. More than half of the outstandings right now, $1.2 billion, is euro-denominated and is acting as a hedge for our equity investment in Klépierre. Potentially terming that out would be one opportunity. We're running with $4 billion of liquidity, or availability in our credit facility, if you will, plus another $1 billion of cash in the bank between wholly owned and our share of JV. Plenty of firepower, Rich.
Okay. Yeah, sounds good. Stephen, the provision for credit loss just seems to keep shrinking. Is that a pretty good indication from you guys that the retail community by and large is, I guess, extremely healthy?
Certainly, receivables are low, and write-offs have been also at historically low levels, and you're seeing the result of that with the lack of bad debt experience. There are always a handful of tenants, Rich, that we are monitoring and paying attention to, but the overall health of the tenant base is pretty good.
Okay, good. Thank you. The last thing I had was the year-end target for occupancy, Rick. You guys are up there pretty high at this point. Does it actually get higher from here, or are we pretty much done at the 94 and a half sort of level?
Well, we're working, and I think you're still going to see a little more growth from where it is today.
Okay, very good. Thank you, guys.
Thank you.
Thank you. Your next question comes from the line of Jeffrey Spector, Bank of America Merrill Lynch.
Great. Good morning.
How are you?
Just wanted to see if we could talk a little bit about the sales increases we've seen in your portfolio, the higher-end mall portfolios over the last couple of years versus, I guess, the lower sales per square foot portfolios. From where we sit, it's hard to look at the information and determine exactly what's happening here. Obviously, we've seen much lower increases in sales at the lower sales per square foot malls. What's happening here? What do you think over the next couple of years? What's the consumer saying? Where are they spending? Is it more the discounters? What are you seeing from your centers? Any concern here on these lower sales per square foot malls? I'm not sure if that's below 300, below 350, below 250.
Well, I'll let Rick. I want somebody to ask Rick to list tenants. Okay? We could start at St. Louis and list all the commitments we have if you really want. Please, somebody ask Rick, because if we don't have a call where we can't list the tenants that are doing business, we're in trouble.
I had that down next.
All right, good. Thank you. Let me just say this. The good news that we're seeing in the mall business is that the demand from the general retailer population seems to be moving down the sales per square foot spectrum. That's just the one point that I would make, and then I'll let Rick say the rest.
I would point you to two things. One, I believe our properties are taking share in their markets. If you look at where we're adding our anchors, to David's point, those anchors are being added across the quality spectrum within our portfolio. They're not being solely added to the higher productivity malls. As we add anchors, we're renovating 15 properties a year. We're making our properties better. We are, I believe, gaining share. The other thing that's going on is that higher productivity tenants will continue to outperform because they're going from a higher base, and they have higher per sales per square foot productivity, and that's going to drive overall sales. You put those two things together, I think that's what's contributing to the trends you're seeing.
Okay, shifting to the redevelopments. I guess, can you talk a little bit more about your plans over the next few years versus, let's say, I don't know, five or seven years ago when lots of malls were under redevelopment, I think for different purposes. It's somewhat to defend against new competition. What's the strategy here? Is it just bottom line, you saved money for a few years there during the crisis, and it's time to renovate, or are you also trying to defend against new competition, or is that not really a fear?
Well, look, we're economic animals here. I think over the years, the market has seen that when we invest capital, we want a return for it. We don't build just for the sake of building, but we do it with the idea that the cash flow growth from that asset will accelerate or that we'll have a return. I would say to you, the primary driver of this is that we've got great properties that we think we can make better. The reason we can make better is because we have the retailer demand to come into that center, but we just don't have the space. We have space because it's a center that's been around that can be better configured, to allow for a better retailer to come into the place. If you look at our list of activity, it's all disclosed there.
You're seeing it. The good news is, our big projects, the Roosevelt Fields, the Copleys, the Del Amos, to name a few, off the top of my head, are still not at the point where we're ready to go, but we're getting very close on those, that is really exciting. I think what it allows us to do is just to take a great property and make it the place to be. We had an outset in essentially 2009 that we had this great portfolio, but we really wanted to make some of these centers iconic in nature and transform them, to gain market share for the 21st century. That's what we're doing. As I said in my comments, the market tends to overlook this stuff.
I got to tell you, we've never been busier in this effort, and the stuff that we're doing is exciting. It's transforming a lot of these properties. We have very good economic returns. We got a lot of resources dedicated to it. In some cases, we're drinking from the fire hose that we're so busy. The good news is stuff is coming online already for the end of this year or next year.
Okay, thanks. Before we get to the tenant side, I'm sorry, I'm not sure if you discussed this already, but I was just curious, your view on some of the recent mall transactions pricing, Kings Plaza, Green Acres, Woodfield sale. Woodfield, I guess hearing high 4s, the others kind of low 5s to mid 5s. What do you think about the pricing and what this is saying about the sales productivity at those malls, what that all means?
We did not bid or participate in Green Acres and Kings Plaza. I really have no comment on the pricing there. I'd say generally, the marketplace understands the relative attractiveness of strong malls. It ebbs and flows. Sometimes people overreact to potential external threats to the mall business. I will tell you that good malls, despite all of its competitive threats, including the internet, if they're properly run and maintained and have the exciting retailers in it, that cash flow is going to grow. We have evidence of that in so many different places. I don't know what else to say. Doesn't surprise me that these values in this kind of low interest rate environment are there. That's a generic statement. It's not a specific statement on any of those transactions you mentioned.
When we think about those transactions and the pricing, you said it is challenging to sell some of the non-core mall properties that you own. Can you just quickly say, I guess, when you say non-core, what are we talking about? Sales under 250, under 300?
When we sell it, you'll know it.
Okay.
Until that time, we're running every property as if it's our only one.
Okay. Rick, can you talk about tenant demand, where are you seeing the most store openings?
Well, the tenant demand is pretty much across the platforms. We're seeing very good demand in the malls, in the mills, in the premium outlets. Premium outlets, you're having a number of retailers that have traditionally not been in that sector, wanting to get involved in that sector in a pretty large way. We've got some tenants coming over internationally that are getting more aggressive with their U.S. presence, we have some brand extensions. The best example is Limited Brands PINK, that started out as a sub-brand inside of the Victoria's Secret stores, now they're very aggressively rolling that out as a free-standing retail concept. It's a great retailer with great credit, with a beautiful store. These are the types of things that make the property better.
Okay, great. Thanks, guys.
Thank you.
Thank you. Your next question comes from the line of Ross Nussbaum, Simon Property Group.
Hi, it's Ross from UBS. Didn't know that I was an employee.
That's right. You really have to bring a hard question for us just to-
Well, if you want to talk, I'm all ears. Can you talk about, David, you just said, I thought you said you didn't participate in looking at Kings Plaza and Green Acres. Why was that?
We just did not have an interest in those centers. Much to the market's surprise, we don't look at every and any deal that's out there.
Okay. Next question. I don't know, David, if you want to take this or Steve. If I look at your expense reimbursements, which handily beat us this quarter and has been trending upwards, frankly, for five years now, you're now running effectively at the highest occupancy rate you've ever run at. Your expense reimbursement ratio is also as high as it's ever been. How do we think about the potential upside in your ability to capture future, I guess, an uptick in that reimbursement level and occupancy while we're at it?
I think the way you have to think about it, Ross, is that there's been a de-linking over the last 10 years between the reimbursement line and the cost line as the industry migrated to fixed CAM. Fixed CAM is now just another charge that has an annual escalator associated with it. You can see the trend in the reimbursement revenue line there. The expense side, quite frankly, as a company, we've done a really good job over the last four or five years of wringing expenses out of the properties. They are at a low level. We've also benefited from some cyclical things like lack of snow this year and low energy costs. You're going to need to make your assumption about where those costs are going to go in the future.
We've certainly got the benefit of a cycle that has been helpful to us, which has caused the disparity in the reimbursements and caused that recovery ratio to continue to increase.
What percentage of your tenants are now on fixed CAM?
Over 90.
Is it fair to say that we're now going to start seeing a leveling off in that expense reimbursement ratio versus the uptrend over the last 5 years?
Most of those tenants who are on fixed CAM have an annual escalator in that charge. The impact on the net recovery will be, do the expenses grow at a rate faster or slower than the aggregate recovery increase from the escalators?
The fact is, it boils down to also how we negotiate what the CAM charge is, right?
Yeah.
I wouldn't say necessarily it levels off. It just depends on how good we negotiate what the CAM charge is. We'll see. When retail demand is strong, we can negotiate a better rate than when it's not.
The way we calculate it, you captured 113% of your operating expenses this quarter.
Yeah.
Do the retailers say, "Hey, wait a minute. Why are we paying $1.13 for every dollar cost?
No. Other than since you're pointing it out, maybe they will now.
Sorry.
I thought you worked for us. Okay? I thought you were a part of Simon Property Group.
You don't pay me enough.
The fact is, it's a negotiation. They don't look at that. It's really a function of what sales productivity they'll generate out of that space. Our people are very focused on it. I'd also just say this. It's also a pretty good evidence of our ability to run a big organization and take advantage of our scale. Part of the reason why we're able to drive down operating cost is because we have systems in place. We've got the procedures. We've got vendor relationships. The fact of the matter is that retailers should not look at that. They should really look at whether or not they're getting a fair deal for their space, and our organization with its size and scale is able to really drive these costs down. That's been our model from a long time.
Yeah. Appreciate it. Thanks, guys.
Sure.
Thank you. Our next question is from Jeff Donnelly, Wells Fargo.
Yeah, David, just to explain that extra 13% of the baggage handling or fuel surcharge fee, since those seem to be in vogue these days. I was curious, because last quarter, I think you were talking about cap rates on B malls would be coming lower. Is that a view you still hold, and has there been much that you've seen to support that?
Well, I think there should be more trades happening. It seems like with the financing market coming back, there should be a few more trades coming on board. I think that'll support that thesis.
I'm curious, where would you peg them today if you had to?
I think you got to be really careful on 6.8, 7.5. I really think it's a function of that asset and its historical cash flow and its future growth. I would be remiss to give you a number. I don't think it means anything. It's such an asset-specific basis. I will tell you, though, that the market clearly is paying for stability and stable cash flow. It really depends if it has to be redone in some fashion, or is it the stable, non-sexy property. It all kind of goes in. It's really real estate specific, as it should be.
Just a last question, more a housekeeping one. Any decision on whether Copley is going to end up as a for sale or for rent project, wholly owned or JV?
Still evaluating all that. Our view today, we might partner with somebody, but our view today is that it'll more than likely be a rental building as opposed to when we first thought about it more for sale. You may do a little bit of both. The view today is that it'll be for rental.
Okay. Thanks, guys.
Sure.
Thank you. Your next question comes from the line of Quentin Velleley.
Actually, it's Michael Bilerman here with Quentin. David, I wanted to come back just to Amazon for a second, because clearly, I think they've dropped some of the tax battles that they have, at least in the contacts that I've been hearing about. They're actually even thinking about going into malls, and part of that is to open up some pop-ups, showcase the Kindle Fires, Kindle Fire HDs, and effectively even open people up, if they didn't know about Amazon yet, to the shopping experience. I'm just curious whether you're sort of in contact with them. Clearly, having the large mall platform, that would be an easy way for them to get access and distribution. How are you thinking about involving them?
Well, look, Amazon is an absolute fantastic company, a force. I think if you talk to Mr. Bezos, he would tell you that there's a role for the way he sells goods. There's also, I think he'd be the first to say that there's a significant role for how we present our retailers' products. Ultimately, I'm sure they'll, at some point, converge. The retailers are certainly converging. We're seeing more and more retailers ship out of stores, have pickup out of stores. That seems to be a trend aggressively that they're doing, which I think is very beneficial for us, the mall owner, in that if you can pick up or ship out of stores, returns happen, additional visits happen, and it helps them on their cost because they don't have to put the extra resources in distribution facilities.
We would expect that trend to continue, and I would say, look, if Amazon or anyone else wanted to talk to us about how to create benefit for our consumer, we'd certainly have an open mind. To your specific point, I have not heard that they want to own any physical or operate any physical stores. We have not heard that.
I guess if you think about, you talk about the tenants being able to ship out of the store, pick up in store, have those started now, as that percentage increases, and I don't know how those sales are tracked. I assume they're not tracked to the store level, which means you're not-
They are tracked at the store level. Absolutely.
You're going to get percentage rents and effectively drive your rental income. It's not becoming a point of contention between you and the tenant, the fact that the sale may be.
Sure, it's going to be a discussion. We're going to hold firm on it. Sure, no, it'll be a discussion, just like, unfortunately, everything in the lease document. No, we would expect to be very firm, just like they can't offset returns against it if they buy it from It's not generated from that store in the first place. That'll be something to discuss. Our view of that is pretty straightforward, and we expect over time that that will be customary.
This is a question for Steve. You look at guidance today at $7.80-$7.85 relative to $7.35-$7.50 when you announced Klépierre and Mills. Let's call it a midpoint increase of $0.40. It's about $145 million of FFO. I don't know if you have this analysis, but can you just break out maybe the big components of that $145 million, where you're getting it from, what's coming in better than expectations, perhaps how much is better, Klépierre performing better than you originally underwrote? Just to give us a sense of what's been driving the significant increase over the course of the year.
Michael, I'd give you two or three thoughts. Sales have remained very robust, more so than we would have anticipated nine months ago. That has led to higher percentage rents. The fact that sales are higher also has to have a second derivative effect on leasing. That would all be rolled in there. The cost environment has remained very muted. To one of the earlier questions, recovery ratios would be a little higher. We would've assumed that borrowing costs would have gone up a bit. They have not, and even though we've decreased our exposure to floating rate debt from 16% down to 10%, we've benefited from a lower interest rate environment. I think those would be the three or four big things.
Klépierre's not driving any bit of an increase at all?
Well, Michael, the Klépierre transaction was accretive. We told you it was accretive at the time of the acquisition. I think David mentioned in his prepared remarks, it's performing exactly as we thought it would.
I don't know if Matt is there or not, in the room. Is he?
He is not.
No.
I'm just curious, maybe David, just on your take, Matt's been there now four months.
Yeah.
Clearly you've liquidated Capital Shopping Centres and Capital & Counties. I don't know if that was his decision. I know you've been frustrated that with the ultimate transaction that occurred last year.
The buck stops here, brother.
No, I know. What has happened over the last four months? What has he brought to the organization? Are you looking at?
Look, there is going to be a lot of opportunities for this company, and given the amount of activity that we already have with our existing asset base, we needed a thoughtful pair of hands to help in all of the stuff that we're doing. He's got ideas and he's looking at all sorts of things, both domestically and internationally. I'd say Steve and I, who have the most exposure to him, have been very pleased with what he's contributed and he's looking at all sorts of things, which I think over time will do some things, and that'll be helpful to the company's profile. You know what? The bottom line here is there's not one deal that we need to do, period, end of story.
What we really need to do, if I had to tell you what we really need to do, is we really have to execute at the highest level on our redevelopment and development pipeline. That's what we've really got to do. That's why we brought Contis on board, because given the volume of activity, we needed someone that could really help in that effort. He's already done that, and he's been instrumental, I think, finally, in getting Del Amo where it is. We've got a great outlet team, and they're executing, but Rick and I have to sit on them and prod them and poke them. Then, Goodman with The Mills is doing a very good job, and I think you've seen the performance there. The bottom line is, the one thing we've got to do is we got to execute our redevelopment pipeline.
That's huge. The deal business, if it ain't a good deal, I'm not doing it. It's that simple. That's why, if we don't do another deal and Matt's here for three years before he does a deal, it's okay with me, because we're only going to do deals that make sense for this company.
Right.
He's a great set of eyes. He's a fresh breath of fresh air. He's younger, because we got some older guys, so it's always good to have a younger guy. He's a nice guy, fits in well with the team, and he'll pick up and he'll go to faraway places at a moment's notice. That's helpful, and he represents the company well.
Just one last one for Rick. You have a bunch of these retailers, Walmart, Target, Best Buy, all effectively saying, "We'll price match relative to Amazon and online." What's your expectation as owning these assets and what potentially could be happening to a shopping experience during this holiday season in guarantees like that?
Well, to the extent that they are going to be aggressively pricing, that can only help increase traffic to our properties and increase our sales. To that degree, that'll be helpful. I will tell you that like a Walmart and a Best Buy, our exposure to those retailers is relatively low. Our retailers are more positioned in the moderate to better price points, and it's not a commodity product. As David said earlier, each of these retailers are very jealous about their brand and their brand equity and protecting their brand, and pricing strategy is part of that. To the extent that our property and our retailers are going to be more competitive price-wise, that can only inure to our benefit in terms of increased traffic and sales.
Great. Thank you.
Sure.
Thank you. Your next question comes from the line of Omotayo Okusanya, Jefferies & Company.
Hi. Good afternoon, gentlemen. I hope I didn't miss this earlier because I've been on a whole bunch of calls. Did you talk about Charlotte, North Carolina, at all and how ultimately you envision that market to evolve? Specifically, I wanted to know if you feel both competing projects can be built and what the potential impact to Concord Mills may be.
Well, yeah, we did talk about it briefly. At the end of the day, my guess is only one will get built there. It will be a competition of which one gets built, but I don't anticipate. You've got two very experienced, three for that matter, very experienced outlet developers in Charlotte. You've got Tanger, you've got us, and Paragon. I think at the end of the day, it'll be a competition to who gets the retailers, and the experience will ultimately dictate that somebody will get the project and somebody won't, and there'll be one built. I don't think, given where the locations of both are, I don't think it will have, if you know Charlotte, I don't think it's going to have an impact on Concord Mills at all.
Okay.
If it does, it'll have a marginal one.
That's helpful. One other thing, just when I take a look at your geographic footprint, I think the one thing that always strikes me is your minimal presence in kind of like the highly dense urban cities like New York, for example. I'm just curious, is that just the strategic thing with the company is that you just don't like those markets, or do you continue to kind of look for opportunities to get into some of those markets, given that assets in those markets generally tend to perform pretty well?
Well, I don't know. In New York, we got Westchester, Woodbury Commons. We're redeveloping Nanuet, New York. In Long Island, we've got Roosevelt Field, Smith Haven, Walt Whitman, which we've all redeveloped or under redevelopment. New Jersey, we got a number of properties in New Jersey. Are we in Brooklyn? The answer is no. Like I said, that's fine for us. We've got plenty to do.
Fair enough. Thank you.
Sure.
Thank you. Your next question comes from the line of Paul Morgan, Morgan Stanley.
Hi. I'm just curious about what you think about the JCPenney's shop-in-shop model and the competitiveness of what they may be trying to do with the inline space in the malls adjacent to their stores.
Well, Rick and I visited the prototype store when, at the end of August?
Yeah, a couple of months ago.
Yeah. Look, I thought it was impressive, and I think it's got a real potential there to be something that we'd love to see as an anchor to our centers in terms of driving traffic. When you talk to the folks that, like a Sephora, that are in JCPenney and are in the mall, they view it as two different shoppers, and it really does not affect how they think about it. It really gives them an opportunity probably to go to some markets where they're too small for them to have an individual store. I think it's beneficial. I think it won't be overly competitive scenario, and hopefully it'll drive traffic to JCPenney, which will drive traffic to the mall.
The only thing I would add is if you look at the department store construct, what we have found is there are a number of our full-price retailers that have wholesale businesses within the department stores, and that's a very good source to us of new lease opportunities. Because if they open in a department store, do business, they see there's a market there, and they will now come to us and then say, "We want to open a full-line store because we're missing sales.
That are going on in the mall as opposed to just in that store.
How do you think, in the context of those comments, about something like the Finish Line and Macy's deal? That's a retailer who would be in a lot of the malls already and is going into 450 or so of their stores.
We've had that conversation with Finish Line, and their view is, and we agree with it, is that it's going to be a different shopper. It's just going to expand their footprint, and expose themselves to a shopper that was otherwise not going to be available to them in their mall stores.
Okay, great. Another question is just on the same-store NOI. You've got $1 billion or so of NOI that is in the non-comparable pool. A lot of that, I guess, is the community and lifestyle business. Do you have a rough sense of what that would do if you were to include a lot of what you exclude, that is still a same center number, if you were to include that in your same store NOI growth, what it would be?
Well, Paul, the comp center NOI growth is for our malls and our outlets only. Mills, as an example, is not in there. Although the growth rate of Mills has been at or higher.
If we owned Mills, it would only improve it.
It doesn't have the community centers either, does it? Right.
No, it does. That's a small part. That's a $150 million annual EBITDA on a $4 billion base.
Yeah.
It's a very small part.
Okay.
For the premium and outlets, the comparable portfolio is 218, what was it?
216 properties.
216.
Yeah. I mean, it's a big pool.
It's a big pool. It's not like 10 or 15. It's 218.
Yeah.
On the outlets, out of a total of, when you add those two up, I don't have it off the top of my head.
Yeah, like 60-
30
60 plus outlets
Well, no, just in the U.S. though.
Oh, just in the U.S.
Yeah. In any event, it's the vast majority of our portfolio.
Great.
We're only taking out, the deals that are under construction or what we get. Yeah.
Exactly.
Okay, just last question on the rent spreads. It's a little bit hard to compare going back to the past, because you changed reporting gross spreads. Where are we now versus the types of numbers that you would have reported sort of in 2005, 2006 when your base rent spreads were 20%, 25%? If you were to think about, just in terms of your negotiation leverage and the type of markups you're able to get, even though we don't see those numbers historically, where are we today?
Well, I think, Paul, one of the things that's changed is that, as an example, over the last several years, we've gone to annual escalators in minimum rent as well. The number we give you is an ending cash rent to a beginning cash rent of the new lease. The fact is, because we're getting many more annual escalators, in our rent streams now, you're comparing a bit of an apple and an orange if you try to go back and look at it five or six years ago.
Yeah, I would just say this, though, that going from pro-rata to fixed, you're not going to see much of a bump there, right? Because, if the tenant was paying $15 pro rata, you can't suddenly say, "Well, I'm going to charge you 18 fixed." They may give you a little bit because it takes out the equation. When you add that in there, you're going to see a lower spread, but it's mostly driven by the rental spread.
Yeah. It's 10% about what we should expect.
Yeah. Sure.
Okay. Great. Thanks.
Thank you. Your next question comes from the line of Nathan Isbee, Stifel Nicolaus .
Hi, good afternoon. As the focus starts to turn now to 2013, you've had the close to 5% same store growth in 2012. Given what you've seen from leasing done already for 2013 with almost full occupancy, how should we think about the 2013 growth? Is it conceivable to think that the growth could match or even accelerate from where we've gone in 2012?
We'll let you know as soon as we finish our 2013 budget. I will say this, Nate, one of the things you have to keep in mind with our comp NOI numbers is, we've been, again, the vast majority of our portfolio in the U.S. is comp. It's 80, 90%, 90% if I have the numbers right. It's the portfolio. Just to underline that. The other point I'd say to you is if you look back in 2010 and 2011, importantly, we were growing our comp NOI portfolio where some of our peers had big decreases or were flat. You have to keep that in mind in perspective in terms of how you look. It's great to take a retailer when they post a negative 10% comp NOI, or I'm sorry, sales, and then the next year, it's up five.
You've got to go back to the -10. To look at what +5 means. We have been growing our comp NOI. We were flat in 2009. We had positives in 2010. We had positives in 2011. At the industry leading positives. 90-some odd percent of our 220 U.S. mall and outlet portfolio is in that number, you just have to put that in context. The fact is, I'm not going to answer your question until, we will at the beginning of next year.
All right. Then, you've made a big push on today's call to highlight the redevelopment, the $1 billion a year over the next few years. We've heard from some players that there's been a change of tone from Sears in terms of store closures and store sales. As you contemplate the $1 billion a year, is that assuming a pretty static environment with Sears? If that changes for you and Sears, would you say that $1 billion a year could go up significantly?
Yes.
Okay. Would you-
Yes, being that if we were suddenly to buy a bunch of Sears stores, that number would go up. Yeah, and a couple of them may be, the redevelopment may take a different form because now if you had the Sears store back, you would do something different than you might otherwise do. I think, Nate, that's right. That number would go up, if we suddenly saw a lot of Sears activity.
Would you say that the tone of the conversations with Sears has changed?
Not really. Not really.
No, I think that we're continuing to have our conversations with them, and it's been pretty consistent over the last months.
I do think, as you mentioned, Nate, I do think they'll sell stores, but it's not going to be, if they had 800 mall stores, if I last remember, it's not going to be you're going to see 200 mall stores sold. They're going to sell a handful here and there, I think.
No, but if you can get 30 or 40.
Sure. No, I agree. I'm just saying, but I was really talking about your broader Sears question. I don't see a big change in their selling a lot of stores. A couple here and there.
I think it's important to emphasize, they're still very focused on running a retail business. That's their business, and all of our conversations with them are certainly grounded by that underlying premise. That they're an ongoing, viable retailer looking to get better and increase their market share.
Have you seen them more willing to cut the store, give you back half?
They're analyzing their business. They're doing a lot of things internally with their business. We're just continuing to have conversations with them to see how we make that box in our centers as productive as it can be, both under their ownership and if they decide they want to talk to us about something, obviously, we're here.
Just for those that are still on and interested, which we appreciate. Our comparable U.S. outlets and malls for this quarter was 216 out of 220. Not included were a couple of malls that are going through major redevelopment, Walt Whitman and Keystone. Then with Merrimack opening and Silver Sands. That was the only two outlets that went in it.
All right. Thanks.
Sure.
Thank you. Your next question comes from the line of Ben Yang at Evercore Partners.
Yeah. Hi, Ben. David or Rick, I think you commented earlier on seeing increasing retailer demand that's coming out lower sales per square foot mall. I was just wondering if you can maybe elaborate a bit on how far down the sales per square foot spectrum, what those occupancy costs look like. Are there maybe any preferred geographies for these retailers as well?
In terms of geography, no. You've got a number of retailers that are growing that have basically staked out a more moderate consumer, and they have a strategy to serve that consumer, and they're doing it very well. We're doing an increasing amount of business with them across a broader swath of our portfolio.
Is there a tipping point in sales where they won't look at malls that do less than maybe like $350 a foot, or do they go as far down as?
No, it all depends on the market and the real estate. It's not really a function of the $322 or $371. It's really whether they think they can do business and make money.
Okay. Then just final one. Do you ever envision a time in the near future where maybe you could get some better NOI growth out of the B malls over your A malls, given obviously the rents are higher in the As, the occupancy levels are higher in the As. Do you think that's something that we'll see anytime soon?
You mean changing the operating trends from the Bs accelerating higher than the As?
Yes, basically getting better core growth out of the Bs rather than the As.
I wouldn't want to categorize it by quality. Certainly, where we have done things in a number of our properties to reposition them, we've seen growth rates commensurate with that capital expended. It's a property-by-property analysis.
Okay. That's helpful. Thank you.
No worries. Okay.
Thank you. I would now like to turn the call over to Dave Simon for closing remarks.
Okay. Thank you so much for your questions and your interest, and we will talk to you soon.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.