Good day, ladies and gentlemen, and welcome to the Q2 2012 Simon Property Group conference call. My name is Catherine, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero 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 of Investor Relations. Please proceed, ma'am.
Good morning and welcome to Simon Property Group's second 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 a 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, July 24th, 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 Investors section.
Participating in today's call will be David Simon, Chairman and Chief Executive Officer, Rick Sokolov, President and Chief Operating Officer, and Steve Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.
Okay, thanks. Good morning, everyone. We're pleased with our strong results for the quarter, and I'll just go through some highlights. First of all, funds from operation was $1.89 per share, up 14.5% from the second quarter of 2011. Our FFO exceeded the First Call consensus by $0.08 per share. For the malls and the premium outlets, our comparable property NOI grew 5.1%. Comp NOI growth in the second quarter of 2011 was 3.5%. A very healthy trend. Tenant sales were up 9.9% to $554 per foot. Occupancy was up 60 basis points to 94.2%. Average rent per square foot increased by 3.7%, and the re-leasing spread was a positive 10% or $4.77 per square foot.
On the capital market side, on June 1, as you know, we completed a new $2 billion unsecured revolving credit facility that supplements our existing $4 billion revolver, resulting in $6 billion of total capacity. The facility matures 2016 with a one-year extension option at the same rate as our other facility, which is LIBOR plus 100 basis points. In the secured market, we've been very active year to date. We have closed or locked rate on 17 new mortgages totaling approximately $1.9 billion, of which our share of that debt is $1.3 billion. The weighted average interest rate on the loans is 4.3%, and the term is seven and a half years on the average term. Last Friday, we redeemed two million units of our operating partnership owned by an affiliate of J.C. Penney at $124 per unit or share.
On the acquisition side, June 4th, we acquired a 50% interest in Silver Sands Factory Stores, a large and highly productive upscale outlet center in Destin, Florida. The 450,000 sq ft center generates sales of approximately $500 per sq ft. We have assumed leasing and management duties. In the coming months it'll be rebranded as a premium outlet center. Development activity is very strong. First of all, we grand opened Merrimack Premium Outlets, a large outlet center in Merrimack, New Hampshire, on June 14th. Strong opening. We're 99% leased. Great looking center. Construction continues on five additional premium outlet centers, all scheduled to open this fall or in 2013. They're located in the U.S., Canada, Japan, and Korea, clearly demonstrating the global nature of our company and our premium outlet platform.
First of all, two in the U.S. are in Texas City, a suburb of Houston, which opens this fall. Chandler, Arizona, a suburb of Phoenix, which will open next year. We're continuing construction in Toronto, which opens next year, another outlet center in Japan, which will be our ninth near the airport, outside of Tokyo, and Busan, our third premium outlet center in Korea. We started construction on July 11th at St. Louis Premium Outlet Centers. We announced a strong lineup of tenants, and our opening is planned for the fall of 2013. Progress is being made under our agreement to develop premium outlet centers in Brazil with BR Malls. Importantly, construction is underway on 25 redevelopment expansion projects at the mall, premium outlet, and mills platforms in the U.S., and two premium outlets in Japan, all with 2012/2013 completion dates.
We continue to expect our share of the development or redevelopment spend to approximate $1 billion this year, next year, and 2014. Let me just turn to Klépierre, give you a quick update. As you know, we bought 54.4 million shares or 29% of the French public company in March. They are the second-largest owner of retail assets in continental Europe, with assets valued at €16.2 billion. They will be announcing their earnings later today. Their business has been remarkably stable considering the turmoil in Europe. They have made excellent progress in refinancing debt, selling assets, and creating additional liquidity. I have been very involved in the development of their future strategic direction. As they accomplish their goals, there's no doubt in my mind that they will be poised to take advantage of future growth opportunities. Turn to dividends.
As you now know, we have announced the fourth consecutive increase in our quarterly dividend from $1 per share to $1.05 per share. Our dividend is now 31% higher than it was a year ago and well above our previous all-time high before the onslaught of the Great Recession. I'm happy to announce that we've increased our 2012 FFO guidance again. Initially, as you'll recall, we were at $7.20 to $7.30 per share. Our new guidance now is $7.60 through $7.70 per share. Primary factors contributing to this are strong operational performance and the impact of our recent investment activity. Just to highlight another important factor in what's happening with the company, we continue to add to our very talented management group. As you know, in 2011, we added Contis to our mall platform, Feible to help us in our legal and deal business.
I'm very pleased to announce the most recent addition many of you know, Matt Lentz. Matt is our Chief Investment Officer, which is a new position in our organization. He brings a great and extensive broad real estate background, both from a bricks and mortar point of view, but also from a securities point of view. Has been involved in reviewing many international opportunities in his previous roles. His job will primarily assist myself and others of the management group in pursuing strategic growth opportunities for the company. Matt's first day on the job was, in fact, yesterday, and as far as I know, he's still here. His wife is about to give birth, so I hope he's not at the office.
Concluding, let me just say last second quarter, I addressed the unfair advantage that the internet retailers have in not being required to collect sales and use tax on remote sales. I believe our efforts and others have made significant progress at the state level, but our tenants need Congress to act to level the playing field on a national level. In the past year, the Marketplace Equity Act was introduced by a bipartisan group of senators, and similar legislation has been introduced in the House to address the inequality in today's marketplace and level the playing field between bricks and mortars and online retail business. We support these proposals. We'll continue to be very focused on making this happen, and we appreciate everybody's support in showing their strong support of this very important legislation. With that said, we can turn it over to questions.
Ladies and gentlemen, if you wish to ask a question, please key star followed by one on your touchtone telephone. If your question has been answered or you wish to withdraw your question at any time, please key star followed by two. Press one to begin. Please stand by for your first question. First question comes from the line of Mr. Alexander Goldfarb of Sandler O'Neill. Please proceed.
Good morning.
How are you?
Doing well. Once again, it's hot in N.Y. David, just going to the J.C. Penney for a second. $1.24, $1.24 is certainly below where you guys are trading. Just want to get a little more color on, one, who approached who first. Two, just want to try and understand why someone would take $1.24 versus where your stock is trading in the open market.
Well, look, let's just say we have a strong relationship with Penney. They're a very important retail partner of ours. Rick and I know Mr. Johnson, and we also know very well members of the board. I'm not going to get into the particulars, but just so you understand, the unitholders have the ability to convert their units on a one-for-one basis for common shares. We view it essentially as common stock equivalents, because obviously they can convert it on a one-for-one basis. When they do that, then we have the option to give them fully diluted stock or cash. It was through that discussion that we negotiated the deal. I'm very convinced it's a great opportunity for the company, and I think it met Penney's strategic goals in terms of their focus on what they're trying to do with their business.
We're pleased with the transaction, and beyond that, there's not much to add to it, Alexander.
Okay. On Brazil, Equity International sold their stake in BR Malls. Just curious if you guys took a look at buying their stake or if there's any discussion around that.
We've looked at a lot of things with BR Malls. We've looked a lot of things in Brazil. The good news is we're very close to approving our first outlet there, which will start construction here potentially within the next 30 to 60 days. Open, it's outside of São Paulo, and open late next year. That's not in this list that I described to you, but it is moving apace and I expect that to happen, and I think we'll get our first outlet center built and open next year. We're pleased. We're making very good progress on that.
Okay. Just final question, just with the recent economic data, has there been any change in the conversations with tenants, or are they still full steam ahead in terms of leasing space in their program this year, next year, and further out?
Hi, Alex, this is Rick. There really has not been any change. They are still coming in and aggressively looking for new opportunities across all the platforms.
Okay. Thank you.
Sure.
Thank you. The next question is from the line of Mr. Ross Nussbaum from UBS. Please proceed.
Hi. Thanks. Good morning.
Morning.
Can you guys talk about the dynamics that you're seeing in the department store sector as you look ahead to next year? Obviously, you've got one big transformation going on at J.C. Penney, then you've got another different type of situation over at Sears. At what point do you guys, or do you believe there still needs to be some rationalization in terms of the number of boxes that are out there?
Well, Rick and I put Penney in a completely different category than Sears. Penney is very focused on delivering value to their customer. They have a very talented management team. Obviously, they are going through a transformation, but we expect Penney to be a viable mall anchor in a fashion that they have been historically. Sears is a little bit different. The fact of the matter is Sears needs less space. I think we touched on this last time. Sears needs less space than what they currently have, and I think there'll be ongoing discussions with us and Sears and the other mall people that will rationalize that space, creating opportunities for both the landlord and Sears. I really would not lump them in together. They're two different companies on two different paths.
At the end of the day, look, Sears will be a lot of work, but we feel confident as they probably reduce some of their space, that that will ultimately benefit us in the long run. Rick, anything you want to add?
I would just add, if you look at today's landscape in the department store universe, their equity, their balance sheets, their credit profiles are all dramatically better than they were just a few short years ago. You have Lord & Taylor that's been recreated into a very viable and aggressive
A growth vehicle. Belk is very well situated. Macy's is well situated. Carson's has a new leadership and a great financial upward trajectory. Candidly, we're in a better position now than we have been, and with no new development, these stores are maintaining their existing stores because they want to really enhance their top line.
Okay. The second question is, I've gotten this question over the past couple of days from some of your investors. Does the hiring of Matt reflect in any way a signal that you intend to accelerate your international expansion? Or is it more of a reflection that you just needed another body or two in the door, given everything you've got going on?
Well, it's really a function of what we've got going on. Believe it or not, this is a big company, and just like I am never satisfied with the portfolio and where we've taken the company, I'm always going to try and add talent to the organization. I've known Matt a long time. We talked on and off. We wanted to fill this position lot probably in late 2008, the world ended, we put it on a back burner because we said, "Well, we're going to hunker down." I just think there's so many opportunities for this company. It's very important to continue to add talent, another pair of hands, another deep thinker. He fits in great with the team. To me, it was a no-brainer. We'll take it wherever it goes, wherever we think we should invest.
Who would have thought we would have bought our stock at $124 three months ago? We saw an opportunity. Who would have thought we would have invested internationally four months ago? Get paid. I'm getting paid. Most people pay for options. I'm getting paid. As I think about that company as optionality, what do I mean by that? If you look at the cash flow that we'll get from their dividend against the cost that it took, both in equity and debt, we're going to get paid $55 ± million a year to decide what we want to do with that stake. That's a good spot to be in. There's not many malls you can build that can generate $55 million of cash flow. Having another guy to think these things with our team, I think is exciting.
I also think with David and Steve, we hired Larry Crema to run our HR group. I think it also demonstrates that this company is a neat place to work and be part of.
Appreciate it. Thanks, David.
Sure.
Thank you. The next question comes from the line of Craig Schmidt from Bank of America. Please proceed.
Well, thank you. The pace of outlet development actually seems as high as it's ever been. I'm wondering, is that sustainable going forward into 2014 and 2015?
On the new development or the redevelopment development?
The new development.
I still think the full price new development it's still a ways away, even though there are a couple announced ones here and there. The outlet business still has some pockets, but again, I think we discussed it last time. I know there's all these ones that are being bandied about, but I think it's going to be harder to do. I think pure new development is still going to be less than everybody thinks. The redevelopment, though, has the potential to really pick up. That's where, thankfully, between Rick and Contis, that's where a big focus is. That has, Craig, a little bit of potential to do more than what we're doing. Rick, you can add to that, thank you.
Just on the outlet side, right now it's being driven by explosive demand among a number of tenants that are not in the business that want to get in the business. I don't want to lose sight of the fact that this demand is going to help our existing portfolio dramatically, and you're seeing that in our results. There's got to be a finite end to the arc of new development. There's a limited number of new opportunities. On the redevelopment side, when David articulated, I believe it was last year or the year before, our redevelopment program, we identified some for you. Literally three-quarters of them are under construction right now, and we're in the process of reloading that pipeline with the next wave of opportunities.
There's a lot going on, and if you look in the 8-K, we're producing low double-digit yields on those, which on a risk-adjusted basis
Are even better than they are on just the return basis, which are terrific in and of themselves.
I guess when I look at your portfolio, you have, between Woodbury, Orlando, San Marcos, centers that are 700,000 sq ft and larger. Is there the capacity in your portfolio to take some as large as that?
I think that's in the outlet side. That's still going to be few and far between. I mean, we're making Orlando bigger, we're making Vegas bigger, we're making
Yes
Desert Hills bigger. These are, I hate using this word, but iconic outlets. Those will all be bigger. Seattle's getting bigger. Chicago will get bigger. That is probably underappreciated opportunity for this company. Just like, Craig, I mean, people talk, they're going to do this, they're going to do that. People are focused on a company having this particular lease here and there. We've got five outlets under construction. We just opened one. People talk about, "Well, we're hoping to lease this space." Hello, we got five under construction, so.
You just mentioned expansions of many of the best-
Yeah
outlet centers in the U.S.
Right. That coupled. There is a lot to what we're doing.
Okay.
That's why we have gray hair.
Thanks a lot.
Sure.
Thank you. The next question comes from the line of Caitlin Burrows from Goldman Sachs. Please proceed.
Hello. We saw a report that Bank of America is not renewing its deals to keep their ATMs in Simon Malls this year.
Yeah.
Because of that or for other reasons, do you expect any material changes in your ancillary income?
No. In fact, we've already replaced them with another operator. That's been in the works for really a couple of years.
Okay.
No big deal. Yeah, I was surprised it got the press, no big deal.
Also, you reported land sale gains of over $6 million. Could you tell us who you sold that land to?
Yeah, I don't have it in front of me.
It was we sold a piece of land in Northwest Houston for a supermarket right next to our Houston Premium Outlets, and that was a pretty substantial gain.
Yeah. Okay.
Okay. Thanks.
Sure.
Thank you. The next question is from the line of Cedrik Lachance from Green Street Advisors. Please go ahead.
Great. Thank you. Just going back on outlets, in regards to Silver Sands, you got a loan there from the bank at a rate under 4%. Can you give me a sense of the appetite for mortgage financing in the outlet space at this point?
Cedrik.
Yeah, Cedrik. Most of our portfolio in the outlet business, because it's wholly owned, is unencumbered. Where we have shown the products to the mortgage market, whether it's the banks or the life companies, I think they recognize the quality and the stability of the cash flow. I think about Philadelphia Premium Outlets, we had a mortgage on, we just got some financing. We got a construction/mini-perm on Toronto at very attractive pricing. It's a very attractive, very viable product for that market.
I would just say, Cedrik, throw that in for the Mills projects, too. Some of these are locked out, but the ones that are open, and the ones that we bought out of the TMLP are extremely financeable, and that financing rivals any A mall that there is out there as well.
Okay. Just pulling back a little bit, looking at the big picture, where do you see the most fertile ground for investments today? Is it primarily in publicly traded companies, or is it in malls or outlets that are owned privately?
Well, that's a tough one, Cedrik, to be honest with you. At this point, I would probably say that outside the opportunity that we saw at Klépierre, it's probably the private deals that we see as the biggest opportunity, primarily because the private owners are going to have a much more difficult time to get financing. The private individuals that may want to monetize their business for whatever reason, or their asset for whatever reason. I would say to you, that's probably the biggest opportunity that we see. Though it doesn't rule out that eventually there may be some more public opportunities. I would say to you, as we think about what we're looking at, they tend to be more private-oriented. It's either financing issues or estate issues or whatever that's driving the need to do it.
Now, philosophically, we don't rarely, and I don't blackline everything, but we don't participate in bidding If there's a banker or a broker and it says bids are due at 2:00 P.M., please send in your letter. We don't do that. I can't remember the last deal that we did, where we all participate in an auction. We just don't do it. We don't need to do it. We have no interest in doing it. These are people that want to do business with us, it doesn't mean that they're not represented by bankers or whatever, but those bankers know that if there's an auction, they can send it to the next mall guy. We're not going to play.
Okay. Thank you.
Sure.
Thank you. The next question is from David Harris from Imperial Capital. Please go ahead.
Yeah, thanks. Good morning, everybody. Hey, on the appointment of Matthew Lentz.
Yeah.
How much experience has Matt acquired outside of public securities over the years?
He used to be a broker. He's been in the bricks and mortar business, so I think it's pretty good.
Okay. what-
We got a group here not that I think there's any holes there, but we got a lot of guys here that know about bricks and mortar that will help him.
Okay. Will his compensation details be made public?
I believe he'll be, whatever these I can't keep track of all the rules, I think he will be.
He'll be a named executive officer.
Yeah. I think he'll be a form four or five. I don't know. Whatever the rules are, he'll be part of the rules.
That'll be next year's proxy?
Potentially. I'm not going to guarantee it because I really don't know.
Okay. Turning to Klépierre, if I'm doing my numbers right.
Yeah
It's something like, you were down about $200 million on your investment here, about half of the stock depreciation and half is FX. You did put in $1 billion against your $2 billion gross investment by way of a hedge, by way of your, I think it was a credit line facility. Have you expanded that or hedged your position against the currency anymore since then? It looks like all the risks are to the downside, David.
Yeah. Well, David, look, I don't think about the good news for the investors, is I actually think about the real estate long term, not quarter-to-quarter. Yeah, the euro's down a little bit. The stock, we did buy it at a premium to where it was trading. That gap has been closed. In fact, it's been up since where we bought it. We kind of look at where we bought it versus the net asset value, and we still think the net asset value is higher than what we bought it. I'm not going to panic about the euro. It's a good portfolio. It's stable. You'll see the results later today. To me, look, it's not a quarter-to-quarter gain. That's of no concern to me, no consequence to me.
We did increase our
We did increase our hedge. We're about 60 some % hedged. We did that before even the latest EUR depreciation. I think the other point is that, if I could put it in real estate context, look, the real question is what happens in the principal. We didn't do this based upon short-term trading patterns. If you look at the dividend and our cost to financing, just a simple go back. You know real estate, right?
A little. Just a little.
Cash on cash returns. We're going to get roughly, this is even with the lower currency, we're going to get $55 million added cash flow while we decide whether we love this company, we want to maintain our investment. Who knows what we do with this investment. The fact of the matter is, we're getting paid while we help make it a better company, which we're doing today. I think about what it takes to build $55 million of additional cash flow, and I think it's a good trade. Look, the proof will be in the pudding. We'll see.
Okay, another question on Klépierre.
Yeah.
Since the election of Hollande, there have been a raft of tax changes, including increases in the dividend tax. Have any of these prompted you to recalculate your pro forma after-tax returns?
No. None of those at this point will have an impact on us.
Okay, great. Thanks, guys.
Sure.
Thank you. The next question comes from the line of Paul Morgan from Morgan Stanley. Please proceed.
Hi, good morning. On the sales growth trends that have been continuing to impress, maybe you could answer a little bit of the composition of it. Clearly, they're above what a lot of retailers are reporting on a portfolio-wide basis. How much of the increase is on the same tenant basis versus sort of shifts in the mix within the mall? Maybe on a trend basis, how is the tourist spending side of your portfolio going?
Let me unpack that a little bit. One, the tourist aspects of the portfolios are still very strong. We're still seeing a lot of activity from a number of the tourism groups. About the only one that softened at all is Japan. That is still a major contributor, and we are overweighted in tourist markets. Secondly, when you think about the contributions of any one tenant, our sales base is over 60 million sq ft. When you get a number out of us, it's a broad-based trend. It's not going to be materially influenced by the outperformance of any one or any collection of tenants. Thirdly, I believe this reflects the fact that we're doing a good job making our properties better and hopefully taking market share from other properties operating in our markets.
That comes from adding better tenants, adding additional anchors, adding renovations, and making our physical plants better. All of those things are feeding into what you're seeing as our bottom-line sales growth.
Paul, this is Steve. I'd just add one more comment, that if you componentize that growth a bit, the rate of sales pace growth that we're seeing in the outlets in the malls is pretty much on top of each other.
Would you say that the non-same tenant number is maybe, if your 10% comps year-over-year, is it half of that is due to change in mix or less than that?
Let me just say this. Our comp numbers and our rolling 12 are right on top of each other.
On top of each other. Right.
Absolutely right on top of each other.
Yeah.
If that's what you're getting at.
Yeah.
The comp sales and the rolling 12 are exactly right on top of each other.
Yeah. Okay. Thanks. Then, just on terms of new concepts, there's been good growth from a lot of the public chains that sort of gotten back into growth mode. I haven't seen as many new concepts, at least relative to the kind of 2004 to 2006 period, Maybe that's sort of what spurred a lot of development that you're not seeing now. Maybe Rick, are you seeing signs that we're about to see an acceleration of new concepts?
Well, there's a couple of things that are happening. One, a number of retailers that were new concepts, say X years ago, are now public, and they are substantially accelerating their growth because they have a very firm capital plan. Francesca's, Teavana, Tumi, Five Below, Fresh Market. We also are seeing a number of concepts that were, again, relatively new a while ago, that are being aggressively grown by their companies, Crazy 8, P.S. by Aéropostale. We're also seeing a number of new concepts, Versona by Cato, Dry Goods by Von Maur, Vince by Kellwood, C. Wonder, Hearts On Fire, Tesla. Topic is doing Blackheart .
We get it. We get it. We get it.
I'm going to wear you out. There's a lot of stuff that's going on in that sector still.
Paul, we all cringed because-
You do
This gives Rick the opportunity to list all these tenants, okay, so.
I have to give him that chance. He's correct.
There you go. I'll pay you later.
Thank you. The next question is from the line of Steve Sakwa from ISI Group. Please proceed.
Hi, Steve Sakwa from ISI. Good morning.
How are you?
Hey, David. I was just wondering if you could maybe talk a little bit more about some of the synergies and maybe best practices that both Klépierre and Simon are kind of sharing with each other. I realize it's still kind of in early days, but are there any sort of success stories or things that you could sort of talk about that kind of show how things are kind of transforming, kind of across both companies?
Well, look, the fact is, we've been very focused on the balance sheet. As you know, they've raised a lot of money in the bond market at much lower spreads than where they were beforehand. That's a very tangible, very important, credible, and important thing that we brought to the table. I'm not sure that, absent our investment, that they would have been able to do it. We've also reduced the reliance on their funding from BNP. Those are real tangible in the bowels of the organization making happen. Operationally, we're helping them think about all of the promotional other income opportunities. That's going to take time. We are now talking to certain sponsors on a global basis. We've helped them with a few tenants in a few areas on a global basis. Their head of leasing was at our shopping center convention, the ICSC.
We had a number of global meetings with him and our people with the global brands, including H&M, Apple, just to name a few, Hollister. It's happening. That stuff's going to take time, but the bond business is tangible. It's there, it's happened, and that's only been in four months. Strategically, you will see changes with this company over a period of time. The management team there has been very good, very cooperative, very interested in replicating what we have and listening to what we have to say. It's working. It's a lot of work. I spent last week there touring assets with them, going through strategy, going through numbers, going through developments. Actually, scary thing, helping design some of the extensions, it's scary because I was helping them. There's certain things I've learned over the years, too. It's happening.
It's going to take time. There's a lot that we're providing. There's more that we'll provide over a period of time. We're also respectful. We've been there four months. We try not to be Attila the Hun. We want to learn as much as we can. The cooperation, the synergies are available, they're there. The chemistry between their managers and ours has been great. Look, the only negative is that every morning I have to hear about Europe every day. Harris reminded me of some of the ups and downs that go with the territory and trying to create value. We're big boys. We know nothing's easy. I look at it, I'm getting paid to make this company better. I've got a board and a management team that wants to get better. We've got people here that can help make them better.
It's happening, and you can see it in the bond yields right away.
Okay, thanks. I guess second question, last quarter, we talked a little bit about the St. Louis project and where you and the other project from Taubman were. Now that you guys have started construction and had your groundbreaking, I'm just wondering, maybe being first out of the ground, has the leasing dynamic changed at all? Can you provide us with maybe an update on where you are leasing on that project?
Well, we announced a whole host of tenants on July 11th. We've added a few more to that mix. Look, Taubman's a formidable competitor. I'm sure they'll announce certain tenants as well. We anticipate that they're going to build their project, we're going to build ours. We're comfortable with our investment. This is not driven by ego by any stretch of the imagination. We expect to get our lease. We expect to have double-digit returns. Taubman's a very formidable competitor. I'm sure they'll feel the same way about what they're doing. It's most likely that we're going to have two outlet centers there. I think, as I said, we're comfortable. We've got a lot of experience in the outlet business. I've been at it since 1998. People scratched their head when we did our first joint venture with Chelsea.
People scratched their head when we bought it in 2004. I got confidence in our team. We expect to build a very high-yielding outlet center, and we're moving forward with it.
Okay, just last question on the international outlets. I see, I think if I did my math right, that Japan sales were up 5%-6%. I'm just wondering, how do you look at Japan in terms of potentially new outlets? Maybe talk a little bit about just how Korea is performing, also, the new project in Malaysia, and any update on the China project.
Sure. Generally, all Asia is very strong. Supplying them, even when it gets down to almost Europe to some extent. Even with all the macro headlines in Japan, they're still doing roughly $1,000 a foot. There's just not that many, and there's just not going to be that many. We've got our ninth that'll open next spring. It's in a great location. We have a terrific partner in Mitsubishi Estate. I don't think that nine is going to go to 18. There might be one or two or three more to do in the next few years. We're also, as you know there, we phase a lot of stuff in, so we'll do three, four, five phases there.
Japan. Even with all the headwinds and everything else, we've got a wonderful niche there, and we'll continue to exploit it and increase the cash flow there. Korea is the Same thing. There's one or two formidable competitors, but our outlets there are probably, what, Steve, $700 a foot? $800?
About $800, yeah.
$800 a foot. The brands that we deliver are great. We have a very good partner there as well. It's fine, and Malaysia is exactly what we thought it would be. It's really trying to get access to the Singaporean market. We have a great partner there. They're doing stuff worldwide, which we're talking to them about some other opportunities. It's meeting our expectations there, so far so good. China's a little bit not as far along as we would like it. It's still a very complex place to do business. We're still hopeful that we'll get one started there. It is more complex, and we're being more cautious given the If you think there's a robust pipeline in the outlet business here, we happen to think that pipeline's been around for years and years, and not much of it will get built.
The pipeline there expands daily. We're trying to really underwrite it smartly, make sure this is something that we want to do. We do have a good partner in Shanghai. We're going to be very judicious in how we ultimately build something there.
Okay. Thank you.
Sure.
Thank you. The next question comes from the line of Jim Sullivan from Cowen and Company. Please proceed.
Thank you. Good morning. David, appreciate all the commentary on Klépierre. I have one other question. As I recall, their 2011 asset sales were completed at about a 5% premium to appraised NAV. I believe at the beginning of this year, they talked about planning EUR 1 billion of additional sales for this year and next. I wonder if you can tell us, number one, if that disposition plan is still in place and what the pricing expectations are relative to NAV.
Look, they're going to announce probably shortly here. Generally, I'll say this, and I want to be very careful. They're ahead of schedule, and NAV, by and large, has not been an issue in terms of being able to sell the assets at or above their NAV. You'll see their results. I just want to be very careful here because they do report, or they may have already reported. I think they go out at 6:00 o'clock-
Yes
Central European Time. So far so good, and it's still on plan, perhaps ahead of schedule, and it's moving right along.
Okay. Second question on Woodbury, which you mentioned earlier, and you mentioned also on the last call in terms of the expansion potential there. Can you indicate whether the plan is to add square footage on land you already own or on land you otherwise control?
It's land that we own. It's really reconfiguring a number of spaces, decking some of the parking-
Yes
Creating additional space on land that we own.
It's about a 60,000 square feet addition, primarily reconfiguring the existing formats and just substantially upgrading the whole physical plant.
Separately on Amazon, David, you touched on this in, again, your prepared comments, but as they prepare to pay sales taxes in several large states this quarter and open more infill DCs, have they had any discussions with you about opening outlet or full-price stores?
Not with us.
Okay, final question, just a line item and other income maybe for Steve. The interest in dividend income was down materially on a consecutive quarter basis. I wonder if you could tell us what's going on with that line item.
A couple of things, Jim. Number one, the dividend from our U.K. investment, CSC, was a second quarter event last year, third quarter this year, just the timing of their payment of that dividend. We had some investments in some loans that were in fact paid off earlier this year. Interest income is down.
Yeah, we were bummed out about that.
On a full year basis, so the loans that were paid off is, it sounds like the variable on a year-over-year basis.
Yes. On a year-over-year basis, that's correct.
The other point is, as you know, we did have the mez loan with The Mills Corporation, and obviously, that got paid off and retired as part of that whole transaction. You're seeing that as well, Jim.
Okay, great. Thank you.
Sure.
Thank you. The next question comes from the line of Quentin Velleley from Citi. Please proceed.
Hey there. Just another Klépierre question. David, your involvement in forming the strategic direction for the company, does that involve acquisitions at this stage, or is Klépierre somewhat held back by leverage and cost of capital at this stage?
I don't think that they are. I don't know that it should be their number 1 focus. We actually did discuss at the recent meetings a couple of opportunities that are out there. I don't think it should be their number 1 focus, but I don't think it's too far off in the future that it could be up there. We do think there's going to be a number of opportunistic deals. Again, it doesn't mean Klépierre. It could be Simon, it could be all sorts of things. There are going to be a handful of those things to do, and I think it should be on their agenda, but probably not at the top of the list.
Okay. Just in terms of Brazil, could you give us an update on discussions with retailers regarding the Brazil outlet industry? In particular, I'm interested in some of what the domestic Brazilian retailers' thoughts are on the outlet industry and the outlet channel, given the infancy of that industry down there.
We had, I want to say 30 days ago, a presentation to a number of Brazilian plus international retailers about our outlet pipeline with brMalls. It was very well attended. The international retailers are growing there daily. Certainly, the high-end guys that we think are important to bring into the outlet properties are gaining entrance into Brazil on a weekly basis, so to speak. Like Tory Burch just opened a store at a new high-end mall in São Paulo. Very well attended. The Brazilian retailers are very excited about the pipeline. We expect them to populate these outlets aggressively. It's very encouraging what's going on down there.
Thank you.
Thank you. The next question comes from the line of Richard Moore from RBC Capital Markets. Please proceed.
Hey, good morning, guys. This is Wes Golladay. Quick question on the outlets. We've heard the number 100 outlets in 10 years. Do you think there's actually more capacity than that for development in the United States?
No, I wouldn't put much credence in our opinion. Look, we could be wrong, but certainly, we don't think there's 100 outlets in 10 years. Not a chance. We don't see it that way.
Okay. Well, I guess maybe how would you view it?
A lot.
The total opportunity for development.
Look, I think there'll be a handful, but I don't see 100 outlets in 10 years. Not a chance.
Okay. Turning to the malls, what are you guys seeing in terms of traffic trends for the last quarter?
Traffic has been relatively flat to up a little in all the platforms.
Okay. Thanks a lot, guys.
Sure.
Thank you. The next question comes from Christy McElroy from UBS. Please proceed, ma'am.
Hey, guys. Sorry for all the outlet questions. Just have a follow-up. Given the pipeline in the U.S. with competing projects and quite a few private developers in the fray, I'm wondering how influential the core group of outlet retailers are in a center actually getting built. While demand for space is obviously very strong today, how are the deciding factors for a retailer signing a lease in a new project different compared to what they were 5 to 7 years ago?
Well, look, we're living this every day. I would say to you, it is still quite a challenge to convince outlet retailers, whether they're manufacturers or full-price retailers. At least this is our experience, and we have a pretty good portfolio, a pretty big one. I think it's still quite a challenge to convince them to go to new centers. That's why all of this talk about this unbelievable demand and all of these 100 centers and this, that, and the other, I got to tell you, we work our tails off to convince retailers that this is worthy of an outlet center. I don't think it's by any stretch of the imagination, simple and easy to do. When we do it, we have confidence we'll do it. It is not like you can plop these anywhere by anybody, and it'll be successful.
It's just not going to happen. I think the retailers that have a high understanding of this business, whether they're manufacturers or full-price retailers, understand that and will also govern their open-to-buy very seriously.
The only thing I would add is, I think we would hope that the retailers have a high regard for the consistency of what we produce. David and I were just up in New Hampshire and visited Merrimack. That is an incredibly well-executed, well-leased, well-marketed project, and hopefully, we have that going for us when we approach retailers about our new projects. They have confidence that they know what we will deliver and know that it will produce.
Okay. On your property operating expenses, they seem to run a little bit lower than normal again this quarter. I know in Q1 there was some favorable comps given weather and such. I am wondering if there was anything specific in Q2 that you could point to, any trends that favorably impacted OpEx this quarter. Is there a way for you to break out your same-store NOI growth between revenue growth and expense growth?
Well, there is a way to do it, we do not. We know what drives our business. Look, size and scale, when we talked about this company 15 years ago, or 17 years ago or 18 years ago, we thought size and scale matter for a couple of different points. Retail relationships, ability to run efficiently, ability to cover our overhead at the executive level over a huge asset base more efficiently than our peer groups. That is what it takes to generate top NOI growth. That is what we do. Nothing jumps out as we are reviewing it right now that-
No
is worthy of mention, we are very focused on our operating margins. Our size and scale and quality of assets allow us to do that.
All right. Thanks, guys.
Sure.
Thank you. The next question is from the line of Tayo Okusanya from Jefferies. Please go ahead.
Hi, yes. Good afternoon. Just a quick question in regards to any early indications about what back to school may look like this year.
It's really too early to say at this point.
Got it. Okay. David, any other markets, I mean, you guys have your fingers in many key markets, but any other markets internationally that you might be interested in?
Let's see. Look, we have a big investment in Klépierre, I think internationally, that's the big focus. We got to make sure that turns out to be a profitable investment. That's the number one priority. The outlet business in Asia continues to progress. I explained that in detail to you. That's really the focus. Brazil, Latin America, I do think will present more and more opportunities, not just Brazil, but all of South America for the company. I think you'll see us hopefully do some smart things down there over time. Steve's whispering to me, you can certainly jump in there. We are building in Canada, Toronto. Toronto, there was a lot of talk about it. There's not a lot of talk about it now. We are under construction. We're going to have a great outlet there. We got a great partner.
We're looking at another deal in Canada, hopefully, that'll be a market that'll present a few more opportunities for us.
Got it. Just the last question in regards to the supplemental line of credit, the additional $2 billion. Should we be reading something into that in regards to you guys are seeing something out there that you need that additional source of capital for?
I would just say it's consistent with our philosophy to be as prudent and opportunistic as we possibly can be. You're always trying to balance prudence against opportunity. They tend to kind of conflict each other. When you should be prudent, there's a lot of opportunities, you try to get that right balance. Let's face it, the world is going to continue to be uncertain for, I think, a few years to come. That's just the world we live in. There's no reason not to have the ability to be both prudent and opportunistic, and then based on how we read the tea leaves, figure out who wins, prudence or opportunity.
Got it. Thank you very much.
Sure.
Thank you. The next question comes from the line of John Kim from CLSA. Please proceed.
Good morning. Thank you. I had a question on the Main Street Fairness Act. Do you view this initiative as ultimately a revenue booster for your centers, or is this more of a defense mechanism?
Look, I think it's going to help our merchants. Anything that helps our merchants ultimately helps us. Look, this is a states right issue. I think most people in this country believe in state rights. That's one aspect of it. Also, the government, Congress should not be creating winners and losers. This certainly has helped fuel the online against the bricks and mortar. Certainly, we're not, "Oh, this is going to mean X million of revenues." If it helps our merchants, it's bound to trickle down to us in some way, shape, or form.
For the states that have already begun collecting tax from internet companies, you haven't really seen a noticeable difference in sales?
It's so early in that effort. Certainly, we haven't seen anything, but it is just beginning.
Okay. On Klépierre, I don't see the second quarter numbers out yet, but in the first quarter, retail sales in Spain were down 6%, Italy was down 2%. What's the bull case for the company to potentially turn these markets around?
Look, I think, the bull case is that its supply and demand will be in their favor once demand picks up because you cannot expand. It's very hard to get the right to build there. The other point is they've got a great portfolio in Northern Europe, which is somewhat insulated from what's going on in kind of the Scandinavian area, somewhat insulated from what's going on in continental Europe. I think operationally, there are things that we can do to help the company increase its cash flow, and an operational focus from the company we think will increase the cash flow. I think that's a bull case. The negative is, look, they're going to have to weather a tough environment. The one country there that continues to be difficult for them is Spain. Again, it's not all of Spain, it's certain assets in Spain.
We'll weather that storm and, I think as things stabilize, we'll get back to being able to generate cash flow growth from those assets.
Sure, maybe just to follow up to David Harris's question. If the euro continues to decline, how would that impact your decision to potentially acquire the remaining part of the company?
At this point, we're pleased with our investment. That's the focus. I can't really speculate on that going forward.
Great. Okay. Thank you.
Certainly, it makes it cheaper, right?
Yeah. Well, that's the potential outcome.
Sure.
Thanks.
Thank you.
Sure.
The next question comes from the line of Nathan Isbee from Stifel Nicolaus. Please go ahead.
Hi. Good afternoon. Going back to the same-store growth, I assume a good portion of that is coming from the 3.7% average base rent growth. Can you give us some detail on where the 3.7% growth is coming from, especially given your spreads are right around 10%?
We're basically in a position of, one, increasing occupancy, two, we're adding a considerable number of anchors that are generating revenue, but three, it's just re-leasing our space at higher rents. When you look at our expiring rents and look at what our average rent is, we've got a nice spread in there, and as our product gets better, we're able to take advantage of that and generate the higher rental revenues.
David, excuse me. The 3.7 is in your small shop, correct?
Yes.
Correct. Yeah.
The 10% spreads, I assume, about across maybe 10%-13%.
Yeah, I think, Nate, this is Steve. We've had this discussion before on calls, one of the things, we calculate our spread in the most conservative way possible, which is what is the ending cash rent that a tenant was paying compared to the beginning cash rent that the new tenant or the same tenant on the new lease is paying. That is a much more conservative approach than the GAAP method of which you're preparing financials, which would include the straight lining of both the old lease and the new lease. That's going to have some impact on it.
Yeah, I understand. Even on a cash basis, the delta between, let's say, 1.3%-1.5%, let's say, from your spreads to 3.7% across a very large portfolio is still pretty wide.
Well, you got overage rent. You got lots of things that.
You're taking overage rent, and you're capturing it in the new base rent.
Yeah. You got a lot of things going on.
Okay. Just one final question to follow up on St. Louis. Can you give us some insight on how the tenants are viewing the two projects? Are there any tenants that you're aware of that have said no to you because they were going next door?
Yes. There are a handful of tenants that said no to us, absolutely.
Are there any tenants that have signed in both?
There are some that have expressed that they're prepared to do both.
Is it safe to say you're not putting in normal radius restrictions? Or you're not having the success putting them in.
I think it's a tenant-by-tenant discussion. It's a tenant-by-tenant. We're going to tend to get that for the people that commit just to us, like we do for every other outlet center.
The only other thing to say is we have announced, as David said, we're now 62% leased and committed. That is certainly consistent with the kind of leasing progress we have had on all of our new projects.
Okay, thanks.
Sure.
Thank you. The next question comes from the line of Ki Bin Kim from Macquarie. Please proceed.
Thanks. Just a two quick follow-ups. First on leasing, could you comment on, I know you say you're releasing spreads that you quote are on a cash basis. What would that look like on a straight line basis for that 10% number?
Ki Bin, we don't calculate it on a straight line basis. As David has said, I think gazillions of times on these calls, the laser focus is cash flow, that's the way we look at the spread.
It would be higher, though.
It would be higher.
Yeah, that's all I was trying to get at.
we're still getting steps in all of our leases.
If it's possible, could you comment on what is the average vintage of the leases that have been expiring this year? Are they seven years old? The second part of that question is, if you could calculate, what would the, on a like for like basis, the sales per square foot be back then versus today?
I want to caution you on two things. One, Steve touched on it earlier, when we roll over, we've done a very good job over the years getting much more focused on our break points and our overage rent. When you look at the relationship between the spreads and our comp and NOI growth, there's a comp and NOI being generated from sources other than just our spreads. David just said, we also build in all of our bumps over the course of the leases. The ending rent has already been impacted by our ability to raise the base rent over the existing term.
If you look at 2004, 2005 sales per square foot, they were in the $400s.
Yeah.
We're rolling leases over. Our expiration line in front of you, but it's in the mid to high 30s. Now we're at 550, and we're getting-
Fifty-two.
Yeah, 50. In the 50s. That gives you a sense of what's happened on that.
If I-
I think that's what you asked.
Just to clarify that, you're saying roughly on a like-for-like basis?
Yeah.
Or-
In other words, if you look at the leases we did six, seven years ago, are rolling off today. These are rough numbers, but they were $37, $38. That probably was just under 9%, probably under 10%, probably 9% of sales. If you look at where we are today, we're $550, and that relationship is probably still pretty the same.
Yeah.
Therein lies the spread differential, if that's what you're thinking about.
Thank you. Just last quick question. In respect to comp at 1.5%, 1.4% Treasury rates and maybe risk premiums offsetting some of that decline, how has that impacted B-mall pricing? Have you seen any additional activity on that front?
I think there's a pause, which is great. PIMCO, this is what Bill Gross said. The fact of the matter is, unless the real estate is going out of business, okay, the fact is people are going to need cash flow growth, right? That's the world that we live in a slow growth environment. Rates are going to stay low, cash flow is going to be stable. If we proved anything to you over the years, it's that this real estate is relative. It doesn't mean that certain things don't turn against us, and they have. Okay? We've had centers that we've lost for whatever reason. These things are sticky, cash flow is stable, and yield is there, and you're seeing it by opportunistic investors. You're seeing it. In Europe, you're seeing it.
The stuff that Klépierre is selling that is to yield hungry investors. Why would they want to buy the German Bund when they can get a six yield or a 5.5, six yield on a stable asset? I think that's great for us to be in, not just us, but all real estate companies. That's a very attractive feature. One of the reasons why we're increasing our dividend.
I guess maybe, do you expect any kind of recognition of the transaction market for B-malls in the second half?
Look-
Maybe it's specific to you two.
With the outlook the way it is, the answer is yes. It is happening slowly. You are starting to see the market pick up.
Okay. Thank you very much.
Sure.
Thank you. The next question comes from the line of Michael Bilerman from Citi. Please proceed.
Yeah, thanks. It is Michael Bilerman. Dave, I just wanted to come back to the unit purchase from JCPenney, I think most would agree with your comment, that units, think of them as 1-for-1 common stock equivalents. Being able to buy something back and create $60 million of shareholder value, is impressive given the fact that there is still another 61 million units outstanding. Was there something particular about this OP agreement with JCPenney where there was restrictions or something that would have caused the value of that stake to be 20% less than what the market is?
No. There's only one operating partnership. All the unit holders are treated the same. There's a preferred unit. We're getting rid of that soon. All of the unit holders, there's no separate different agreements. They're all the same.
Right. Going back to the question of getting a 20% discount, was there a time lapse, effectively, if they came to you and said, "Okay, I'm going to exercise. I'm going to put my notice in to redeem my units," and now you have the option of delivering them stock or cash. Was there a time that they saved on that?
The time actually is very quick. Put that aside. We actually didn't get notice technically. There was a discussion about the Relatively simple. They did not give us notice. They give us notice, they get the stock, and they can market it. Shelly, correct me. We actually have to register the stock, I think, right?
Right.
It's freely tradable. We register it, boom, done. It was in the discussion that obviously, it turned to cash and believe it or not, we part with our cash. We're very tough. Whenever we write a check out of this building, we are very focused on parting with our cash. We like cash, and that's what happened.
If they were to take stock, how quickly could they have monetized that stock?
2 million shares. I assume it's pretty quick.
[audio distortion .
Why would someone leave $55 million on the table? It's not like small potatoes, right?
Well, look, I'm not going to get into that. Let's move on, Michael.
Oh, okay. Is there other opportunities that you have? You still have 61 million units. I recognize a lot of them are family. There's a bunch of family units in there. Is there other opportunities where you can buy back stock at such an accretive discount?
Look, there's nothing that I can really add to that other than what I've already said.
Okay. I'm just curious what the board's course of action has been since the proxy and the shareholder vote.
Well, look, the board obviously has taken the vote to heart. They are very focused in talking to shareholders about it. The good news, the fact of the matter is our focus, our number one focus, and that's me, Rick, Steve, the other members of our team, is on the business. Okay? Obviously, our performance over this year, last year, for as long as we've all been together, it's pretty good, and it speaks for itself, and we have all the confidence in the world that we'll continue to deliver very good performance to our shareholders. There's no guarantees, but that's the focus. The vote, given our performance, was extremely disappointing, and we didn't understand the vote, and there's enough precedents out there to suggest we just didn't understand the vote.
We'll be talking to our shareholders about it, trying to understand the way they voted it. I will say that we've had some discussions. There's not a clear consensus as to why we voted. They voted against it. We've had a number of shareholders that were supportive of it. The board will take its job very seriously. We welcome any shareholder comments. We've had discussions with shareholders. We expect to have more, and we'll take it from there. The number one focus, obviously, even though we're disappointed because we've been such stewards of capital and performance, continues to be how do we make this company better, and we do it every day. We've had discussions, and we'll continue to have more discussions with shareholders.
Okay. Just lastly, hopefully, this is okay from J.C. Penney, should we expect any other announcements between you and J.C. Penney in regards to maybe buying anchor boxes or other sort of ventures with them in the future?
Well, no. This thing was just really focused on the transaction that we did. We'll talk to them like we talk to all of our retail partners, I wouldn't expect anything out of the normal course of business.
Okay. Thank you.
Sure.
Thank you. The next question comes from the line of Michael Mueller from J.P. Morgan. Please go ahead.
Yeah. Hi. Most have been answered, but just one question. David, in the past, you cut out the U.S. portfolio based on sales just to show how concentrated it was, X% of our NOI comes from over $800, over $500 a foot in sales. When you look at the Klépierre portfolio, how concentrated is it on that basis?
It's really not up for me to do that. I'm sure they'll welcome the question. I will say this. They do a very sophisticated analysis of their portfolio. Buys, hold, redevelopment. It's really not up for me to do it. I do think the quality is there. The opportunities for enhancing the operations are there, but it's really not up for me to do that. I will tell you, though, they're very sophisticated in how they slice and dice the portfolio and what they want to do with the assets.
Okay. That was it. Thanks.
Sure. No problem.
Thank you for your question. Sir, excuse me, you have no further questions at this time. I would like to turn the call over to Mr. David Simon.
Thank you. Thanks for your questions, and we look forward to answering anything else you might need over the next few days. Thank you.
Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a very good day.