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 a listen only mode. We will conduct a question and answer session towards the end of this conference. As a reminder, this call is being recorded for replay purposes.
I 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 2nd 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 24, 2012. Reconciliations of non GAAP financial measures to the most directly GAAP measures are included within the earnings release for the company's supplemental information package that was included in this morning's Form 8 ks. 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 Sokoloff, President and Chief Operating Officer and Steve Stearitt, 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 2nd quarter of 2011. Our FFO exceeded the 1st 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 Q2 of 2011 was 3.5%, so a very healthy trend. Tenant sales were up 9.9 percent to $5.54 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 $2,000,000,000 unsecured revolving credit facility that supplements our existing $4,000,000,000 revolver resulting in $6,000,000,000 of total capacity.
The facility matures 2016 with a 1 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 $1,900,000,000 of which our share of that debt is $1,300,000,000 The weighted average interest rate on the loans is 4.3% and the term is 7.5 years on the average term. And last Friday, we redeemed 2,000,000 units of our operating partnership owned by an affiliate of JCPenney at $124 per unit or share. On the acquisition side, June 4, we acquired a 50% interest in Silver Sands Factory Stores, a large and highly productive upscale outlet center in Destin, Florida.
The 450,000 Square Foot Center generates sales of approximately $500 per square foot. We have assumed leasing and management duties. And in the coming months, it will be rebranded as a premium outlet center. Development activity is very strong. First of all, we grand open Meramec Premium Outlets, a large outlet center in Meramec, New Hampshire on June 14th, strong opening.
We're 90 9% leased, great looking center. Construction continues on 5 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, 2 in the U.
S. Are in Texas City, suburb of Houston, which opens this fall and then Chandler, Arizona, a suburb of Phoenix, which will open next year. We're continuing construction in Toronto, which opens year. Another outlet center in Japan, which will be our 9th near the airport. Outside of Tokyo and Busan, our 3rd premium outlet center in Korea.
We started construction on July 11. 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 VR malls.
And importantly, construction is underway on 25 redevelopment expansion projects at the mall, premium outlet and mills platforms in the U. S. And 2 premium outlets in Japan, all with 20 twelvetwenty 13 completion dates. We continue to expect our share of the development and redevelopment spend to approximate $1,000,000,000 this year, next year in 2014. Let me just turn to Clay Pier to give you a quick update.
As you know, we bought 54,400,000 shares or 29 percent of the French public company in March. They are the largest 2nd largest owner of retail assets in Continental Europe with assets valued at €16,200,000,000 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. And 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. Turning to dividends. As you now know, we have announced the 4th 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 to $7.70 per share. Primary factors contributing to this are strong operational performance and the impact of our recent investment activity. Now just to highlight another important factor in what's happening with the company. We continue to add our very talented management group.
As you know, in 20 11, we added ConTis to our mall platform, Bible to help us in our legal and deal business. And obviously, 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 bricks and mortar point of view, but also from a securities point of view, also very been involved in reviewing many international opportunities in his previous roles. He'll focus his job will primarily assist myself and others of the management group in pursuing strategic growth opportunities for the company.
And Matt's first day on the job was in fact yesterday. And as far as I know, he's still here. But actually his wife is about to give birth, so I hope he's not at the office. Concluding, let me just say last Q2, 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 bipartisan group of senators and similar legislation has been introduced in the House to address the inequality in today's marketplace and appreciate all everybody's support in showing their strong support of this very important legislation. So with that said, we can turn it over to questions.
First question comes from the line of Mr. Alexander Goldfarb, Sandler O'Neill. Please proceed.
Good morning.
How are you?
Doing well, doing well. Once again it's hot in New York. David just going to the J. C. Penney for a second, $1.24 is certainly below where you guys are trading.
Just want to get a little more color on 1, who approached to first? And 2, just want to try and understand why someone would take 124 versus where your stock is trading in the open market?
Well, look we let's just say we have a strong relationship with Penni. They're a very important retail partner of ours. I know Rick and I know Mr. Johnson and we also know very well members of the Board. So I'm not going to get into the particulars, but just so you understand, I mean, the unitholders have the ability to convert their units on a one for one basis for common shares.
And 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 they we have the option to give them fully diluted stock or cash. And it was through that discussion that we negotiated the deal. And I'm very convinced it's a great opportunity for the company. And I think it met Penny's strategic goals in terms of their focus on what they're trying to do with their business.
So we're pleased with the transaction. And beyond that, there's not much to add to it, Alexander.
Okay. And then on Brazil, Equity International sold their stake in BR Mall. Just curious if you guys took a look at buying their stake or if there's any discussion around that?
Well, we've looked at a lot of things at BR with BR malls. We've looked at 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 and open it's outside of San Paulo and open late next year. That's not in this list that I described to you, but it is moving a pace and I expect that to happen and I think we'll get our 1st outlet center built and open next year. So we're pleased we're making very good progress on that.
Okay. And just final question just with the recent economic data. Has there been any change in the conversations
with tenants? Are there still full steam
ahead in terms of leasing Hi, Ash. This is Rick. There really has not been any change in the
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. Sure.
Thank you. The next question is from the line of Mr. Ross Nussbaum from UBS. Please proceed.
Hi, thanks. Good morning.
Good morning.
Can you guys talk about the dynamics that you're seeing in the department store sector as you ahead to next year? Obviously, you've got one big transformation going on at J. C. Penney and 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, I put Penny in a completely and Rick in it. I put Penny in a completely different category than shears. I mean, customer. They have a very talented management team. We expect obviously, they are going through a transformation, But we expect PennEast to be a viable mall anchor in a fashion that they have been historically.
Sears is a little bit different. I mean 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, really would not lump them in together. They're 2 different companies on 2 different paths. And at the end of the day, look, it's going to be 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 and Taylor that's been recreated into a very viable and aggressive growth vehicle. Dillard is very well situated. Macy's is well situated.
Carsons has a new leadership and great financial upward trajectory. So 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. And the second question is and 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 2 in the door given everything you've got going on?
Well, it's really a function of what we've got going on. I mean, we believe it or not, this is a big company. And just like I am never satisfied with portfolio and where we've taken the company. I'm always going to try and add talent to the organization. I've known Man a long time.
We talked on and off. We wanted to fill this position loss probably in late 2008 and then the world ended. So 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. So it's to me it was a no brainer. And 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 3 months ago, but that's we saw opportunity. Who would have thought we would have invested internationally 4 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 $55,000,000 plus or minus $1,000,000 a year to decide what we want to do with that stake.
That's a good spot to be There's not many malls you can build that can generate $55,000,000 of cash flow. So having another guy to think these things with our team, I think is exciting. I also think it 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, Dave. 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 and it actually seems as high as it's ever been. I'm wondering is that sustainable going forward into 20
142015? On the new development or the redevelopment?
The new development.
I still think the full price new development still is not is still it's still a ways away even though there are a couple of announced ones here and there. The outlet business still has some pockets, The outlet business still has some pockets, but again, I think we discussed it last time. I mean, I don't I know there's all these ones that are being dancing about, but I think it's going to be harder to do. So I think pure new development is still going to be a little bit still be less than everybody thinks. The redevelopment though could has the potential to really pick up.
And that's where thankfully between Rick and Conthys, that's where a big, big focus is. That has Craig a little bit of potential to do more than what we're doing. But Rick you can add to that. Thank you.
Yes. 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. And I don't want to lose sight of the fact that this demand is going to help our existing portfolio dramatically and that's 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 3 quarters of them are under construction right now and we're in the process of reloading that pipeline with the next wave of opportunities. So there's a lot going on and we're if you look in the 8 ks, 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 Westbury Woodbury, Orlando, San Marcos centers that are 700,000 square feet 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 the Desert Hills bigger.
But these are I hate using this word, but iconic outlets. Those will all be bigger. Those are all Seattle is getting bigger. Chicago will get bigger. So these are all 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 5 outlets under construction. We just opened 1. So people talk about, well, we're about to, we're hoping to lease this space.
Hello, we got 5 under construction.
And you just mentioned expansions of many of the best outlet centers in the United States.
And that couple. So there is a lot to what we're doing. That's why we have gray hair.
Thanks a lot.
Sure.
Thank you. The next question comes from the line of
keep their ATMs in Simon Mall this year. Because of that or for other reasons, do you expect any material changes in your ancillary income?
No. In fact, that's that we've already replaced them with another operator. That's been in the works for really a couple of years. No big deal. Yes, I was surprised it got the press, but no big deal.
And then also you reported land sale gains of over $6,000,000 Could you tell us who you sold that land to?
Yes. I don't have it in front of me, but it was we sold a
piece of land in Northwest Houston for a supermarket on right next to our Houston Premium Outlets and that was a pretty substantial gain. Yes. Okay.
Okay. Thanks.
Sure.
Thank you. The next question is from the line of Cedric Leshan from Green Street Advisors. Please go ahead.
Great. Thank you. Just going back on the outlets in regards to Silversands, 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?
Yes, Cedric. Most of our portfolio in the outlet business because it's wholly owned is unencumbered. But 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. So I think about Philadelphia Premium Outlets, we had a mortgage on, we just got some financing on the we got a constructionmini perm on Toronto at very attractive pricing. So it's a very attractive, very viable product for that market.
Yes. I mean there is and I would just say Cedric, throw that in for the mills projects too. I mean we're we've 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 aim all that there is out there as well. Okay. And 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, Cedric, to be honest with you. At this point, I would probably say that outside the opportunity that we saw at Clay Pier, it's probably the private deals that we see as the most the biggest financing and or 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. No, it doesn't rule out that eventually there may be some more public opportunities. But I would say to you as we think about what we're looking at, they tend to be more private oriented.
And it's either financing issues or state issues or whatever that's driving the need to do it. Now philosophically, we will not we don't rarely and I shouldn't I don't black line everything, but we don't participate in bidding. When if there's a banker or a broker and it says bids are due at 2 p. M, please send in your letter. We don't do that.
I mean, I can't remember the last deal that we did where we'll participate in an auction. I mean, we just don't do it. We don't need to do it. We have no interest in doing it. So these are people that want to do business with us.
And then we 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 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.
Yes, thanks. Good morning, everybody. Hey, on the appointment of Matt Lentz, how much experience has Matt acquired outside of public securities over the years?
He's had a he used to be a broker. He's been in the bricks and mortar business. So I think it's pretty good.
Okay. And
what We got a group here that any 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 them.
Okay. Will his
whatever these I can't keep track of all the rules, but I think he will be one of the he'll be a Form He'll be a named executive officer. Yes. I think he'll be a Form 4. I don't know. Whatever the rules are, he'll be part of the rules.
So that will be next year's proxy?
Potentially. I can't I'm not going to guarantee it because I really don't know.
Okay. And then turning to Klepierre, if I'm doing my numbers right, it's something like you were down about $200,000,000 on your investment here about half of the stock depreciation and half is FX. You did put in $1,000,000,000 against your $2,000,000,000 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? I mean, it looks like all the risks are to the downside, David.
Yes. Well, David, that's look, we don't I don't think about the good news about for the investors is I actually think about the real estate long term not quarter to quarter. So yes, the euro is 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 don't I'm not going to panic about the euro. It's a good portfolio. It's stable.
You'll see the results later today. So to me, this isn't look, it's not a quarter to quarter So that's of no concern to me, no consequence to me. But we did increase our hedge and we're about 60 some percent hedged. We did that before even the latest euro depreciation. But I think the other point is that and if I could put it in real estate context and look the real question is what happens in the principal.
But this is not we didn't do this based upon short term trading patterns. But if you look at the dividend and our cost of financing, just a simple go back, you know real estate, right? Just a little. Cash on cash returns. We're going to get roughly and this is even with the lower currency.
We're going to get $55,000,000 added cash flow, while we decide whether we love this company, we want to maintain our investment, whether who knows what we do with this investment. But the fact of the matter is we're getting paid while we help make it a better company, which we're doing today. And I think about what it takes to build $55,000,000 of additional cash flow. And I think it's a good trade. But look, the proof will be in the pudding.
We'll see.
Okay. Another question on Claire Pierre. Since the election of Holland, there have been a raft of tax changes including increases in the dividend tax. Have any of these prompted you to recalculate your pro form a 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 are have been continuing to impress, I mean, maybe you could answer a little bit of the composition of it. I mean, clearly, they're above what a lot of retailers are reporting on a portfolio wide basis. So I mean, how much of the increase is the same tenant basis versus sort of shifts in the mix within the mall?
And then maybe on a trend basis, kind of how is the tourist spending side of your portfolio going?
Let me unpack that a little bit. 1, 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. So that is still a major contributor and we are out weighted in tourist market. Secondly, when you think about the contributions of any one tenant, our sales base is over 60,000,000 square feet.
So 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 anyone 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. And that comes from adding better tenants, adding additional anchors, adding renovations and making our physical plants better. And 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.
And so would you I mean,
would you say that the kind of 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
Let me just say this, our comp numbers and our rolling 12 are right on top of each other. Right. Absolutely right on top of each other. But that's what you're getting at. The comp sales and the rolling 12% are exactly right on top of each other.
Okay. Thanks. And then on the just in terms of new concepts, I mean, 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 2,004 to 2,006 period and maybe that's sort of what spurred a lot of development that you're not seeing now. But 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. 1, 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 of concepts that were again relatively new a while ago that are being aggressively grown by their companies Crazy 8, TS by Aero. But we're also seeing a number of new concepts Versana by Cato, CATO, Dry Goods by Von Maur, Vince by Kellwood, Sea Wonder, Hearts on Fire, Tesla, Topic is doing Black Heart.
We get it. We get it.
So I'm going to wear you out. But there's a lot of stuff that's going on in that sector still.
Paul? We all cringed because this gives Rick the opportunity to list all these out, okay?
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 Issy 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 Clefiere and Simon are kind of sharing with each other. And 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. So 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. We've also reduced the reliance on their funding from BNP.
And I mean those are real tangible in the bowels of the organization making happen. And operationally, I mean, we're helping them think about all of the promotional other income opportunities. I mean that's going to take time, but 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 in our 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 and M, Apple, just to name a few Hollister. So it's happening. That stuff's going to take time, but the bond business is tangible. It's there. It's happened.
That's only been in 4 months. Now strategically, you will see changes with this company over a period of time. And the management team there has been very, very good, very cooperative, very interested in replicating what we have and listening to what we have to say. So it's working. It's a lot of work.
We spent I spent last week there touring assets with them, going through strategy, going through numbers, going through developments. Actually, it's a scary thing, Helping design some of the extensions, it's scary because I was helping them and that's but there's certain things I've learned over the years too. So, 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 4 months. We try not to be a tell of the hunt. We want to be we want to learn as much as we can.
But the cooperation, the synergies are available, they're there. The chemistry between their managers and ours have 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. But I look at it, I'm getting paid to make this company better. And I've got a board and a management team that wants to get better. And we've got people here that can help make them better. And 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 kind of 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? And can you kind of provide us with maybe an update on where you are leasing on that project?
Well, we announced a whole host of tenants on July 11. We've added a few more to that mix. I mean look they're Taubman is 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. Our numbers are 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 is a very formidable competitor. I'm sure they'll feel the same way about what they're doing. And it's most likely that we're going to have 2 outlet centers there. So but 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 'ninety eight. We were people scratch their head when we did our 1st joint venture with Chelsea. People scratch 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. And then just last question on the kind of the international outlet. I see I think if I did my math right the Japan sales were up kind of 5% to 6%. And I'm just wondering how do you kind of look at Japan in terms of potentially new outlets? And maybe talk a little bit about just how Korea is performing?
And also the new project in Malaysia and any update on the China project?
Sure. Generally, Asia is very strong. I mean, there's supplying them even with all the gets down to kind of almost Europe to some extent. I mean even with all the macro headlines in Japan, I mean they're still doing roughly $1,000 a foot. And there's just not that many and they're just not going to be that many.
We've got our 9th that will open next spring. It's in a great location. We have a terrific partner in Mitsubishi Estate. So I don't think that 9% is going to go to 18%. There might be a 1 or 2 or 3 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 3, 4, 5 phases there. Japan, so 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 1 or 2 formidable competitors, but our outlets there are probably Steve $700 a foot, dollars 800 a foot.
The brands that we deliver are great. We have a very good partner there as well. So it's 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. And it's meeting our expectations there. So far so good. China is 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. But 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 has been around for years years and not much will get is expands daily. So 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, but we're going to be very, 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 Klepierre. I have one other question. As I recall, their 2011 asset sales were completed at about a 5% premium to appraised NAV.
And I believe at the beginning of this year they talked about planning €1,000,000,000 of additional sales for this year and next. I wonder if you could tell us number 1 if that disposition plan is still in place and what the pricing expectations are relative to NAV?
Well, look they're going to announce probably shortly here. But generally I'll say this and I want to be very careful. All everything 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. But I you'll see the results. I don't want to 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 o'clock Central European Time. So but so far so good and it's still on plan, perhaps ahead of schedule and it's moving right along.
Okay. 2nd question on Woodbury, which you mentioned earlier and you mentioned also in 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. So it's really reconfiguring a number of spaces decking some of the parking and creating additional space on the land that we own.
It's about a 60,000 square feet addition primarily reconfiguring the additional the existing formats and just substantially upgrading the whole physical plant.
Okay. And then 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. And then 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 1, the dividend from our U. K. Investment CSC was a 2nd quarter event last year, Q3 this year, just the timing of their payment of that dividend. And then we had some investments in some loans that were in fact paid off earlier this year.
So interest income is down.
No. We were bummed out about
that. So
on a
full year basis, so the loans that were paid off, it sounds like the variable on a year over year basis?
Yes. On a year over year basis, that's correct.
And then the other point is we did as you know we did have the mezz loan with mills. And obviously that got paid off and retired as part of that whole transaction. So you're seeing that as well Jim.
Okay, great. Thank you.
Sure.
Thank you. The next question comes from the line of Quentin de la Lee from Citi. Please proceed.
Hi, there. Just another Klepierre question. David, your involvement in forming the strategic direction for the company, does that involve acquisitions at this stage? Or is Klepierre somewhat held back by leveraging cost of capital at this stage?
I don't think that they are. I don't know that it should be their number one focus. And we actually did discuss at the recent meetings a couple of opportunities that are out there. But I don't think it should be their number one focus. But I don't think it's too far off in the future that it could be up there.
And we do think there's going to be a number of opportunities. And again, it doesn't mean Clay Pier could be Simon. It could be all sorts of things. But there are going to be a handful of those things to do. And I think it should be on the agenda, but probably not at the top of the list.
Okay. And then just in terms of Brazil, could you give us an update on discussions with retailers regarding the Brazil outlet industry? And in particular, I'm interested in some of what the domestic Brazilian retailers thoughts are on the outlet industry and the outlet channel given I guess the infancy of that industry down there?
We had a almost 30 days ago kind of a presentation to a number of Brazilian plus international retailers about our pipeline with BR malls. It was very, very well attended. The international retailers are growing there daily. And certainly, the high end guys that we think are important to bring into the outlet properties are gaining entrants into Brazil on a weekly basis so to speak like Tory Burch just opened a store at a new high end mall in San Paulo. So very, very well attended.
The Brazilian retailers are very excited about the pipeline and we expect them to populate these outlets aggressively. So it's very, very encouraging kind of what's going on down there.
Thank you.
Thank you. The next question comes from the line of Rich Moore from RBC Capital Markets. Please proceed.
Hey, good morning guys. This is Wes Colliday. 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. And I wouldn't put much credence in our opinion. Look, we could be wrong. But certainly, we don't think there's 10 outlets in or 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, 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. And 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.
Sorry for all the outlook questions. Just have a follow-up. Given the pipeline in the U. S. With competing projects and quite few private developers in the fray, I'm wondering how influential the core group of outlet retailers are in the center actually getting built?
And while demand for space is obviously very strong today, how are the deciding factors for a retailer signing a lease and a new living this every day. I
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, pretty big one. I think it's still quite a challenge to convince them to go to new centers. That's why this all of this talk about this unbelievable demand and all of this 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. So 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. But it is not like you can plop these anywhere by anybody, anywhere by anybody and it will be successful. It's just not going to happen. And 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 Meramec. That is an incredibly well executed, well leased, well marketed project. And hopefully, we have that going for us when we approach
Okay. And
Okay. And then 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'm wondering if there was anything specific in Q2 that you could point to any trends that favorably impacted OpEx this quarter? And is there a way for you to break out your same store NOI growth between revenue growth and expense growth?
Well, there's a way to do it, but we don't. I assume we know what drives our business. Look, we're 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 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's what it takes to generate comp NOI growth and that's what we do.
Nothing jumps out as we're reviewing it right now that is worthy of mention. But we are very focused on our operating margins and 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.
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. And then 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. Not I mean, look, we have a big investment in Klepierre and I think internationally that's the big focus. We got to make sure that, that turns out to be a profitable investment. We're 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. I mean Brazil, Latin America, I mean, I do think we'll present more and more opportunities, not just Brazil, but all of South America for the company. And so I think you'll see us hopefully do some smart things down there over time. And Steve is whispering to me, but you can certainly jump in there.
But we do have we are building Canada, Toronto. I mean, Toronto, there's 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, but hopefully that will be a market that will
supplemental line of credit, the additional $2,000,000,000 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. I mean, 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. Try so you try to get that right balance.
And the world let's face the world is going to continue to be uncertain for I think a few years to come. If not, that's just a world we live in. So there's no reason not to be not to have the ability to be both prudent and opportunistic. And then based on how we read the tea leaves, figure out where the primary 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 helps I think it's going to help our merchants. Anything that helps our merchants ultimately helps us. And look Congress should not look this is a states' right issue. I think most people in this country believe in state rights. So that's one aspect of it.
But also the government Congress should not be picking creating winners and losers. And this certainly has helped fuel the online against the bricks and mortar. It certainly we're not, oh, this is going to mean X million of revenues. But if it helps our merchants, it's bound to trickle down to us in some way, shape or form.
So 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 that I would certainly we haven't seen anything, but it is just beginning.
Okay. On Klepierre, I don't see the 2nd quarter numbers out yet, but in the Q1 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?
Well, 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 have the right to build there. And 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, we 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 case.
The negative is look it's going to they're going to have to weather tough environment. The one country there that continues to be difficult for them is Spain. And again, it's not all of Spain. It's certain assets in Spain. And 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. And maybe just a follow-up to David Harris' question. If the euro continues to decline, how would that impact your decision to potentially acquire the remaining part of the company?
We really at this point, we're pleased with our investment and that's the focus. Can't really speculate on that going forward.
Right. Okay. Thank you.
Certainly, it makes it cheaper, right?
Yes. Well, that's the potential outcome.
Sure.
Thanks. Thank you. The next question comes from the line of Nathan Iffy from Stifel Nicolaus. Please go ahead.
Hi. Good afternoon. Just 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 2, we're adding a considerable number of anchors that are generating revenue. But T, it's just releasing our space at higher rents. And 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.
Excuse me, the 3.7% is in your small shop, correct?
Correct. Yes.
And then the 10% spreads, I assume about across maybe 10% to 13%?
Yes. I think Nate, this is Steve. I think we've had this discussion before on calls. But 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. And 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.
So that's going to have some impact on it.
Yes, I understand. I mean, even on a cash basis, the delta between, let's say 1.3% to 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. I mean,
you got lots of things that you're taking overage rent and you're capturing it in the new base rent.
I mean, you got a lot of things going on.
Okay. And then one final question, a follow-up on St. Louis. Can you give us some insight on how the tenants are viewing the 2 projects? Are there any tenants that you're aware of that have said no to you because they were going next door?
Yes. Yes. There are a handful of tenants that said no to us. Absolutely.
And are there any tenants that have signed in both?
There are some that have expressed that they're prepared to do both.
Okay. So 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. So I don't think there's any 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.
Just then the only other thing to say is we have announced as David said, we're now 62% leased and committed. So 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 couple of quick follow ups. First on leasing, could you comment on I know you said you're releasing spreads that you quote are on a cash basis. What would that look like on a straight line basis so 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. And so that's the way we look at the spread.
It would be higher though. It would be higher.
Yes. That's what I was trying to get at.
Yes. We're still getting steps in all of our leases.
And if it's
possible, could you comment on what is the average vintage of the leases that are that have been expiring this year? Are they like 7 years old? And 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?
Well, I want to caution you on 2 things. 1, and Steve touched on it earlier, when we roll over, we've done a very relationship between the spreads and our comp NOI growth, there's a comp NOI being generated from sources other than just our spreads. And David just said, we also build in all of our bumps over the course of the leases. So the ending rent has already been impacted by our ability to raise the base rent over the existing
term. But if you look at 2,000 4,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000, 000,000,000,000, I mean that's so now we're at 550 and we're getting in the 50. So I mean that gives you a sense of what's happened on that. So Mike Yes, I think that's what you asked.
Yes, yes. So I just want to clarify that. So you're saying roughly on a like for like basis? Yes.
In other words, we were if you look at the leases we did 6, 7 years ago are rolling off today. These are rough, rough numbers, but they were $38, dollars 37, dollars 38 that probably was just under 9 probably under 10%, probably 9% of sales. And if you look at where we are today, we're $550,000,000 and we're probably that relationship is probably still pretty the same. But therein lies the spread differential. That's what you're thinking about.
Yes, yes. Thank you. And just last quick question. In respect to comps at 1.5%, 1.4% treasury rates and maybe risk premiums offsetting some that decline. How has that impacted Bmall pricing?
And have you seen any additional activity in that front?
Well, look, I think and I think there's a pause, which is great. I mean, this is what PIMCO, this is what Bill Gross said. I mean, 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? And that's what that's the world that we live in, in a slow growth environment. Rates are going to stay low.
Cash flow is going to be stable. I mean, if we proved anything to you over the years, it's that this real estate is relative yes, it doesn't mean that certain things don't turn against us and they have, okay? We've had centers that we've lost to for whatever reason, But these things are sticky. Cash flow is stable and yield is there and you're seeing it by opportunistic investors. You're seeing it I mean in Europe you're seeing it.
I mean the stuff that Klepierre is selling that is to yield hungry investors. Why would they want to buy the German bund when they can get a 6 yield on a or 5.5, 6 yield on a stable asset. I think that's great for us to be in, not just us, but all real estate companies. And that's a very attractive feature, one of the reasons why we're increasing our dividend.
But I guess maybe do you expect any kind of recognition of the transaction market for BMO in the second half? And maybe specific to you too?
Look, with those with the outlook the way it is, the answer is yes. And it's happening slowly. I mean you're starting to see the market pick up.
Okay. Thank you very much.
Sure.
Thank you. The next question comes from the line of Quentin Villalu Citi. Please proceed.
Yes. Thanks. It's Michael Bilerman. David, I just want to come back to the unit purchased from J. C.
Penney. And And I think most would agree with your comment that units think of them as 1 for 1 common stock equivalents. So being able to buy something back and create $60,000,000 of shareholder value is impressive given the fact that there's still another 61,000,000 units outstanding. And so was there something particular about this OP agreement with J. C.
Penney that 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 and all the unitholders are treated the same. There's a preferred unit that we're getting rid of that soon. But all of the unitholders, there's no separate different agreements. They're all the same.
Right. So then 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 that was there a time that they saved on that?
The time actually is very quick, but put that aside. We actually didn't get noticed technically, but there was a discussion about relatively simple here. They if they give us they did not give us notice. They give us notice. They get the stock and they can market it.
We actually Shelly correct me, but we actually have to register the stock, I think, right? So it's freely tradable. We register it, boom, done. It was in the discussion that obviously it turned to cash and we part believe it or not we part with our cash. We're very tough whenever we write a check out of building.
We are very focused on parting with our cash. We like cash and that's what happened.
But if they were to take stock, how quickly could they have monetized that stock?
2,000,000 shares, I assume it's pretty quick
close. Right. So why would someone leave $55,000,000
on the table? I mean, it's
not like small potatoes, right?
Well, look, I'm not going to get into that. Let's move on, Michael.
Okay. Well, is there other opportunities that you have with you still have 61,000,000 units. I recognize a lot of them are family there's a bunch of family units in there. But is there other opportunities where you can buy back stock at such an accretive discount?
Look, we there's nothing that I can really add to that other than what I've already said.
Okay. And then I'm just curious what the Board's course of action has been since the proxy and the shareholder vote?
Well, look, I mean, it is the Board obviously has taken the vote to heart. They are very focused in talking to shareholders about it. The good news look, I mean, the fact of the matter is we're putting this our focus, our number one focus and that's me, Rick, Steve, the other members of our team is on the business, okay? And obviously, our performance over this year, last year that the 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 precedence out there to suggest it was we just didn't understand the vote. But we'll be talking to our shareholders about it, trying to understand the way they we voted.
They voted against it. We voted. They voted against it. We've had a number of shareholders that were supportive of it. But the Board will take its job very seriously.
We welcome any shareholder comments. They will we've had discussions with shareholders. We expect to have more and we'll take it from there. But 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. So but we've had discussions and we'll continue to have more discussions with shareholders.
Okay. And then just lastly, hopefully this is okay from JCPenney, but should we expect any other announcements between you and JCPenney in regards to maybe buying anchor boxes or other sort of ventures with them in the future?
Well, not 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, but nothing don't 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 Mike Mueller from JPMorgan. Please go ahead.
Yeah. Hi. Most have been answered, but just one question. David, in the past, you cut up the U. S.
Portfolio based on sales just to show how concentrated it was, x percent of our NOI comes from over 800, over 500 a foot in sales. When you look at the Clapier portfolio, how concentrated is it on that basis?
It's really not up for me to do that, but I'm sure they'll welcome the question. They I will say this, they do a very sophisticated analysis of their portfolio, buys, hold, redevelopment. But it's really not up for me to do it. But 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. So 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.