Good day, ladies and gentlemen, and welcome to the 4th Quarter 2010 Simon Properties Group Inc. Earnings Conference Call. My name is Lacey, and I'll be your coordinator for today. Answer session towards the end of the presentation. As a reminder, this conference is being recorded for replay purposes.
I would now like to turn the presentation over to your host for today's call, Ms. Shelley Duran, Vice President of Investor Relations. Please proceed.
Welcome to Simon Property Group's 4th quarter 2010 earnings conference call. Please be aware that statements made during this call that are not historical may be deemed forward looking statements. Actual results may differ materially from those indicated by forward looking statements due to a variety of risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that today's call includes time sensitive information that may be accurate only as of today's date, February 4, 2011.
During today's call, we will discuss certain non GAAP financial measures as defined by the SEC's Regulation G. Reconciliations of these 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 ks. This package is also available on the Simon website in the Investors section under Financial Information Quarterly Supplemental Packages. Participating in today's call will be David Simon, Chairman and Chief Executive Officer Rick Sokoloff, President and Chief Operating Officer and Steve Stearitz, Chief Financial Officer. I will now turn the call over to Mr.
Simon.
Okay. Thanks. Good morning, everybody. We'll go through some highlights and then open it up for Q and A. First of all, FFO as adjusted without the impact of our non cash impairment charge in the Q4 increased 8.4% from the Q4 1 year ago, which was $1.66 to $1.80 per share.
We reported FFO of $1.78 dollars per diluted share for the quarter, which exceeded the 1st call consensus estimate by $0.04 And I'm pleased with this performance, which was accomplished despite the following 4th quarter items. We recognized transaction expenses of $6,400,000 or 0 point per share. We recorded an impairment charge of $8,200,000 or $0.02 per share for an investment in a development project in Italy that opened in November of 'seven and Opry Mills closed after the flood in 2010. The negative impact to FFO for the quarter from Opry Mills was approximately $6,400,000 or $0.02 per share and this loss will continue for the balance of 2011 or loss of approximately $0.05 for the total of the year until we rebuild the center. FFO as adjusted for the year was $6.03 per share as compared to $6.01 in 2,009.
We declared a quarterly dividend of $0.80 per share, which was 33% higher than the dividend at this time last year. I'll talk about NOI now, malls and premium together which contribute approximately 90% of our domestic NOI comparable sales. And I should say that these statistics do not include prime outlets to give you a sense of comparability. Comparable sales on a rolling 12 month basis were $4.94 per square foot, up 9.3% as it compared to $4.52 per square foot at 2009 year end. Occupancy at year end this year or actually in 12 I'm sorry, twelvethirty oneten was 94.2 which sequentially was 60 basis points higher than ninethirty and 80 basis points higher than a year ago.
At year end, the re leasing spread for 12 months was a positive 1 point $1.5 per square foot. We continue to see gradual improvement in deal flow and in the pricing of our space. On a same space basis, our 20 10 re leasing spread was a positive 2 point 7 $1 per square foot. Comparable property net operating income growth was 3 0.4% for the quarter, 2.9% for the year. And recall last year, we had a positive roughly 1% growth.
So we had growth on top of comparable NOI growth. The drivers of the increase in the NOI for the Q4 were higher occupancy and higher sales. Our operating profit margin is 150 basis points improvement to 70.6%, which we continue to believe is top of the industry. Just want to give you a quick update on Prime. We closed on August 30.
Operations and back office functions have been successfully integrated. The rebranding of the centers for Prime Outlets name is complete and the portfolios continue to perform better than we expected. Occupancy for the properties was 95.4 percent at year end versus 94.7 percent at ninethirty. Sales were $4.23 per square foot at twelvethirty one versus 406 per square foot at 9:30. Capital markets quickly, we closed in the 4th quarter 4 new mortgages totaling $662,000,000 at a weighted average rate of 4.47 percent and a weighted average term of 9.5 years.
December 31, we had approximately $1,100,000,000 of cash on hand including our share of JV venture cash, joint venture cash and our availability on our corporate credit facility was $3,000,000,000 for a total liquidity position of approximately 4.1. We successfully and deployed profitably deployed $3,200,000,000 of cash in 20.10 to grow our business through acquisitions, 10 to grow our business through acquisitions, redevelopment and new development and strengthen our balance sheet by deleveraging and lengthening maturities. Development quickly again, we completed expansions at South Shore Plaza, The domain Houston Premium Outlets and Tokai Premium Outlets started construction on new premium outlets in Meramec, New Hampshire, South Korea and Malaysia and opened 2 shopping centers in Italy. In addition, we completed more than 35 AnchorBig Box replacements all in 2010. And we have been very successful in our efforts to re tenant department store and big box spaces and have 30 new approved anchor or big box stores with openings scheduled in 20112012.
Construction has or will commence in 2011 on 6 significant redevelopment projects, including Fashion Mall at Keystone in Indianapolis, Las Vegas Premium Outlets, South Pheasant Lane Mall, South Dale Center, South Ridge Mall and the University Mall in Pensacola. We have also reinstated our modernization program and have projects planned at up to 18 malls over the next 2 years. During 2011, projects will be completed at Coddington Mall, Fashion Valley, Great Lakes Mall, Orlin Square and Plaza Carolina. Our 20 11 budgeted capital spend on new development, redevelopment and modernization projects in the U. S.
And abroad is approximately $500,000,000 Details on cost returns and timing of the projects of course are provided thoroughly in our 8 ks reporting package. Guidance, let me just talk about that for a second. We provided 2011 FFO guidance of 6.45 dollars to $6.60 per share at the midpoint of the range. This would represent growth of approximately $0.50 per share or over $175,000,000 of additional FFO in 2011 as compared to 20 170 $5,000,000 of FFO on an annual basis. So 1 year of growth and we are beating that number.
So I'd also like to point out we expect 2011 to result in an all time high for SPG in terms of its earnings and given all the capital raising and balance sheet activity that was completed in our industry over the last couple of years, I believe that we are one of the few REITs that can make that statement. Before I open it up for Q and A, I'd like to just add a few including comments and just give you the following thoughts. First of all, some of you have mentioned concerned about our ability to continue to grow in light of our current size and certain transactional outcomes. Let me emphasize, we are not concerned. No one in our industry has done a better job of growing their business than we have through good and bad economic cycles and I don't expect that to change.
We are aggressive in our pursuit of opportunities to profitably grow our business. Our financial strength affords us the luxury of pursuing transactions that most of our competitors cannot even contemplate, and we will continue to pursue opportunities that could enhance our franchise. We've also demonstrated discipline when the opportunity ceases to make sense for us. We can and will walk away. We have been excellent stewards of shareholders' capital having successfully completed $28,000,000,000 of acquisitions since our IPO in 1993.
And during that period of time, we've delivered on average an 18.4% return to our shareholders. In addition, let us not forget that we did close on a $2,300,000,000 acquisition of an outlet portfolio just 5 months ago, the largest real estate transaction completed in 2,009 2010. And speaking of the outlet business, there's been some market shatter that we should spin this business off or somehow break up the company. And let me just give you these following thoughts. The multiple platforms of our business are very synergistic as they enhance relationships, result in cross fertilization of tenants and lead to the best use of development land among other things.
I think this is best illustrated by sharing some numbers from our outlet business pre and post the Chelsea transaction acquisition in 2004. As we will recall, as a standalone public company, Chelsea was very well regarded by The Street and considered a best in class performer. In the years prior to our acquisition, Chelsea delivered an average comp NOI growth of 5% per year, average growth in base rent of 2% per year and positive releasing spreads of 13% per year. All of this was done with a corporate overhead spend of approximately over $50,000,000 We have now owned the portfolio for 6 years. And during that period of time, comp NOI growth has accelerated to 7.5% annually.
Average base rent growth has grown 8% annually and re leasing spreads have averaged a positive 32% annually. We've developed 11 new premium outlets in the U. S. And abroad and expanded several more. We have introduced many new retailers to the outlet sector.
We have increased sales at the center by enhancing the actual product, physical product and the tenant mix. Gross EBITDA of the portfolio has grown a factor of 2.7x since the acquisition, frankly a remarkable feat in the real estate industry. And our outlet business overhead, about half of what it was 6 years ago. The value creation from Chelsea acquisition speaks for itself and this is attributable to the management expertise we brought to the business as well as the resultant synergies and income and cost savings that we brought to the platform. And let us not forget that our regional malls delivered sector leading NOI growth during this period of time.
With the addition of Prime, we expect our outlet business to continue to grow and be synergistic with our other platforms. As we have said in the past, we've considered ourselves a retail real estate company and not just a mall company. We have articulated a well developed and thoughtful strategy 17 years ago when we went public to own highly productive high quality assets all along the retail real estate spectrum. We have stayed true to that strategy and it's continued to serve us and it will continue to serve us well. And finally, I'd just like to say we are more than happy to stack our record up as a public company against anyone and we're very excited about our prospects for 2011 beyond.
And with that said, we'll open it up for questions.
Thank And our first question will come from the line of Quentin Belay with Citi. Please proceed.
Hey, good morning. It's Michael Bilerman here with Quentin.
We're honored.
Thank you. David, I want to go on just on those comments about being a retail real estate company. I can remember back to that initial merger call that you had on the Chelsea deal and I think you build yourself at that point. That was the first time of saying, I'm we're a retail real estate company. And I think it came up on that call of how do you view the shopping center business, which you have a few $1,000,000,000 in the company today, but how do you sort of see that fitting in?
And with more limited opportunities on the mall side at least domestically and already fully consolidated in the outlet business, how does that next leg either grow or contract within the overall scheme? Well,
interesting question in that it has not been a growth for us, but there is benefits to being in that business because there's still a significant amount of cross fertilization with the retail community. So, in that sense, it's important to have a leg in that business. Additionally, the vast majority of those centers are in mall right near malls, adjacent to the malls that we own and or in markets that we have a strong synergistic. We've never been that synergistic. We've never been that excited about growing it through acquisition.
I don't think that's going to change other than there may be a couple here and there because of our regional fit with a center might make sense. And we also view ultimately it does provide us some optionality if we ever anything anything if you'd like to.
The only thing that I would add is that we have certainly been opportunistic in that business and built a number of shopping centers that were incorporated into other projects we've done. And that's another important reason to keep that expertise within our platform, so we can take advantage of whatever development opportunities present themselves.
And I think David the comments about that spinning off the outlet business, I think when people look at your multiple and your multiple is below that of shopping centers and the loan outlet company that's there, and you're trading in line with regional mall peers, there seems
to be a sum of
the parts value that's not being captured in your valuation.
Well, look, all we can do is continue do what we do. I think if anybody should be given the benefit of the doubt is us. I mean the numbers that we were able to produce with the outlet business as part of our franchise are unprecedented in real estate. And what can I tell you, we'll continue to do what we do? But I don't see that business standalone being able to produce the results that it can as part of our company.
Just one last thing on capital shopping centers. After the vote, I think CEO David Fischel is quoted in the press as saying he was glad that the distraction is over referring to Simon. So I guess even though he got a better deal for his shareholders, it didn't matter. As you as a shareholder now or still can you just comment about what you're going to do with your stake?
Well, let me I wrote one of my friends in the industry sent me a bunny. Have you ever seen these bunny movies? They're basically they're done by little CSC that I thought I would just share because CSC that I thought I would just share because it was there's a lot of press and with the takeover panel rules, you can't really talk to the press and the analytic community about it. So if I could, I'd like to just address it in totality and this will be I hope I can do it in 30 seconds, but you can go on YouTube and do Bunny movies and pick your favorite movie and you could probably watch it in 30 seconds. In any event, and I'm not that's not paid advertising by the way, I have no idea who does Bunny movies.
But we let me give you my 32nd summary of CSC. First of all, we've been a supportive passive shareholder for 3 years despite their underperformance. We always considered our stake as an option if and when they decided to sell. The Trafford sale, we thought had 2 problems, price and structure in terms of issuing shares at a discount, which handed control to Whitaker. We asked them to restructure the deal.
They wouldn't despite the market's poor reaction of the deal. Based on our view that they were handing control to Whitaker, we decided to make an indicative offer that was subject to due diligence. We would have never bought the company without due diligence. Management refused to provide due diligence regardless of whatever takeout price we would have come up with, which reinforced our view that they were completely entrenched. They responded with a restructure of the Trapper deal, which we forced, put out a ridiculous indicative value range further demonstrating management's focus on entrenchment.
CEO in the press said that we were a nuisance even though our presence forced a better deal with Trafford and benefited their shareholders. Chairman said that the shareholders are one of many things they consider as fiduciaries, but not at the top of the list. We never made a firm bid. Company relied on South Africa's shareholder base, which has many different agendas given they're wanting exposure outside of South Africa. And we're looking forward to them reaching their indicative value of 6.25p.
Sounded like more than 30 seconds, but in a nutshell, that's our view of CSC.
So you sold your share or you kept your
share? We continue to own our shares at this point.
Good morning. Can I just ask one question just in terms of occupancy cost ratios? Obviously, some of your peers have had a big focus on where their occupancy cost ratio is and how much upside or otherwise is in their portfolio. So can you give us and break out the mall and the outlet occupancy cost ratios for the year end December 2010?
We have them, but we don't break out those statistics. And Rick is pointing to me the number for the combined portfolio is 12.9% at year end 2010 and year end 2009 it was 14.1%. Got
you. Okay. Thank you.
Thank you.
And our next question will come from the line of Paul Morgan with Morgan Stanley. Please proceed.
Good morning. Funny movies, I didn't see that coming up on this.
We're trying to liven this up, but if you've watched them, they're actually kind of funny.
Well, I'm going
to have to take it out, I guess. On the guidance, I mean, any can you give any more kind of details, some thinking about kind of way you might think NOI or lease spreads and occupancy evolving over the course of the year?
Well, I think it's our nature to obviously the Milton Cooper view of the world is certainly our view. I would say that. 2nd, the comp NOI growth that we are looking toward this year is comparable to what we had in 'ten. We do have this $0.05 problem with Opry Mills. So it's not a huge thing.
It's a temporary thing. We do expect build rebuild that center and get it not for 11 though. We hope to get it done by early 12. And look, I mean, in 'ten, we had some benefits of bad debt expense and so on. But I think we're looking for a similar number.
Yes, because on the lease spreads, if I look at the kind of your, I guess, what mall and kind of Chelsea expiring rents at $33 this year versus what looked like kind of $38.50 last year. Is there anything that since we're not is there any reason I shouldn't believe that your spreads are going to go up? Or is there some non comparability of kind of the type of space that is expiring in 'eleven versus 'ten?
No, I think we're moving in trajectory for 11, I think in the right direction about spreads. So I don't think there's anything unusual there.
Okay. Paul, this is Steve. I'd just add a couple of comments. David mentioned bad debt. We had literally no bad debt experience or bad debt expense in 10 for a company with $4,000,000,000 of consolidated revenue.
I wouldn't expect that to recur in 'eleven. I also think we have as David, I think mentioned in the call text, we improved our margin 150 basis points this year on top of an improvement last year. Some of that was done at the operating expense line for sure. And I don't think that level of savings at the operating expense line is going to recur in $11,000,000 And then the last thing I'd mention, while it's not part of the comp NOI, if you look at the other income schedule in the 8 ks, we had a lot of lease settlement income in 2010. And we're just not planning for that to recur in 2011.
We're looking at a more historical level.
Okay, great. That's helpful. Other question just maybe for Rick. As you're talking to retailers about 2011, I mean, how often and to what extent is their concerns about margin compression coming up in rent negotiations? And is this I mean, do you see this being how much of a headwind do you see this being as that starts to bite later in the year?
The rent negotiations with retailers haven't changed in 30 years. They're going to seize upon whatever facts are currently out there to argue for lower rents and we're going to seize on whatever facts we can to argue for higher rents. And right now, we're still seeing firming demand. There is very little new development to the extent that the retailers are looking to grow and an increasing number of them are given their cash flow generation and the profits. We're going to hopefully have an ability to increase our rents as our occupancy moves up.
But that is certainly something they are focused on and legitimately so it's out there.
So you think it's just kind
of too early to get a
feel for how it might play out?
Yes. I believe that they're going to have to deal with that on their cost of goods sold side of their margin, and we're
And our next question will come from the line of Christy McElroy with UBS. Please proceed. Hey, good morning. I am on the line with Ross as well. We've seen a few more department store closings and floor plate reductions in the last 6 months or so?
And then with the changes at JCPenney and Dillard's, you have investors speculating about monetization of real estate in the department store space again. What would you say your appetite is for getting space back today just sort of generally speaking? I know every situation is different. And can you provide sort of your general thoughts about department store consolidation and expansion over the next few years?
Well, let me unpack it. 1, as David mentioned in his comments, the demand for our anchor and big box spaces is accelerating. If you look in our 8 ks, we've listed all that we've added. We had a very robust program in 10. We've shown you in the 8 ks those that are currently totally nailed down for 11.
We have almost double that amount in the pipeline. And when we're if we get spaces back, we're going to be in a position to bring in a number of retailers, and we've demonstrated a pretty broad array, including Bed Bath, Best Buy, Target, Kohl's, theaters, health clubs, there's a lot of demand for space. Again, there's not a lot of new development. I don't know that I would agree with your categorization of announcements, Macy's on their entire fleet, I think, announced 3. Penny announced 6.
And these are minimal closures and very much reduced from the percentages of store fleet that we were looking at several years ago. So we really don't see that coming down the pike. May Macy's consolidation, Lord and Taylor, Parisian, and we make them better.
Yes. I just would add that I don't think there's any market at all that we're a self managed I have no inside knowledge of this obviously, but I don't think there's any market
at all about a self managed,
go access the public markets. I don't see that happening.
And then just Rick following up on your comments with regard to the $500,000,000 of spending that you're projecting in 2011 on development, redevelopment expansions. What kind of returns are you underwriting?
We're hoping that we're going to get in the low double digit, high single digit over all that.
Okay. And then I think Ross has a question as well.
Yes. Hi, guys. Good morning.
David, when you think about external growth opportunities, how much more closely you're going to be looking at the JVs within your existing portfolio and buying out potential partners that would seem like a easy potential avenue of growth for you?
It can and has been historically. And we're it's a function of price and value and we did some of that last year. Ross, as you know, Houston and unfortunately Opry, that's a little unlikely with Opry, but and the Great Mall of the Bay Area, which is a very good asset. So I do think there's opportunities there with time and wouldn't surprise me.
Why if I understood this correctly, why isn't there business interruption insurance at Opry?
There is, but we're in the middle of a dispute with the insurance company. So we took a conservative approach to it.
Understood. Okay. And then finally, your Italy JV debt is coming due later this year. What's the game plan there?
Well, we've got enough value, equity value and coverages. We'll likely just simply refinance it.
Thank you. Sure.
And our next question will come from the line of Jay Haberman with Goldman Sachs. Please proceed.
Good morning, everyone. David or Rick, on just touching on the leasing spreads again, I know you've seen the rebound in tenant sales, but do we need to see the retailers expanding again to really drive the spreads or can you comment a bit on it? Do you think it's sales alone that can drive higher rents?
It should ultimately. I think again, and it'll get still a little bit of the property type where the demand is. But certainly, sales moving in the right direction help. The demand at the better properties is obviously fueling that. And hopefully with the economic stability that seems to be in the system, I think the more moderate centers will have the ability to flatten the rent.
We did, there's no question we had a handful centers that actually had negative rollovers due to the economic scenario. And we're starting to see a little bit more stability in that lower group of centers. So and that will be important because that does have some impact on our spreads.
Okay. And then you mentioned obviously the firming economy, but as you think about external growth, you rethink U. S. Strategy versus looking internationally?
Well, I think we've got a lot to do in the U. This year. We're very excited about all that's going on with the properties in terms of redeveloping them, transforming a number of them, we are really busting hump on that effort. So I'm very pleased with that effort and we're making tremendous inroads. I mean a couple that frankly, a year ago, I didn't think we had a shot at them and we're going to start this year.
Couple of them are Mills malls, which include South Dale and Southridge. So I think the effort is really I've been really happy that we're really pumping on that front. So we've got plenty to do there. And Jay, the bottom line is we'll always look both domestically and internationally, externally. We don't need to do anything to do a deal for deal sake.
There's no one that's done more deals than us. Yes, we haven't always gotten the deal. Sometimes we didn't get it because we didn't want to pay more and sometimes we didn't get it because we were dealing with entrenched team and we didn't think it was worth a scorched earth tactic to try and get it. We felt we'll find if that's what you want, we'll move on. There's nothing that can keep us from growing, don't have to do deals.
We got plenty of properties here to make better and we're very focused on doing that.
Okay. And then just in terms of dispositions, I know it was asked earlier about shopping centers, but as you think about some of your B malls, do you see pricing as attractive and I guess given the capital that's out there today?
Well, I don't think it's come yet, but it seems to be maybe around the corner that some of those assets, some of that market might be there. So I think 'eleven will be a developing year in that area. I think like many of our peer, I'm sure there's going to be a focus on narrowing the focus a little bit by calling the property portfolio. We'll participate in that, but we want to see a little bit more firming of the values in that category and not yet, but it seems to be headed in that direction.
And just finally on the Gap, I know there's a new executive, do you see any shift in strategy and I guess what sort of conversations have you had thus far?
We have constantly monitored their performance for a very period of time. They have been a net loser of square footage in closing underperforming stores. It's obviously a big relationship, one that we are incredibly focused on at David and my level and spend a great deal of time on it. We obviously hope for them to be as productive and as good a retailer as they can be because that only helps our properties.
And look, all I can tell you is that the their outlet business has been extremely strong. So with the new executive running the GAAP, I think that's obviously a positive, at least based on what we've seen in out of the outlet business.
Thank you.
Thank you.
And our next question will come from the line of Craig Schmidt with Bank of America Merrill Lynch. Please proceed.
Thank you. In your supplemental, you mentioned that 2 centers are being demalled. Could you describe those efforts?
Sure. 1 is University Mall in Pensacola. We're basically going to create the box environment with Sears and Penney as our lead anchors continuing to be our lead anchors there. The other one is in Nanuet where again, we will be demalling that and bringing in more of that kind of the higher end retailers, still will be anchored by Macy's and Sears. We would hope to bring a high end food provider, supermarket essentially and some of the better specialty tenants.
And do you have a sense
of what returns might be on that demodeling process?
They'll both be double digits. I mean both of these are basically producing negative or de minimis cash flow right now. So if we look at the incremental investment based upon and the return now, I think they'll both be double digits.
Great. And then I just I had a question, if you had any feedback from your BlackBerry and iPhone apps for the malls and where you might be going with that program?
The feedback has been encouraging. Obviously, they're relatively new, but that certainly is a very significant focus and highlights one of the remarks David made in his initial comments, we are uniquely positioned to be able to dedicate both the human and the financial resources to the sector leading in this. I think we have done so historically and we are committed to do so in the future. It's a highly important component of how we manage market and maintain our properties and we're going to be devoting increasing time and money to introducing even more programs in that regard.
And I would just say that people that do follow us on social media, on the social media side are our best customers. They really like the fact that we're able to talk to them about promotions and offerings from the retailers. And it's really influencing some behavior. So this whole area of basically trying to our vision here, just like we had the vision of being a retail real estate company, our envision with the mall is to really turn it into a smart box, one where technology can enhance the shopping experience, create more efficiency out of it. And I think we're just on the cusp of that.
We're working with a number of retailers that see the same vision that we do, obviously trying to put all the retailers on the same platform. If you think about the mall in a sense, what makes the mall great, it's all the retailers together in one platform. In that case, it's the physical. We really want to move the mall environment from a technology point of view on that same platform as customers interface with what's going on in the mall. And it's going to take time, but I think if we can show that value to the retailer, then by creating that platform, it's going to enhance the shopping experience for the consumer, and that's what we're after for sure.
Yes. I guess I was also interested because I read that 6 times the amount of Internet sales were purchases that were influenced by the Internet, but still done at bricks and mortar.
There's an undeniable link. I think the movement toward from your desktop to mobile is a great opportunity for the physical based environment to take that mobile and enhance that when they're walking the physical or adjacent or near the physical environment. So the fact that they've gone mobile and moved toward mobile, if we can bridge that to the physical world, I think it's got a lot of benefits for us. As an industry, it's not just us, but we're going be pushing it hard.
Okay, thanks.
And our next question will come from the line of Alex Goldfarb with Sandler O'Neill. Please proceed.
Good morning. Hey, Alex. Just circling back
to capital for a minute,
just to help us sort British and the South African shareholders were saying? Were they more like as you would talk to them, were they more NAV we're not sure where we're going to reinvest the proceeds and therefore we'd rather just hang on to capital rather than having to deal with trying reinvesting. What were the big themes?
Well, I think you got to really the U. K. Shareholders were very similar to what I would say that U. S. Shareholders look to.
So there wasn't a great difference there.
And
we again, I mean, our feedback from the UK shareholders was that this we were they were disappointed that the company wouldn't give us due diligence to decide whether or not we wanted to make a firm offer. And I think the U. Have a very similar mindset to the U. S. Shareholders and they viewed the Trafford deal in many respects as a change of control and they wanted to look at their financial options.
The South African shareholders essentially started that way and but they were also highly influenced that there is an exemption that they get by
owning
by owning capital shopping centers. It's exempted from the limitation that they have in terms of being able to make investments outside of South Africa. So there was some of that. On the other hand, some were more clinical. Their mood ebbed and flowed, but clearly having exposure outside of South Africa was important to a number of them.
Okay. And then just moving to the Great White North, if
you guys work You mean Indianapolis.
Exactly. Well, we certainly have our fair share of snow here out East, but it sounds like you guys got a doozy out there. As far as Canada, what are the I mean, obviously, Kimco entered there a while back and obviously there's been another announcement more recently. What do you think the challenges of entering that market and why do you think we haven't seen more U. S.
Retail REITs head up there? Is it just the returns? Is it trying to get land? Is it maybe something in the leasing environment that it's a little bit different than here? What are the challenges for up there?
Look, I think frankly a number of retail REITs were just focused. The last couple of years have not been easy, right? So I think it's more of that. I think the Canadian market certainly has developed more of it's more of an interest to our U. S.-based retailers than it's used to be.
But it's not huge. I mean, they're not a number there's not it's not pervasive. It's not every U. S. Retailer is up there, but it's growing and growing.
And so I think it's just other priorities, Alex, primarily. I think demand has improved. And then ultimately, I would just say just from our perspective because we've reviewed the market for on and off for a number of years, finding the right site at the right value is not overly easy. And there's and you want to go to you want to start if you're going to do it, you want to start in Toronto, so to essentially would be the best place to start. And it's just not a lot of great sites at appropriate values to justify it.
But it's long term, I think it's a good market for potentially future retail development, including outlets.
So as far as returns, would you underwrite Canada to be this is it the same returns as the U. S? Is it lower returns? Is it higher returns that you would want to take?
I think land value there will be more expensive than land value here in the cities that you would want to build outlets in. And rents may all be able to offset that. So you may end up with similar returns.
Okay. Thank you. Thanks.
And our next question comes from the line of Ki Bin Kim with Macquarie. Please proceed.
Thank you. So I just had a couple of questions regarding your leasing strategy. So in light of sales kind of sales per square foot increasing towards $500,000,000 in conjunction kind of little occupancy costs, how Can you give us a sense of how quickly can the occupancy costs go back to historical levels? And when you're sitting with a tenant and during lease negotiations, do you typically find or have in the mindset to find a rent status like 15% occupancy cost? Or do you actually embed any future growth in tenant sales?
Let me just answer the first question. Obviously, we would very much hope that they are going to continue to move up, but we have a very nice problem in that our sales are growing at 9.4 percent a year. Don't forget, we only roll a certain percentage of space every year. So it takes some time to make up that ground when you have good sales growth. In terms of our negotiation, every negotiation we have is driven by what's the quality of the mall, what's the type of tenant use and what is the quality of the space within that mall.
And those three things drive how we price our space and we are constantly trying to get the appropriate market rent. When tenants complain to us that our rents are too high, we point out that we don't set the market, the tenants do. And if you look at our occupancy, obviously, there are people that still believe they can make a lot of money at the rents we're charging. We're going to constantly keep pushing that rent. And the other point I want to make because David emphasized this, all the capital we're spending in our portfolio, renovating properties, modernizing them, adding anchors, adding department stores, expanding them are only making our properties more valuable to the retailer because they're increasing the total sales we have and the productivity of all the other tenants.
So not only do we get the returns that David talked about, but we get the incremental benefit of having a much better shopping environment going forward as we go to re lease space rolling over there.
And I've got a follow-up. So in your same store leasing stats, you mentioned that the uptick in leasing rents per square foot is $2.21 in the same space. What is that in a percentage term? And last question, is your guidance for 2011 lowered by the impairment charges that you expect in Opry?
It is lowered. It's not impairment. It's basically we're it's really we're incurring interest expense with no income, okay. So we have no cash flow right now at Opry Mills. So it's not an impairment sure how much of the same what percent of our leasing spread or leasing data is just same space.
Is that what you're asking?
I think in your opening comments, you mentioned that the leasing spreads, the positive it was positive $2.71 or so. It's all for the same space. I was just wondering what that means in that percentage term?
Well, yes, all we same space is actually literally this space, a lot happens in malls where you our spreads as we traditionally have done it is just ending versus new in totality. We try to to narrow it down. I don't know if we have the exact percent of what same space is, but we certainly can get to that to you as a I don't have that in front of me.
And, Pramod, last question. Can you disclose what the tenant sales per square foot was in the quarter, not 2010 or not 20 yes, not 2010?
Well, it is in the what's the it is
Not the average for the year, but for the quarter.
You mean the quarter over quarter, the sequential growth
in the 4th quarter, it was 9%.
Okay. Thank you.
Sure. And our next question comes from the line of David Harris with Gleacher and Company. Please proceed.
Hey, David. What else can I say but touche?
We want a retraction.
That's a high price to ask. Dollars 500,000,000 of development redevelopment is a pretty small beer on a company with a $60,000,000,000 gross asset base. Any comment there as to where you're going in the next few years?
Well, that's what makes us unique as we still care about a 500,000,000 dollars So, look, again, remember, just take a step back having lived through 8, 9 and a good chunk of 10, we just have geared up on this. And so to create the deals that we're actually going to be able to spend that money when it takes some time to get that going is not a small feat. And as Rick said, it is going to produce incremental NOI growth. That's not insignificant. So in the scheme of things, it may not seem like a big percent of our total asset base, but it is extremely cash flow positive plus all the other residual benefits of making a property better in the long run is very, very important.
And I would hope that with time, we could crank this up. But it's a very, very good solid start to having essentially just rejuvenated this program in kind of mid to really in the fall I'm sorry, in the early spring of 'ten. So it's a good start. What the number is? I think it's going to be up to how creative it will be, and I can't pinpoint it other than we've got a lot on the drawing board that we're hopeful about.
And I think we'll just see where it takes us.
Is it typically a sort of 12 month lead in for this sort of stuff?
It does, especially if you're trying to secure anchor involvement in
it. And or get entitlements.
Entitlements are not they're not easy to get even in today's environment.
Okay. I've got a question for Rick. I looked at the TIs, Rick, in the 8 ks and compared them to where they were for the 12 months ending December 'nine. It looks like there's a pretty sharp increase. Is there important happy fact is that we've leased dramatically
more square footage. And as we are doing more and more deals, we're spending a little more and more allowance. But when you look at that number, it is on a per square foot basis pretty consistent.
Yes. David, this is Steve.
The only thing I'd say that might tweak that a little bit, Rick and David both alluded to it earlier, we're doing a ton of box activity, where over the last some as well. But I think Rick's right. If you just think about the ordinary regular 7 to 10 year lease, the economics of that in terms of what the tenant allowance is hasn't really changed.
And the box, just Steve, is that higher or lower?
It's probably lower on a per square foot basis, but dollar amounts there because they're bigger spaces, it's more money. Okay. And if you look I think Steve is 100% on, if you look at probably 'nine box activities, 'ten, you'll see the dramatic uptick.
Okay. One quick final question for you, Steve. Nice bond trade in 'ten. Any chances of replicating that as we look into 'eleven and the refinancing market?
Well, I mean, David, I would say this,
I hope so. But if
you recall, by virtue of the 2 tenders that we did in 'ten, we significantly cleaned out our bond maturities in 'eleven and 'twelve. And fact, we've got under $400,000,000 a year coming in each of those 2 years. So we can be very opportunistic. We certainly are looking at the market. We're paying attention to it.
But the activity that we'll do in the bond market in 2011, if any, will be opportunistic.
And run a slide rule over converts at all?
I'll see it right now.
Yes, I confess that maybe the single largest file I have in my office because of all the banking brethren sending us proposals, but I don't see it right now.
And our next question will come from the line of Carol Kemplay with Hillard Lyons. Please proceed.
Good morning.
How are you doing?
Good. How are you all?
We're doing great.
I was just curious why
did other income fall year over year?
Well, you had a couple of things. You're talking about looking at 10% as opposed to 9% and are you looking at it on 9% to 10%. Are you looking at it
on a full year basis? Quarterly
on the
income statement. Quarterly on the income statement. It was lease termination income in the Q4 of 2009.
Okay. And then what new retail what retailers are wanting more space at this point?
Well, the ones that are particularly active now are like Love Culture, Gymboree is rolling out Crazy 8, Encore Shoes, Pandora. We're doing a lot of business with Sperry and Stride Rite that are divisions of Collected Brands. Route 21 and Forever 21 remain very active. And happily, we're also spending a lot of time with the restaurants. So we've got a number of California Pizza Kitchens opening in the portfolio and Red Robin's.
And we've also been active with Ann Taylor and LOFT. So there's a very good core group of retailers that are still looking to aggressively grow.
Okay. Thank you.
Thank you.
And our next question will come from the line of Nathan Iffy with Stifel Nicolaus. Please proceed.
Hi, good morning.
How are
you? Just going back to Prime, you've had a full quarter under your belt here.
Can you just
talk how much NOI growth potential you see out of the portfolio, both in 2011 and maybe over the next few years?
Well, I can tell you that what we were going to exceed our underwriting.
And what was that?
Well, Kamal, these are tough questions.
Well, Nate, we told you it was a going in 8% cap.
We're going to exceed our underwriting. And I think the remerchandising success that we've had with our other outlets will take some time, but we would hope to get it are with our other outlets. So we see that opportunity for sure.
I mean, are you looking at 5%, 7%, 10% growth in 11% from that?
Well, certainly from our underwriting, we're above 5% and probably close to your other number.
Okay. Thanks. And then looking back at the recent holiday season, a lot of talk was about strength coming out of the luxury and the higher end retailers. Can you talk about how that's playing out in
your portfolio?
We've seen the same trends. Obviously, some of that was just a function of rebounding off of depressed levels in 2009. But clearly, I just saw Estee Lauder reported yesterday and their better brands had better performance than their more moderate brands. And I think you can see that across the landscape that the better consumer has come back stronger, and we're seeing that as well in our properties. The other thing that's been very apparent in our properties is that the centers that benefit from tourism are being incrementally benefited with above portfolio sales growth because the tourist is back substantially and that obviously is also helping.
All right.
Thanks. And then just quickly, when you talked about Canada having reviewed it, I'm sure you've been focused
on it for a while.
How many centers do you see the country being able to support in terms of the quality of Chelsea type of center?
On the outlet side, yes. It's hard to say. I think the bond mills has been successful. So I do there as an example. Obviously, I think getting 1 or 2 built in kind of the major markets, there are not many, but if they're there, that's got an option.
I mean, it's hard to say, but certainly more than a few. And it really a lot of that just depends on couple go and whether they produce the results that they do. Now, the fact is the Canadians with the strong dollar love to come to the U. S. To shop.
And I do think that still is an opportunity for them that may limit some of the potential growth just because they do have that advantage visavis the U. S. Dollar.
All right. Thanks.
Sure. And our next question comes from the line of Jim Sullivan with Cowen Group. Please proceed.
Thank you. Good morning. Good morning. I have two questions for you. First of all, on the same store NOI outlook, when we looked back at the prior cycle and I'm talking about a cyclical rebound in the economy post 2,002 And it was pre the premium acquisition and the converging all the sales productivity was fairly comparable over that period of time, the sales productivity growth.
I know there was a significant contribution from the growth of specialty leasing, the RMU phenomenon and but looking at where you are now historically, if we think about the cyclical rebound in the economy and retail sales, is there any secular
the answer to that is yes. And it's primarily because the shock to the system this time around has been dramatic and it's impacted the consumer probably psyche more than the last downturn. And I think it's just going to take it's going to be a very gradual ramp up. And the employment side is probably more tenuous here. Though the better income side, the difference here though, the better income participant in the economy is more employed than maybe the last time around.
But I just think the shock to the systems a little bit, there's a more uncertainty coming out of it clearly than there was last time. So I would be a little more cautious. I don't think there's anything fundamental in the supply and demand scenario or anything else out there that could keep that from happening. But I just think the size of the economic dislocation here has been so great and there's still a lot of uncertainty. You've got state budget issues, you've got the municipal market.
You still got employment. You got inflation may or may not be here. So there's just a lot of noise here that I think may keep that may keep the recovery more muted than it might otherwise be.
Okay, fair enough. And the second question to really revolves around the a lot of commentary about department stores and underutilization of department store pads. So you addressed the one solution to that, which is the spin off leaseback alternative. Other people have talked about monetizing the square footage by converting the use to something else. And the question I have and it really is, I guess this is partly a legal question, but the presence of operating covenants and reciprocal easements, doesn't that mean that any monetization of those pads that involves a conversion of use has to go through you guys?
Yes.
Have you had any discussions with any of department stores on some of those underutilized underproductive spaces?
They're look, The company that has been making certain efforts in that regard has been Sears, where they've done a couple of areas where they've been able to do a partial use in part of their space. But again, as David alluded to earlier, the single best profitable use for these boxes is as a performing department store in a chain. If you put the multiple of EBITDA on stock price, it usually dwarfs the real estate value of that box for any other use. And I think that's why you've seen historically over time relatively few closures and why you see stores working now that the environment is more stable, working to find new opportunities to build stores. And we are going to hopefully have a number of announcements over the next 6 months of department stores being
And I And I would just say, Jim, the biggest discussion we have with them is what price we're willing to buy it and what price they want to sell it. They don't want to be very few of the certainly the department stores want to ultimately be in the development business. And that's where most of their boxes, if they're connected to a mall, they end up being in the development business. And that's not a core competency. And in many of those most of those cases, they're selling it to us or some other developer.
And the landscape frankly is littered with some bad deals where they sold and developers tried to buy it at certain prices and they didn't get the right value. We have not had that experience. We've actually been pretty good at what we've bought and being able to recapitalize on it.
Good. Okay. Thank you. Thanks.
And our next question comes from the line of Bin Yang with Keith, Bruin and Wu. Please proceed.
Yes. Hi, good morning. Good morning, Bin. David, I have a question on the domestic outlet strategy. Clearly, the space is getting a bit crowded.
And it's kind of interesting to see what's happening in the Houston submarket with you, Tang or maybe even Taubman competing to get an outlet center built there. And since we could see this happen going forward, can you talk about how retailers evaluate the different opportunities that they have? Is it based on rents and location only or is there anything else that might differentiate your site from say, Tanger's?
Well, I don't want to speak for the retailers. But let's assume, I think they I'll say it very generically. They tend to go where they think the best site and or development is going to take place. And I'll leave it at that.
I mean, is it going to be similar to what we saw with the lifestyle centers where they tend to move as a group? And once you or Tanger has some of those key tenants, then it's pretty much a done deal on which site
also sometimes sensitivity plays a role into it certainly in the outlet side with respect to where their full price stores are located. So it's kind of location development and they're certainly part of that when you get the momentum in a deal, the retailers see that and then they tend to go where they think the development is going to get done. But a lot of it's the site.
Okay. And just final question on
But I will say this, I think, I don't think you'll see, I think we're all very experienced developers. Houston, as a good example with Taubman and Tanger and us, we're all looking in kind of a submarket. I think we're all very competent developers and my guess is whoever is successful, there's not going to be 2 of these. They'll ultimately be 1. And so I don't see it so much like the lifestyle group where you had a bunch built because there was so much money.
I think the guys that are in this business time. I don't see that happening.
Okay. And then at what point do you guys potentially bail on a project? I mean is the high single digit return still satisfactory for you guys like a Galveston project? Or is that too low given what you've gotten in the past?
I think it be too low for us from a development point of view. I'd still if we're not in the double digits, we would not bill.
But fair to say that lower than like the mid teens that you used to get just a few years ago?
Well, it might be lower. We tend to look at most of our new stuff in phases. So the initial phase could be the low double digits and then ultimately if we build phase, we're in the mid range But there is more competition, so it may have some impact on that. But again, if we felt like we're building below low double digits, we would not build.
Great. Thank you.
Thanks.
And your next question will come from the line of Michael Mueller with JPMorgan. Please proceed.
Yes. Hi. Just a couple of quick ones here. On the 6 major redevelopments you're talking about kicking off this year, what's the rough dollar cost of that?
Well, I think altogether, we're in the $500,000,000 range. Those will be again, it's a lot of this is going to be spread over 11 and 12. But if you were just to look at we don't really just I don't have those 6 right in front of me. We can certainly give that to you. But overall, when you look at everything, it's around $500,000,000 our share.
And is that the spend or is
that the total expected cost?
That's just for spend this year.
Okay. 11%.
And a couple of those clearly will have carryover in 11%. But we could get you those exact numbers. Okay. And then obviously those will be in our 8 ks when they start construction.
Sure. Secondly, on guidance, I may have missed it, did you mention what the occupancy assumption was to get to your same store guidance?
We did not. We decided to be less granular on our guidance this year than the last several years that you should not be worried about that. That doesn't mean that we don't have obviously all the confidence in the world of delivering that guidance, but we just felt like it was more important to look at the totality of it than any one particular statistic. But I think generally speaking occupancy is up marginally in our model.
Got it. Okay. And then last Sure, this isn't in guidance, but are you expecting to put capital to work in terms of acquisitions this year?
It's not in our guidance.
Yes. I'm sure it's not in guidance, but is it the expectation that you're going to be able to find some acquisitions this year?
It's you never know. I just would say to you, you never know. I'm sure there'll be opportunities, but we'll just see how the year transpires.
Okay, great. Thanks. Thanks.
And our next question will come from the line of Cedric Lechamps with Green Street Advisors. Please proceed.
Great. Thank you.
David, I think about a year ago, you talked about lifestyle centers that you had looked at probably about 3 dozens and you couldn't find the time any that were worthy of an investment. With the environment having changed the way it has, do you think that any of those or any lifestyle centers might turn out to be a decent investment going forward?
Yes, it's a good question. We continue to scour that land, that minefield of broken lifestyle centers. And frankly, we still are having a hard time finding a couple of crown jewels. Not to say there might not be 1 or 2, but Rick, I mean, we just haven't seen it. We just haven't seen it.
The demand there to go, you got Cedric, most of those are the ones that we look at are all in co tenancy, all have kick outs, and they all need lease up and they're just not performing. And some may be good long term real estate, but the demand frankly for those kind of centers has not, as far as we can see, has really not picked up. Rick, you
I think that's right. And if you the ones we've looked at, frankly, we've seen NOIs that are in the offering brochures and we underwrite it based on potential decreases in NOI because of sales levels and co tenancy, we're coming up with fractions of the NOI even in the offering book. Now maybe we're conservative, but we've got so much we can do at better returns in our portfolio, it's very difficult to take a reach and try and buy somebody else's problem. Okay, great. Thank
you. Sure. Thanks.
And our next question will come from the line of Tayo Okusanya with Jefferies.
Yes. Good afternoon. Most of my questions
have been asked, but just one quick one. In regards to 20 11 guidance,
could you give us a sense of
how much in regards to using excess cash to pay down debt is built into those numbers, whether it's the any outstanding debt in 2011 or any debt you may pay off early from 2012 or 2013?
Tayo, this is Steve. There really isn't any of that. There as I said, we have very little bonds coming due. And even our mortgage maturities, we're just essentially assuming that we're going to roll them over.
Got it. Okay. That makes that's helpful.
David, also I'm a big fan of the 32nd Bunny movies as well.
Yes. Which one is your favorite? James Bond. Okay. Well, you should watch Titanic.
I thought that was pretty funny. Thank you. Thank you. Take care.
And our next question is a follow-up question from the line of David Harris with Gleacher and Company. Please proceed.
You still speak to me, David. Early days yet, but new management at GGP out of bankruptcy, are you coming across them more as a competitive force in the marketplace or is it really just maintenance of the status quo?
I don't nothing really nothing that I've seen. Rick, what do you think?
No. Look, they're now actively leasing and they have direction. But candidly, last year and the year before, they were trying to actively lease as well. So we've competed with them for a very long time and we'll be competing with them going forward, and we intend to hopefully continue outperforming
them. We're happy to help them too if they need any help.
Okay. I'm sure. Rick, if you look back on the last couple of years, I mean, now obviously, we're in the new chapter for general growth. Did they is there any sense that you have that they really did get distracted and lost some competitive status in the marketplace? Or did that is that something we kind of view from 30,000 feet that we wonder about and operationally it really didn't make much of a difference?
I couldn't really tell you that. Look, the last couple of years, we were all very focused on a lot of exterior forces. We're just focused on trying to grow our business and really didn't spend a lot of time focusing on that.
Is it in the new concept area that you kind of more act as compared not only just with general growth, but also with the other big competitors in the space? Is it really on the new leasing side? Not obviously renewing existing leases in established centers that you're really going head to head with them.
Well, actually with General Growth, we have very, very little property overlap. And I think we mostly frankly compete with our peer group in the eyes of the analysts and investors. It's real the competition at the property level is overblown for any of us. We certainly I mean, we're all trying to get the fair share of retailers open to buys, but I'd say the biggest competition is frankly in the eyes of investors.
Okay.
Not so much day to day warfare at the property level. Sure, there's some malls that we overlap with a few of our peer group, but it's mostly at the corporate level, not so much on the retail day to day level.
Okay, great. Thanks for the reality check.
No worries.
And our next question comes from the line of Andrew Fenton with Credit Suisse. Please proceed.
I just had a global question for you. It's interesting on assignment calls, it always seems like the questions lead to acquisitions. And 2, you're kind of 2 large cap global peers, both Unibail and Westfield actually shrank their balance sheets through 2 different transactions, kind of in a view to increase their ROE. Have you ever thought of doing something like that?
Well, I think there was some reference to it about maybe we should spin this off or that off. We actually like what we've built here. We've had better growth. So I think part of the response that you may be seeing is that the growth profile of those companies may be different than ours. We haven't had that issue and we're also primarily focused in the U.
S. Whereas certainly Westfield has a couple of different footprints. So we don't we think we're different we're in a little different boat than those are. I do think, as we've said, we'll certainly look to sell assets over time if the market gets better that don't fit our long term view. But beyond that, we don't see any real change or need to given our growth profile.
I guess their pitch is you get some assets that eventually get mature and then you can get a much better return on the stuff that you have remaining redevelopment or potentially is NOI upside. Do you have any part of your portfolio where you feel like Simon's kind of worked it in and the upside isn't as big?
Well, look, certainly with the vast portfolio we have, we have a handful of centers like that. And like I said, I think if the market stabilize for those kind of centers from a value point of view, it's conceivable that we could sell more assets than we have. We've actually over the years been a very we've never been afraid to sell assets. So we've sold a couple of $1,000,000,000 if not more assets over our period of time. So I think if the market gets better, we'd certainly look to that.
I don't think that that necessarily needs to take the form of some kind of corporate restructuring, but it's always good to prune your portfolio if you can.
All right. Thanks for the time, guys.
Sure. Thank you.
Ladies and gentlemen, this concludes our question and answer portion of today's call. I would now like to turn the call back over to Mr. David Simon, CEO for any closing remarks.
Okay. Thank you for your interest. Obviously, we're 2010 was a really good year for the company and we expect 2,007 to be more of the same and you can or 2011, sorry, to be more of the same and our passion for the business continues. Thank you very much.