Good day, ladies and gentlemen, and welcome to the Q1 2010 Simon Property Group Earnings Conference Call. My name is Steve, and I'll be your operator for today. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Shelley Duran, Vice President of Investor Relations.
Please proceed.
Thank you. Welcome to Simon Property Group's Q1 2010 earnings conference call. 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 terms.
Acknowledging the fact that this call may be webcast for some time to come, we believe it's important to note that today's call includes time sensitive information that may be accurate only as of today's date, April 30, 2010. The company's supplemental information package was filed earlier today as Form 8 ks. The filing is available via mail or e mail and is posted on the Saudi 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 Sokoloff, President and Chief Operating Officer and Steve Barrett, Chief Financial Officer. I will now turn the call over to Mr.
Simon.
Hey, good morning, everybody. Thanks for joining us. We'll give you the highlights and then open it up for questions. First of all, we reported FFO as adjusted for the Q1 of 1 point dollars FFO after the loss on extinguishment of debt related to our January tender offer was $0.94 per share, dollars 0.09 above first call estimates. The impact of the issuance of 52,100,000 shares of common stock through public offerings and dividends in 2009.
In the Q1 of 2010, the impact to FFO per share of that Our retailers are feeling better about their business and the debt markets are strengthening. We're clearly seeing the impact of an economic recovery and it's beginning to surface in our results. However, we continue to believe that the recovery may be slow and there will be challenges in the weeks and months ahead. I'll walk you through some of our key operating statistics. Beginning with this quarter, we modified the reporting of statistics of U.
S. Business by combining our malls and outlets. We made this change for several reasons, including it is more representative of our entire enterprise performance combined together. These assets represent over 80 6% of our net operating income. The historically bright line between malls and outlets is becoming more blurred every day.
Many tenants are leasing space in both property types. Tenants that are historically operated in outlet centers are now leasing space in malls as well as other venues including strips and street level shops and traditional mall tenants now opening concepts in the outlets. And we also consolidated the back office of the premium outlet business into our Indianapolis infrastructure last year. We believe this is an improved methodology, but but understand that it may take time for you to adjust your models. Therefore, to assist in that process, we have provided historical data for occupancy sales, rent and leasing activity on a combined basis for 2,005 through 2,009 in the 8 ks we filed this morning.
We continue to lead our peer group in comparable property net operating income growth generating 2.5% growth in the Q1. Drivers of that increase in comparable NOI include much improved bad debt expense as well as a reduction in the bankruptcies in 20 rent sales or higher overage rent due to sales growth as well as our continued focus on cost control in the home office and field. As of threethirty one, comparable sales on a rolling 12 month basis was 4 $67 per square foot. Sales growth accelerated in the Q1 with tenants reporting sales 6.6 higher during the Q1 of 2010 as compared to the Q1 of 2009. We also saw a very strong improvement in the month of March with sales growth of 10.6% as compared to March 2009, partially aided by the shift to Easter.
Sequential quarterly occupancy changes from 2,009 twelvethirty onetenine were in line with historical trends and were consistent with our budget. As of threethirty one occupancy was 92.2%, 10 basis points higher than a year ago. And now beginning with the Q1 of 20 10, the re leasing spread is being reported on a rolling 12 month basis. This spread was $2.11 per square foot or 5.2 percent and that we're seeing improvement in leasing activity in 20 10. $0.69 per square foot or 7.2%.
Demand for space continues to improve purchase for cash outstanding notes maturing in 2011, 2012 and 2013, 2,285,000,000 dollars of the bonds were tenanted at a weighted average interest cost of 5.76 percent in our duration of 2 years. We recorded a loss on this of $166,000,000 which is what was recorded in our Q1 with this transaction and obviously we told you about that as soon as the transaction was done in January. Concurrently, we sold $2,250,000,000 of senior unsecured notes, our largest ever notes offering. We had a great book. Our orders totaled $10,000,000,000 The average duration was 14.4 years and the weighted average coupon was 5.69%.
As a result of this activity, we extended the duration of our senior unsecured notes with no overall increase in our weighted average interest rate. During the quarter, we paid off $300,000,000 of senior unsecured notes that matured on three-eighteen and unencumbered 2 18 and unencumbered 2 malls totaling $282,000,000 of mortgages as well as paid our cash loss on the extinguishment of debt of $166,000,000 Subsequent to the completion of the company's new unsecured corporate facility in December of 'nine, 5 additional banks have added a total of $280,000,000 increasing our borrowing capacity to $3,845,000,000 The facility has accordion feature allowing borrowing capacity increase to as much as $4,000,000,000 As of March 31, 2010, we had $3,600,000,000 of cash on hand, including our share of joint venture cash, approximately $10 per share, the availability of our corporate credit facility of 3,200,000,000 dollars for a total liquidity position of 6,800,000,000 declared an all cash dividend of $0.60 per share. This time, I would like to make a statement regarding our acquisition of Prime Outlets. First, let me say that we expect to close this transaction per our definitive agreement. The Federal Trade Commission is reviewing the transaction.
We have met with the FTC and are fully cooperating in that review. As you may know, the U. S. Antitrust authorities have consistently recognized that the retail real estate industry is highly competitive and fragmented and is one of the only industries exempted from hard Scott Rodino filing requirements. Pennants whether they are discount retailers, manufacturers or otherwise can and do lease retail space in a variety of locations.
According to recent estimates, there is approximately 14,000,000,000 square feet of space in shopping centers of all kinds. Our assets comprise only 3.5 percent of the total shopping center space. Addition to the wide variety of physical sites, e commerce websites and mail order catalogs have become established in powerful retail outlets, and only a small percentage of U. S. Off price retail sales are conducted through retail outlets in the properties owned by SPG and Prime.
This will be my only comment today regarding this transaction. Just let me conclude, as I stated in the morning release, the year is off to a positive start for the company. We reported solid results and encouraged by the trend of the retailer sales. Our retailers are exhibiting more Our retailers are exhibiting more confidence in their business. We're seeing increased inventory in the stores.
The environment for new store openings is The environment for new store openings is slowly improving. Owning the secured debt market has significantly and positively changed in the last two quarters with the reemergence of structured secured lending and the continued activity from life companies. Strong sponsorship remains a critical component for lenders. With that in mind, during the Q1, we have circled 2 10 year transactions totaling $515,000,000 at an average interest rate of 5 $95,000,000 We expect to lock rate within the next month on 2 more 10 year fixed rate transactions, comprising approximately 5 dollars 550,000,000 at even lower rate spreads than in the Q1 and all of our 2010 secondured debt maturities are done. While development projects, we're selectively spending capital dollars on expansions and selective international activities, all with expected double digit returns.
We're adding 116,000 Square Feet to Houston Premium Outlets. We're adding anchors and box tenants, big box tenants at more than 20 regional malls, mills and community centers. We started construction on our 2nd premium outlet center in South Korea as well as expansions of 2 premium outlets in Japan. And once again, we believe we're well positioned to continue to deliver solid results in 2010. And as a result, we've increased our bottom end of our 20 10 FFO guidance by $0.05 per share.
And so with that, operator, we're ready for some questions.
And your first question comes from the line of Alexander And your first question comes from the
line of Alexander Goldfarb with Sandler O'Neill.
Please proceed.
Good morning. Just wanted to ask some questions on the general growth, sort of for perspective. What's been the feedback as you guys have had your discussions as far as the warrants from the Board's perspective? Are they viewing the warrants as something that would disrupt the bid or are they viewing that as an integral part of the alternative proposal for the company?
Well, I don't really know other than to say, Alex, that there's no reason to issue warrants when you have a better deal economically, more certain, better sponsorship, better diverse group of investors. But so I don't know why they would issue any warrants given the current state of play. It doesn't compute from my perspective.
Okay. And then the second part on the JGP is what's the dynamic? I think earlier the unsecured creditor committee came out in support of you guys, but given that Fairholme and Pershing owned a good chunk of that, what's your sense of the dynamic between the unsecured creditors committee and the respective unsecured debt holders themselves?
Well, I can't speak for Fairholme or Pershing Square. I can only tell you that we've had positive support from the creditors committee. They view our deal as more certain and we think they'll continue to support us.
Okay. And then the final question is just on the guidance. Just two line items just through your lease term expectations for the year and expectations for the year and provision for credit losses. And then as far as prime goes, should we be assuming that in our numbers for this year and is that in your guidance or what is your recommendation to us as far as our estimates?
Well, I'll let Steve answer the first two, but let me just say on Prime. As we said at the beginning of the year, Prime is in our guidance. And when we issued our guidance earlier in the year, we anticipate an earlier close to Prime. So we're not going to pinpoint exactly for you at this moment when we expect it to close. We do expect it to close.
But the fact of the matter is we haven't changed our guidance. In fact, we've increased the bottom end even though what we gave you initially, we've been delayed from when we thought we would close prime.
Alex, this is Steve. I'll just talk a minute about the other two items you asked about. The bad debt expense, as you did see, we actually had a recovery in the Q1. I wouldn't expect that trend to continue. Although, as I look at the landscape right now, I do think bad debt expense will be relatively muted throughout the rest of the year.
But I would expect to see some expense, not necessarily recovery. On the lease settlement side, we did have a spike in activity in the Q1. Historically, we run about $5,000,000 a quarter, dollars 4,000,000 to $5,000,000 of just ordinary normal course of business. And I'd
And And your next question comes from the line of Paul Morgan with Morgan Stanley.
Hi, good morning. Hi, Paul. On the outlets versus the malls, I think I understand why you're combining them, but I mean could you just last say for 2,009 there was about a 500 basis point difference in the same store NOI growth and you're up in the first quarter. And could you talk about kind of the contributing factors and whether that disparity is consistent with when you last broke it out?
Let me answer that. The disparity has narrowed and the comparable we had positive comparable property growth in the mall business, if you just look at the mall assets for the Q1. Okay.
And then the lease spreads, the rent on expirations was much higher than what you reported previously. And obviously, your lease terms were way up. I wonder if those are sort of related and whether we might see that number as a blip that comes back down based on maybe some closings of high end stores or if that's not accurate?
No. Paul, it's Steve. We clearly are seeing some positive momentum in the leasing business. I think David mentioned in his prepared remarks, if you look at just the first quarter activity on a standalone basis, the spread was actually almost $3 a foot. So, no, I would not expect it to be a blip.
Okay. I guess to clarify, my question was whether that high number on the expiring rent is abnormal because I mean your average for the year is quite a bit lower than what you reported in the Q1 40 point $7.1 Is that indicate anything specific relative to what closed in the Q1?
No. I mean, don't forget, our business is such that a lot of the leases are still geared towards the retailers year end. So we have the largest expirations at January 31, but it's not reflective of anything different.
Okay. And then just Rick, maybe you could talk a little bit about where you're seeing open to buys increase and also maybe a little bit of clarity on whether we're seeing kind of more activity from some of the bigger footprint type stores?
Well, let me do the first on the specialty store tenants across all the platforms. It is obviously a more constructive leasing environment. And we have a number of tenants that are now coming back and wanting to open the stores in 10 that they otherwise might have opened in 2,008. There are a number of new concepts like PS by PS by excited that they're looking to grow their footprint. On the box area, if you look at the schedule we have in the ks, you're going to see an increasing amount of activity there as well.
And the thing to remember is the development today is probably at 40 year lows, as David referenced. So that is certainly playing into our hands to absorb the existing inventory.
Okay, great. Thanks.
Thanks, Paul.
And your next question comes from the line of Steve Sakowo with ISI Group.
Thanks. I guess I wanted to try and maybe continue I guess what I guess what I'm trying to really figure out is if Chelsea has historically had kind of 30% rent spreads and we know that the malls were sort of slipping last year.
Let me just let me interrupt you, Steve. We also had positive rent spreads in the mall business in the mall assets. So and again remember that there's a lot more activity just given the size of the portfolio, malls versus outlets. So I mean, if that's what you're headed to, we've had a positive in both. And again, the expirations for the quarter, maybe there's some unusual
think when you were giving guidance or we were talking about your business, I thought kind of late last year, the beginning part of this year, you thought that the mall spreads would be down and maybe closer towards the single digit range or very low double digits versus spreads that have been closer to 20%. Now that you're kind of merging these things together, we have to think of them as kind of one number. What do you think spreads collectively for both the malls and outlets will be this year?
I think it's going to be consistent with our guidance. The specific number I think we'd have to get back to you on. We don't see a big change in the business.
Okay. And then, I guess maybe for Rick talking about open to buys. Is it fair to assume then that the maybe the leasing that was put in place here in the Q1 was done under an environment that was pretty stressful? Is it fair to assume that this was kind of reflect of really tough situation in the last 6 months? And I guess, when would you expect to see maybe those numbers start to trend higher?
I mean, is that a quarter event out? Or might we see the spread start to rebound in the Q2?
I think it's going to be further out. You have to understand leasing that we're doing today is not going to open until the Q4 at the earliest and we're starting to talk about 11 Leasing. And obviously, the stores that are opening new in the portfolio were done last year with a little less constructive sales and profit dynamics. And so that's going to reflect slightly lower slower rents. And I'll just say, Steve, we continue to
have a lot of pressure put on us by the retailers on the rent. So it is a challenge and we're doing the best that we can, but there is a lot of leverage and pressure the tenants are putting on us in terms of rent.
Okay. And then I guess just lastly, David, you did mention, I guess you're looking at some select development opportunities on the outlet side. Yes. Can you just talk about maybe how return expectations for that business have changed, if any?
Well, I think it's not just us. I think generally the outlet properties are attracting a lot of new entrants into the outlet business and there's lifestyles that are being converted to outlet. There's malls that are being converted to outlets type tenants, part of the warping that we see going on in the industry. So that's one of the things that we're dealing with. But it was not just us.
And I would say generally the returns are under pressure, not dramatically so. I mean the returns historically as you know Steve have been really, really positive. They're still double digits, but it's not it's probably off a couple of 100 basis points, if not more just because the rent pressure in that business even though the demand is good is the retailers are just generally cautious and able to negotiate pretty good deals.
So low teens might be down towards 10?
I think it will be a little bit better, but I'd say 10 to 12 just cut through it. I guess you want me to pin you want to pin me down with a number?
If you could go out 3 decimal points, yes, that'd be great.
Yes. So yes, you probably went from the 14%, 15% range probably to 10% to 12%.
Okay. Thanks.
And I think the other thing is the outlet development pipeline, not just us, but generally is different than it was 5, 6, 8 years ago. These are these the idea of being next to a full price is kind of out the door. The land costs are much higher, because they're really in regional mall locations essentially and construction costs have kind of stabilized, but I think land cost, tenant improvement cost has certainly gone up.
And your next question comes from the line of Jim Sullivan with Cowen and Company.
Thank you. A couple of modeling questions first. And so for Steve, I guess, the same store NOI number that you're
does include bad debt expense. Okay. So, It does include bad debt expense.
Okay. So that's very positive variance we had in Q1 as part of that number. 2nd, on the home and regional cost line, that number was below 20%. I think that's the first time since before retired the first time. Can you just tell us why and where that number is going?
We continue to do more with less. How that.
Let me amplify on that just a bit, Jim. Don't expect the same amount of positive variance because we did have a true up from a legacy incentive plan related to the outlet business that provided some of that favorable variance in the Q1.
But I still stand by my comment.
And how much less?
How much more? Where do you want to start?
Anyway Well, typically that number has been over 25 for some time. So it was a big
No, Steve, I'm kidding you. Steve's right, but Steve's right.
Most of the favorable variance in the Q1, Jim, was was attributable to the legacy unit.
Okay. And that was how much?
I think the favorable variance was about $8,000,000 in the quarter.
Okay. And the final question for me is really kind of a big picture question for you, David. That is you've obviously been talking with a lot of major institutions in terms of joint ventures, both domestically and overseas. And question I have for you is whether you've seen any change recently that kind of matches what we saw in share price performance over the last couple of days whereby those institutions are showing a clear preference to invest in North America as opposed to Europe?
Well, I think they see the U. S. I agree and they see the U. S. As having certainly better growth prospects than Europe.
We see the same thing, frankly, and part of what's driving us in some of our decisions in Europe. And I think they see they are also moving toward their the moving toward the alternative investments have been put a little bit on the back burner and they're looking for core investments. And when you look for core investments, they like a regional mall. So that both of those are kind of aligned in terms of what's happening on the capital front.
Okay. And then finally, regarding the international side, you announced a couple of projects, new projects expansions in Asia. Should we be expecting more of
the same? Is that continue to be a sector where the opportunities
for new development Is that continue to be a sector where the opportunities for new development are going to continue?
Yes. But primarily, if only exclusively in the outlet format. So South Korea, we've got a few more opportunities. We're very close to starting in Malaysia, which we hope will attract the Singapore market. That is the focus.
As you know, we sold our Walmart anchored malls in China. Could we do outlets in China? Maybe. But at this point, we are very comfortable with the outlet format in those kind of areas in Asia. So, we'll continue to push that.
And is it a competitive advantage that you have in the outlets in versus full price or is it just a lack of opportunities or yield?
Well, I'd say we're good at what we do there. We've got the right partners. We've had success. So it's always success begets success. And full price, certainly in China and other, I think the yield on full price is very, very, very tricky.
And the thing that I've seen in Asia is that if the tenants don't produce, they don't really necessarily pay you what they want to pay us. So, we just think the outlet sector is actually a little more risk averse and it's morning,
everyone
Could you talk about the dynamics of the anchor stores maybe versus the inline stores and perhaps even some performance by segment? And I guess also David, you talked about some challenges ahead. I mean, are you worried about store closings at this point or is it really just more of the sort of comments about the slow recovery?
Well, I'll let Rick talk about department stores, but absolutely store closings, our occupancy went down, store closings are an everyday event. The retailers are if they don't have the right rent as a percent of sales, they will close the stores. We have suffered through that a lot last year. I think I give credit to Rick and the leasing team for maintaining occupancy, but store closings absolutely continues to be an issue. And I don't think it will go away anytime soon.
I'll turn it over to Rick on the anchors.
I would say to you, in addition to store closings, a lot of the specialty stores are downsizing their footprints. So there's pressure in that regard as well as they're trying just like us to do more with less. On the anchors, performance is obviously better. Balance sheets are dramatically better. Virtually every one of them are at stock prices that they haven't seen in years, and they are more optimistic about their future and they're more focused on top line growth.
That I don't think is going to immediately transfer into department stores looking to open new units. They're just working on making their existing product better and it is more productive and that helps us drive more traffic.
And David, going just sticking with the store closings theme, I mean, do you and to even Q1 of next year? Well, you know, Q4 into even Q1 of next
year? Well, they've already made some decisions. So, we know that in 10, when the lease expires, we're going to have to deal with store closings. So, look, the environment, we got a better shot at keeping some open given that the world's getting better, but it continues to be a focus for retailers. If they don't have the right rent sales, they're going to close the store.
So, you've seen our rent spreads compress and our occupancy get dinged a little bit because of that environment. The good news, it's moving better, but it's got to continue to move better for us to be able to deal with the store closings.
Just last question for me on the dividend. I know you had to right size the dividend last year when liquidity obviously dried up. But how do you when do you reconsider the dividend in those conversations with the Board, given your yield is now about 2.7% and your payout ratio is as low as I've seen it?
Well, very good question. We're going to address it a little bit with our taxable income at the 4th quarter, depends on kind of where we see that. But I think it's a good question. We'll be able to see how the year shakes out. There won't be a change in the Q3 in terms of the $0.60 We'll see where taxable income is in the Q4.
And then I think depending on the kind of our view of the world, we'll see what the right number is for 11%. Good question though.
Thank you. Thanks.
Your next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch.
Hey, good morning. On your two expansions,
the domain of Oshore, how was the leasing on the 136, I guess, the Domain and 138,000 at South Shore?
Well, we've had challenges in both, Craig. These were brought on ahead of construction during the
Lean years.
The lean years, yes, 2 days ago, Okay. So 2 days ago, but in any event, so we struggled frankly. We've got good momentum. I'll let Rick talk to you about the percentages, but we brought them on at obviously a horrific time, but we're making progress. So I don't know if you have the numbers in front
of you. Yes. The only I would add that at Domain, we're going to hopefully by the Q3 be about 80% occupied and at South Shore Target is opening in October and we anticipate being about 80% open at that time as well when Target opens. And David is right, they were both very well executed, but the timing could have been a lot more fortuitous.
Yes. I mean long term, obviously, we believe very much in both projects, but it's we just had to keep pounding away and get at least.
Okay. And I know you're not thinking about non outlet development at this point, but I'm just wondering if the hesitancy of the department stores to open new units continues, might you see something more like a St. John's Town Center opening from guys than a traditional mall?
I will tell you, we just the outlet, there's a good pipeline out there for the industry. I Rick should comment. I just don't see no kind of that on the I just don't see the demand. I just don't see it from our standpoint.
Rick? Yes. The only thing I would add is that the discussions we're having with department stores is how we can add them to our existing properties. I don't think any of them believe there are a lot of underserved markets left in the United States.
And I would just add that the focus we had obviously a lot of redevelopment stuff that we put on hold. So I think as I said probably the last call is, I think we'll start to see some of that put on the drawing board again. And as that I think that's the first step for us in any event as opposed to round up new development ex the outlet assets.
Okay. Thank you.
Thanks. Your next question comes from the line of Quentin Valle with Citi.
Yes. Good morning. It's Michael Bilerman here with Quentin. David and Rick, I just want to come back to the leasing spreads for a second. And if we look at the stop on Page 18, for twelvethirty one for 2,009, the lease spread was about $5 right?
And then threethirty one is a trailing 12 month number, which includes most of 2,009 in the Q1. And the store closing rent jumped up from that $38 to $0.41 which is a pretty massive spread to include just all the 1st quarter expiries. And I think you had said that there was a $3 positive spread in the Q1. But I guess I'm having a hard time figuring out how that math works when 2,009 was positive $5 trailing 12 in the Q1 is $2 something is just not matching up?
Well, hey, Michael, it's Steve. I mean, just from a math perspective, what's happening is the Q1 of last year was very positive. And in fact, if you go look at our 8 ks from the Q1 of last year, my recollection was that the spreads in the mall business were $9 So you had a very positive quarter burning off. And obviously, as David and Rick alluded to, the leasing trend is getting better. We're seeing better spreads in the Q1 of 'ten than we saw in the Q4 of 'nine, but you're replacing a quarter with lower that has lower spreads from taking out the Q1 of last year, which had very high spreads.
And that's a simple But I guess is in the expiration number of that $40.71 to $41 your average I mean, if we go back to the prior subs, the average mall rents for 10 that were expiring were $36, dollars 37 The outlets are in the high 20s. For the trailing 12 month average to be $41 it just doesn't something is I guess the where you're signing rents makes sense. I guess where they're expiring doesn't. And so I don't know if there's something particular in the Q1 relative the last 12 months in twelvethirty onetwonine, the expiries were $38 right? So if you roll in the Q1, for the Q1 to roll to $41, that would mean the Q1 expiries were probably high 40s or even
50s.
Don't forget, Michael, is comprised of 2 things. It's comprised of normal lease expirations and we disclose for you what our lease expirations are over the course of any period and you can see what the average rent is. But it's also stores that closed prematurely, whether that's bankruptcies or whether that's environment
that we're in, if a tenant doesn't have the right
rent to sale, the environment that we're in, if a tenant doesn't have the right rent to sales ratio, they're going to close. We had some high rent tenants that close.
Well, I guess what
I mean, as an example, think about all the jewelry stores that have closed over the last 18 months. Right.
And that's what I think that's what you're seeing in terms of the having a pretty big impact in this year, 1st quarter, because we had a lot of jewelry stores close.
But you don't see like moving the twelvethirty one going down from 13 down to 5 as being a concern of what that would have implied for the Q1?
No. Because we told you what the Q1 was.
Okay.
David going back a couple of months ago you had said in a release that there was a number of other things that you were working on in terms of growth opportunities and that you were not going to sit on your hands and wait around for a situation. I guess, can you give an update as to where those other situations are, the size of those opportunities and how you're thinking about that aspect of your business?
Well, look, I think it's safe to say we're good, but it's hard to work on one big deal and a lot of other ones at the same time. So our focus let's not forget we have a prime deal where we're looking to close, but our focus obviously has been on general growth. And I think at the time that we mentioned it, we were still changed the last time we spoke and we've been exclusively focused on that transaction. So if it so happens that there's nothing there for us, which is a distinct possibility. I'm very comfortable with the ability to grow our business externally.
But I can't give you chapter and verse as to when and how. I don't think that would be appropriate.
But I guess are those opportunities were those offerings being marketed? And at this point now that you've pulled back from them, they'll go to someone else? Or I'm just trying to get a flavor
of what
No, I don't think any of these were auction oriented marketing deals. And And it wasn't like that kind of stuff.
Yes. Just quickly, in you mentioned the redevelopments in the malls will probably be the first projects that you start looking at. Just wondering what you feel is that timing of when they might commence and probable scale, I assume, is still quite a way out?
Well, I think no, I end up spending more redevelopment dollars this year than we thought. As we were planning at the end of 'nine and into last year, actually our CapEx expenditures, now some of it may actually, when you get it all done, will be spent in $11,000,000 But there's a lot of activity on the redevelopment front and we'll spend more in this year than we anticipated. And I think that will carry over into 2011 as well. Rick, I don't Yes.
And if you would just look at Page 34 of the 8 ks, we've shown you a number of the redevelopment projects that are coming online in the remainder of
2010. And some
of these are significant upgrades to our properties, and we have a pipeline of opportunities that we are working on and as they get to the point of starting, we'll share them with you.
And as retailers looking for smaller store sizes or a reduction in store size, is that something that's going to drive more redevelopment over the next 5 years?
I don't think it's a redevelopment as much as it's going to enable us to maximize the NOI out of our better properties because we're going to have more space to lease to more tenants without having to add additional space.
Just a quick question on just on the outlet versus the mall. What percentage of the NOI has the cross polymerization or the cross fertilization of of tenants? I mean, I had always I know you've been increasing it, but I still thought it was predominantly a separate tenant base.
Not really. It's really more. I don't I would say at least 40%, 50% if not more.
So 50% of the outlet NOI are also in the mall?
Yes, essentially. I mean, you have a lot of companies like Liz that do both and the Gap that does both. That's off the top of my head. I don't know specifically, but the pure manufacturers are more vertically integrated now. So they do retail and manufacture.
The pure retailer of Gap does both. And so if you go through the list, I'd say off the top of my the old just like the of the world are gone. So I'd say if you walk I'm happy to walk an outlet asset with you, but I would tell you just off the top of my head, it's $50,000,000 We could certainly do that math, but it's wouldn't you say it's 50.
Yes. And just anecdotally, if you look at all the announcements that have been made over the last few months about new concepts coming to the outlets, they've almost been exclusively from retailers that are already operating in our malls, such as Ann Taylor Loft, now outlet Coach Men's, LensCrafters, Vera Bradley, New York and Co. Christopher and Banks, those are all mall retailers that are now moving concepts into the outlets as well, which is again an example of the convergence that David talked about in his opening remarks.
Great. Thank you.
Thanks.
And your next question comes from the line of Tayo Okusanya with
good morning. Just going back to the numbers again Steve, if you could just help me out a little bit. The recovery of the credit losses in the Q1, could you explain exactly why that happened?
Sure. We were over reserved at year end based on an account by account analysis of receivables that we didn't think we would necessarily collect and we collected them in the Q1. So when you have a reserve out there
and there's no receivable left, you got to reverse the reserve.
Got it. And then the $20,000,000 lease settlement charges in the quarter, was that specifically from just a few concentrated tenants or from a bunch of tenants?
It's a bit about.
There were a handful of kind of multi source within normal ordinary course of business as
well. Okay.
And then operating expenses for the quarter, dollars 98,700,000 that was a little bit light versus 1Q of 2009 year over year comparable. When I kind of think about forecasting going forward, is that $98,000,000
something significant happen in the quarter?
Special or did something happen in the quarter?
A couple of things. David mentioned trying to do more with less. We've obviously been focused on costs. You do have seasonal costs. As an example, utility costs are much higher in the summer because you're air conditioning the centers.
But there is no question that we're seeing the benefit of aggressively managing the cost in the malls.
I just want us to take credit that not only did we outperform, we also outperformed with all the snow expenses. So we had one goal this quarter was not to use the extra snow as the reason we missed the numbers.
Fair enough. Thank you very much.
All right. Take care.
Your next question comes from the line of Ben Yang with Keith, Briat and Wood.
Yes. Hi. Good morning. David, I was wondering if you can give us your updated view on the acquisition landscape and etcetera. I mean, obviously, general growth is the elephant in the room and you previously commented that you are exclusively focused on this.
But I wonder if they end up playing with the Brookfield sponsored recap. I mean, do they end up selling assets? And also there's some speculation that some of your molecules could be consolation prices if you don't put general growth. I'm just wondering if you can comment on what you're thinking or perhaps expecting?
Look, we let me just tell you let me just make a general comment. I have no idea what if Brookfield is successful, what they'll do with the company or how they'll run it. So I have no sense of anything on that. And we're not going to if we're not successful, the last thing we're going to do is just go to a deal to do a deal. When we look at deals, this is really Ben, are you there?
Yes, I am.
I just got some feedback. When we look at deals, we look at what the value of the real estate is, not what we can pay for the real estate. We did that, we get ourselves in trouble. So look at the end of the day, if there's good real estate to buy at the right price, we'll buy it. If it's not, we won't and we'll wait for that opportunity.
So that's how we look at things. So it's not what we can afford to pay. That would be just not the way to run anything. It's really what we think the real estate is worth and what the real estate might be worth in our hands. But with that said, I hope I answered your question.
I have no idea what Brookfield will do if they're successful. 16 years that if there's real estate appropriately priced that we think is more valuable in our hands, we'll be prepared buy it. If not, we'll just wait for the right time.
The right time.
Great. And then if there's a good deal on there in the near term, I mean, do you just use the cash to pay down the debt? Is that kind of the plan at this point?
Correct.
Great. Thank you, guys.
Thanks.
Your next question comes from the line of Cedric Lechants with Green Street Advisors.
Thank you. Just going back to expenses, what's your ability from this point forward to further cut the expenses?
You're muffled there. Can you repeat yourself?
Sorry, David. Just going back to the expenses and operating expenses in particular. So from this point forward, what's your ability to further decrease the operating expenses?
Look, our philosophy is we hope there's no snowstorm and no, I'm kidding.
Look, I think we're running a
pretty good shop. You got to the number one focus is you can't you've got to have a pleasant consumer experience for the consumer and consumer and obviously for our retailer partners. So I think we've we're doing that. And to continue to drive those down, I think we might jeopardize that. So I'd say, Cedric, we're operating probably as appropriately as we can.
We got to be very mindful of
Okay
Okay. And in regards to the recoveries on the expense front, you alluded a couple of times to retailers needing to have an appropriate occupancy costs in the properties. So is the CAM recovery is one of the items that is currently going down versus previous leases? Or are you still able to recover as much, if not more, from tenants?
Well, remember, we've essentially gone to fixed. So it's all part of the negotiation with our retailers on what they pay in terms of gross rent. So, we there are very few lease discussions. We've still got some older leases running off, but there are very few lease discussions that have pro rata CAM at this point.
Okay. So, when you negotiate at this point, it's much more of a gross number than trying to divide between base rent and can recovery?
We still allocated between operating expense recovery and rent. But it is it's not there's certainty for the retailer in terms of what they're paying us in terms of reimbursing us for operating expenses.
Okay. And one final question. I noticed that you purchased the partial interest in 2 of the mill properties from your German partner. Are you able to disclose the cap rate on those transactions?
I actually don't know. Probably not, but I think we made a good deal. All right.
Thank you.
Next question comes from the line of Jeff Donnelly with Wells Fargo.
Good morning, guys. David, I'm not sure if you can break it out, but how much of your interest in GGP is driven by the structure of their balance sheet rather than their mall portfolio per se? Because I guess the pursuit of a platform with above average leverage abundant long term loan rate secured debt could convey that you might have a view on core growth that will be soft for some time. Or maybe the better way to ask this question is for the cycle ahead, who do you think is the better balance sheet?
Well, let me answer it this way. I hope you're not serious about that last part. But I think their balance sheet scares me as opposed to is a I mean, there is still a lot of secured debt and a lot of highly levered assets. So again, I hope you weren't serious on the last part. So, no, we look at the assets.
One of the obviously the big issues here is it's still a very highly levered company with not a lot of financial flexibility. And so the secured market, as you know, is still Jeff not back. I mean, and doing big secured deals is tough. It's getting better, but it's not there. Obviously, our balance sheet compared to theirs is an apple and an orange.
No, that's fair. And I guess what I meant by better is to the extent that you see more sluggish growth environment or even a rapid growth environment, does having higher leverage warranted?
Well, look, I think that was an argument that was made by them earlier and you saw the result of that. So I don't think so.
I guess to switch gears, in your opening remarks and I think you just touched on a moment ago, you had mentioned that outlets and full price malls are blurring. I know that shift hasn't happened overnight, but what does that say about the long term sales growth potential for regional mall sales if brands are willing to effectively open off price channels and undercut their full price channel?
Do you think that the next
10 years will be weaker than the last 10?
Well, that's a good question. I think everything has to be done in moderation. So, I don't know that it will be dramatic changes, but like we said before, Jeff, there's retail real estate that's going to become yesterday's news. The retail real estate environment is under pressure. And certainly the Internet and e commerce has had a dramatic impact on our business.
And that's the biggest concern we have going forward. There are certain elements of that that aren't a level playing field for instance on the Internet sales taxation and the ability for the pure Internet retailers to just avoid it. But I think this will cause and the whole environment generally is going to cause some retail real estate to essentially have to morph into something else or go out of business.
And I guess one last question on that then is that a lot of the lifestyle center activity we saw whether it's standalone centers or just the new wing on a mall was somewhat reliant on restaurants as that new anchor and they're still on their heels. To the extent we do see more shakeout in mall anchors down the road, I hypothetically say
it's Sears. What do you how do
you think of, I guess, about the alternative use of those big boxes down the road if there aren't a lot of big box users kicking around and again, the anchors for them right now, they seem to be on the sidelines.
Jeff, it's Rick. Again, I think if you look in the 8 ks, you will see our most current thinking on how we're handling these boxes. And frankly, it's a function of the size of the box. Is it a one level mall and a 2 level box, 2 level box with parking on both levels. There are still users that want to locate in our properties utilizing that real estate that are going to make our properties better, but it's a lot of work and it takes time to get done, but the demand is
in in the mall still given the if you have the right critical mass in the right location, I think we've all demonstrated in our industry the ability to recycle boxes and that ought to continue.
That's helpful. Thanks.
Thank you. Thanks. And
your next question comes from the line of Michael Mueller with JPMorgan.
Yes. Hi. On the financing side, Steve, can you just walk through what you see happening at the back end of the year, anything contemplated in terms of another bond deal? I think David may have referenced something in terms of locking in some rates. And does it still look like you're going to end up paying off form shops and Kapay, etcetera?
What David mentioned, I think earlier was that our 20 10 secondured maturities have Forum and Copler.
Okay. And one other question, not to beat a dead horse, but going back to the closing rent levels of the $41 given the comments about higher rent payers in their store closings, the jewelry stores, etcetera, Should we extrapolate from that? What should we put more weight on that the Q1 spreads were the $3 or that you had some high rent payers in the Q1 that seemed like they closed, where if you look forward the spread may increase a little bit?
I think I'd focus on the spread and I'd also just focus on the bottom line results, which is we grew NOI by 2.5%. So that's what I would focus on.
Okay.
That's just my personal preference. So Got it. Noted. I have a simple model. As long as cash flow is growing, then that's then I'm reasonably happy.
I'm not yes, Rick is saying not really, but I'm reasonably happy. If it's not growing, then that's the focus.
Okay. Got it.
And that's how frankly guys that's how we run the business. We're looking at EBITDA or NOI growth.
And your next Rich Moore with RBC Capital Markets.
Hello guys. A question for you on the mills properties. I mean, you have regional malls kind of on one end, you have outlet centers on the other end. I mean, why not put the mills metrics into the metric mix too? I mean, they have the whole cross fertilization thing that you guys were talking about,
etcetera? Yes, Rich, that's a good question. The reason we don't is because that's its own separate company and we have our partner in there. It's got its own separate revolver, its own separate balance sheet. It's kind of one entity in generally.
So And its contribution
as a percentage of NOI to the total enterprise is a fraction of what
the outlooks in the malls are. Now we do disclose operating statistics for it, but that's the primary reason whereas essentially the malls and the
run independent.
Okay. And the metrics seemed a little softer this quarter. I mean, how do you feel about the whole Mills venture
at this point? Look, I think the actual Mills projects are doing very we're pleased with it. Rick and I are pleased with it. Look, when we bought mills, there were a couple 2 or 3 mills that were really tough. We knew that going in.
It's effectively the mill share of that cash flow was de minimis. So we don't pour hair out over it, though we continue to try and and improve it. But I would say we've made a lot of progress on the mills and improving from Potomac. I mean, Rick can recite all the stuff that we've done, the block, Ontario, the Great Mall. So, I mean, there's a lot of good activity where we've had some slower results and we got kind of caught in the significant downturn is the malls that the mills owns, where a couple of them had some we were really excited about certain redevelopment opportunities like at Southdale and Del Amo.
And that has taken a little bit back burner. On the other hand, we got a Target deal with Espenade and we're working some stuff with Southridge. So we're regaining momentum with the mall portfolio, but that has been that's taken longer. But generally, the results are exactly what we underwrote despite the significant change in the economy. And the demand at the mills has been good.
So we're okay there other than the tougher ones like I said, where which continues to be tough.
Sure, sure. Yes. And so when you guys are sitting at ICSC, these are just part of the mix that you're showing the retailers?
Oh, yes. Oh, yes. Yes. And I would just make a comment that we're also finding the convergence. Many of our tenants that are operating in the malls are looking and opening full price stores in the mill.
I had a conversation yesterday with a retailer on a space and he said, well, we're definitely going to go. We're debating
internally whether we want to have a full price
store or an
outlet store in the mill. All people and a very good distribution channel.
Okay, good. Thanks. And then one last thing for you Rick. You made a comment about the smaller footprints of some of the in line guys. And I'm curious how much smaller, how widespread is that?
How far does that go? Because that could be serious, I guess, over time if guys are reducing 10% or 20% or 50% or whatever they're doing?
It's on the margin, and there are a number of retailers that are growing their footprints. But it gives us an opportunity to improve our tenant mix because at a number of our properties where tenants want to consolidate their concepts, it gives us more space to deal with and we can drive our NOI.
Yes. I would just add the only one that's really out there doing it in a big way is the GAAP. But I think as Rick has said, they have very good locations. So it could be a win win for both of us. We downsize them, we get back decent space and we go from there.
That's the only I mean, not to say there aren't tenants here and there with a store here or there that likes to get smaller. But I would say that's the biggest one out there that wants to do it on a more on a broader basis.
Okay, great. Thanks guys.
Thanks.
Your next question comes from the line of Christy McElroy with UBS.
Hey, good I'm here with Ross Nussbaum as well. In your conversations with national retailers as they shift to more definitive plans for taking new space, would you say there's more of a quality and location bias today than in the last 2 to 10 years rather than just focusing on blanket square footage growth? And this sort of touches on a previous question, but generally speaking, what do you think is the ultimate fate of some of the Class C secondary, tertiary market malls out there that stand today with above average small shop vacancy, maybe an anchor to gone. Do those malls
that depending on what's happening in that market, if it's a dwindling, dying market, those malls are going to go away. If there's something interesting, if it's good real estate and the market could be a small market, but it's got good employment, it's got good prospects, then I think it can be recycled. And we've seen it both, frankly, where we've been able to Rick mentioned Richardson Square as a decent infill place, mall that we basically tore it down and redid it. Where we
it
was where we it was an old manufacturing town that the employment base was shrinking. The age of the the we sold it and we went on. So I think you'll see a little bit of both. On your first part, I would say to you that it really depends on the retailer, but what they're really focused on is what sales productivity they can achieve from the space. And that's the focus.
And then from there results in the deal or the rent negotiation. But there are certain tenants that love moderate scenario. They have their idea of what they can afford to pay. And depending upon that asset, I mean, that may be a perfectly fine deal for that asset. So I do think though, Christy, there's clearly the focus, much greater focus on what the sales productivity is.
And then Ron to the question as well.
Hey, guys. Just in rationale, but I do think that the investment community would prefer to be able to see how those 2 distinct formats are performing individually, particularly after the Prime transaction closes. So just a thought there. But on the Mills portfolio, I'm curious, you don't disclose the same store NOI growth for the community lifestyle centers or the Mills assets. I'm curious, what's the cash flow there?
And how would that influence the 2.5% number that you reported for
quarter? Well, Ross, this is Steve. They're not major components of the overall enterprise. So they're not going to move the needle much in any event, but I will say that the cash flow for both the strips and the mills is positive.
Okay. And then, David, about a month or 6 weeks ago, I think I'd ask a question at the NYU REIT conference about what you thought about real estate valuations and REIT share prices. And you had made a comment along the lines that you were a little cautious, thought things might have gotten a little ahead of themselves. And here we sit 10% higher and cap rates have come down a bit. I'm curious where you sit today on your overall evaluation of REIT valuations and commercial real estate valuations looking at what's happened in the world over the last 30, 60
days? Well, certainly other than our company being undervalued, okay. Look, I think generally the we just got to be very careful. What I don't want to see our industry or and it's just I think it's broader just for all equity markets. I don't want to see us go from one bubble to the next bubble.
And there is certainly is a sense we created just another little false sense of euphoria. So I've been surprised. Obviously, we think we're a little different position than a lot of companies, but it's still a it is a great surprise to me and I just I think we have to be careful as an industry that we don't go from one bubble
good
morning. Hi,
Nate good morning.
Hey, Nate.
Actually, good afternoon. Just following up on the line of questions. Can you talk a little about the sales trends you're seeing across your portfolio, maybe the As versus the Bs and maybe some of the geographies where you're seeing strength versus weakness?
Sure. Let me just say on the regional thing, we're just starting to see a little pickup in Florida, California not so much. The outlets are producing a little bit better sales growth than the mall assets. And as I've said repeatedly, I mean, the Midwest is just the Midwest. God love us.
But the good news is we're starting to see a little bit better trend in Florida. Rick, I don't know if you want to add to that.
Yes. Just a couple of little more color. In the outlets, the one area that has gotten substantially are better. Not surprising books, music and kids shoes and women's popular price were a little a little softer. I think as things got better, people have moved
up a little bit on
their price points and I think you're seeing that in the results that are being reported by our retailers. Okay. And this is are being reported by our retailers.
Okay. And then just looking at the prime portfolio, are you expecting to sell any of those assets, any prime redevelopment opportunities
in there?
We don't have any plans to sell any assets, no.
And are any of them prime opportunities where you could invest in serious dollars?
Well, there's a the good news with Prime is it also comes up comes with a couple of development sites that we're anxious to be able to build when the deal closes. So that will be a big focus for us.
Okay. Thanks.
And we have a follow-up question from the line of Paul Morgan with Morgan Stanley.
Hi. Just a couple of quick things on the do you have a transaction expense number in your guidance?
Not really. The 3.7 percent.
Yes. And
then in the quarter.
We didn't really have that in our initial guidance, but that's what we spent this
Okay. So it's I mean, it's likely that you'll continue to have those. I mean, are
you Yes. It's likely we'll continue to have those at least for the time being.
Okay. So think that as kind of a downside component or do you think you're sort of comfortable given that you will have those that your range is still okay?
Yes. I think we're baking it into our range more or less. It doesn't seem like it's going away anytime soon, but it could.
Okay. Last thing on tenant allowances, they were high in the Q1 relative to the prior year or even the full year last year. Is this is there any color about that? And how are tenants still very how are they thinking about kind of capital apart from rent?
Hi, Paul. It's Rick. There's really not been any change in the negotiating dynamics on the TA. I think slight increases. Again, if you look at 34, we've had increased box activity.
So that's a little more of the dollars. But in terms of the specialty stores, same trends we've experienced.
And that concludes the Q and A portion of today's call. I'd like to turn the presentation back over to Mr. Simon for closing remarks. Okay.
Thank you everyone. Appreciate your interest and we look forward to talking soon. Take care.
And thank you for your participation in today's