Simon Property Group Management Discusses Q1 2013 Results - Earnings Call Transcript

Seeking Alpha

Simon Property Group (SPG)

Q1 2013 Earnings Call

April 26, 2013 9:00 am ET

Executives

Shelly J. Doran - Vice President of Investor Relations

David E. Simon - Chairman and Chief Executive Officer

Richard S. Sokolov - President, Chief Operating Officer and Director

Stephen E. Sterrett - Chief Financial Officer and Senior Executive Vice President

Analysts

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Christy McElroy - UBS Investment Bank, Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Paul Morgan - Morgan Stanley, Research Division

Quentin Velleley - Citigroup Inc, Research Division

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Michael Bilerman - Citigroup Inc, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

David Harris - Imperial Capital, LLC, Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Benjamin Yang - Evercore Partners Inc., Research Division

Josh Patinkin

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2013 Simon Property Group Earnings Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Shelly J. Doran

Good morning, and welcome to Simon Property Group's First Quarter 2013 Earnings Conference Call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially due to a variety of risks, uncertainties and other factors. You may refer to our SEC filings for a detailed discussion of forward looking statements. Please note that today's call includes time-sensitive information that may be accurate only as of today's date, April 26, 2013.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information package that was included in this morning's Form 8-K filing. This supplemental is available on the Simon website in the Investors section.

Participating in today's call will be David Simon, Chairman and Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Steve Sterrett, Chief Financial Officer.

I will now turn the call over to Mr. Simon.

David E. Simon

Good morning. Our results for the quarter were strong. FFO was $2.05 per share, up 12.6% from the first quarter of 2012. Our FFO exceeded the first call consensus at quarter end by $0.05 per share. For our Malls and Premium Outlets, comparable property NOI growth was 4.8% and that was off a 5.7% increase in Q1 of 2012. Tenant sales were up 5.3% to $575 per square foot. Occupancy, up 110 basis points to 94.7%. Base minimum rent per square foot was 3% higher and our re-leasing spread was a positive 13.4% or $7 per square foot. We were very active in the debt markets during the quarter closing our locking rates on 13 new loans, totaling approximately $2 billion, of which our share was $1.3 billion, the average rate was 2.92%, and a weighted average term of a little over 8 years.

Let me turn to the all important development activity. First of all, we opened the Phoenix Premium Outlet Centers in Chandler, Arizona on April 4. This center is 100% leased, open with an impressive collection of stores. I will not name them, Rick will if you're interested. Several high profile stores will be opening in the coming weeks, and the good news is the shopper response has been very strong and many merchants reporting as one of their best outlet openings in the last couple of years.

Shisui Premium Outlets opened on April 19. This our ninth center in Japan. It's located 15 minutes from Narita International Airport, serving Greater Tokyo. The center opened with large crowds and 70 media outlets opening, and we expect this to be a terrific center serving the area of visitors to Tokyo, given the proximity of the airport. Significant redevelopment projects were completed during the quarter; Apple Blossom Mall, Quaker Bridge Mall and South Hills Village. Several significant projects are on track for completion in 2013, including expansions in Sawgrass Mills, Dadeland Mall, Seattle Premium Outlets, Orlando Premium Outlets at Vineland, Walt Whitman Shops, and the and the re-grand opening of the shops at The Shops at Nanuet and the University Town Plaza in Pensacola.

Redevelopment expansion projects including the addition of acres and big bucks tenants are underway at 44 properties in the U.S., 2 in Asia. Our share of this cost is approximately $1 billion and the blended estimated rate of return is approximately 11%. We have 3 Premium Outlet Centers under construction, opening in the third quarter of this year. St. Louis Premium Outlets in Chesterfield, Missouri, opening in August 1, which is 96% leased. Toronto Premium Outlets in Ontario, Canada, opening August 22, which is 85% currently leased. Busan Premium Outlets in Korea, opening in late August. As we highlight in the press release, demand for space in all of these centers has been exceptional and we expect to be fully leased at opening.

We also have at least 8 additional new Premium Outlet projects in North America in various stages of predevelopment. Klépierre reported its first quarter revenues this week. You can read about them, so I'll be brief other than to say that rents were up for the quarter a total of 3.4% reaffirmed 2013 guidance. We've now owned our stake for 13 months. Progress has been made in several aspects of the business. They have sold EUR 760 million of assets. They have simplified their business with the elimination of the [indiscernible] sub-brand, as well as the ongoing sale of the office portfolio.

Their focus on operations, we've added a new CEO. They're generating additional Simon brand venture-type revenues, as recently evidenced by the Coca-Cola partnership. They strengthened their balance sheet through recent financing activities and they've opened 2 great malls in St. Lazare, Paris and Emporia in Malmö, Sweden. And I think if anyone has had the opportunity to visit it, visit those centers, you'll see that the company has clearly the capability to build first-class 21st century retail.

Today, we announced the dividend of $1.15 per share for the quarter. Over the past 6 quarters, we have increased the common stock dividend each quarter as we've been playing catch up to our taxable income. Our growth rate in our dividend has been over 31% over the last 2 years. Importantly, we anticipate, subject to review and Board approval, increasing our dividend as we anticipate our taxable income continuing to grow.

Guidance. Today we increased the top and the bottom line of our 2013 FFO guidance to a current range of $8.50 to $8.60 per share. This is an increase from $0.10 from the initial guidance in February of $8.40 to $8.50 per share. Strong operating performance is the driver of this increase.

Occupancy. Reasonable Mall and Premium occupancy cost of 11.3% and strong rent spreads give us good momentum. Finally, '13 is off to a good start, and we're ready to answer any of your questions that you'd like to post.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Jeffrey Spector of Bank of America

Craig R. Schmidt - BofA Merrill Lynch, Research Division

It's Craig Schmidt here. It sounds like you've made real progress on your dispositions at Klépierre. Maybe you could give some more color on what's left to do, as well as maybe some of your refurbishes that you've done in the portfolio, and any successes you've had in bringing new retailers to your Klépierre portfolio?

David E. Simon

Well, first of all, they will continue to sell non-core assets as well as the office portfolio. So they've got a couple of the office deals that are close to being signed up, including their headquarters. And they'll continue to sell kind of the smaller non-core assets, which frankly are very stable, solid centers, but they don't have the extension capabilities that we're interested in pursuing. And they've done a great -- a number of extensions like Plessui [ph] in Paris. On the east side of Paris, near the airport that I think represents the ability to take a smaller center and expand it. And on the retail front, we're continuing to solidify that. The operational side of the business is the true upside, the coordination among retail, what we do at Simon-brand ventures. How we operate the centers is the next chapter in the story. Obviously that takes some time. We've had to add to the personnel ranks, we had to set the strategy and we're pleased with what's going on there, and I think there'll be more to come.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

And are you surprised that -- are you surprised that your ability to push rents, given the general difficulty in Europe?

David E. Simon

Look, I don't run this day-to-day. There -- some of these questions are better asked for them. We are not the ones pushing the rents. We're providing strategic advice and helping them focus on what is important in their business and also, showing them how we run our business so they can run their business. I'm not surprised that a number of those countries have stability in cash flow in tough economic times. I think what you've seen here in the U.S. is that the same thing happened here for us in very tough economic times. And the one area that -- where they're having the most difficulty is in Spain. And that is a focus for the company, but that continues to be something that is affecting the cash flow to some extent is because Spain continues to be under pressure for basically all retail real estate owners that have real estate in Spain.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Great. I was impressed with your 96% lease in St. Louis. Do you know how much will open in August?

David E. Simon

We should be in the 90s. There's always a few laggers, but that's a real number and we should be in the 90s. I mean, even though we'd love to open every center at 100% leased and operate it, sometimes it does take time. Phoenix is a great example. We're at 100% leased. We were in the kind of the low 90s to be at opening, but in the last couple of months, we'll be 100% occupied. Same thing will happen in St. Louis. There may be a couple of slow people, but we are 96% leased.

Operator

Your next question comes from the line of Christy McElroy of UBS.

Christy McElroy - UBS Investment Bank, Research Division

Follow up on Craig's question about the outlets. Can you disclose the expected yields at Chandler and St. Louis for 2013 and maybe discuss some pre-leasing progress at Columbus and Charlotte?

David E. Simon

Well, look, our yields in the outlet business continue to be attractive. These will be double-digit yields unquestionably, and Chandler will be probably north of 10%, St. Louis will at or about 10%. And in addition, as you may probably know, we're looking at Phase 2 now and, obviously, as we bring that online in St. Louis, we will -- the yields will go up. But they're both north of 10%. They are both north of 10%. Now on your question on Columbus, let me just say this, Columbus is a very competitive market. There's a lot of folks that have competing real estate there and sites. So we'll see, we may or may not be the victor in that competition, but we're working to continue to try and move that forward. Charlotte is basically a go deal. So with us in Tanger, we expect to start construction in the next 2 months. We're very excited about that project. I'm not going to tell you what the yield is because I don't know what Tanger does, but it will be very, very good. The retailers are very happy that we have put together our joint venture. They -- we very excited about going in and it's got to be at least over 50%, 60% pre-leased. Not that we really need it because the one thing that we know is we have 80 Premium Outlets in the world, I think. So we don't, Christy, we don't really need to pre-lease like some others that might, because we kind of know whether or not we can lease it. But Charlotte's go, starting construction here shortly and we're racing to do a '14 opening.

Christy McElroy - UBS Investment Bank, Research Division

Okay. And then I know that you continue to do quite a bit of anchor in big-box repositioning. Can you talk a little bit about what the retailer demand is like today for Mall anchor space? How you think about getting that space back from a re-tenanting perspective. And are sale leasebacks of anchor space something that you would consider if a major tenant came to you looking to raise capital?

Richard S. Sokolov

Christy, it's Rick Sokolov. The demand is as good as it has ever been, and I think that, that can be referenced by the number of spaces we have available. In our mall portfolio, we literally have 635 department stores and 1% of them, 6 or 7, are vacant. And that's the lowest it has been in as long as I can remember. We actively deal with every one of our malls to keep a running list of the people that have demand to get in there, and we are in a constant dialogue with our anchors that we've identified that we have the potential of getting back to try and make them better. And if you look over the years, I think we've added almost 175 boxes and anchors over the last 4 years in the portfolio. So we've been very active and it's making them a lot better. I do not believe we would really be interested in entertaining sale leasebacks.

Christy McElroy - UBS Investment Bank, Research Division

And are you able to of quantify maybe a range of what you might pay for vacant anchor box space for the Class A mall versus the Class B mall?

David E. Simon

Well, each deal is very, very -- depends on a lots of individual characteristics of each deal. It's not really something that you can generalize about.

Ross T. Nussbaum - UBS Investment Bank, Research Division

It's Ross Nussbaum. One final question. The 4.8% same-store NOI growth you've generated this quarter, if I think about that relative to the occupancy gains you had and the re-leasing spreads over the last year, it kind of feels like there's something else that's helping that number. Is there a piece there that I'm not thinking about?

David E. Simon

Well, I mean, partly is good sales growth, partly is that we're very focused on operating to the best of our ability. I would point out, last quarter, Q1 '12, we had 5.7% comp increase. So that 4.8% on top of 5.7% is just running the company as well as we can. But we're never satisfied. We're always trying to improve, and that's what we're all about.

Operator

Your next question comes from the line of Paul Morgan of Morgan Stanley.

Paul Morgan - Morgan Stanley, Research Division

On your re-leasing stats, the opening number went from $53 to $55 [ph] , and I guess it's a 12-month trailing average. And so, I mean how much of your -- is there a disproportionate share opening in the first quarter because I'm trying to see the kind of forecast that number out it was a big jump given that is a rolling average?

Stephen E. Sterrett

Paul, this is Steve. Some of it is mix. In the mall business especially, there are more leases that are tied to traditional retailer's fiscal year end, which is January 31. And in fact, if you look at the supplemental, as I recall, the remaining square footage that we have expiring in '13 is in the 3 million to 4 million square foot range, where over a normal year like 2014, 2015, it's 8 to 9 million square feet. So we have dealt with a lot of the -- especially regional mall expirations that occurred January 31.

Quentin Velleley - Citigroup Inc, Research Division

Okay. That makes sense. And then, I mean, can you maybe just characterize -- I mean, you provide a lot of -- you list all your redevelopment projects and it looks like there's like 37 in there and you have about $700 million it listed in that stock [ph] , which is -- I mean it's only about $20 million per project, but it looks like there's some that are kind adding new space and it should represent, I guess, a more sizable chunk of that. And I'm trying to see -- should we see -- should we expect to see more expansions of malls, given the demand and given your spreads and resulting in some lumpier projects that pull that number up? Are there lumpy projects in there that represent a big share of that $700 million?

David E. Simon

The lumpy projects are basically, hopefully ready to start shortly. And I'm not going to list -- I'm just from recall. I mean, the lumpy ones, you'll start to see later on this year and in '14, I they include as Roosevelt Field of Copley, the Lambeau, and Woodbury, King of Prussia, to name -- Houston Galleria, to name 4, 5 or 6 lumpy, bigger, bigger, chunkier ones. You're right. A lot of what we have now is, they run the -- they run the $20 million, $30 million, $40 million, but you have something like Nanuet, which is $150 million project and Walt Whitman is around $80 million. So you got a little -- you got it all over the Board. But the lumpier, bigger ones, we are essentially in our first phase of the Lambeau. We will begin our first phase of Roosevelt Field here in the fall. Stanford, Rick whispered to me, thank you, we're finalizing everything there to as many of you know to relocate Bloomingdale's, build them a new store and then we take over their existing Bloomingdale's store and carve it up for small shops. So the bigger, lumpier ones really are, hopefully, beginning to start second half of '13, and '14 will be a huge year for us, '15 as well, as these bigger, lumpier ones come onstream.

Stephen E. Sterrett

Paul, it's Steve. I would just add one thing to that. Because it gets lost in the sauce sometimes but between -- David mentioned Woodbury, but he didn't mention Desert Hills, Orlando Premium, Las Vegas North, those are 4 Premium Outlets that's all to north of $1,000 of food and sales where we are adding significant amount of space. And so we're -- those are projects that will come on in the next year or 2 as well.

David E. Simon

And as Steve said, those are, on average, are about $100 million a pop.

Paul Morgan - Morgan Stanley, Research Division

Yes. So I mean, that number could, well it should really double, probably, in a year from now.

David E. Simon

It's going to balloon, and I think what we have said and what we've said and we'll say again is that this is our #1 priority. This is the huge focus for the company. This is where we'll spend most of our time. And the good news is we recognized this that the world was not going to end a little bit ahead of others. So we're in the midst of doing this now. Woodbury is going to start. Right after this, most people, after their first quarter, our earnings take the afternoon off, right after this, Rick and I are going to spend 2 hours on the final approval of Woodbury. It's $168 million deal, and it's going to really, really be cool and it's really going to start and we really got the approvals and blah, blah, blah, blah. And then in the afternoon, we do take a lunch break. Rick demands to go out to lunch. I like to eat at my desk. It's a source of much conflict in the organization, but right after that, we're approving, I don't know, 20-some odd different mall deals. So #1 priority, we're glad we're in the midst of this now and a lot of good stuff to come.

Paul Morgan - Morgan Stanley, Research Division

Would you think those blended stabilized returns are going to be around? I mean, you've got 9 -- you've got 14% for the Premium Outlets in there. Is that going to change much?

David E. Simon

Yes. Look, I think they'll all be very, very accretive to our company. I don't -- soon as the project gets approved and we put it in there, you'll see the return.

Operator

Your next question comes from the line of Cedrik Lachance of Green Street Advisors.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

David, we knew that [indiscernible continues to grow in your portfolio and we're passed some previous peak. What do you think is stabilized occupancy?

David E. Simon

Well, actually, I've been very impressed with our leasing team that they've been able to achieve these occupancy levels. So I think the focus now is, it's always good to, on the margin, to continually increase occupancy. But, Cedrik, I do believe that the focus now will be making sure that the mix is the best that it can be. But I have actually been very pleased and impressed with our leasing team in the amount of their ability to drive occupancy. I don't tell them because then they'll, then they'll take the afternoon off, where Rick and I won't, but now, seriously, I've been very pleased with the results that they've been able to produce.

Richard S. Sokolov

And Cendrik, the only thing I would add is that the number that I'm thinking about is higher than I would have told you perhaps a year ago, because what has emerged in our sector now is you have a number, very high fashion, highly productive tenants like ZARA, H&M, UNIQLO, Topshop that are demanding bigger spaces. And because they are all bigger space, that's going to create incremental demand for our space that could enable us to perhaps drive the percentage higher than what otherwise be the case absent that demand.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

Okay. So as you look at your ability to change the mix, what can it do for your ability to push rents in the centers?

David E. Simon

Well, look, it's relatively straightforward. The better the tenant does in terms of sales per square foot, the greater they have the ability to pay rent. And it's really that simple. So as we do that, we're hopeful that rent will follow or be part of that initial equation.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

And turning maybe to densification. You've got -- you're talking about Copley earlier. It seems that you could add non-retail users depending on the city. How many malls do you own where you think you could add non-retail users and densify the site?

Richard S. Sokolov

Cedrik, it's Rick. Right now, we're working on adding hotels at 5 different projects, and we're working on adding multifamily at 4 additional ones. We're under construction with a multifamily project at Firewheel in Garland, Texas, so we still think there is very good demand for it. What we have found is that when we add these hotels and multifamily or condo components in our projects, they are yielding the higher room rates for hotels and monthly rentals from multifamily because people very much enjoy the mixed aspects of the community. So we think we bring an incremental value to those components and we're going to continue to pursue them.

David E. Simon

I just roughly put Copley aside because that's the big one. But there are at least 12 to 15 in each area that are of immediate focus. That doesn't mean it's limited to those, say, 24 to 30, but there is a list of those 12 or so in each category being hotel or and/or multifamily that we're very focused on. In fact, we're going to prove this afternoon in Southdale more than likely. I'm still struggling with the returns because our returns are higher than the multifamily guys gets. But -- so I'm still trying, I'm still struggling with some of those deals. But I do think there is a pipeline to the advantage of that, and it's good for the real estate generally.

Cedrik Lachance - Green Street Advisors, Inc., Research Division

And just final question, in your Annual Shareholder letter, you talked about continuing to lead the industry and promoting the malls and marketing medium. How much more can you do? How much more income can you generate from that aspect of the business?

David E. Simon

Well, I think it's also just more than income in that. I could be wrong here, but I do think, I do think we're on the verge of a technology backlash. And our focus is creating a mall environment where people -- we had a meeting on this -- kind of a brainstorming meeting on this Monday, and something was said that was very clever, is that people today are looking down, they're not looking up. And what happens in the mall environment is we do give them the opportunity to look up and around and not just down. Down meaning at your mobile device and everything else. So I do think the mall has a unique ability to be part of that, maybe, next wave of trying to create social responsibility, community relations, community feel, and part of a process where we actually look up as opposed to look down. So it's a big focus for our company. The revenue side, obviously, we love cash flow, so we're cash flow junkies, so we're going to look to that too. But there's a unique ability for us to really kind of create community in our properties beyond that. And I think that's a huge mission for us to try and achieve. It's a long-term prospect, lots of ideas there, very hard to sort out exactly how we will execute it. But -- and the good news is, just to segue into the e-commerce, I mean, you're seeing more and more pure e-commerce companies opening stores because they know that people frankly want to look up, they don't always want to look down. So a great example is this Warby Parker, this eyeglass thing that was kind of the new hot dotcom thing and they're opening physical stores. Now whether they go to the malls or not, I'm not -- who knows? But the fact of the matter is, I think they recognized that people want to touch, feel, look up. So our mission is to get people to look up, not look down.

Operator

Your next question comes from the line of Quentin Velleley of Citigroup.

Quentin Velleley - Citigroup Inc, Research Division

It's been a while since you combined the operating statistics of the mall and the outlet business together. Can you maybe talk a little bit about how it's just performing, some of the similarities and differences? And then as we look at the 79.6% of your NOI that comes from Malls and Premium Outlets, could you sort of give us a rough sense as to what the percentage is coming from outlets versus malls?

David E. Simon

Sure. I'll just say this. Steve can answer the second one. In the real estate recession, or I should say, not the real estate recession, because frankly, having lived through '90 to '93, this was child's play. But if you look at the general economy, our outlets clearly outperformed the malls during that '09, '10, and '11 period. And now I will say, Quentin, generally, in terms of sales growth and comp growth, they're relatively close. The outlets are still marginally better, but the difference between those 2 has narrowed considerably. Now with respect to the breakout, do you...

Stephen E. Sterrett

Yes. Quentin, if you actually -- in our year end [indiscernible] , that's posted on the website, we do break it out for you and I don't have it in front of me. But as I recall, the malls are 55% and I think the outlets are 25% because when you put the outlets and the mills together, essentially about 1/3 of our NOI comes from the value side of the business.

Quentin Velleley - Citigroup Inc, Research Division

Okay. And then maybe just in terms of the ongoing success that you're having with Klépierre in terms of improving operations and capital and asset sales and so forth having an influence, are you spending a lot of time looking at a similar style of public company investment where you take a similar amount of minority stake and gets some Board representation? Is that something that's increasingly attractive to you, given the success of Klépierre?

David E. Simon

We have a thought about it from time to time. It's not a big focus for us. But it could lend itself to a situation here or there. But Klépierre was -- the reason we made the investment the way we did was for all sorts of reason, including risk management. So really, it would depend on the circumstances. It's not something that we're out looking to do, but in the right kind of context, it's conceivable.

Michael Bilerman - Citigroup Inc, Research Division

David, it's Michael Bilerman speaking. It sounds like if you're really a cash flow junkie, you should put advertising in the floors, that way you can get more money when people are looking down.

David E. Simon

We tried that. We've done that. We did "buy a footprint", but it didn't go over well. It was great for the kids. Then when I saw the adults using it, I thought it was a little tacky.

Michael Bilerman - Citigroup Inc, Research Division

Thinking about Klépierre, I guess we've elapsed the 6th status for them to effectively go private. So how should we think about your stake and how you want to evolve over time, whether you want this to be stub [ph] outstanding, whether you want to bring it in-house, whether you want to bring a joint venture partner in. How should we think about how that evolves now that the, at least the REIT issue, the French REIT issue is elapsing?

David E. Simon

Well, Michael, I would love to answer that question, but I respectfully won't. We are pleased with the investment. We're making good strides. We need to make more strides. And I said the big problem with the company today is somewhat out of their control, not just dealing with the Spanish economy. But we're pleased, but I really, as much as I'd like to talk about that kind of stuff, I really can't. It is a public company. I've got to respect that situation. So we're pleased we are making very good strides. And I would say operationally, things do take longer there than they would than they would, say, here. But we've been pleased with kind of the blocking and tackling that the company is undertaking now, they still need to do a lot more, though we've been pleased with the progress they've made to date.

Michael Bilerman - Citigroup Inc, Research Division

And just going back to the rental spreads on Page 19 of your sup, and, Steve, you answered that the count, the retailer calendar year end, the January 31. But, I guess, I'm still having a hard time. March 31, '12, it's $7 million trailing at $54, $49 expiring and now you're 3/31/3 [ph] 7.4 million square feet of $59 versus $52, and even 12/31/12, 8 million square feet of $53, $48, it just seems like there's -- that the opening/closing arch is much, much higher this quarter. Whatever happened in the first quarter of 2013 was dramatically higher rents than at any point over trailing '12 [ph] any other quarter.

Stephen E. Sterrett

Michael, that's true, but if we also look, they were dramatically higher closing rents as well. So some of it is clearly mixed-driven. Some of it is clearly the fact that over the years, our portfolio continues to get better. And so the rents that we were able to do leases at 3 years ago, 5 years ago, 8 years ago were better, and those are all now rolling off. So -- but mix is clearly an issue, or component of it.

David E. Simon

And I would just point out that we have in our portfolio, U.S. portfolio, not including the Mills, or actually it does include the Mills, we have 121 properties that do over $700 a foot. So...

Michael Bilerman - Citigroup Inc, Research Division

121?

Stephen E. Sterrett

That average $700 a foot in sales.

David E. Simon

121. So and as a Steve said, Rick said, we're really trying to make those properties better and better in all sorts of different ways. So that's going to lead to more rent growth. But again, I would not overreact to one really good-looking statistic in one particular quarter. Just like I would ask for forgiveness to the extent that one quarter, we have a statistic that looks bad. I'm sure part of it is mix, we can drill down to it a little bit more, but demand is good and we got a reasonably good portfolio.

Operator

Your next question comes from the line of Alex Goldfarb of Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

And just going, I guess, sort of back to Christy's question on department stores and just thinking about JCPenney in particular, especially if they brought in AlixPartners. Your sense of -- as you guys obviously speak to them, other department stores, how much do you think the massive Ala Moana trade has worked department store managements in thinking what their boxes are worth or do you think most people are pretty realistic in what they think their real estate is worth?

David E. Simon

Look, I can't speculate what Ala Moana, how that has affected the judgment of department store or retail CEOs. I would point out though since Ala Moana, there just hasn't been a lot of box trades and you can come to your own conclusion as to why maybe because they don't want to sell or maybe there's a spread between the bid and the ask. I don't know. But I can't speculate on how they think about that at all, Alex.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then going to Klépierre, while I know that you don't want to comment directly on their operations, can you just give us a sense as you guys think about the growth and what Simon can bring to their platform, this split between improving NOI versus bringing in the Simon brand venture type revenue stream and increasing that ancillary income. How would you think about the growth? Is more of it just going to come from NOI or is there a big opportunity, you think, to really improve the ancillary income that, that could be a meaningful contributor?

David E. Simon

Well, again, I'm not going to quantify that. It's not something I can do. Look, I think the important thing to put in perspective there, Alex, is that we don't run the company. We own a stake, we're pleased with the stake, we can show them how we run it and then they need to apply it. And we brought in, the company has brought in some talented people to learn from what we do, assuming we do what we do reasonably well. I mean, I'm not telling you we do what we do is great, because I always think it can get better. But assuming we do what we do reasonably well, we can show them how we do it and how we think about the business, but they've got to do that. They're the ones that need to do it. And it's not easy to do when the economy there is sputtering along and in some cases, still contracting, i.e., Spain. But they get what we're doing, they want to run the company better, they are running the company better. And I think as kind of I said in my letter, I do think there's growth there as soon as the economy of Europe generally stabilizes and I do think the economy of Europe will stabilize. It's not going to -- despite my personal view of it, it's not going to what continue to contract as it has over the last year or 2. So, I mean -- so it was a long winded answer, but I'm not going to speculate exactly how much NOI growth there is, but I do think there's improvement in how they run the business and I think they would agree, I think, that's their big focus in the upcoming years.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then just finally for Steve -- and thank you for new supplemental. On Page 23 in the CapEx and development page, there's an item called conversion from accrual to cash basis. And if you don't have this off hand, we can discuss offline. But just curious what that is.

Stephen E. Sterrett

Well, it's simple, Alex. We give you a CapEx number but there are CapEx numbers where we have accrued obligations like we got a construction build, but we haven't paid it yet. Okay. And all we're doing is giving you both the accrual number and the cash number because some people look at it and want the accrual number, some want the cash number.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, that make sense.

David E. Simon

Sure. And, by the way, that's been in there for a long time.

Operator

Your next question comes from the line of David Harris of Imperial Capital.

David Harris - Imperial Capital, LLC, Research Division

Listen, there's a question, David. See if you feel -- how comfortable you feel answering this. Any thoughts as to what Simon might look like if we were to lose the tax break?

David E. Simon

I don't worry about that at all, David. I just -- REITs have been around for 60 years, it's not going to happen. I just can't imagine it's going to happen. As you know, it's revenue-neutral. If, in fact, there was some change, I think the -- I think most politicians understand the importance commercial real estate has in stabilizing the general economy. The last thing in the world they would want to do is create some kind of economic uncertainty. They've seen the fact that the downturn and what commercial real estate, how it handled itself in the amount of liquidity that reached -- brought to the table to stabilize pricing, and that create kind of what happened in the early '90s. And as I said, I have lived through that, as has Rick.

David Harris - Imperial Capital, LLC, Research Division

Me, too.

David E. Simon

You, too. Some others. It's not going to happen. But, by the way, if it did, we would, we would be best positioned to take advantage of it. Because, as you know, our cash flow is significantly above our dividend payment. And look, I have always fantasized, I probably shouldn't say this. So I always fantasized we pay out a $1.5 billion a year in dividends, $1.6 billion? What is the numbers now?

Stephen E. Sterrett

$1.6 billion.

David E. Simon

$1.6 billion. Imagine if I have that amount of capital through 2, 3, 4 years. So we would do some great stuff with it. But David, that's on a side, it's not going to happen. REITs have performed, they've been very important to the economy, they've been great for individual shareholders, they helped stabilized pricing. No way.

David Harris - Imperial Capital, LLC, Research Division

Okay. So no Plan B planning at this point?

David E. Simon

Well, we don't need to. But like I said, if the sun hits the moon and hits another galaxy, we will be better positioned than anybody else.

David Harris - Imperial Capital, LLC, Research Division

Well, tax breaks aren't granted in perpetuity. So I think the question is out there. A similar question actually related to Klépierre. I mean obviously, there's been a lot of talk about tax increases and public policy responses that may be somewhat more fluid in Europe today. Any notion at all that the tax status of the company like Klépierre is being questioned?

David E. Simon

Not at all.

David E. Simon

Your next question comes from the line of Michael Mueller of JPMorgan.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Let me go back to the leasing spreads again, not to beat a dead horse here, but the 13%, so the 300-basis point pickup, when I first looked at that, what went into my mind was you're starting to roll some shorter term post-downturn leases and you're getting the benefit there. I guess what I'm trying to get at is, does it feel like this increase whether it's 200 basis points, 300 or whatever it is, is probably going to be sticky going forward or is it just purely an anomaly where Q2 rolls around and for some reason were back down to 10%?

Stephen E. Sterrett

Mike, it's Steve. Let me take a shot at it and Rick can weigh in or David. I think if you look at the -- we give you 5 quarters' worth of information, and the one thing you can see from the 5 quarters is that the spread has increased over each of the 5 quarters. The magnitude of the increase, this quarter was substantial relative to the trend that we had been seeing, but we had been going from the low 4s to the mid 4s to $5 a foot. So and, as I said, some of that is lumpy because of first quarter explorations, but the fact is, deal flow has been getting better, quality of deals has been getting better, occupancy cost has stayed relatively low. So as you want to think about it, as a mark-to-market or however you want to think about it, there is, there should be an upward bias. Is the upward bias from $5 to $7, I think that's hard to say. But the trend has been good.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay. And then, I guess, secondly, just curious about what are the thoughts on the pace of rolling out outlets in Brazil today compared to what you were thinking 6 months or a year ago?

David E. Simon

Let me answer it if I could. I think both. As you know, we've looked diligently in Brazil and diligently in China. Both markets for us have proven to be very, very difficult to find the right project with the right risk/reward ratio, and hence we have nothing -- I mean, we're still working with BR Malls. We're still hopeful that eventually, we'll be able to do something there. China is proved to be a market that I continue to really question whether or not anybody can make money investing there, especially us. And so I'm hopeful that over time, we'll find the right opportunity with BR in Brazil, but that's taken longer than we anticipated. And then China is really, really on the back burner. And I have no regrets about it being on the back burner.

Operator

Your next question comes from the line of Deutsche Bank.

Unknown Analyst

I just wanted to go back to JCPenney real quick. Just, obviously given the transition at the top there, I'm just wondering if you could share your thoughts on that move itself. But then also, given their sort of return to more conditional marketing tactics that they've been known for. At the ground- level, have you seen any change in traffic levels and that kind of thing since the move?

David E. Simon

Well, let me just mention, we're pleased that Mike Ullman is back. I think he will -- he's obviously a very confident, seasoned, thoughtful CEO and leader. And given all the turmoil that Penny was going through, a perfect choice to help stabilize the company. And that we have great respect for him and his ability. And I would say, generally having walked a number of Penny stores with David Contis and Rick over the last -- not just the stores. So the stores are looking better. So I think they're heading on the right track. It's very hard for me to speculate exactly how it's all going to shakeout. But the bottom line is the organization needed some stability and thoughtfulness, and I think Mike's perfectly the right guy to provide that,

Unknown Analyst

Okay. And just want to go back to some comments you made about the department -- no, the anchor space I, think, 635, only 6 or 7 vacant, so some of the lowest vacancy you've ever seen there. But then you also kind of you say that -- I think I heard no interest in sale-leasebacks. Just curious, if you could comment on what kind of demand is out there for additional anchor space, obviously with the, vacancy low, that's good, but I mean, are you seeing much demand for anchor space? It just seem like more people are moving to the outlet channel in terms of the traditional anchors.

Richard S. Sokolov

This is Rick. There is a great deal of demand for the space, and if you look at the kind of tenants that we're adding to the properties, we're adding Wegmans, Fresh Market, Dick's, theaters, health clubs. There is a substantially broader number of categories of retailers that want to take advantage of all the traffic en masse that we are creating at these properties. So we have, again, more demand today than we have had historically from a broader collection and a variety of retailers than we've had in the past, and all that is helping drive, I think, the growth of our property and the lack of vacancy among our anchor boxes.

Unknown Analyst

Okay. Do you have enough data points at this point for some of these non-traditional anchor malls, as far as how the performance of those malls compares to historically the traditional setup our mix?

Richard S. Sokolov

I think that all of our anchor components are part of the mix that we have at the property. They are not going to be game changing, but they obviously want to be a property that are consistent with their growth and in some instances, merely a function of whether we can accommodate the physical configuration. Wegmans needs almost 4 acres of land for a single level building, well in a lot of instances, that can [ph] happen. So it's really less a function of that kind of a correlation, a more a function of can we continue to give our trade area shoppers more reasons to come to our properties, then that's what we're all about.

Operator

Your next question comes from the line of Richard Moore of RBC Capital Markets.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

On the bankruptcy front in the lease termination front and that sort of side of the equation, it seems that things are pretty good. I guess, Rick, how would you characterize the outlook for lost tenants over the next 3 to 9 months?

Richard S. Sokolov

Well, if you look historically, our bankruptcy numbers have been up a little in '13 just because of Bakers. But overall, the credit profile of our tenants has never been better. Our receivables, Steve can elaborate, has never been in better shape or bad debt is stable. So we're feeling good about the credit profile of our tenants and more importantly, their rent-paying ability, which continues to be pretty strong.

Stephen E. Sterrett

Yes, Rich, this is Steve. Just to put numbers on Rick's overall statement. I think at the end of the third quarter, we were chasing $42 million of receivables that had been built, but not yet been paid and that's on about a $7 billion annual base of revenue that we bill either on the consolidated or the JV property. So you're literally talking about less than 2 days’ worth of revenue. And the credit profile, as Rick said, is very strong right now.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. I don't think my calculator decimals go out that far, Steve, so. Okay, good. And then on the outlets, I think didn't you guys do the development of Houston and Tangers doing Charlotte, and how do you split up Columbus? So, I guess, who's driving Columbus is what I'm curious.

David E. Simon

It's -- in Charlotte, we've actually switched the roles that we had in Texas. And in Texas, we were the developer and we jointly leased and they run the center. In Charlotte, they are the developer as there was the site. We're going to manage the center and will jointly lease. And then in Columbus, again, Columbus is a competitive marketplace. But in Columbus, we're switching back to the other deal. So it's been -- partnerships are very common in the real estate industry. All sorts of people are partnered, developers over the years have always partnered. We have a very good relationship with Tanger and so it's just kind of a natural to say, okay, this is a way it was here, we're going to swap there and then go back here, and then there's another deal to do, it would probably swap back to the way we're doing Charlotte. So long winded, but Charlotte will be a the Charlotte Premium Outlet, and then Tanger will be branding Columbus, if, in fact, we're the successful developer.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And then, David, how many more do you think of the 8 that you have going and you would do with or that you're thinking about for North America you'd do with Tanger?

David E. Simon

Well, in the 2 or in the 8, and that be of the 8 North America, that includes Canada by the way, and we are actually looking at another site in Mexico. And we've seen very good progress in our outlet in Mexico City. But of the 8, 2 of those are Charlotte and Columbus, of the 8.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

Okay. And no more plans yet with Tanger?

David E. Simon

No, sir.

Richard C. Moore - RBC Capital Markets, LLC, Research Division

And then the last things, the recovery ratio, I think it was pretty much a high this time, this quarter. I mean, is it going to stay up where it is?

Stephen E. Sterrett

Well, I think we're excited -- I tell you in a weird sort of way the recovery ratio the way those of us who have been around awhile that historically thought about it. It's kind of less relevant now because we are 90 plus percent converted to fixed KM, so the KM charge is just another fixed charge that the retailer looks at in the calculation of the total occupancy cost that they're paying to the landlord. Our fixed KM all have individual annual escalators. And if you look at our operating cost, they've been pretty flat. And as long as that's the case, you're going to see the recovery ratio the way developers have traditionally thought about it, continue to increase.

Richard S. Sokolov

But I will tell you just in terms of our ability to drive rents if you go back and we've given you some of the quarters in the K, but our occupancy cost is down over 100 basis points since 12/31/10. So we're still providing very good profitability and value for our retailers.

Operator

Your next question comes from the line of Ben Yang of Evercore Partners.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

David, you made some comments last [ph] quarter that demand is picking up in the B mall category that sales were actually okay. So 3, 4 months into the new year, is that still the situation generally that the B mall segment continues to perform okay?

David E. Simon

Yes. Yes. Yes. I mean, yes, it is.

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then also, maybe for Steve based on some of your recent conversations with the lenders. Are the lenders taking a more conservative approach maybe to the B mall category given obviously what's happening at JCPenney?

Stephen E. Sterrett

Well, Ben, I would just say that lenders and I assume you're referring to the secured lenders, generally speaking, I have kept a more conservative posture. Loan to values are still relatively modest, underwriting is still relatively conservative. And that's true regardless of the quality of the asset.

Benjamin Yang - Evercore Partners Inc., Research Division

Okay. So no significant change over the past few weeks given obviously the new management team at JCPenney's and a lot of uncertainty going on with that particular anchor; is that a fair assumption?

Stephen E. Sterrett

That's fair.

Benjamin Yang - Evercore Partners Inc., Research Division

Okay. And then maybe switching gears. You made some comments on China just now. On the back burner, just to find opportunities, just to make money. Can you just elaborate a bit on some of the challenges that you see in China today that makes you a little more cautious because I do recall that you guys did go to China a few years ago doing some anchored centers, and I was curious what you see today that makes it still very challenging for you guys.

David E. Simon

Well, that was a very good experience. And we brought 70% -- look, any time you invest capital and you only bring 70% of it back home, you learn a lesson. And I would say, Ben, generally, generally, the ability to underwrite the product there in terms of what the tenants are going to pay, what the costs are, what the approval process is, all of the elements of the P&L and pro forma, including construction cost, land cost, permitting, it's all very, not to say that people can't make money there, but it's all very difficult to really have a high degree of confidence. And when you think of the risks associated there, you would hope that the returns are better, at least on the piece of paper that you're ready to make the investment are. And frankly, they're not, and that's what -- that's where the big gap exist. And so a lot of it is, build and they will come, and that plays out pretty badly in real estate development. I mean, it's certainly, build it and they will come in the U.S. As Rick knows and I know, Rick's older so he knows a little bit more than I know. Build it and they will come did not make every mall successful. There were a lot of malls that frankly shouldn't have been built. So it's just very tough to have the level of precision that we want and if there were margin for error, i.e., returns on investment that were higher, you would take the risk. I just don't see it in everything that we look at on a piece of paper in China. Brazil is a little bit different. You can pencil better returns there. But again, finding the right site and the right -- and the ability to build and so on is a little more tough -- difficult but you do see a little bit of a -- you do see a much better returns at least on a paper.

Benjamin Yang - Evercore Partners Inc., Research Division

Okay. That's very helpful. And maybe just one final one on China. I mean, what type of returns would make it more attractive for you to go into China, given all the risk that you've kind of elaborated on?

David E. Simon

You'll know it when we do it, and right now, I don't see anything on the drawing board that's going to -- and again, please, the fact of the matter is, somebody could be very successful and we could miss an opportunity, but for whatever reason, whatever we're looking at, it's just not making sense for us. That's not to say others might not be successful.

Operator

Your next question comes from the line of Josh Patinkin of BMO.

Josh Patinkin

A couple of questions on Toronto Premium Outlet and the broader opportunity set for the Premium Outlet brand in Canada. Hudson Bay is opening their first outlet store there. Are you in a position to announce any other merchants?

David E. Simon

Yes, we will. I don't know when we're going to do that, but we normally do that. We normally have done that throughout the process, but we will. I mean, this should be, by all accounts, a very successful outlet center.

Richard S. Sokolov

We're already 85% leased and committed, and we will be putting out a press release in the next month or so. It's opening in August. So it's happening and it's gotten very good response from both the Canadian-based retailers, but also the U.S. retailers that are operating in Toronto already.

Josh Patinkin

Okay. So that was my next question. The American brand, I'm trying to assess their level of interest in Canada, and are the Canadian brands that are going in there, are they developing a made-for-outlet merchandising strategy similar to what happened?

David E. Simon

Some are. Yes, some are now. Hudson Bay is a perfect example. We have a wonderful relationship with the parent, which is, as you know, Lord & Taylor and we've picked up the phone and said, this, you're doing Lord & Taylor outlets in the U.S. a few here and there. You ought to do it with Hudson Bay and, really, we generated that idea. They thought long and hard about it and they were very interested in doing that. So I do think it will start a trend there, no question about it. And the U.S. folks are very interested, assuming they have a full price presence ahead of that. And Canada generally is very attractive to most U.S. retailers. But not all are there. And some of their outlet concepts will be delayed to the extent that until they have the full price there, which is coming and for us, with Toronto Premium Outlets, the luxury brands are starting to hit Toronto, and what we think over time, as they hit there, we have the natural place for them to do the outlet. But again, that's going to take time. In the meantime, we're going to have a terrific center and we have a Phase 2 there that would allow us to bring in the luxury guys as they hit kind of the greater Toronto market.

Unknown Analyst

Okay. As you look at Canada, how many Premium Outlet caliber malls are there to build in Canada do you think?

David E. Simon

Well, look, we expect in our, at least one of the -- now this was a great secret, now you've got 3 or 4 of the 8, but one in Mexico [ph] . One of the 8, at least 8 is in Montréal, which we expect, again another meeting today on it, but we're going to start construction on that in July. And so that's -- we think that's a good market, a very good market. Now it poses a little trickier leasing because a number of the U.S. brands won't go up to Québec, but we think that's offset by some of the international brands that really do like Montréal. In fact, Montréal is a great fashion city and they have great malls there, and we think it's going to be a great long-term project. So we've got Montréal. Obviously, Vancouver is a very interesting market as well. We're focused on those kind of bigger gateway areas up in Canada.

Operator

Your next question comes from the line of Nathan Isbee of Stifel, Nicolaus.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

David, you've updated your FFO guidance at the first quarter for stronger operations. Just going back to the first -- fourth quarter volume you said on that call, it was going to be tough to match the 4.8% same-store growth you did in '12. Could you perhaps give us an update of those thoughts?

David E. Simon

Well, we -- look, the first quarter was very good. We had a -- what's really impressive for me is that it was off a really good first quarter in '12. So that's pretty significant cash flow growth when you had the 5 7 plus the 4 8, on top of the 4 8.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

I agree.

David E. Simon

I am conservative by nature. I think the organization generally is even though we probably don't compliment them as much as we should, they're really doing a good job. So it would be -- I would be very, very excited if we maintained that we are not anticipating that. We also kind of trended down through the year. First quarter was better or so last year if you look, we kind of -- I don't remember where we were overall for '12, but...

Unknown Executive

4 8.

David E. Simon

4 8. So I think '13 we're heading the right direction. I'm really not answering your question, but it's off to a good start is all I can tell you.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then any thoughts about some of the fundamental strength of the B mall market. There seems to be some new entrants into the B mall category, people looking to buy some of those major assets [ph] , et cetera. What are your thoughts in terms of perhaps accelerating your sales out of that group, taking advantage of the new entrants to that market?

David E. Simon

Well, we're still going to prune the portfolio. So I'm pleased that there are new people coming in the market that are looking at deals. So I think that's good for us generally.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just finally on St. Louis. You have 97% spoken for at this point. Now that you're getting closer to the open, can you give us a little bit more, perhaps the insight into the negotiations with the retailers of why they chose your site over the competing and what type of sales they're expecting to get out of that?

David E. Simon

Look, I -- really, I'm not going to get into that, Nate, other than to say we presented to them what they thought the center was going to be like Cincinnati Premium Outlets. This is kind of how we envisioned the productivity and the mix. And that's been very -- it's a quite center, but it's been well received by the community and by the retailers. And that's how we sold it to the retailers. Now they have a lot of confidence that if we say we're going to build Cincinnati, they did, we did that, so that's how we kind of sold it, and to them in terms of how they should think about the productivity. The pricing was similar to that. I mean, and we took it from there. I mean, nothing beyond that, really. I mean, it was competitive, but at the end of the day, I think retailers have a level of confidence with us that -- in terms of the outlet product. I will say this, though, we got the -- this pricing in new deal, it's not -- the outlet retailer generally, they know what they can afford to pay. So as much as we'd like to say, there's just great, huge negotiation on rents, I mean they're used to saying, here's what I pay on the new outlet center and that's what they pay. So they're in a very good position to bargain what the rental rate is. I mean, the one thing they really wanted to do, they really don't like competing centers. They really like when there's one site and then they all go because they don't -- they know what they can afford to pay and then that's what they pay. So in Charlotte, as much as the market might think, boy, Charlotte looks like we're going to build that one center. The retail community loved the fact that they didn't have to worry about a competing site. They really, really like it. Now in St. Louis, I'm sure a number of them felt that way as well.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And I guess your success there hasn't whetted your appetite for another bite [ph] .

David E. Simon

No. Look, we've lost plenty of those, too. And I mean -- but it's, like I said, it's not -- it's common to partner and just get a deal done for the community, for the retailers and be done with it. In this case, it didn't happen.

Operator

This concludes today's question-and-answer session. I will like to hand the call back over to Mr. Simon for closing remarks.

David E. Simon

Okay. Thank you for your time and your interest, and we'll talk to you very, very soon.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a wonderful day.



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