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Simon Property Group Management Discusses Q3 2013 Results - Earnings Call Transcript

Simon Property Group (SPG) Q3 2013 Earnings Call October 25, 2013 9:00 AM ET


Elizabeth A. Zale - Senior Vice President

David E. Simon - Chairman and Chief Executive Officer

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

Richard S. Sokolov - President and Director


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

Michael Bilerman - Citigroup Inc, Research Division

Ross T. Nussbaum - UBS Investment Bank, Research Division

Craig R. Schmidt - BofA Merrill Lynch, Research Division

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

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

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

Omotayo T. Okusanya - Jefferies LLC, Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Benjamin Yang - Evercore Partners Inc., Research Division

Josh Patinkin

Haendel Emmanuel St. Juste - Morgan Stanley, Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Jeremy Roane

David Harris - Imperial Capital, LLC, Research Division

John P. Kim - CLSA Limited, Research Division


Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Simon Property Group Inc. Results Conference Call. My name is Gwen, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.

Elizabeth A. Zale

Thank you. Good morning, everyone, and welcome to Simon Property Group's Third Quarter 2013 Results Conference Call. Presenting on today's call is David Simon, our Chairman and Chief Executive Officer; Rick Sokolov, our President and Chief Operating Officer; and Steve Sterrett, our Chief Financial Officer. Before we begin, just a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please also note this call includes information that maybe accurate only of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the company's supplemental information included in today's Form 8-K filing. The supplemental information is available on the investors.simon.com.

I would now like to introduce David Simon.

David E. Simon

Good morning. It was a strong quarter with excellent performance in our core business. We had strong progress on our growth strategy, which includes redevelopment and expansion of existing properties to meet retailer demand and enhanced productivity, development of new Premium Outlets and our continued smart acquisition strategy. FFO was $2.21 per share, up 11.1% from the third quarter of 2012. Our FFO exceeded the first call consensus estimate by $0.05 per share.

For the malls and the Premium Outlets, comparable property NOI growth was 4.9% for the quarter, driven by tenant sales up 3% to $579 per square foot. Occupancy up 90 basis points to 95.5%. Our releasing spread was a positive 15.2%, or $8.05 per square foot. Retailer demand for space in our properties remained strong and healthy, driving our occupancy increases. Our retailers sales continues -- growth continues to be ahead of GDP. And more important to us, our existing leases are under market rent. And keep in mind, we see almost no or very little correlation between tenant sales growth and our NOI growth due to our ability to replace underperforming retailers. We have good visibility for strong NOI growth over the near term.

New development, just quickly, we opened 3 new Premium Outlet Centers during August, all of which have exceeded expectations. All were nearly 100% leased at opening, and sales per square foot of all 3 properties are trending above our portfolio average. The total net development cost of the 3 were $400 million, that's not our share, but in total, we expect a first year return of 10.5% on our cost.

We broke ground on Premium Outlets in Charlotte and in Montréal. And we finalized joint ventures that are under construction in Eagan, Minnesota, which is in St. Paul, Minneapolis; and Vancouver, British Columbia, Canada in our new partnership with McArthurGlen.

On the redevelopment expansion highlights, The Shops at Nanuet opened in October, a complete transformation into an open-air environment, providing everyday shopping and activities plus dozens of fashion and specialty retailers unique to the area. It's 98% leased. Community acceptance and early reports on sales have exceeded expectations. We also opened a 105,000 square-foot expansion of Orlando Premium Outlets in October. It's 100% leased. Redevelopment and expansion projects ongoing at more than 35 properties in the U.S. and Asia.

Overall, our multi-year pipeline of new development and redevelopment and expansion projects is key to driving growth in NOI. We continue to expect development investment at least $1 billion annually, from '13 through '16 go projects. Go projects include Roosevelt Field, Houston Galleria, Woodbury, Stanford, Del Amo, just to name a few. In other words, they are under construction.

International, just let me mention a few things. Finally, we completed the closing of our joint venture with McArthurGlen. It includes ownership interest in 5 McArthurGlen Designer Outlets located in Vienna, Venice in Naples, in the Netherlands, near Düsseldorf and one in the U.K. near Kent. We also own a 50% interest in their management and development company, which has a strong pipeline of future projects and opportunities. We're excited to partner together. Great platform for high quality retail real estate in Europe and a strong team of professionals. This partnership supports and extends our international growth strategy. Important industry synergies will be taken advantaged of in upcoming years, similar to what we're accomplishing with Klépierre.

Total consideration for the recent investments is approximately $500 million at a cap rate of slightly north of 6.5%. Klépierre announced the revenues a couple of days ago. We continue to believe we are well-positioned to assist them in delivering greater value from their platform. European retail recovery is just getting started, and they are beating financial and operational expectations.

Capital markets, annuities, investor service upgrade at SPGs, senior unsecured debt to A2 with a stable outlook. We are 1 of only 2 REITS with an A-rating from S&P and Moody's. We completed a $750 million Eurobond offering to complement our McArthurGlen and Klépierre investment. It taps into broad market, expands our access to capital, provides a natural hedge and a strong demand enabled more favorable terms for lending for leading European real estate players. Rate of 2.375 for 7-year notes.

Dividend, quickly, we increased our quarterly dividend from $1.15 to $1.20 per share, as a result of continued strong performance and a raise of our taxable income estimate, a year-over-year increase of 9.1%. Total dividends paid in 2013 will be $4.65 per share compared to $4.10 in 2012, an increase of 13.4%. We will, again, raise our first quarter dividend after our taxable income estimate is complete in the first quarter 2014.

Today, we're raising our FFO guidance to a new range of $8.72 to $8.78 of FFO per share. The primary driver of this increase is strong operating performance across all platforms. This increases the midpoint by $0.10 from our last one in July and $0.30 from the midpoint of the range from the beginning of the year in February.

Our commitment to shareholder return and our ability to execute has built an unprecedented track record of meeting or exceeding expectations on a quarterly and annual basis for at least the last decade. Our nearly 20-year history as a public company since IPO in December of 1993 is as follows. Total shareholder return of approximately 1,975%, or 17% annually for 20 years. Our FFO grew in 1993 from $150 million to over $3.15 billion in 2013, using the midpoint of our guidance range. Our equity market cap grew from $1.8 billion to approximately $58 billion today. And we're not resting, the range of opportunities in front of us is exciting and we'll continue to focus and work very hard to produce strong results.

We're now ready for questions.

Earnings Call Part 2: