Simon Property Group Inc (SPG) — Q1 2015 Earnings Call Transcript

Thank you, Whitley. Good morning and welcome to Simon Property Group’s first quarter 2015 earnings conference call. Presenting on today’s call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer. Before we begin, 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 note that this call includes information that is accurate only as 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 supplemental information in today’s Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I’m pleased to introduce David Simon.

Okay. Good morning. We had a strong start to 2015. As you know, we closed on the acquisition of Jersey Gardens and University Park Village, two great properties that we are excited to have in our portfolio. We created two joint ventures with two of our longstanding retail partners, one with Hudson's Bay Company and the other with Sears Holdings, which will serve as additional avenues for growth. And of course we continue to produce strong operating and financial performance. As you know, results in the quarter were highlighted by funds from operations of $2.28 per share, exceeding once again the First Call consensus by $0.03. That was achieved even though we had a decrease of approximately $0.03 for the quarter due to the strong dollar against the euro and the yen. On a comparable basis excluding the operating results from WPG properties in the prior year period, our FFO per share increased 6.5% or $0.14 even with the currency devaluation. Our occupancy was 95.8%, with strong leasing activity. The malls and premium outlets recorded leasing spreads of $11.19 per square foot, an increase of 18.9%. Comp NOI increased 3.5% in the first quarter of 2015, compared to an increase of 5.3% in the first quarter of 2014. Approximately 95% of our domestic property NOI is included in our comp NOI calculation. Our comp NOI in the first quarter was negatively impacted by about 50 basis points due to a significant overage retroactive billing within the mills in the first quarter of 2014. Total sales across our portfolio increased 2% in the first quarter, compared to the first quarter of last year. We are continuing new premium outlets in Gloucester and new centers in Tampa and Tucson, as well as our designer outlet in Vancouver. We are slated to begin construction on as many as three additional domestic premium outlets in 2015, as well as three international outlets for a total of six. We expect the approval process for Syosset Park to go well. Our industry-leading balance sheet continues to differentiate us from our peer group. We announced a $2 billion share repurchase program. We are proud to announce a dividend increase of $1.50, which is a year-over-year increase of 15%. We have increased our guidance based on our view of the year, from $9.65 to $9.75. We continue to feel very comfortable on the comp NOI growth of 4% for the year for malls, Premium Outlets, and Mills. And we are ready for your questions.

Hey, good morning. It’s Michael Bilerman here with Christy. I was curious as to how you think about your stake in Macerich at this point. Do you sort of view it as a $470 million mall, that’s given you a 3% yield, and think it is potentially worth $570, or do you view it as worth $470 million, which you bought for $370 million?

Well, Michael, frankly, we were not able to engage with Macerich, even though we tried hard to. We put an unbelievable offer on the table and tried to engage. We have been quite busy between Sears, Hudson's Bay, finishing Brickell, and ensuring our redevelopment is on time and on budget. I haven’t really had the luxury of figuring out what to do with that stake. At this point, I can’t really answer your question, but at some point, I will address it. I’m open to your ideas if you have any though.

In terms of the Klépierre Corio transaction, could you talk about potentially increasing your stake up to 30%?

That kind of opportunity is always on the table. We are up €1.4 billion in our investment, which is not too shabby. I mentioned we helped engineer a €7.4 billion European merger. I’m pleased with my investment, but we will see how that evolves. I haven’t had indications from other large shareholders that they wish to exit.

Good morning, David. With the new Hudson's Bay and Sears joint ventures, is this control over their boxes unlocking any future potential major redevelopment projects in your centers?

The partnership with Sears is all about redeveloping those boxes. We bought the Plaza store with significant demand. We are looking at an expansion there, potentially worth a couple of hundred million dollars. All of that is aimed at faster redevelopment.

Thank you. From Simon’s mall portfolio perspective, is there opportunity for you with the churning in the mall anchor space?

We have a very high-quality portfolio that’s produced outsized comp NOI growth. There has not been a lot of churning in the department store world. We are focused on replacing lost specialty retailers with stronger ones. The retail business is Darwinian, and we expect to be able to add stronger retailers moving forward.

Just following up on Macerich, what were the pursuit costs related to that and where do they fall in your Q1 numbers?

It’s in the other expense category, and they are done. We have no more pursuit costs; they are immaterial.

Are you able to provide an estimate?

Immaterial, but we do a lot of this in-house.

Just curious about occupancy in Q1; was it down a little year-over-year?

We normally close 60 to 80 basis points from seasonality. We had more than that this time, with about 50 basis points from bankruptcies. Our cautious comp NOI growth is in line with that, but we expect occupancy to increase as we move through the year.

We expect occupancy to go up as we redeploy some of that space we are working on.

David, do you intend to buy back stock around the current levels?

We wouldn’t have announced it unless we were serious. We couldn’t buy stock back due to our blackout period when the announcement came. Looking at our growth prospects and track record, we are very well positioned, and we want to take advantage of volatility.

Can you talk about the department store industry right now?

We feel comfortable with our relationship with both Sears and Hudson's Bay. Both have valuable retail real estate, and we are looking for future growth opportunities. Could other retailers also tap into their real estate value? Sure, but they need to be careful.

Could you talk about the rating agencies' stance, especially regarding the cap rates they use?

The agencies should update their cap rates; it’s silly to use 7% given current mall trades. They have confidence in us to resolve any potential issues.

Can you provide your ownership percentage in the Brickell transaction?

We will have a 25% interest in the retail and will manage the retail portion of the project.

Can you clarify the strategic decision involving the Miami project?

They approached us about the project. We're confident it will be a unique and high-value asset.

Can you give an update on tourism-driven markets as it relates to the strong dollar?

The strong dollar has affected sales in some international markets. However, this volatility is manageable and won't change our overall financial profile.

How much room is there for premium outlets to be built in the U.S.?

It's a challenge to produce outlets of our quality. I'd say under 10 over the next three to five years.

Any new names for potential tenants?

L Brands, with Victoria's Secret, is doing great and expanding. We are growing with international retailers like UNIQLO and H&M.

Regarding Syosset, how much of that project would you actually do yourselves?

We may sell or joint venture most of the other uses. But we will manage the 400,000 square feet of retail.

To what extent are you seeing omni-channel capabilities incorporated into the Premium Outlet model?

Retailers will bring omni-channel capabilities to outlet stores. This integration should enhance the outlet experience.

How do you think about Land and Buildings and Orange Capital’s proxy campaign post them rejecting your offer?

I’m not surprised by their actions; we put a significant offer on the table in good faith. I hope they understand it was not a hostile offer. It was unsolicited but not hostile. Thank you, everyone, and take care. We will talk to you soon.