Simon Property Group's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Simon Property Group (SPG)

Q1 2012 Earnings Call

April 27, 2012 11:00 am ET

Executives

Shelly J. Doran - Vice President of Investor Relations

David E. Simon - Chairman, Chief Executive Officer and Chairman of Executive Committee

Richard S. Sokolov - President, Chief Operating Officer, Director and Member of Executive Committee

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

Analysts

Christy McElroy - UBS Investment Bank, Research Division

Jeffrey Spector - BofA Merrill Lynch, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Quentin Velleley - Citigroup Inc, Research Division

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

Paul Morgan - Morgan Stanley, Research Division

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

Steve Sakwa - ISI Group Inc., Research Division

Ki Bin Kim - Macquarie Research

David Harris - Imperial Capital, LLC, Research Division

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

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

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

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

Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Simon Property Group Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. 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 2012 Earnings Conference Call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to our filings with the SEC for a detailed discussion. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time-sensitive information that may be accurate only as of today's date, April 27, 2012.

During today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information package that was included in this morning's Form 8-K. This package is also 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

Okay. Good morning. Thank you for joining us today. The scope and breadth of our company can be best described by a high-level overview of our activities and accomplishments during the first few months of 2012. First of all, financial and operationally, let me just state that FFO was $1.82 per share, up 13% from the first quarter 2011. We exceeded the First Call consensus by $0.14. We have now met or exceeded expectations for 31 of the past 33 quarters. For our malls and Premium Outlets, comp NOI grew 5.7%, and you'll recall that our comp NOI for first quarter 2011 was up 2.3%. Tenant sales were up 11.2%. Both individually the malls and the Outlet portfolio were up double digits. Occupancy was up 60 basis points. Average rent per square foot was increased by 4.4%. Releasing spread was a positive 9.7% or $4.74 per square foot.

Now let me turn to transactions. As you know, we invested $2 billion in purchasing shares of Klepierre, the second largest owner of retail real estate in Continental Europe. With assets valued at a portfolio EUR 16.2 billion, we now own nearly 29% of the company. I'm Chairman of the Supervisory Board, and we control 3 of the 9 board seats. Our investment provides opportunity for significant value creation through exchanging operational best practices, creating synergy through our leasing and marketing efforts and the generation of ancillary revenues. We'll be actively involved in the Klepierre capital allocation decisions, including allocation of capital amongst the various assets and the countries in which they do business and we'll be providing guidance on investment and divestiture decisions and balance sheet management. We view this investment as having significant optionality for us given the countries in which Klepierre operates, the large number of assets that it owns and manages and the successful operational platform that it possesses. From a capital point of view, it essentially replaces our previous European investments, which were liquidated at a significant gain to our shareholders over the past couple of years.

Now let me turn to Mills. As you know, we acquired the interest of our joint venture partner in 26 of 36 assets of The Mills Limited Partnership for $1.5 billion. Transaction completed at a good cap rate for us and reinforce that this has been a good deal for us and our partner, Farralon. We believe there is upside in the assets with growing NOI, and we'll continue to pursue many of the redevelopment opportunities in the portfolio. At the end of the day, both of these transactions will be immediately accretive to FFO. To fund Klepierre and Mills transaction, we sold unsecured notes and issued common equity. We sold $1.75 billion of senior unsecured notes in 3 tranches. Rates on the 3 tranches of notes were the lowest ever achieved by a REIT by an average of 76 basis points. We issued 9.1 million common shares at a price of $137 per share, and our rating of A-, A3 were affirmed by all 3 rating agencies. In addition, we weren't done with that. We acquired another 25% ownership interest in Del Amo Fashion Center where our major redevelopment is in the planning stage, and we sold our interest in Gallerie Commerciali in Italy at a gain to our investment.

Development activity, if I may turn to. We successfully reopened the fully restored Opry Mills to a great public reception. Space at the center is approximately 90% leased and committed. In addition, we started construction on 4 new Premium Outlet Centers, all scheduled to open in 2013: Shisui in Japan, our ninth Premium Outlet in Japan; Phoenix, serving the greatest Phoenix and Scottsdale areas; Toronto, which actually the groundbreaking was this week, our first upscale Outlet Center in Canada; and Busan in Korea, our third Premium Outlet in Korea. In addition, we signed agreements to develop Premium Outlet Centers in Brazil with the well-known and well-respected BR Malls, and in China, with the well-known and well-respected Bailian Group. And we're focused on a site adjacent to the Disney Shanghai. Continued construction on 2 new Premium Outlets that will open in the U.S. this year, Merrimack, New Hampshire and south of Houston, Texas. We continued construction on 25 renovation and expansion projects in the U.S. and in Japan with 2012 and 2013 completion dates, and we continue to expect our share of development spend to approximate $1 billion in 2012, '13 and '14, respectively.

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