Simon Property Group - Earnings Call - Q4 2011
February 3, 2012
Transcript
Speaker 0
Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Simon Property Group earnings conference call. My name is Kathy, and I'll be your operator for today. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session. If at any time during this call you require operator assistance, please press star followed by zero, and an operator will be more than happy to assist you. 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's call, to Miss Shelly Doran, Vice President of Investor Relations. Please proceed.
Speaker 5
Good morning, and welcome to Simon Property Group's fourth quarter 2011 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 and may be accurate only as of today's date, February 3, 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 Property Group website in the investor section. Participating in today's call will be David Simon, Chairman and Chief Executive Officer; Richard Sokolov, President and Chief Operating Officer; and Stephen Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.
Speaker 6
Good morning. We reported FFO of $1.91 per diluted share for the quarter, which represents an increase of 6.1% over FFO in the fourth quarter of 2010. FFO for the fourth quarter was $0.065 higher than the midpoint of our increased guidance range provided in October of 2011 with our third quarter results. These results exceeded the First Call consensus by $0.01 per share, and we have now met or exceeded expectations for 30 of the past 32 quarters, which is an eight-year run. This quarter capped off a great 2011 for Simon Property Group. Our FFO growth per share was 14% for the year, expected to be amongst the highest of all the REITs. Our FFO of $6.89 per share was $0.365 higher than the midpoint of our original guidance provided in February of 2011.
For our malls and outlets, total sales on a rolling 12-month basis were $536 per square foot, up 10.7% from $484 as of December 31, 2010. Occupancy was 94.8%, which was 30 basis points higher than the year earlier period, and 90 basis points higher than the end of the third quarter. The releasing spread for the rolling 12 months was $5.20 per square foot, a positive of 10.5%. Our releasing spread continues to grow at a steady pace as deal quality continues to improve. The following resulted in our comparable property net operating income growth of 4.5% for the quarter, which had a positive impact from overage rent, and our year comp NOI growth came in at 3.4%. During the fourth quarter and subsequent to year-end, we completed several property transactions.
We dissolved our joint venture with The Macerich Company and exchanged our 50% ownership interest in six malls and one community center with them for the ownership interest in five malls and one community center. No cash was exchanged other than customary net working capital adjustments. We disposed of our interest in three properties: Gwinnett Place, Factory Merchants Branson, and Crystal River Mall. These transactions led to a reported gain, as disclosed in the financial statements. For the full year 2011, we invested approximately $1.8 billion in acquisition activities, with the acquisition of one property and the acquisition of initial ownership interest or increases in ownership interest in 12 properties. For the full year, we disposed of our interest in 10 malls, 3 outlets, and 1 community center for a total value of $550 million.
During January 2012, we acquired an additional 25% ownership interest in Del Amo Fashion Center, which now increases our ownership interest to 50%. We're extremely excited about the upside potential from this transaction, given the redevelopment opportunities that exist there. Also in January, we sold our 49% interest in GCI, which is our Italian interest investment. As a result of this transaction, we no longer own any interest or any assets in Italy. We received aggregate proceeds of $378 million for our equity interest and will report a gain in the first quarter of 2012 associated with this transaction. On development, we opened one new development in the fourth quarter, Johor Premium Outlets in Malaysia. It's 100% leased. Initial sales are very good, and we plan on working on phase two of that transaction, that development.
We also have, as you know, two new outlet projects under construction in Merrimack, New Hampshire, and Southeast Houston, Texas. Both will open later this year. We currently have 23 renovation and expansion projects under construction in the U.S., with completion dates scheduled for 2012 and 2013, including the major restoration of Opry Mills, which is scheduled to open March 29th of this year. We're very excited about that event. It's been a long, long, tough road to get that mall back to where it will be a very productive asset for us. In 2011, we spent approximately $400 million in new development, redevelopment, and renovation activities. We have identified 20 new developments, expansion, and renovations where we expect to begin construction in 2012. Three that I want to highlight importantly in our premium outlet projects.
First, today, in fact, or maybe yesterday, depending on how you're thinking about Korea's time zone, we marked the groundbreaking of a 240,000 square foot outlet center in Busan in Korea, which is scheduled to open in the fall of 2013. It will be our third project in Korea. We also will begin construction in April of our 360,000 square foot Phoenix Premium Outlet Center, which will open in the spring of 2013. Additionally, we plan to begin construction of our 360,000 square foot Premium Outlet in Toronto this spring with our partner, Callaway, and that will open in the summer of 2013. We're seeing very good value creation opportunities in these new developments and redevelopment projects, and we are anticipating spending $1 billion in 2012 with all the activity that's going on.
That estimated rate at this point, we anticipate being approximately $1 billion in 2013 and $1 billion in 2014. As always, as construction commences, we'll detail all the costs, returns, and timing for these projects in our supplemental reporting package. Let me turn to the capital markets. As you know, in October, the fourth quarter, we closed on our new unsecured revolving credit facility that increased our revolving borrowing capacity to $4 billion. This facility can be increased to $5 billion during its term and can be extended to October 30, 2016, at our sole option. The base interest rate is LIBOR plus 100 basis points. On November 10, 2011, we completed a $1.2 billion senior note offering, which resulted in historically low coupon rates and effective yields, with an average weighted all-in yield of 3.6% interest for eight years, which we were very pleased to do.
Let me turn to our dividends. In the fourth quarter of 2011, we increased the quarterly dividend of our common stock from $0.80 to $0.90. I'm pleased to announce another increase in the dividend today from $0.90 to $0.95. Our quarterly dividend now has increased 18.8% since the third quarter of 2011. This puts us on a trajectory to pay dividends of at least $3.80 per share in 2012. This morning, we also released guidance for 2012 of $7.20 to $7.30 per share. This guidance includes the near-term dilution resulting from our sale of our GCI business, the proceeds of which have been utilized to pay down short-term floating rate debt currently until that capital is more permanently redeployed.
It also reflects downtime at some of our better assets that are undergoing major redevelopments in 2012, including, but not limited to, the Fashion Mall at Keystone here in Indianapolis, Southdale Center, Dadeland, Quaker Bridge, and Walt Whitman Malls, to name a few. It also reflects the impact of expenses we will incur in connection with the development of our proprietary consumer marketing initiative. In the fourth quarter of last year, I recall that my conclusion addressed concerns voiced by some about our ability to grow in light of our size. We generated funds from operations of an aggregate of $2.4 billion in 2011, a record for us and the industry. This represents an increase of nearly $320 million over our 2010 FFO. By comparison, by our standards, we have only researched 15 U.S. REITs that, in fact, have an FFO greater than $320 million in 2011.
We will continue to grow our company and deliver excellent results. Our common stock once again outperformed in 2011, generating a total return to our stockholders of 33.6% as compared to the RMS return of 8.7% and an S&P return of 2.1%. We have now outperformed the RMS for the last 11 consecutive years and have outperformed the S&P 500 in 10 of the last 11 years as well. We're very well positioned for 2012 with a strong portfolio, irreplaceable assets, and a very attractive pipeline of new and redevelopment projects. We look forward to another strong year, and our focus remains on enhancing long-term shareholder value. With that, we're ready for any questions.
Speaker 0
Thank you. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star two. Questions will be taken in the order received. As a reminder, please press star one to begin. Our first question comes from the line of Quinton Vally of Citi. Please proceed.
Speaker 9
Hey, good morning. I'm here with Michael Billiman as well. My first question is maybe for Rick. Just in terms of J.C. Penney's announcement of their Main Street concept and the 80 to 100 branded shops that they're thinking of introducing into their department store boxes, Rick, I'm just keen for your thoughts on what you think the overall impact might be on the mall.
Speaker 2
Let me just take a step back. We obviously are very excited about anything that will make our properties better, and we want all of our tenants to be as good as they can be. Certainly, Ron Johnson and his new management team have energized all the constituencies based on the introduction of the strategy, and we hope they can implement it. As to your specific question, the concept of having the in-store shops is certainly not a new one. If you walk our mall and walk the existing vendor matrixes of our department stores, you're going to find dozens of retailers that have wholesale presence in the department stores, along with very robust in-line, full-price specialty stores in our malls. Just an example: Nike, Skechers, Coach, Sephora, Bare Escentuals, Kiehl's, The Art of Shaving. I could go on and on.
The answer is that we don't think it's going to be a particularly negative impact, and we hope it's going to be a lot stronger to enhance the market share of our properties.
Speaker 6
Yeah, let me just make it even simpler than that. He's a great retailer. We think it'll be great for the mall environment. We look forward to working with Ron, who we know well during both his Target days and his Apple days.
Speaker 9
Okay, thanks. David, just regarding your Capital Shopping Center stake, there were some related party transactions announced regarding land in Glasgow and an option on land in Spain. I understand that you're sort of now a passive investor in that REIT, but I'm just keen for your thoughts on those transactions and whether or not that changes the way you view owning the stock.
Speaker 6
That's a very good question. Needless to say, I think we were disappointed in the Spain transaction. I think the company needs to focus on improving the UK shopping center environment and its centers. Even though the transaction is not overly material, I think it's a bad use of management's focus to go ahead and spend time in Spain. Needless to say, we all know what's going on in Spain in terms of unemployment and retail sales. Certainly, as a large real estate owner, we understand that we want to look at things on the long-term basis. In my humble opinion, this management team has no business being and pursuing projects outside of its native territory in the UK. It puts doubt into, to me, the strategy that the company is undertaking.
Obviously, I don't have to reiterate how they viewed our offer and whether or not they acted in the best interest of shareholders. At this point, I think we have the better argument in that case. I'm waiting for an explanation as to why, in fact, they're pursuing looks to me like just a divergence of focus. Whether or not it'll impact our stake, it's too early to tell, but I am waiting for some kind of explanation from the management team.
Speaker 9
David, it's Michael Billiman. Just one quick question. You talked about cost relating to proprietary customer marketing initiative, and it sounds like that's all the Simon, Groupon type stuff that a lot of the customer data and technology stuff that you've been doing. Can you just elaborate a little bit more about sort of what you intend to spend and sort of timing of when things will come to fruition?
Speaker 6
Yeah, look, the spend we have allocated in our budget a spend. I don't want to get too specific, but there will be an investment that we will spend. We'll have some, obviously, we're going to be expensing all of this, so there's no capitalization of it. It's not going to change the materiality of the company. Given the prospects of a successful creation of a product, we think it's worthy of the investment. Now, our goal right now, Michael, is to debut this product in the Northeast for the fourth quarter of this year. There is not complete certainty that we'll do that just because it is complicated, and we want certainly a handful of important retailers to join in our effort. That's what we're anticipating to be.
We would prototype this and debut it in up to five properties in the Northeast and look to see what kind of adoption and what kind of product acceptance we get and then tweak it from there. That's the goal. The materiality of it, materiality is in the eyes of the beholder. I will just say it's not going to detract overly. It's certainly more than a rounding error, but it's something that we want to invest in. Connecting with the consumer, understanding the consumer is, I think, critical to the future of mall ownership. This is where we're going to embark. We'll see where it goes from there.
Speaker 9
Great. Thank you.
Speaker 0
Our next question comes from the line of Jay Hammerman of Goldman Sachs. Please proceed.
Speaker 9
Good morning. You know, just focusing on the anchor stores for a moment and maybe just back to sort of Quinton's question on J.C. Penney. As you think about sort of the leaders in the category, and I guess you could put Macy's, Nordstrom, and certainly the positive news on J.C. Penney, how are you thinking about potential closings over the next couple of years and perhaps capital that might need to be invested as some of the sales or market share erosions for others are declining?
Speaker 6
Right.
Speaker 9
Accelerating, sorry.
Speaker 2
If you look at our capital that have been spent, and we show you every quarter all the activity we have, this is really an ongoing process. Over the years, we've replaced probably over 60 anchors from all the different consolidations. In virtually every case, the property ends up stronger, and we've been able to generate good returns as a result of that process. We don't envision that this time period is going to be any different.
Speaker 9
You're not concerned about the number of closings accelerating in the near term?
Speaker 2
We, frankly, based on all the announcements from Sears, that included none of our properties. Ron Johnson in his presentation reiterated his strong belief in malls and the significant opportunity that his stores have in malls.
Speaker 9
Okay. Maybe just switching gears a moment. I mean, David, you mentioned the very strong performance over the last decade, and clearly U.S. sales have recovered and more than some since the last downturn, and your stock now at an all-time high. How do you think about sort of the best opportunities for growth or new investment over the intermediate term, say the next three years or so? Specifically, you've talked about Brazil, you've talked about China, and obviously Europe's been in the cards as well.
Speaker 6
Jay, it's absolutely clear to us that the best thing that we can do and why we added to the executive ranks here is redevelopment in our core business. We anticipate, again, things can change. I am pleased that we got confidence coming out of the economic upheaval sooner than a lot of folks that this year we're going to spend. I mean, you know, always things take longer than you want, and things flop from one year to the next in redevelopment and development. This year, we're budgeting $1 billion, and it looks like we're going to spend $1 billion next year. These are all very high return on investment activities. To me, that's the absolute number one priority. We've got two new outlets that we're going to open this year. Let's not lose sight of that.
We've got the restoration of Opry, which has been closed for, I don't know how long, but too long, two and a half plus years. We're starting construction in two outlets, Phoenix and Toronto, in the next 60 days as just an example. We've got all sorts of expansions on the outlet side and the mall side. To me, that's the focus. I think you'll see something from us in Brazil, something from us in China, but it won't be a big grand, huge, unique, big investment on either one. I think you'll see us enter those markets thoughtfully. We're out of Europe right now, and at this point, I have no regrets from that decision. Europe is a different animal.
Speaker 9
Right. You timed it well. You know, just in terms of the starts on the premium outlet side, can you talk about the pre-leasing at this point, and maybe, Rick, just sort of where you are on 12 lease rolls?
Speaker 2
On the outlet side, Galveston is frankly substantially leased. We expect to open that thing almost 90% with a great collection of tenants. Merrimack is opening this year, and we're frankly almost, we're 95% leased there. In terms of our rollovers, we're about halfway through our 12s with very good momentum in that business.
Speaker 9
Great. Thank you.
Speaker 6
Thank you.
Speaker 0
Our next question comes from the line of David Harris of Imperial Capital. Please proceed.
Speaker 9
Hey, good morning. Could you just elaborate a little bit more on the dividend? I for one was a little surprised that your board chose to increase it again, having increased it last quarter.
Speaker 6
David, it really boils down to simple calculus, which is we are chasing our taxable income. It is likely that we're going to have to chase our taxable income all year. We're trying to do it in the most thoughtful way. We did listen to the marketplace about the special dividend. The world was less than excited about it. To me, $0.20 of cash is still $0.20 of cash. We listened, and we're looking to chase our taxable income the rest of this year and then in the future. It really just boils down to that simple calculus.
Speaker 9
Is it reasonable to expect there could be another review subsequently this year?
Speaker 6
I think it's reasonable to assume that every quarter it's going to go under. Taxable income for any entity, any big company is complicated. It's certainly, in our case, complicated because not only do you have taxable income from just the normal business, but you've got acquisitions, sales. Obviously, we're going to get future depreciation from all the investment we're in, etc. The fact of the matter is it's going to have to be under intense scrutiny each quarter from here on out the rest of this year. You know, it's likely we're going to have to chase it a little bit this year. The good news is it ain't going down.
Speaker 9
With regard to Europe, do your comments include or exclude the UK?
Speaker 6
I would say I would include, you know, I've been more impressed, frankly, with the UK government's actions. I think, you know, just from a macro point of view, I almost feel a little bit better about, you know, kind of what they're trying to do macro there. Put that aside because I'm certainly no expert. I would throw them in the same bucket.
Speaker 9
All those bunga bunga parties with Silvio Berlusconi got a bit too much for you, didn't they?
Speaker 6
Unfortunately, we never got on that list. Rick and I can't get invited to any Super Bowl parties either. It's just the spot we're in, I guess.
Speaker 9
Hey, one final question. I think it was on this call a year ago that you talked about the biggest decision you were going to be looking to make this year, i.e., in 2012, sorry, 2011, would be whether to really tap the capital markets. Now, I know you raised the $1.2 billion of unsecured and you looked at your revolver, but it didn't really, the markets didn't really kind of force that decision. I mean, how do you look at the world today, particularly in the light of Bernanke suggesting that or telling us that the Fed's going to remain on hold through the end of 2014?
Speaker 6
I think we have the ability to be extraordinarily thoughtful and patient there. I mean, we have no capital needs, you know, really 2012 and 2013, if you look at our balance sheet, other than typical refinancing of mortgages, which the market has gotten somewhat better at. If there's a transaction out there is when we'll factor something like that. Right now, even though the capital markets are attractive, you know, at this point, we don't see any reason to warehouse capital.
Speaker 2
David, it's Steve. I'd just add one thing to what David said, which is, you know, we do, as an ordinary course of business, roll over a lot of secured debt. We've been very active with extending duration and locking in rates, given the environment that we're in. In fact, I just happened to look at this this morning. Our weighted average borrowing cost over the course of the last 12 months went down 20 basis points. On $24 billion of debt, you know, that's a pretty meaningful move. While the headline, you know, large raise of bond proceeds, you know, we did just once in 2011, we were doing a lot of nick and necking and around rolling over our debt, and it did affect, you know, the profile of the balance sheet.
Speaker 9
Steve, I'm sorry to take up so much time. I know there's a lot of other people waiting. Today, is the company kind of where you want to be in terms of leverage, or do you consider yourself to be underlevered or whatever metric you want to use to think of your debt to equity?
Speaker 2
It is certainly a broad question. I will say this. If you look at our coverages today, which are three times, and you look at the stability of the cash flow that was demonstrated during 2008, 2009, I think the strength of the balance sheet is pretty evident, and the stability of the cash flows has been demonstrated. I mean, typically, we are going to naturally delever because of the cash flow that we generate absent a transaction. As David said, we have the opportunity, given a transaction, to be very aggressive in the capital markets with the way the financing environment is right now.
Speaker 6
I would just say, I like deleveraging, okay.
Speaker 2
Not bad.
Speaker 6
I mean, we, you know, we're good at doing deals and making money from doing deals. The spot that we're in right now where we can delever, invest in our good real estate is a good spot to be in. You know, I like that. I like that position.
Speaker 9
Okay, great. Thank you.
Speaker 0
Our next question comes from the line of Christy McElroy from UBS. Please proceed.
Speaker 8
Hey, good morning, guys. In the process with The Macerich Company of dissolving the JV, as you came to an agreement on the value of those assets and determining the appropriate split, can you just talk about the range of cap rates that were used to value the malls and what was the median cap rate of the portfolio?
Speaker 6
Look, I don't have those numbers right in front of me, but these assets were appraised a while ago, and we basically used those appraisals as the basis, but it was much more simple than that. The fact is, The Macerich Company expressed an interest in unwinding the deal. We said, "Fine, suggest to us how you would do it." They came back and said, "You can choose between the two pools of assets, the one that they manage and the one we manage." We looked at the real estate, we looked at the relative values, and we chose the pool that they were managing. Since the appraisals were done, I don't know, a year plus ago when we had a discussion about the same kind of topic. At that point, it was just whether or not we wanted to proceed on the basis that they suggested, and we did.
It's as simple as that. It wasn't a, we didn't sit there and negotiate values. They gave us an option A and an option B, and we chose option A. They were left to decide whether what they offered was good, and we were left to decide whether or not what they offered was good for us. You know, we're pleased with the outcome.
Speaker 8
Okay. With regard to the sale of the GCI portfolio, I'm wondering if you could disclose the cap rate. Can you talk about your sort of IRR over the life of that investment? What was your undepreciated cost basis in GCI?
Speaker 6
You will see the gain in the first quarter. It was an okay deal. It was not a great deal. The cap rate sale based upon 2012 is around a 6.5% cap rate. You know, we learned a lot. It was a good experience. O'Shaun was a good partner. The reason we got out, we were more worried about the macro environment than they were. The redevelopment that was offered was less returns than what we wanted. We had a mutually agreeable way to unwind, very similar to The Macerich Company. That is what happens sometimes. The cap rate was 6.5%. It was a highly levered entity. That is why we will have dilution this year. I think, Steve, $0.06, $0.07.
Speaker 2
$0.67.
Speaker 6
In our numbers, had we not sold it, you know, we would have had guidance higher. We think in the long run, it was the right thing to do. It was an okay deal, not a great deal. I don't know what our IRR was, but you know, the gain you'll see in the first quarter.
Speaker 8
Lastly, regarding the debt coming due on mills this year, you have the $655 million senior facility and then another, I think, $1 billion of mortgage debt coming due. Can you talk about plans for refinancing all that? Are you having preliminary discussions on the facility? Would you expect any resulting changes to the partnership this year?
Speaker 6
The mortgage refinancing is all in process. You know, we anticipate that happening. You got to remember some of those deals, Mills is TMLP. Our partnership with Farelon is a small partner in some of those assets. The gross number sounds bigger than what the actual TMLP's responsibility is. If you look at our responsibility as half the owner of TMLP, it's even smaller. The senior and the mezz debt, we are just starting discussions with the senior lenders. No issue there. We expect, you know, we built up a significant amount of cash in TMLP to deal with any refinancing requirements. That's in process. We'll spend the next couple of months doing that. The last one, look, you never know. Partnerships sometimes are built to last a long, long time, and sometimes they unwind in a very positive way. I would expect that we'll have a positive outcome.
It's been a good partnership, and it'll either continue on a very good basis or we'll figure something else out.
Speaker 8
Thank you.
Speaker 0
Our next question comes from the line of Steve Sakwa of Evercore ISI. Please proceed.
Speaker 3
Thanks. Steve, I had just a couple of technical questions as it relates to page 15. I guess the interest in other interest in dividend income went down, and I guess we were under the impression that you were due a dividend from CFC. I'm just wondering if that's the case or there was a timing issue or something else going on in that line item.
Speaker 2
There's something else going on in it, Steve. If you look at the balance sheet, you'll also see a decrease in our deferred costs and other assets. I think we had mentioned on prior calls that we held some mortgages as investments on other shopping centers, and those mortgages were paid back at their maturity date.
Speaker 6
We're really bummed on that front.
Speaker 3
Okay. Secondly, I just noticed that down on the other expense line item, the other figure jumped quite a bit for the quarter and is up pretty significantly for the year. Is there anything you can sort of talk about? Does that relate to any of these projects, David, that you talked about in terms of this consumer marketing initiative, or is there something else in that line item?
Speaker 2
Steve, it's really a function, and you'll see the line right above it on page 15 as well. The professional expenses were up quite a bit in the quarter. We've got a lot of transaction activity going on, some of which materialized in the fourth quarter, some of which David alluded to as potential activity in 2012. It's just a combination of costs related to those. Some are professional expenses, some are related expenses, but they are all driven by transaction or potential transaction equity that we've got in the hopper right now.
Speaker 6
It did include, we have been using BCG to help us work scope out, work on this initiative that we hope to prototype and debut in the fourth quarter. Some of those expenses are also rolling through that number.
Speaker 3
Is it fair to assume the 12-month numbers may be inflated, or do you think those are good run rates?
Speaker 2
No, I think the 12, I think the fourth quarter number, Steve, is higher than what you would see on a run rate basis.
Speaker 3
Okay. Maybe I missed it. Did you guys, I know you gave guidance, but did you give a same store guidance for the year?
Speaker 6
No, Steve, we really decided to change our, we decided in 2010. If you go back in 2010, we decided not to do that any longer, just to give you kind of the gross number. The answer is no, we did not do that. Obviously, we feel confident it'll be positive this year, but we do not give that number out.
Speaker 3
Okay. Just in terms of leasing spreads, is there anything you could sort of talk about in terms of how it progressed throughout the year? I'm just trying to figure out if you kind of exited the year at a substantially stronger rate as you go into 2012. Does that kind of 10.5%, 11% number still have upward bias to it as you look into 2012?
Speaker 2
We did have positive progress throughout the year, quarter over quarter in our spread. We are seeing better demand as we enter into 2012. We've already made very good progress towards our 2012 renewals in the mall business. We anticipate a positive bias in that spread.
Speaker 6
Yeah. Look, Steve, I just want to, the retail real estate business is still tough, okay? We are grinding, we're grinding like no other time. Our results, our sales, our occupancy, and our rents are all obviously very positive. It is a grind, and there are retailers that continue to downsize and continue to, we continue to have struggles on leasing some of that space up and getting market rents in some of that space. We still feel positive about it, but there's still work to be done. It is not, it's not, it's a lot of work to produce these results.
Speaker 3
Okay. My last question, could you just circle back on the Toronto project? I mean, you were pretty adamant you were starting that project. I realize there's kind of been a head-to-head competition up there. What can you sort of tell us about leasing or kind of the state of the site, and, you know, plenty more details about that project?
Speaker 6
Emphatically, we're going to start in the spring. We feel we're permitted to go. We're finishing it up. Leasing, look, we're in a different spot than others in the outlet business. We can rely on the experience and judgment of having 70 premium outlets, Mills assets throughout the world. We don't necessarily need to pre-lease. We're pros. We're experts in this business. The answer is we've got real interest. We've got certain commitments. Barring something unforeseen, both of those that I mentioned, we will be starting construction. We're a little different. We understand this business very well. We know the risks about starting construction, whether you're fully leased or not. We've done it in the past in the outlet business, and we're good to go on both of these deals.
Speaker 3
Okay, thanks.
Speaker 6
Sure.
Speaker 0
Our next question comes from the line of Paul Morgan of Morgan Stanley. Please proceed.
Speaker 3
Hi, good morning.
Speaker 6
Hey.
Speaker 3
Good morning. I just wanted to go back to the dividend a little bit. I mean, you've got the, you're based on kind of where you are now, your FFO payout ratio is only 52% something. You've got a big portfolio. As you burn through your depreciation base, you said you're kind of chasing taxable income. I kind of wonder, do you have a feel for, I mean, your guidance for FFO is relatively narrow. Do you have a feel for kind of where, you know, how much you might have to grow the dividend? Is the dividend going to be growing at a materially faster pace than FFO going forward short of a bigger deal?
Speaker 6
It's an entirely appropriate question. Obviously, this is a great dialogue at the board level. It's hard for me to be really specific. Based upon what I know, we're going to have to, I would think, continue to raise our dividend the rest of the year. It doesn't give you guidance on how much and when. We want a little bit more data coming in with the first quarter ops. We want to understand what, if any, transactions transpire or happen or what have you that may have some impact on that. What I know today, obviously subject to counsel with the board, $0.95 will not be enough per quarter to pay out our 100% of our taxable income.
Speaker 3
I mean, you generate a lot of free cash flow right now, and you've kind of fought over the years to grow that after the dividend. I mean, does this make it any more, does it make you any more inclined to pursue deals? I mean, because obviously that's a one-side benefit of a large transaction.
Speaker 6
Not at all really, because, as I mentioned early, we've got so much going on with the existing portfolio and all the redevelopment and new development. There is nothing wrong with generating the cash, increasing the dividend, delevering, and just keep doing what we're doing. I feel absolutely no need or pressure to do any deal whatsoever. I like kind of the model we've got. That's not to say we won't if we think we like the real estate that we would get at the end of the day. I don't like parting with our cash right now. I like reinvesting in our portfolio. We're entirely pleased with what's going on here.
Speaker 3
Okay. On that note, you've got $700 million or so in what your supplemental talks about as being kind of renovation and expansion. It doesn't really say much about which malls are being expanded, but it kind of implies $70 million of incremental NOI, essentially. Do you have any color on where that's coming from or any big expansions that drive that? It just looks like renovations, but.
Speaker 6
Yeah. I mean, for instance, in the outlet side, we expect to start in Las Vegas, in Orlando, in Desert Hills, and Seattle.
Speaker 2
is under construction.
Speaker 6
Seattle's under construction. Those are four in that side. In the mall side, we're undergoing a massive extension and redevelopment of Walt Whitman, Quaker Bridge. We've got Opry Mills. We've got King of Prussia. We announced, as you know, at KLP that we're going to connect the two malls. We are in planning phase on that now. We're obviously working with the town on approvals. Those are just, Nanuet is the mall's been shut down. We're going to start construction there, finally. La Plaza, we're going to add a second level on. We got major redos, new department stores, new food courts, examples with Keystone, Dataland, and Southridge in Milwaukee. Plaza Carolina has been, several boxes have been added. Those are just, off the top of my head.
When we start construction, we put it in the 8K, and I think you'll see an addition to that disclosure as the year progresses.
Speaker 3
Okay. Great. Just my last question on occupancy. At the end of the year, I think maybe not your highest number ever. You know, are you reaching a point at kind of 94.8%? I know some of it's seasonally high, but where you're sort of at a frictional max. How much farther do you think you can drive portfolio occupancy? If it's not much farther, does that mean you can start pushing rents harder?
Speaker 6
I think there, yeah, you're right. There is the frictional number. This year will be a little bit interesting because we do have a lot of movement going on with the portfolio, as you might imagine, with all the development spending. Put that aside, I think there's some improvement, but I think now the focus is on improving the quality of the 95% that were leased. You know, we didn't have that luxury, obviously, in 2009, 2010, and to some extent 2011. We're still going to feel pressure in 2012 with certain retailers. I think the focus now, hopefully, is to marginally improve that occupancy, but it's really going to be taking the existing occupancy, maybe stabilizing that as it is, but really improving who's in the space.
Speaker 3
I agree. Thank you.
Speaker 0
Our next question comes from the line of Alexander Goldfarb of Sandler O'Neill. Please proceed.
Speaker 3
Good morning.
Speaker 6
Morning.
Speaker 3
I'm impressed you guys are in with all the stuff going on out there in Indy.
Speaker 6
We are so focused on what we do.
Speaker 3
I figured you guys would be renting out the parking spots for additional FFO.
Speaker 6
That's true. We've got sponsorship on our building that may have a big impact on our fourth quarter or first quarter. We're so focused on what we do, we have blinders on this for this week in any event. In fact, we're so focused on what we do that we forgot that the Super Bowl was this week when I planned our board meeting and our earnings call, okay? We could have probably picked a better week.
Speaker 3
Just quickly, it sounds like in Europe, obviously, the macro situation didn't help any, but it sounds like the yields that you were seeing over there from your investments just were not meeting your expectation, and the macro situation just sort of was the hair on the camel's back. As you think about Brazil and China, what are the returns or what are the return premiums over what you would invest at in the U.S.? What are you looking for in those different markets?
Speaker 6
I think the development returns in Brazil are well articulated. I think in our view in Brazil, what we would do is develop, as opposed to buy there. I think the development yields that they're trying to achieve, the 15% kind of return on cost, would be where our focus would be. China is, we've got opportunities. I was over there in December. We're working on a couple of outlet deals, but the number side of that equation, all of the financial due diligence, is still a work in progress. If it's not a premium to what we do here, there's just no reason to do it. Even though you might argue that the NOI growth will offset that, I still want to invest at higher levels than I can here. That's the frustration with, say, going to Europe and doing a lot of redevelopment.
We do see, as we pencil out China and Brazil, just like we have seen in Japan, seen in Korea, seen in Malaysia, all of those are higher development yields than we would gather here, garner here, I should say.
Speaker 3
By implication, when you were considering the capital shopping, despite the low, you know, going in yields that the U.K. commands, from your underwriting, you were seeing returns that were in excess of the U.S. Is that fair?
Speaker 6
I was really referring to new development, okay? I think what we saw there, and again, recall that our deal was subject to due diligence. We saw, at the end of the day, yields comparable to what we would pay here on acquisitions, yet once we got our hands on the fact that the management operations could be improved. I don't want to confuse development yields with acquisition yields. We saw kind of comparable acquisition yields in the UK comparable to what we would pay here. With supply issues, they're a lot different than they were here. On that basis, it was worthy of pursuing it to get to the point where we could validate that initial conclusion, but we weren't given access to the books, and therefore, we did not make a formal full bid.
Speaker 3
Okay. Just the second question is going back to the dividend. EQR, you know, went to a policy where they paid a steady first, second, third quarter dividend with a true up in the fourth. Is that, you know, as you guys contemplate the dividend, is that something that would be that you think would be helpful or would investors be receptive?
Speaker 6
That's what we did in 2011. The fact is, the more we talked to people, the less they liked it. My view would be to try and not do that, really create a dividend that equals taxable income, and then as that grows, your dividend grows.
Speaker 3
Okay.
Speaker 6
We would like to get away from the special dividend based upon the true-up dividend, which in our case was represented by a special dividend. We would like to get away from that and make it more what I said. Now, look, sometimes you never rule out, if you sold $5 billion of properties and you had a big taxable income, there may be certain circumstances that you'd have to do that. The fact is, we would like to not do that. That's what we're going to try and achieve in 2012. Certainly, as we catch up to our taxable income, we will get away from the special true-up dividend.
Speaker 3
Okay, thank you.
Speaker 6
Sure.
Speaker 0
Our next question comes from the line of Kai Ben Kim of Macquarie. Please proceed.
Speaker 3
Thank you. Just to follow up on Alex's previous questions about Brazil, from a levered return standpoint, would you be funding it locally, or is there some ARB opportunity using your cheap cost of corporate debt to fund development out there?
Speaker 6
We would use our, you know, the cheapest capital we have is the cash on the balance sheet. You know, what are we getting?
Speaker 2
billion a year.
Speaker 6
No, what are we?
Speaker 2
Oh, investing.
Speaker 6
Oh, 20, 30 bps.
Speaker 2
20, 30 bit.
Speaker 6
The fact of the matter is, any development that we would undertake in Brazil, we're just going to cash fund. We wouldn't use any leverage.
Speaker 3
Okay. Is that typically, would you build a JV or by yourself?
Speaker 6
Right now, we're contemplating a JV. That's probably likely how we'll do that, and in China as well, if we get to that point in China.
Speaker 3
Okay. Last question. If I look at the sales per square foot increases in your portfolio, consolidated versus unconsolidated, it seems like your JV properties are a lot better, up 22% year over year versus your consolidated, which is up only 9%. Still good, but lower than your JV assets. How should we think about the opportunity for additional JV takeoffs in terms of are all the JVs at one point in time, are they all opportunities for you? Broadly speaking, if you could talk about cap rates, not deal specifically, but for the best assets, where could we see cap rates for these assets? I guess kind of going down the spectrum on quality.
Speaker 6
You know.
Speaker 3
Sorry for the long question.
Speaker 6
Yeah, I would just say part of the difference between the growth in consolidated and unconsolidated, I think we can get a better answer for you on that than just the quality because.
Speaker 3
Some of it's a mixed change.
Speaker 6
Yeah, mixed change, and that we put more, you know, we have more outlets in there now that, you know, we put the prime in our numbers, but I think we restated 10 for that in any event. We can get you a better answer on that. I think the mix, our mix in our wholly owned properties is great. There's no real issue between what's in our JV and what's in our consolidated. I mean, just like in our consolidated, you got Roosevelt Field, King of Prussia, Forum Shops, Woodbury, all of the outlet business. Put that aside. That's not to say we don't have some great JV assets, but the base is much bigger in the consolidated than the JV. Don't read too much into that.
Now, going to your question, cap rates on A assets is, you know, there's not a lot being done in that whole area. They continue to move lower, given the fact that investors believe in NOI growth for high-quality retail assets. You tell me, I mean, it's low. It's lower than, you know, it's in the 4s, maybe, if that helps.
Speaker 3
Yeah, it does help. I guess one part of that question is, are what?
Speaker 6
I doubt that we'll be buying in the 4s, though, because you know.
Speaker 3
Okay, okay.
Speaker 6
I think there are people out there that will clearly buy in the $4s.
Speaker 3
Even for your A assets that you're managing, you know, something in the 4s wouldn't be a price that you would clear at for a takeup?
Speaker 6
You know, look, I don't know. I mean, it would have to be something really, really unique to get to that. I mean, King of Prussia, we did not get to that number. There's nothing like that asset, especially given its development. It all depends on the circumstances. I do think there are institutional investors out there that would feel comfortable, you know, at those kind of iconic assets to be in that level. Whether we would or not, it would take an interesting set of circumstances.
Speaker 3
Gotcha. Thank you for that, Carter.
Speaker 6
Sure.
Speaker 0
Our next question comes from the line of Jeffrey Donnelly of Wells Fargo. Please proceed.
Speaker 3
Good morning, guys. David, if any of your board members need a room, I hear the nights in at the airport, it's like $800 a night. Actually, can you just talk about the volume of move-outs that have happened subsequent to quarter-end? Is that in line with prior years? On your guidance, where did you guys peg year-end occupancy?
Speaker 2
The move-outs have basically been consistent historically. We didn't have anything out of the ordinary. This is Steve, Jeff. We've also, year to date, as you've seen, very little bankruptcy activity as well.
Speaker 3
What did you say within your guidance, maybe for year-end occupancy as a target?
Speaker 6
We are really getting away from those kind of specifics. We do it asset by asset to build up through our budget. In our own budget, it's a slight improvement, but we don't give specific numbers, Jeff.
Speaker 3
Got it. Just while I got you guys, on Sears, more focus on Sears Holdings. You have de minimis, I think, direct exposure through base rent, but do you have an estimate of what your ultimate financial exposure is through co-tenancy rights?
Speaker 6
Yeah, I would just say, if we do get to co-tenancies with retailers, and we do in some cases, I'm not really happy about it, but we do do it. It's rare that it's going to be tied to a Sears operating. Usually, it's three out of four or something like that. I would say that particularly.
Speaker 0
would be de minimis.
Speaker 5
Okay. Maybe you could talk a little bit about your exposure there. Is there a theme to it, if you will, where maybe the majority of your exposure's in single or two-story stores, or they're in malls of a certain sales production? Just curious,
Speaker 6
If you look at our Sears portfolio, they are very well situated in our better properties. We have, obviously, significant numbers throughout the portfolio, but again, this is nothing new. I mean, we are working with Sears. We are strategizing if, in fact, the eventuality comes that we want to deal with it. We are lining up demand. There is happily substantial demand. We are just going to have to see how this unfolds. To date, none of our stores have been impacted. We try to monitor their volumes, and our portfolio as a whole is above average, both in terms of gross volumes and sales per foot.
Speaker 5
Just, last two questions. One is, on Del Amo, were you able to share maybe a cap rate or a rough cap rate on that transaction? Maybe, Steve, can you talk about what you've seen change in the financing market for, I guess I'll say, second-tier market malls or those with below-average sales production? Any movement there?
Speaker 0
I can take the second part of the question first, Jeff. We've continued to see really pretty robust demand for, on the call it, lack of a better term, the middle-quality malls. Interestingly enough, it's come from the banks in anticipation of a restart of the CMBS market in 2012 and the ability to syndicate some of these. Pricing has been pretty decent. As I said, we've been out with two or three assets, and the demand has been very good.
Speaker 9
Look, Jeff, we don't do individual cap rate things in malls other than we really feel like we've made a fair deal and one that we'll be able to add value with as we move very, very aggressively on our redevelopment plans there.
Speaker 5
Okay. thanks.
Speaker 0
Sure.
Speaker 2
All right.
Speaker 8
Our next question comes on the line of Ronald Kamdem of Morgan Stanley. Please proceed.
Speaker 3
Good morning.
Speaker 0
Hey, Carol.
Speaker 3
Hey.
Speaker 1
Hey.
Speaker 3
Are there any updates on the St. Louis potential outlet development?
Speaker 0
We're working it, but the short answer is not really.
Speaker 3
Okay. Steve, I noticed G&A expense was up in the quarter. Was that something that just this quarter? Is that a good run rate going forward?
Speaker 0
Again, it's a little bit of both, Carol. There's part of it where it's just the full-year impact of compensation plans, but then there is a bit of it that is probably not going to repeat in 2012.
Speaker 3
Okay. I know you all have talked about you feel no pressure to do acquisitions, and you think renovations are a better reinvestment of your capital at this point. If you decided you wanted to do acquisitions, is there anything out there on the market that you would have any interest in?
Speaker 0
Do you have any ideas?
Speaker 3
No, I don't.
Speaker 0
Okay.
Speaker 3
I like the renovations at your old malls, personally.
Speaker 0
Yeah, you know, the answer is, usually, they come about when you least expect it. Again, we, you know, it's not a high priority, but, you know, we look at just about every and any alternative. The good news is, you know, but you gotta be really disciplined when you have this ability. The good news is we can look at basically any real estate company in the world and decide whether or not it makes sense for us. With that comes a burden, you know, not to screw up. What's better? You can look at every deal or you're in a position where you can't? I'd rather be in the fact that we can look at every deal, but with that comes some discipline here that we better not make a mistake.
Speaker 3
Okay, thank you.
Speaker 8
Our next question comes on the line of Cedric Lechance of Green Street. Please proceed.
Speaker 11
Thank you. David, earlier, you talked about some of the challenges that are still out there when it comes to leasing space in your properties or in the mall business in general. Can you quantify it per mall category, if you will? What do you observe in A malls versus Bs and Cs?
Speaker 0
The risk in the A malls is really not a risk because if you do get that space back, you are going to have plenty of demand to lease that up. It is going to be in the kind of, however you want to characterize. I hate listing malls A, B, and C, but it is certainly going to, the pressure that we have as an owner will be on what people call the B mall category. It is surfacing because of tenants like The Gap, the Paxson Wares of the world, that are still and continuing to connect with the consumer. Again, I do not like naming names and pointing retailers out. That is only representation of a couple of retailers that, in fact, themselves have said they are closing stores. The fact is that is where the pressure in the portfolio occurs and is occurring.
That is what we are working to offset. If we get the space back on A, and the fact of the matter, in a lot of A malls, retailers that are downsizing, we are taking the opportunity to help with that downsizing by not renewing them in the A malls.
Speaker 11
Starting with the B malls, who are the replacement tenants when a Gap or a PacSun exit the property?
Speaker 6
There are a lot of people that are very aggressively growing their footprint. That leads to David's point. We're doing deals throughout the quality spectrum with Loft, with Love Culture, Crazy 8, Zumiez, Tillys, Cotton On, Francesca's, all of the Teavana, all of those tenants are.
Speaker 11
H&M.
Speaker 6
H&M. We are doing this with a lot of these tenants throughout the portfolio. One other point that I want to make is this $1 billion that we're spending in our portfolio is certainly giving us more attractive properties in terms of the tenants wanting to be in them. It is no accident when we're adding over 35 anchors in our portfolio, when we're renovating 20 properties, when we're getting substantially higher growth. That is making us have a better product for our leasing agents. That is hopefully going to bear fruit and enable us to deal with the space we get back from the tenants that are shrinking their footprint.
Speaker 11
Okay. Just to finish, in terms of the Italian sale, are there any circumstances or tax circumstances associated with repatriating the capital to the U.S.?
Speaker 0
None. None.
Speaker 11
Okay, thank you.
Speaker 0
Sure.
Speaker 8
Our next question comes on the line of Ben Yang of KBW. Please proceed.
Speaker 11
Yeah. Hi. Good morning. David, you talked earlier about how the joint venture with The Macerich Company was carved up, but I don't think you mentioned, was there any consideration to selling those assets outright?
Speaker 0
Not really. The answer is no. You know, look, we're all, you know, we're off on our own with each other. You know, we never really talked about selling the whole portfolio.
Speaker 11
That's despite Steve's comments that the financing market for these mid-share malls is coming back. Is it anticipated that you might end up selling them or selling more above and beyond what you just got from The Macerich Company?
Speaker 0
The fact of the matter is the portfolio that we got, we think there's upside. You know, we're pleased with the outcome. You know, we think we can move the needle on those assets, and we have no intention at all of selling those assets. You know, look, we're going to still prune the portfolio. You know, and I think, as Steve said, that the fact that the financing market's getting better, I think that will help us. It's been, obviously, that's been a challenge to sell, sell, kind of the smaller malls. With respect to specific respect to IBM, there's absolutely no desire or interest to sell those assets.
Speaker 11
Okay. Just switching gears, you had made some comments also that you guys are different. You don't need to pre-lease to start new outlet construction, which, to me, sounds like kind of a shot across the belt to the competition. I was just curious.
Speaker 0
I didn't say that. I said we take a different approach. You're, you used the word different. I don't think I said the word different, but,
Speaker 11
Okay, at that point.
Speaker 0
If we go back, I could be wrong.
Speaker 11
Okay. I'm just wondering, can you talk about how retailers have been evaluating the multiple options in those markets that you've identified, where there is competition? I mean, is it just a stalemate that kind of forces you to, what looks like, go to do some spec development in outlets?
Speaker 0
I think every development is different. In a lot of cases, the retailer is using the competitive scenario to drive down rents. We're seeing that a lot. The retailer is very adept, very skilled at using the leverage of competition to drive rents down. In some cases, they're sitting on the sidelines saying, "I wanna be, I wanna have an outlet in this marketplace, but you guys figure it out," and they're on the sidelines. In some cases, they have faith in us. They wanna go with us 'cause we've got this knowledge base of all of these assets. In some cases, they wanna go with the other guy because of whatever other reason. It's all over the board. The fact of the matter is, we don't really pre-lease, period. We're doing Nanuet, and that's not an outlet. We've got certain commitments from very important retailers.
Are we sitting there leasing up the small shop up to a certain % to where we lease? The answer is no. We should be able to use our judgment and our experience of whether or not we can get something leased at a what rent. That's just the way we operate. Certainly not meant to be a shot across the bow for anybody. Everybody can do whatever they want. I have no influence on that at all. That's how we operate.
Speaker 11
Okay.
Speaker 0
That's how we operate.
Speaker 11
That's helpful, but at what point do you end up actually buying the land? I mean, is it fair to assume that you've actually purchased the land in Phoenix, in Toronto, in St. Louis? Is that?
Speaker 0
Phoenix, we have signed the ground lease. I was down there, I don't know, was it last week or two weeks ago?
Speaker 11
Yeah.
Speaker 0
I signed the ground lease. We're on Indian land, you know, by the Wild Horse Casino there. That ground lease is signed. In Toronto, it's all documented and signed. Land closing is forthcoming.
Speaker 11
What type of delta is there when you ground lease something like that versus buying the land outright?
Speaker 0
It tends to have a better return in a lot of cases. Obviously, when we're on Indian land, you can't really buy the land. That's how it works.
Speaker 11
Okay, thank you.
Speaker 0
We thought we liked the site enough, given that was a good outcome for us on that deal.
Speaker 11
Okay, thanks again.
Speaker 0
All right. Thank you.
Speaker 8
Our next question comes on the line of Omotayo Okusanya of Credit Suisse. Please proceed.
Speaker 11
Hi, good morning.
Speaker 0
Morning.
Speaker 7
Morning.
Speaker 11
I'll take another retailer example. Williams-Sonoma was amongst your larger tenants five years back. Now, roughly 40% of their businesses are online. About a quarter of their leases are expiring over the next two years. What I'm hearing from multiple conferences is that they're planning on trying to negotiate the rent on those expirations. If they're not successful, they just plan to move more of their business online. I just wanted to get your thoughts on it and if this is, like, indicative of a changing trend in retail in general.
Speaker 6
I don't believe there's anything out of the ordinary with your example. Williams-Sonoma happens to have great real estate and great properties. If their business strategy is such and their productivity is such that they cannot afford to maintain the space that they currently have, they are going to come in and offer us a rent that enables them to maintain their occupancy. If we don't believe that rent is fair market value, they are going to move out, and we are going to replace them with somebody that has got a productivity and a business strategy that will enable them to pay what we believe is fair market rent.
Speaker 11
Right. Thank you. Makes sense. Are there any acquisitions included in your 2012 guidance?
Speaker 0
Acquisitions?
Speaker 11
Yeah.
Speaker 0
No, there are not.
Speaker 11
No. Okay, thank you so much.
Speaker 0
Sure.
Speaker 8
Our next question comes on the line of Jim Sullivan of Cohen & Company. Please proceed.
Speaker 7
Hi. I just have a couple of questions on Del Amo. Obviously a very large asset. I think, David, in your prepared comments, you talked about a redevelopment or an investment in that asset. I understood you've just recently increased your share in it. I'm just curious if you can tell us whether the $1 billion for this year and next year of redevelopment includes Del Amo, number one. Number two, if you could talk a little bit about your plans for that asset if you feel able to at this point.
Speaker 0
The $1 billion does not include for this year because we still think we are in a spot where we're going to use this year for 2012 to plan what we're doing. Part of that depends on outcomes with certain discussions with certain stores. It's a complicated asset. I'll turn it over to Rick to explain. We have lots of different options. It's complicated. It's probably better to show you physically than words, but I'll let Rick take it from there.
Speaker 6
Just, very briefly, it's midway between Century City and South Coast Plaza. It's positioned to serve all of the great communities on the Pacific Ocean that have a trade area of a million people with a $90,000 household income. We believe there's an opportunity to add fashion anchors. We believe there's an opportunity to add some full-line anchors and completely redevelop the property. It's over 2.275 million square feet, so we've got a lot of FAR and a great market. We're very focused on bringing that forward. It's certainly going to be part of the capital spending that David talked about in 2013 and 2014.
Speaker 11
Very good. Thank you.
Speaker 0
Thank you.
Speaker 8
Our next question comes on the line of Omotayo Okusanya of Jefferies. Please proceed.
Speaker 0
Well done.
Speaker 5
Good afternoon, guys. Two questions. The first one is, is a Steve Ritz combo. Just wanna try to know what occupancy cost of sales was in fourth quarter and for new tenants signing leases, what the target is on that number.
Speaker 6
The occupancy cost in the fourth quarter for the malls and the outlets was 11.8%.
Speaker 5
Okay.
Speaker 6
The way we price our real estate is a function of who's the tenant, what's the productivity of that tenant, what's the mall, what's the space in the mall. We have a very focused process, and all of those factors feed into it.
Speaker 5
Okay, could you give a range?
Speaker 6
It's very hard to do. I think if you look at our leases we signed, I believe in the fourth quarter were $50, $50 and change starting rent. That gives you a pretty good barometer of the type of activity that's undergoing in the portfolio right now.
Speaker 5
Got it. Okay. That's helpful. In regards to guidance, you talked about the $0.07 dilution from GCI. Could you give us a sense of what the dilution is from the Consumer Marketing Initiative as well as the downtime from the redevelopment?
Speaker 0
We didn't, we're not going to give specifics on that, but it's all in our numbers.
Speaker 5
All right, thank you.
Speaker 0
Thank you.
Speaker 8
Our next question comes on the line of Wes Golade of RBC Capital Markets. Please proceed.
Speaker 10
Hello, everyone. Rick, can you give us a quick rundown of the new retailers and concepts entering the Simon portfolio?
Speaker 6
The ones that are coming in that we're working with are examples of Dry Goods, that's a division of Von Maur, Vince from Kellwood, C. Wonder, Running Company is a new concept that Finish Line is working with, Versona from Cato. I certainly don't wanna ignore, like, you look at a Limited Brands, and they had a great report, and they're aggressively looking to get more space to take care of their PINK concepts. The fact that a brand is mature doesn't mean that it still doesn't have a significant growth potential.
Speaker 10
Okay. Thank you. One quick final question. Now that we're five years from the peak of the market, are you noticing any pressure from releasing the lease you signed five years ago?
Speaker 0
No, no.
Speaker 10
Okay, thank you.
Speaker 0
Thanks.
Speaker 8
Our next question comes on the line of Michael Muller of JPMorgan. Please proceed.
Speaker 10
Great. Thanks. I know you don't like breaking up the portfolio in terms of performance, but can you talk generically about how the mall portfolio is performing versus the community center portfolio? Maybe thinking about 2011, 2012, is the gap any closer these days?
Speaker 0
They're both performing better than what we expected in 2011. The outlet business continues to have higher comp and a year-over-year growth than the mall business. I think we're generally pleased with both segments, and the gap is certainly less. It certainly has been reduced compared to, you know, 2009 and 2010 levels. I think that's safe to say that, you know, the outlet business was stronger in the height of the significant economic downturn. That gap, the growth rate gap, has certainly narrowed.
Speaker 10
Okay. That's fair between the traditional mall and the community center as well?
Speaker 0
You know, our community center, we don't, you mean the,
Speaker 10
Growth rate.
Speaker 0
The growth rate, yeah.
Speaker 10
Okay.
Speaker 0
The mall business grows much better than the community center business.
Speaker 10
Okay, and then, going back to non-core asset sales, can you just talk about, generically, about how big the potential pool of assets that you would like to sell over time is?
Speaker 0
I think historically, you know, this year, we basically disposed of assets around $500 million. You know, if we could continue to, you know, sell $200 to $300, $400 million of assets a year, in terms of pruning, I think that would be, you know, the level that would be, you know, desirable.
Speaker 10
Okay, great. Thanks.
Speaker 0
Sure. Thank you.
Speaker 8
Our next question comes on the line of Jeffrey Spector of Bank of America. Please proceed.
Speaker 4
Great. Good afternoon. A few questions. If we could just start off, I guess, with the big picture. Rick, just wanted to follow up from our ICSC dinner in December. Can you talk about your more recent conversations with tenants? Retail sales seem to be stronger than expected. You know, what is their latest view on these new store openings or new concepts?
Speaker 6
I think, as David Simon alluded to earlier, it's very much a tenant-by-tenant analysis. Sales were better. There were some pressures on margins. We've detailed earlier in the call a number of tenants that have very aggressive growth profiles. There are others that are retracing a little bit and reducing their footprint. Generally, however, the balance sheets remain strong. They are still generating cash flow, and we're still able to drive demand from the types of tenants that we'd like to have in our properties.
Speaker 4
Where do you stand on pricing power at this point? I know David said business is still tough. Is it still a tough negotiation, or do you feel like pricing power is coming a little bit more back to your side?
Speaker 6
There is never a negotiation that is not tough. I mean, look, we're fighting over the same dollar. That's been that way for 40 years, and it'll continue that way. Ultimately, do we have some better power? Look, as the productivity of our properties get better, as we improve our properties, as our occupancy gets stronger, just fundamental supply and demand, there's virtually no new construction. That certainly plays into our strengths.
Speaker 4
I guess, thinking about your budget and your guidance, David, your thoughts on the consumer? Our economists keep saying the consumer spending is going to slow second half of the year. When you guys thought about, when you finalized your budget, how were you thinking about the consumer?
Speaker 0
I think our budgeting reflects, you know, it's ground-up. It reflects the general nature of our, you know, the fact that we are cautious in how we put our numbers together. I think, in a sense, that reflects also what's going on in the macro environment. I think we take that into account. There's no guarantees in anything, but I do think we take in the fact that it is generally still a very cautious environment. We have a lot of work to do to make our numbers. On the other hand, we always wanna beat our numbers. We're at the point now where we're giving you our view of what it is, given what transpired with the GCI sale, etc. We always wanna beat our numbers, but we're generally cautious. I think that reflects the consumer.
This year, you do have a certain added uncertainty with the general election and all that crap that follows with it. On the other hand, there are reasonable signs. I mean, it's very confusing signs out there, but there's some reasonable ones. Jeff, you're aware, obviously, of what happened with jobs today. On the other hand, you see more layoffs that have been announced over the last week or two. In my view, it's still a very confounding, tough environment to kind of decipher through. I do know, though, that the program that we have and our internal investments will pay rewards for our shareholders in the future. That, I'm not worried about. We would like to see better income growth and job growth.
That would give us a cushion that we haven't been able to really have over the last couple of years, even though we've produced terrific industry-leading results.
Speaker 4
Great. I just want to clarify, you, David, you mentioned you're going to spend $1 billion this year in development, next year $1 billion. I think you also said 2014. Is that strictly redevelopments, new premium outlet centers, and expansions at your existing premium outlet centers?
Speaker 0
Correct, yeah. That's all in. That's new development and redevelopment.
Speaker 4
Just to clarify, not new malls.
Speaker 0
Yeah. I, you know, unless you got a site you want to show us, where the new malls, I still think are ways away. I think, you know, I still don't see a real demand for a lot of new malls. Nanuet's a good example. You could consider that a new mall in a sense, but, you know, we put that in our redevelopment category.
Speaker 4
Should we assume it's full price in China premium outlets? Did you say that?
Speaker 0
I did not say that. You should not necessarily assume that.
Speaker 4
Okay. With the Phoenix announcement.
Speaker 0
On both fronts.
Speaker 4
Jeff, on both fronts.
Speaker 0
On both fronts.
Speaker 4
Okay.
Speaker 0
Okay.
Speaker 4
Last question on Phoenix.
Speaker 0
Yeah.
Speaker 4
I guess with your announcement, have you heard anything from your competitors on their sites?
Speaker 0
I assume their, our assumption is they're going to go full steam ahead. You know, we are going forward, we'll have no impact on what they do.
Speaker 4
Okay. I'm sorry. One last question. Do you still have the ownership stake in Value Retail in the UK and Europe?
Speaker 0
We do.
Speaker 4
Okay. Anything with that at this point, with the sale in Italy? Or you like that small investment? Keep it as is? Or is there any chance to increase that or do anything more on the outlet front, I guess?
Speaker 0
We like that investment. In fact, we have an investment at the holding company, more or less. There are investors in various outlets that, in some cases, are different than the investors at the holding company. In fact, we just increased our ownership interest in two outlets at year-end.
Speaker 4
In Value Retail?
Speaker 0
Correct.
Speaker 4
Okay. Great.
Speaker 0
Yeah.
Speaker 4
Thanks very much.
Speaker 0
Yeah, no worries.
Speaker 8
Our next question comes on the line of Craig Schmidt of Bank of America Merrill Lynch. Please proceed.
Speaker 10
Thank you. I just wanted to push a little more on Del Amo. Do you think that investment could be north of $200 million?
Speaker 0
Yeah. It could be. It could be. If you want to see all the options, we'll let you spend, it's at your own peril, but we'll let you spend time with David Contis.
Speaker 10
Okay.
Speaker 0
We could actually use your help, Craig.
Speaker 10
It sounds like you.
Speaker 0
It'll be at your own peril and may take a long time. Reserve half the day.
Speaker 10
It sounds like you're talking to fashion anchors. Are they positively inclined at this point?
Speaker 6
Everyone acknowledges the importance of the market and the fact that it's not adequately penetrated on their existing stores. Obviously, we're now in an environment where people are considering more capital investments. We're optimistic.
Speaker 10
Okay. Prior to my meeting with David, Contis, is this still going to be done in phases? I thought you had focused on the northern end first at one time.
Speaker 6
It will still be done in phases based on when we can get the right critical maps. Right now, we're focusing on when, how we're going to start it. It is, again, a very big project. It is going to take a number of phases and a number of years to bring to fruition.
Speaker 10
Okay. In terms of the outlet business, I'm wondering if, you know, like the malls, are the higher-end ones doing better than the more moderately priced ones? Or are outlets strong just throughout the price point spectrum?
Speaker 0
I would say they're generally strong. You know, the tourist outlets are the ones that are really kicking ass.
Speaker 10
Okay, thank you.
Speaker 0
Sure. Thank you.
Speaker 8
For no further questions in the queue at this time, I will now turn the call over to Mr. David Simon for closing remarks. Please proceed.
Speaker 0
Okay. Thank you, everybody. Thanks for your patience on the call. Have a good weekend.
Speaker 8
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.
