Apr 30, 2010
Executives
Shelly Doran – Vice President, Investor Relations David E. Simon – Chairman, Chief Executive Officer Richard S.
Sokolov – President, Chief Operating Officer Stephen E. Sterrett – Chief Financial Officer
Analysts
Alexander Goldfarb - Sandler O'Neill & Partners L.P. Paul Morgan – Morgan Stanley Steve Sakwa – ISI Group Jim Sullivan – Cowan & Co.
Jay Haberman - Goldman Sachs Craig Schmidt – Bank of America/Merrill Lynch Michael Bilerman - Citigroup Quentin Velleley - Citigroup Tayo Okusanya – Jefferies & Co. Ben Yang – Keefe, Bruyette & Woods Cedrik Lachance – Green Street Advisors Jeffrey Donnelly - Wells Fargo Securities, LLC Michael Mueller - J.P.
Morgan Richard Moore - RBC Capital Markets Christy McElroy - UBS Ross Nussbaum - UBS Nathan Isbee - Stifel Nicolaus & Company Inc.
Operator
Welcome to the Q1 2010 Simon Property Group earnings conference call. (Operator Instructions) I would now like to turn the conference over to your host for today, Miss Shelly Doran, Vice President of Investor Relations.
Please proceed.
Shelly Doran
Thank you. Welcome to Simon Property Group’s first quarter 2010 earnings conference call.
Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties.
Please refer to our filings with the SEC for a detailed discussion of these terms. Acknowledging the fact that this call may be webcast for some time to come, we believe it’s important to note that today’s call includes time sensitive information that may be accurate only as of today’s date, April 30, 2010.
The company’s supplemental information package was filed earlier today as Form 8-K. The filing is available via mail or email and it is posted on the Simon website in the Investors section under Financial Information, Quarterly Supplemental Packages.
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 Simon
Good morning everybody. Thanks everyone for joining us.
We will give you the highlights and then open it up for questions. First of all we reported FFO as adjusted for the first quarter of $1.41.
FFO after the loss on extinguishment of debt related to our January tender offer was $0.94 per share, $0.09 above First Call estimates. Per share amounts reflect the impact of the issuance of 52.1 million shares of common stock through public offerings and dividends in 2009.
In the first quarter of 2010 the impact to FFO per share of that activity was $0.17 per share. It was a good quarter operationally and financially with consumers spending more in our centers.
Our retailers are feeling better about their business and the debt markets are strengthening. We are clearly seeing the impact of an economic recovery that is beginning to surface in our results.
However, we continue to believe the recovery may be slow and there will be challenges in the weeks and months ahead. I will walk you through some of our key operating statistics.
Beginning with this quarter we modified the reporting of statistics of our U.S. business by combining our malls and our outlets.
We made this change for several reasons including it is more representative of our enter enterprise performance. Combined together these assets represent over 86% of our net operating income.
The historically bright line between malls and outlets is becoming more blurred every day. Many tenants are leasing space in both property types.
Tenants that have historically operated in outlet centers are now leasing space in malls as well as other venues including strips and street level shops and traditional mall tenants are now opening concepts in the outlets. We also consolidated the back office of the premium outlet business into our Indianapolis infrastructure last year.
We believe this is an improved methodology but understand it may take time for you to adjust your models. Therefore, to assist in that process we have provided historical data for occupancy, sales, rent and leasing activity on a combined basis for 2005 through 2009 in the 8-K we filed this morning.
We continue to lead our peer group in comparable property net operating income growth generating 2.5% growth in the first quarter. The drivers of that increase in comparable NOI include much improved bad debt expense as well as a reduction in the bankruptcies in 2010, higher overage rent due to sales growth as well as our continued focus on cost control in home office and field.
As of 03/31 comparable sales on a rolling 12 month basis was $467 per square foot. Sales growth accelerated in the first quarter with tenants reporting sales 6.6 higher during the first quarter of 2010 as compared to the first quarter of 2009.
We also saw a very strong improvement in the month of March with sales growth of 10.6% compared to March 2009 partially aided by the shift of Easter. Sequential quarterly occupancy changes from 12/31/09 were in line with historical trends and were consistent with our budget.
As of 03/31 occupancy was 92.2%, ten basis points higher than a year ago. Now beginning with the first quarter of 2010 the releasing spread is being reported on a rolling 12 month basis.
This spread was $2.11 per square foot or 5.2% and we are seeing improvement in leasing activity in 2010. The first quarter spread under our old reporting method for the first three months of 2010 was at $2.69 per square foot or 7.2%.
Demand for space continues to improve as the economy recovers and tenants continue to experience positive sales trends. In January we commenced a tender offer to purchase for cash outstanding notes maturing in 2011, 2012 and 2013.
$2.285 billion of the bonds we tendered at a weighted average interest cost of 5.76% and our duration of two years. We reported a loss on this of $166 million which is what was recorded in our first quarter with this transaction and obviously we told you about that as soon as the transaction was done in January.
Concurrently we sold $2.25 billion of senior unsecured notes. Our largest ever notes offering.
We had a great book. Our orders totaled $10 billion.
The average duration was 14.4 years and the weighted average coupon was 5.69%. As a result of this activity we extended the duration of our senior unsecured notes with no overall increase in our weighted average interest rate.
During the quarter we paid off $300 million of senior unsecured notes that matured on 03/18 and unencumbered two malls totaling $282 million of mortgages as well as paid our cash loss on the extinguishment of debt of $166 million. Subsequent to the completion of the company’s new unsecured corporate facility in December of 2009 five additional banks have added a total of $280 million increasing our borrowing capacity to $3.845 billion.
The facility has an accordion feature allowing borrowing capacity increase to as much as $4 billion. As of March 31, 2010 we had $3.6 billion of cash on hand including our share of joint venture cash.
Approximately $10 per share, the availability of our corporate credit facility of $3.2 billion for a total liquidity position of $6.8 billion. Additionally, we anticipate generating over $750 million of free flow after the payment of our dividend.
We also declared an all cash dividend of $0.60 per share. At this time I would like to make a statement regarding our acquisition of Prime Outlets.
First let me say we expect to close this transaction per our definitive agreement. The Federal Trade Commission is reviewing the transaction.
We have met with the FTC and are fully cooperating in that review. As you may know the U.S.
anti-trust authorities have consistently recognized the retail real estate industry is highly competitive and fragmented and is one of the only industries exempted from Hart-Scott-Rodino filing requirements. Tenants whether they are discount retailers, manufacturers or otherwise can and do lease retail space in a variety of locations.
According to recent estimates there is approximately 14 billion square feet of retail space in the U.S. approximately half of which is space in shopping centers of all kinds.
Our assets comprise only 3.5% of the total shopping center space. In addition to the wide variety of physical sites, e-commerce websites and mail order catalogs have become established as powerful retail outlets and only a small percentage of U.S.
off-price retail sales are conducted through retail outlets located in the properties owned by SPG and Prime. This will be my only comment today regarding this transaction.
Let me conclude, as I stated in the morning release the year is off to a positive start for the company. We reported solid results and are encouraged by the trend of the retailer sales.
Our retailers are exhibiting more confidence in their business. We are seeing increased inventory in the stores.
The environment for new store openings is slowly improving. The tone in the secured debt market has significantly and positively changed in the last two quarters with the re-emergence of structured secured lending and the continued activity from life companies.
Strong sponsorship remains a critical component for lenders. With that in mind during the first quarter we have circled two tenure transactions totaling $515 million at an average interest rate of 5.95%.
We expect to lock rate within the next month on two more tenured fixed rate transactions comprising approximately $550 million at even lower rate spreads than in the first quarter. All of our 2010 secured debt maturities are done.
While we do not believe demand exists for any new non-outlet development projects we are selectively spending capital dollars on expansions of selected international activities all with expected double digit returns. We are adding 116,000 square feet to Houston Premium Outlets.
We are adding anchors and box tenants at more than 20 regional malls, Mills and community centers. We started construction on our second Premium Outlet center in South Korea as well as expansions of two premium outlets in Japan.
Once again we believe we are well positioned to continue to deliver solid results in 2010 and as a result we have increased our bottom end of our 2010 FFO guidance by $0.05 per share. So with that operator we are ready for some questions.
Operator
(Operator Instructions) The first question comes from the line of Alexander Goldfarb - Sandler O'Neill & Partners L.P.
Alexander Goldfarb - Sandler O'Neill & Partners L.P.
I wanted to ask some questions on the general growth. Sort of for perspective what has been the feedback as you have had your discussions as far as the warrants from the board’s perspective?
Are they viewing the warrants as something that would disrupt the bid or are they viewing that as an integral part of the alternative proposal for the company?
David Simon
I don’t really know other than to say that there is no reason to issue warrants when we have a better deal economically more certain better sponsorship, a better diverse group of investors. So I don’t know why they would issue any warrants given the current state of play.
It doesn’t compute from my perspective.
Alexander Goldfarb - Sandler O'Neill & Partners L.P.
The second part on the [JTP] is what is the dynamic? I think earlier the unsecured creditor committee came out in support of you guys but given that Fair Home and Pershing own a good chunk of that what is your sense of the dynamics between the unsecured creditors committee and the respective unsecured debt holders themselves?
David Simon
I can’t speak for Fair Home or Pershing Square. I can only tell you we have had positive support from the creditors committee.
They view our deal as more certain and we think they will continue to support us.
Alexander Goldfarb - Sandler O'Neill & Partners L.P.
On the guidance, two line items for your lease term expectations for the year and provision for credit losses, and then as far as Prime goes should we be assuming that in our numbers for this year and is that in your guidance or what is your recommendation to us as far as our estimates?
David Simon
I will let Steve answer the first two. Let me just say on Prime, as we said at the beginning of the year Prime is in our guidance and when we issued our guidance earlier in the year we anticipated an earlier close to Prime.
So we are not going to pinpoint exactly for you at this moment when we expect it to close. We do expect it to close but the fact of the matter is we haven’t changed our guidance.
In fact we have increased the bottom end even though what we gave you initially we have been delayed from what we thought we would close Prime.
Stephen Sterrett
I will talk a minute about the other two items you asked about. The bad debt expense as you did see we actually had a recovery in the first quarter.
I wouldn’t expect that trend to continue although as I look at the landscape right now I do think bad debt expense will be relatively muted throughout the rest of the year but I would expect to see some expense, not necessarily a recovery. On the lease settlement side we did have a spike in activity in the first quarter.
Historically we run about $5 million a quarter. $4-5 million of just ordinary course of business and I would expect the run rate for the rest of the year, the remaining three quarters, to kind of fall back to that historical level.
Operator
The next question comes from the line of Paul Morgan – Morgan Stanley.
Paul Morgan – Morgan Stanley
On the outlets versus the malls I think I understand why you are combining them. For 2009 there was about a 500 basis point difference in same store NOI growth and you are up in the first quarter.
Could you talk about the contributing factors and whether that disparity is consistent with when you last broke it out?
David Simon
The disparity has narrowed and we had positive comparable property growth in the mall business. If you just look at the mall assets for the first quarter.
Paul Morgan – Morgan Stanley
The lease spreads, the rent on expirations was much higher than what you reported previously. Obviously your lease terms were way up.
I wonder if those are related and whether we might see that number as a blip that comes back down based on maybe some closings of planned stores or if that is not accurate?
Stephen Sterrett
We clearly are seeing some positive momentum in the leasing business. I think David mentioned in his prepared remarks if you look at just the first quarter activity on a standalone basis the spread was actually almost $3 a foot.
I would not expect it to be a blip.
Paul Morgan – Morgan Stanley
My question was whether that high number on expiring rent is…your average for the year was quite a bit lower than reported in the first quarter of $40.71. Is that indicative of anything specific relative to what closed in the first quarter?
Stephen Sterrett
No. Don’t forget our business is such that a lot of the leases are still geared towards the retailer year-end so we have the largest expirations at January 31 but it is not reflective of anything different.
Paul Morgan – Morgan Stanley
Maybe you could talk a little bit about where you are seeing open to buys increase and maybe a little bit of clarity on whether you are seeing kind of more activity from some of the bigger footprint type stores?
Richard Sokolov
Let me do first on the specialty store tenants across all of the platforms it is obviously a more constructive leasing environment. We have a number of tenants that are now coming back and wanting to open the stores in 2010 that they otherwise might have opened in 2008.
There are a number of new concepts like PS by Aero that are moving ahead. Sperry and Stride Rite from Collective Brands and we are looking at a lot of deals with Microsoft.
As you know they opened two stores. One of the two is in our property and it is performing very well and they are excited and we are excited they are looking to grow their footprint.
On the box area if you look at the schedule we have in the 8-K you are going to see an increasing amount of activity there as well and the thing to remember is the development today is probably at 40 year lows as David referenced so that is certainly playing into our hands to absorb the existing inventory.
Operator
The next question comes from the line of Steve Sakwa – ISI Group.
Steve Sakwa – ISI Group
I wanted to try and continue the line of questioning from Paul. If we look at where you opened leases in the quarter and you kind of look at the lease expiration schedule I guess what I am trying to really figure out is if [Kelsey] has historically had 30% rent spreads and the malls were sort of slipping last year…
David Simon
Let me interrupt you. We also had positive rent spreads in the mall assets.
Again, remember there is a lot more activity just given the size of the portfolio malls versus outlets. So if that is what you are headed to we had positive in both.
Again, the expirations for the quarter maybe there is some unusual…
Richard Sokolov
The mix can change.
David Simon
Yes, the mix can change.
Steve Sakwa – ISI Group
My question was really I am trying to think when you were giving guidance and talking about the business I thought late last year and the beginning part of this year you thought that the mall spreads would be down and maybe closer towards the single digit range or very low double digits versus the spreads that had been closer to 20%. Now that you are kind of merging these together we have to think of them as kind of one number, what do you think spreads collectively for both the malls and outlets will be this year?
David Simon
I think it is going to be consistent with our guidance. The specific number I think we would have to get back to you on.
We don’t see a big change in the business.
Steve Sakwa – ISI Group
Rick, talking about open to buy, is it fair to assume then that maybe the leasing put in place here in the first quarter was done under an environment that was pretty stressful? Is it fair to assume this is reflective of really tough situation in the last six months?
When would you expect to see maybe those numbers start to trend higher? Is that a 3 quarter event out or might we see the spreads start to rebound in the second quarter?
Richard Sokolov
I think it is going to be further out. You have to understand leasing we are doing today is not going to open until the fourth quarter at the earliest and we are starting to talk about 2011 leasing.
Obviously the stores that are opening new in the portfolio were done last year with a little less constructive sales and profit dynamics and so that is going to reflect slightly lower rents.
David Simon
I will just say we continue to have a lot of pressure put on us by the retailers on the rent. It is a challenge and we are doing the best we can.
There is a lot of leverage and pressure the tenants are putting on us in terms of rent.
Steve Sakwa – ISI Group
You did mention I guess you are looking at some select development opportunities on the outlet side.
David Simon
Yes.
Steve Sakwa – ISI Group
Can you talk about how return expectations for that business have changed, if any?
David Simon
I think it is not just us. I think generally the outlet properties are attracting a lot of new entrants into the outlet business.
There are lifestyles that are being converted to outlet. There are malls that are being converted to outlets.
Part of the morphing we see going on in the industry so that is one of the things that we are dealing with. It was not just us.
I would say generally the returns are under pressure. Not dramatically so.
The returns historically as you know have been really, really positive. They are still double digits but it is probably off a couple hundred basis points if not more just because the rent pressure in that business even though the demand is good the retailers are just generally cautious and able to negotiate pretty good deals.
Steve Sakwa – ISI Group
So low teens might be down towards 10?
David Simon
I think it will be a little bit better but I would say 10-12. I guess you want to pin me down with a number.
Steve Sakwa – ISI Group
If you could go out to [three] decimal points that would be great.
David Simon
Probably went from the 14-15 range to probably 10-12. I think the other thing is the outlet development pipeline, not just us but generally, is different than it was 5-8 years ago.
The idea of being next to a full price is kind of out the door. The land costs are much higher.
In regional mall locations essentially. Construction costs have kind of stabilized but I think land costs, tenant improvement costs have certainly gone up.
Operator
The next question comes from the line of Jim Sullivan – Cowan & Co.
Jim Sullivan – Cowan & Co.
A couple of modeling questions first. The same store NOI number you are quoting here is that pre or post lease term fees and credit losses?
Stephen Sterrett
It does not include lease termination fees. It does include bad debt expense.
Jim Sullivan – Cowan & Co.
So that very positive variance we had in Q1 is part of that number. On the home and regional costs line that number was below 20.
I think that is the first time since before I retired the first time. Can you tell us why and where that number is going?
David Simon
We continue to do more with less.
Stephen Sterrett
Let me amplify on that just a bit. Don’t expect the same amount of positive variance.
We did have a true up from a legacy incentive plan related to the outlet business that provided some of that favorable variance in the first quarter.
David Simon
I still stand by my comment.
Jim Sullivan – Cowan & Co.
How much less?
David Simon
How much more? Where do you want to start?
Jim Sullivan – Cowan & Co.
Typically that number has been over 25 for some time. So it was a big…
David Simon
I am kidding you. Steve is right.
Stephen Sterrett
Most of the [paper will vary] in the first quarter. [Audio fade]
Jim Sullivan – Cowan & Co.
That was how much?
Stephen Sterrett
I think the favorable variance was about $8 million in the quarter.
Jim Sullivan – Cowan & Co.
You have obviously been talking with a lot of major institutions in terms of joint ventures both domestically and overseas. The question I have for you is whether you have seen any change recently that kind of matches what we saw in share price performance over the last couple of days so whereby those institutions are showing a clear preference to invest in North America as opposed to Europe.
David Simon
I think they see the U.S., I agree and they see the U.S. as having certainly better growth prospects than Europe.
We see the same thing frankly and that is part of what is driving us in some of our decisions in Europe. I think they are also moving toward the alternative investments have been put a little bit on the back burner and they are looking for core investments and when you look for core investments they like regional malls.
Both of those are kind of aligned in terms of what is happening on the capital front.
Jim Sullivan – Cowan & Co.
Regarding the international side you announced a couple of new projects and expansion in Asia. Should we be expecting more of the same?
David Simon
Yes. But primarily only exclusively in the outlet format.
So South Korea we have a few more opportunities. We are very close to starting in Malaysia which we hope will attract the Singapore market.
That is the focus. As you know we sold our Wal-Mart anchored malls in China.
Could we do outlets in China? Maybe.
At this point we are very comfortable with the outlet format in those kinds of areas in Asia. We will continue to push that.
Jim Sullivan – Cowan & Co.
Is it a competitive advantage you have in the outlets in Asia versus full price or is it just a lack of opportunities and yield?
David Simon
I would say we are good at what we do there. We have the right partners.
We have had success so it is really success to get success. Full price, certainly in China and I think the yield on full price is very, very tricky.
The thing that I have seen in Asia is if the tenants don’t produce they don’t really necessarily pay you what they want to pay you. We think the outlet sector is actually a little more risk averse and we have been successful there.
Operator
The next question comes from the line of Jay Haberman - Goldman Sachs.
Jay Haberman - Goldman Sachs
Could you talk about the dynamics of the anchor stores versus the in-line stores? Perhaps even some performance by segment?
I guess also you talked about some challenges ahead. Are you worried about store closings at this point or is it really just more of the comments about the slow recovery?
David Simon
I will let Rick talk about department stores but absolutely store closings our occupancy went down. Store closings are an everyday event.
Retailers if they don’t have the right rent as a percent of sales they will close the stores. We have suffered through that a lot last year.
I think I give credit to Rick and the leasing team for maintaining occupancy but store closings is absolutely continuing to be an issue. I don’t’ think it will go away any time soon.
I will turn it over to Rick on the anchors.
Richard Sokolov
I would say in addition to store closings a lot of the specialty stores are downsizing their footprint. So there is pressure in that regard as well as they are trying just like us to do more with less.
On the anchors, performance is obviously better. Balance sheets are dramatically better.
Virtually every one of them are at stock prices that they haven’t seen in years. They are more optimistic about their future and they are more focused on top line growth.
That I don’t think is going to immediately transfer into department stores looking to open new units. They are just working on making their existing product better and it is more productive and that helps us drive more traffic.
Jay Haberman - Goldman Sachs
Going with the store closing theme do you expect that to happen throughout the year or do you think retailers try to hang on for much of this year and it falls into later Q4 and even into Q1 of next year?
David Simon
They have already made some decisions. We know that in 2010 when the lease expires we are going to have to deal with store closings.
The environment, we have a better shot at keeping some open given the world is getting better but it continues to be a focus for retailers. If they don’t have the right rent/sales they are going to close the store.
You have seen our rent spreads compress and our occupancy get dinged a little bit because of that environment. The good news it is moving better but it has to continue to move better for us to be able to deal with the store closings.
Jay Haberman - Goldman Sachs
On the dividend I know you had to right-size the dividend last year when liquidity obviously dried up. When do you reconsider the dividend and those conversations with the board given your yield is now about 2.7% and your payout ratio is as low as I have seen it?
David Simon
Very good question. We are going to address it a little bit with our taxable income in the fourth quarter.
It depends on kind of where we see that. I think it is a good question.
We will be able to see how the year shakes out. There won’t be a change in the third quarter in terms of the $0.60.
We will see where our taxable income is in the fourth quarter. Then I think depending on the view of the world we will see what the right number is for 2011.
Operator
The next question comes from the line of Craig Schmidt – Bank of America/Merrill Lynch.
Craig Schmidt – Bank of America/Merrill Lynch
On your two expansions [inaudible] how is the leasing on the small shop space? The 136 I guess the domain and [inaudible] at South Shore?
David Simon
We have had challenges in both. These were brought on ahead of they were under construction during the lean years.
Two days ago? Right.
We struggled frankly. We have good momentum.
I will let Rick talk to you about the percentages but we brought them on obviously at a horrific time. We are making progress.
Richard Sokolov
I would add at Domain we are going to hopefully buy the third quarter would be about 80% occupied and at South Shore, Target is opening in October and we anticipate being about 80% open at that time as well when Target opens. David is right.
They were very well executed but the timing could have been a lot more fortuitous.
David Simon
Long term obviously we believe very much in both projects. We just have to keep pounding away and get it leased.
Craig Schmidt – Bank of America/Merrill Lynch
I know you are not thinking about non-outlet development at this point but I am wondering if [inaudible] and department stores to open new units continues might we see something more like a St. Johns Town Center opening from you than a traditional mall?
David Simon
I will tell you the outlet is a good pipeline out there for the industry. I just don’t see the demand.
I just don’t see it from our standpoint.
Richard Sokolov
The only thing I would add is the discussions we are having with department stores is how we can add them to our existing properties. I don’t’ think any of them believe there are a lot of underserved markets left in the United States.
David Simon
I would add the focus, we had obviously a lot of redevelopment stuff we have put on hold, so I think as I said probably in the last call I think we will start to see some of that put on the drawing board again. I think that is the first step for us in any event as opposed to ground up new development X the outlet assets.
Operator
The next question comes from the line of Quentin Velleley – Citigroup.
Michael Bilerman - Citigroup
I just wanted to come back to the leasing spreads for a second. If we look at page 18 the 12/31 for 2009 the lease spread was about $5.
Then 03/31 is a trailing 12 month number which includes most of 2009 and the first quarter and the store closing rent jumped up from that $38 to $41 which is a pretty massive spread to include just all the first quarter expiries. I think you had said that with a $3 positive spread in the first quarter I am having a hard time figuring how that math works when 2009 was positive 5, trailing 12 in the first quarter is $2.
Something is just not matching up.
Stephen Sterrett
From a math perspective what is happening is the first quarter of last year was very positive. In fact if you go look at our 8-K from the first quarter of last year my recollection was that the spreads in the mall business were $9.
So you had a very positive quarter burning off and obviously as David and Rick alluded to the leasing trend is getting better. We are seeing better spreads in the first quarter of 2010 than we saw in the fourth quarter of 2009 but you are replacing a quarter that has lower spreads from taking out the first quarter of last year which had very high spreads.
That is the simple math.
Michael Bilerman - Citigroup
In the expiration number that $41 your average, if you go back to the prior subs the average mall rents of tenants that were expiring were $36-37. The outlets are in the high 20’s.
For the trailing 12-month average to be $41? It just doesn’t…I guess where you are signing rents makes sense.
I guess where they are expiring doesn’t. I don’t know if there is something particular in the first quarter relative…the last 12 months at 12/31/09 the expiries were $38 so if you roll in the first quarter for the first quarter to roll to $41 that would mean the first quarter expiries were probably high 40’s or even 50s?
Stephen Sterrett
Don’t forget two things. One, closing square footage in our spread calculation is comprised of two things.
It is comprised of normal lease expirations and we disclose to you what our lease expirations are over the course of any period and you can see what the average rent is but it is also stores that closed prematurely whether that is bankruptcies or lease settlements or lease terminations. Obviously as David and Rick alluded to in the environment we are in if a tenant doesn’t have the right rent to sales ratio they are going to close.
We had some high rent tenants that closed. As an example, think about all of the jewelry stores that have closed over the last 18 months.
David Simon
I think that is what you are seeing in terms of having a pretty big impact in this year’s first quarter because we had a lot of jewelry stores close.
Michael Bilerman - Citigroup
But you don’t see moving the 12/31 going down from $13 down to $5 as being a concern? Of what that would have implied for the first quarter?
David Simon
No because we told you what the first quarter was.
Michael Bilerman - Citigroup
A couple of months ago you had said in a release there was a number of other things that you were working on in terms of growth opportunities and that you were not going to sit on your hands and wait around for a situation. Can you give an update as to where those other situations are, the size of those opportunities and how you are thinking about that aspect of your business?
David Simon
I think it is safe to say we are good but it is hard to work on one big deal and a lot of other ones at the same time. Our focus let’s not forget we have a Prime deal we are looking to close.
Our focus obviously has been on general growth. I think at the time we mentioned it we were still debating what role and how we might play in general growth.
Obviously a lot changed from the last time we spoke and we have been exclusively focused on that transaction. It so happens that there is nothing there for us which is a distinct possibility I am very comfortable with the ability to grow our business externally but I can’t give you chapter and verse as to when and how.
I don’t think that would be appropriate.
Michael Bilerman - Citigroup
Are those opportunities being marketed and at this point now that you have pulled back from them they will go to someone else?
David Simon
I don’t think any of these were auction oriented marketing deals. It wasn’t like that kind of stuff.
Quentin Velleley - Citigroup
In terms of you mentioned the redevelopment in the malls would probably be the first project you would start looking at, I am wondering what you feel is to the timing of when that might commence and probable [inaudible]. I assume it is still quite a way out?
David Simon
I don’t think it is quite a way out actually. I will tell you we are going to end up spending more redevelopment dollars this year than we thought as we were planning at the end of 2009 and last year.
Actually our CapEx some of it may actually by the time you get it all done will be spent in 2011 but there is a lot of activity on the redevelopment front ad we will spend more in this year than we anticipated. I think that will carry over into 2011 as well.
Richard Sokolov
If you look at page 34 of the 8-K we have shown you a number of the redevelopment projects that are coming online for the remainder of 2010 and some of these are significant upgrades to our properties and we have a pipeline of opportunities we are working on. As they get to the point of starting we will share them with you.
Quentin Velleley - Citigroup
As retailers are looking for the smaller store sizes or a reduction in store size is that something that is going to drive more redevelopment over the next five years?
Richard Sokolov
I don’t think redevelopment as much as it is going to enable us to maximize the NOI out of our better properties which are now more space to lease to more tenants without having to add additional space.
Michael Bilerman - Citigroup
A quick question on the outlook versus the malls, what percentage of the NOI has the cross pollonization or the cross fertilization of tenants? I know you have been increasing it but I still thought it was predominately a separate tenant base.
David Simon
That really has really morphed. I would say at least 40-50% if not more.
Michael Bilerman - Citigroup
So 50% of the outlet NOI are also in the mall?
David Simon
Essentially. You have a lot of companies like Liz that do both.
The Gap does both. That is off the top of my head.
I don’t know specifically. The pure manufacturers are more vertically integrated now so they do retail and manufacture.
The pure retailer or Gap does both. So as you go through the list I would say the old like the Mikasa’s of the world are gone.
I am happy to walk an outlet asset with you but I would tell you it is just off the top of my head it is 50. We can certainly do that math but wouldn’t you say it is 50?
Richard Sokolov
Anecdotally if you look at all the announcements that have been made over the last few months about new concepts coming to the outlets, they have almost been exclusively from retailers that are already operating in our malls such as Ann Taylor Loft, Coach Men, Lens Crafters, Bradley, New York & Co., Christopher and Banks. Those are all mall retailers that are now moving concepts into the outlet as well which is again an example of the convergence David talked about in his opening remarks.
Operator
The next question comes from the line of Tayo Okusanya – Jefferies & Co.
Tayo Okusanya – Jefferies & Co.
Going back to the numbers again, help me out a little bit. The recovery of the credit losses in the first quarter could you explain exactly why that happened?
Stephen Sterrett
We were over-reserved at year-end based on an account by account analysis of receivables we didn’t think we would necessarily collect and we collected them in the first quarter. So when you have a reserve out there and there is no receivable left you have to reverse the reserve.
Tayo Okusanya – Jefferies & Co.
The $20 million lease settlement charges in the quarter was that specifically from a few concentrated tenants or from a bunch of tenants?
Stephen Sterrett
It was a bit of both. There were a handful of small stores but then normal, ordinary course of business as well.
Tayo Okusanya – Jefferies & Co.
Operating expenses for the quarter $98.7 million was a little bit light versus 1Q of 2009 year-over-year comparable. When I try to think about forecasting going forward is that $98-99 million number more the run rate you are expecting or did you have a special or did something unique happen in the quarter?
Stephen Sterrett
A couple of things. David mentioned trying to do more with less.
We obviously have been focused on costs but you do have seasonal costs. For example utility costs are much higher in the summer because your air conditioning, etc.
but there is no question we are seeing the benefit of aggressively managing the costs of the malls.
David Simon
I just want us to take credit not only did we outperform, we also outperformed with all of the snow expenses. We had one goal this quarter which was not to use the extra snow as a reason we missed.
Operator
The next question comes from the line of Ben Yang – Keefe, Bruyette & Woods.
Ben Yang – Keefe, Bruyette & Woods
I was wondering if you could give us your updated view on the acquisition landscape and your [inaudible]. Obviously general growth is the elephant in the room and you previously commented you are exclusively focused on it but I wonder if they end up going with a broker sponsored recap?
Do they end up selling assets? Also there is some speculation some of your mall peers could be consolation prizes if you don’t get general growth.
I am wondering if you can comment on what you are thinking or perhaps expecting?
David Simon
Let me just make a general comment. I have no idea if [Brookfield] is successful what they will do with the company or how they will run it.
I have no sense of anything on that. If we are not successful the last thing we are going to do is go do a deal to do a deal.
When we look at deals we look at what the value of the real estate is, not what we can pay for the real estate. If we did that we would get ourselves in trouble.
At the end of the day if there is good real estate to buy at the right price we will buy it. If not, we won’t.
We will wait for that opportunity. That is how we look at things.
It is not what we can afford to pay. That would be not the way to run anything.
It is really what we think the real estate is worth and what the real estate might be worth in our hands. With that said I hope I answered your question.
I have no idea what [Brookfield] will do if they are successful. We will continue to look like we always have over the last 16 years if there is real estate appropriately priced we think is more valuable in our hands we will be prepared to buy it.
If not, we will wait for the right time.
Ben Yang – Keefe, Bruyette & Woods
If the good deals aren’t there in the near-term do you just use the cash to pay down the debt? Is that kind of the plan at this point?
David Simon
Correct.
Operator
The next question comes from the line of Cedrik Lachance – Green Street Advisors.
Cedrik Lachance – Green Street Advisors
Going back to expenses what is your ability from this point forward to further cut the expenses?
David Simon
You were muffled there. Can you repeat yourself?
Cedrik Lachance – Green Street Advisors
Going back to the expenses, operating expenses in particular, from this point forward what is your ability to further decrease your operating expenses?
David Simon
Our philosophy is we hope there is no snow storm. I am kidding.
I think we are running a pretty good shop. The number one focus is you have to have a pleasant consumer experience for the consumer and obviously for our retailer partners.
I think we are doing that. To continue to drive those down I think we jeopardize that.
I would say we are operating probably as appropriately as we can. We have to be very mindful of the consumer experience and so I wouldn’t expect us to be able to push that much further.
Cedrik Lachance – Green Street Advisors
In regards to the recovery on the expense front you alluded a couple of times to retailers needing to have an appropriate occupancy cost in the property. So is the CAM recoveries one of the items that is currently going down versus previous leases or are you still able to recover as much if not more from tenants?
David Simon
Remember we have essentially gone to fixed. So it is all part of the negotiation with our retailers on what they pay in terms of gross rent.
There are very few lease discussions. We still have some older leases running off of.
There are very few lease discussions that have pro rata CAM at this point.
Cedrik Lachance – Green Street Advisors
When you negotiate with them at this point it is much more of a gross number than trying to divide between base rent and CAM recovery?
David Simon
We still allocate it between [operating sense] recovery and rent but there is certainty for the retailer in terms of what they are paying us in terms of reimbursing us for operating expense.
Cedrik Lachance – Green Street Advisors
I noticed you purchased the partial interest in two of the Mills properties from your German partner. Are you able to disclose the GAAP rate on those transactions?
David Simon
I actually don’t know. Probably not but I think we made a good deal.
Operator
The next question comes from the line of Jeffrey Donnelly - Wells Fargo Securities, LLC.
Jeffrey Donnelly - Wells Fargo Securities, LLC
I am not sure if you can break it out but how much of your interest in GGP is generated by the structure of their balance sheet rather than their mall portfolio per se? Because I guess the pursuit of a platform with above average leverage and abundant long-term low rate secured debt could convey you might have a view on core growth that it will be soft for some time.
Or maybe the better way to ask this question is for the cycle ahead who do you think has the better balance sheet?
David Simon
Let me answer it this way. I hope you were not serious about that last part.
I think their balance sheet scares me. There is still a lot of secured debt and a lot of highly levered assets.
Again, I hope you weren’t serious on the last part. No, we look at the assets.
Obviously the big issue here is it is still a very highly levered company with not a lot of financial flexibility. So secured market as you know is still just not back.
Doing bigger deals is tough. It is getting better but it is not there.
Obviously our balance sheet compared to theirs is an apple and an orange.
Jeffrey Donnelly - Wells Fargo Securities, LLC
What I meant by better was to the extent you see a more sluggish growth environment or even a rapid growth environment is higher leverage warranted?
David Simon
I think that was an argument that was made by them earlier and we saw the results of that. I don’t think so.
Jeffrey Donnelly - Wells Fargo Securities, LLC
In your opening remarks and you touched on it a moment ago, you had mentioned outlets and full price malls are blurring. I know that shift hasn’t happened overnight but what does that say about the long-term sales growth potential for regional mall sales if brands are willing to effectively open off-price channels to undercut their full price channel?
Do you think the next 10 years will be weaker than the last 10?
David Simon
That is a good question. I think everything has to be done in moderation.
I don’t know that I will be dramatic changes but like we have said before there is retail real estate that is going to become yesterday’s news. The retail real estate environment is under pressure.
Certainly the internet and e-commerce has had a dramatic impact on our business. That is the biggest concern we have going forward.
There are certain elements of that which aren’t a level playing field. For instance on the Internet sales taxation and the ability for the pure internet retailers to just avoid it.
I think this will cause the whole environment generally is going to cause some retail real estate to essentially have to morph into something else or go out of business.
Jeffrey Donnelly - Wells Fargo Securities, LLC
A lot of the lifestyle center activity we saw whether it is standalone centers or just the new wing on a mall is somewhat reliant on restaurants as that new anchor. They are still on their heels.
To the extent you do see more shakeout in mall anchors down the road, hypothetically, how do you think about the alterative use of those big boxes down the road? If there aren’t a lot of big box users kicking around and again the anchors for them right now at least seem to be on the sidelines.
Richard Sokolov
Again, I think if you look in the 8-K you will see our most current thinking on how we are handling these boxes. Frankly it is a function of the size of the box.
Is it a one level mall and a two level box? Two level box with parking on both levels?
There are still users that want to locate in our properties utilizing that real estate that are going to make our properties better but it is a lot of work and it takes time to get done. The demand is slowly re-emerging.
David Simon
I would say at the end of the day if it is good real estate it is going to get recycled. The malls if you have the right critical mass and the right location I think we have all demonstrated in our industry the ability to recycle boxes and that ought to continue.
Operator
The next question comes from the line of Michael Mueller - J.P. Morgan.
Michael Mueller - J.P. Morgan
On the financing side can you walk through what you see happening at the back end of the year anything contemplated in terms of another bond deal? I think David may have referenced something in terms of locking in some rates.
Does it still look like you are going to end up paying off Forum shops and Copley, etc.?
Stephen Sterrett
What David mentioned earlier is our 2010 secured maturities have effectively all been addressed. That plan does continue to include paying off the debt at Forum and Copley.
Michael Mueller - J.P. Morgan
Not to beat a dead horse but going back to the closing rent levels at $41, given the comments about higher rent payers and their store closings, [inaudible], should we extrapolate from that, what should we put more weight on? That the first quarter spreads were $3 or that you had some high rent payers in the first quarter that seemed like they closed?
If you look forward the spread may increase a little bit?
David Simon
I would focus on the spread. I would also just focus on the bottom line results which is we grew NOI by 2.5%.
That is what I would focus on. That is just my personal preference.
I have a simple model. As long as cash flow is growing then I am reasonably happy.
Rick is saying not really but I am reasonably happy. If it is not growing then that is the focus.
That is how frankly how we run this. We are looking at EBITDA or NOI growth.
Operator
The next question comes from the line of Richard Moore - RBC Capital Markets.
Richard Moore - RBC Capital Markets
A question for you on the Mills properties. You have regional malls kind of on one end and you have outlet centers on the other end.
Why not put the Mills metrics into the metric mix too? They have a whole cross-fertilization thing you were talking about?
David Simon
That is a good question. The reason we don’t is that is its own separate company and we have our partner in there that has its own separate revolver and its own separate balance sheet.
It is kind of one entity generally.
Stephen Sterrett
And its contribution as a percentage of NOI as a total enterprise is a fraction of what the outlet and malls is.
David Simon
We do disclose operating statistics for it but that is the primary reason. Whereas essentially the malls and the outlets are kind of all together.
The mill because of the separate corporate structure is kind of run independently.
Richard Moore - RBC Capital Markets
The metrics seemed a little softer this quarter. How do you feel about the whole Mills venture at this point?
David Simon
I think actual Mills projects are doing very…we are pleased with it. Rick and I are pleased with it.
When we bought Mills there were 2-3 Mills that were really tough. We knew that going in.
Effectively the Mills share of that cash flow was diminimous so we don’t pull our hair out over it. Though we continue to try and improve it.
I would say we have made a lot of progress on the Mills and improving from Potomac. Rick restated all of the stuff we have done.
Block, Ontario, The Great Mall. There is a lot of good activity.
Where we have had some slower results and we got kind of caught in the significant downturn is the malls that the Mills owns where a couple of them we were really excited about certain redevelopment opportunities like at Southdale and Del Amo that has taken a little bit of a back burner. On the other hand we have a Target deal with Esplanade and we are working some stuff with South Bridge so we are regaining momentum with the mall portfolio but that has taken longer.
Generally, the results are exactly what we underwrote despite the significant change in the economy. The demand at the Mills has been good.
So we are okay there other than the tougher ones like a [St. Louis] continues to be tough.
Richard Moore - RBC Capital Markets
So when you are sitting at ICSC these are just part of the mix you are showing the retailers?
David Simon
Oh yes.
Richard Sokolov
I would just make a comment we are also finding the convergence many of our tenants that are operating in the malls are looking at opening full price stores in the Mills. I had a conversation yesterday with a retailer on a space and said well we are definitely going to go.
We are debating internally whether we want to have a full price store or an outlet store in the Mills. We are having a number of outlet tenants open their outlet stores in the Mills.
It is all things to all people and a very good distribution channel.
Richard Moore - RBC Capital Markets
You made a comment about the smaller footprints of some of the in-line guys. I am curious how widespread is that?
How far does that go? That could be serious I guess over time if guys are reducing by 10-20% or 50% or whatever.
Richard Sokolov
It is on the margin. There are a number of retailers that are growing but it gives us an opportunity to improve our tenant mix because a number of our properties where tenants want to consolidate their concepts.
It gives us more space to deal with and we can drive our NOI.
David Simon
I would add the only one that is really out there doing it in a big way is the Gap. I think as Rick just said they have very good locations so it would be a win/win for both of us.
We downsize and get back decent space and go from there. That is not to say there aren’t tenants here or there with a store here or there that wants to get smaller but I would say that is the biggest one out there that wants to do it on a broader basis.
Operator
The next question comes from the line of Christy McElroy – UBS.
Christy McElroy - UBS
In your conversations with national retailers as they shift to more definitive plans for taking new space would you say there is more of a quality in location buys today than in the last 2-10 years rather than just focusing on blanket square footage growth? This sort of touches on a previous question, but generally speaking what do you think is the ultimate fate of some of the classy, secondary tertiary market malls out there that stand today with above-average small shop vacancy and maybe an anchor or two gone?
Do those malls eventually become obsolete or do they get recycled?
David Simon
Let me answer the last part. I would say to you that depending on what is happening in that market if it is a dwindling, dying market those malls are going to go away.
If it is good real estate and the market could be a small market but it has good employment and it has good prospects then I think it can be recycled. We have seen both frankly where we have been able to, Rick mentioned Richardson Square as a decent in-fill place.
Oak Mall that we basically tore down and redid it. On the other hand we had a mall in Indiana and we actually sold a couple in Indiana and I won’t mention names where it was an old manufacturing town that the employment base was shrinking and the age of the customer was increasing.
It wasn’t well located and we had no shot at it. Thankfully we sold it and we went on.
I think you will see a little bit of both. On your first question I would say it really depends on the retailer.
What they are really focused on is what sales productivity they can achieve from the space. That is the focus.
From there results in the deal or the rent negotiation. There are certain tenants that love moderate scenarios.
They have their idea of what they can afford to pay and depending upon that asset that may be a perfectly fine deal for that asset. I do think though there is clearly a much greater focus on what the sales productivity is.
Ross Nussbaum - UBS
In reference to the combination of the operational information on the malls and the outlets, just to comment on that I understand your rationale but I do think the investment community would prefer to be able to see how those two distinct formats are performing individually particularly after the Prime transaction closes. On the Mills portfolio I am curious, you don’t disclose the same store NOI growth for community lifestyle centers or the Mills assets.
I am curious what is the cash flow there and how would that influence the 2.5% number you reported for the quarter?
Stephen Sterrett
They are not major components of the overall enterprise so they are not going to move the needle much in any event. I will say that the cash flow for both the strips and the Mills is positive.
Ross Nussbaum - UBS
David, about a month or six weeks ago I think I asked you a question at the NYU REIT conference about what you thought about real estate valuations and re-chair prices. You had made a comment along the lines you were a little cautious about things might have gotten a little ahead of themselves and here we sit 10% higher and cap rates have come down a bit.
I am curious where you sit today on your overall evaluation of REIT valuations and commercial real estate valuations looking at what has happened in the world over the last 30-60 days?
David Simon
Certainly other than our company being undervalued, I think generally we just have to be very careful. What I don’t want to see our industry, and I think it is broader for all equity markets, I don’t want to see us go from one bubble to the next bubble.
There is certainly a sense that we created just another little false sense of euphoria. I have been surprised.
Obviously we think we are in a little different position than a lot of companies but it is a great surprise to me. I think we have to be careful as an industry we don’t go from one bubble to the next.
Operator
The next question comes from the line of Nathan Isbee - Stifel Nicolaus & Company Inc.
Nathan Isbee - Stifel Nicolaus & Company Inc.
Following up on that line of questions can you talk a little bit about the sales trends you are seeing across your portfolio? Maybe the A’s versus the B’s and some of the geographies where you are seeing some strength or some weakness?
David Simon
Let me just say on the regional thing we are just starting to see a little pick up in Florida. California not so much.
The outlets are producing a little bit better sales growth than the mall assets. As I have said repeatedly the Midwest is just the Midwest.
God love us. The good news is we are starting to see a little bit better trend in Florida.
Rick I don’t know if you want to add to that maybe.
Richard Sokolov
A couple of more color, in the outlets the one area that has gotten substantially better is the international tourist is back. So those are doing significantly better.
In terms of categories, home furniture, family apparel, women’s shoes, specialty and family shoes are better. Not surprising books, music and kids shoes and women’s popular were a little softer.
As things got better people have moved up a little bit on their price points and I think you are seeing that in the results that are being reported by our retailers.
Nathan Isbee - Stifel Nicolaus & Company Inc.
Looking at the Prime portfolio are you expecting to sell any of those assets? Any Prime redevelopment opportunities in there?
David Simon
We don’t have any plans to sell any assets. No.
Nathan Isbee - Stifel Nicolaus & Company Inc.
Are any of them Prime opportunities where you could invest some serious dollars?
David Simon
The good news with Prime is it also comes with a couple of development sites we are anxious to be able to build when the deal closes. That will be a big focus for us.
Operator
The next question comes from the line of Paul Morgan – Morgan Stanley.
Paul Morgan – Morgan Stanley
Do you have a transaction expense number in your guidance?
David Simon
Not really. The 3.7?
We didn’t really have that in our initial guidance but that is [where we expect it].
Paul Morgan – Morgan Stanley
So it is likely you will continue to have those?
David Simon
It is likely we will continue to have those at least for the time being.
Paul Morgan – Morgan Stanley
So we should think of that as kind of a down side component or do you think you are sort of comfortable given you will have those that your range is still okay?
David Simon
I think we are baking it into our range more or less. It doesn’t seem like it is going away any time soon but it could.
Paul Morgan – Morgan Stanley
On tenant allowances they were high in the first quarter relative to the prior year or even the full-year last year. Is there any color about that and how are tenants thinking about capital apart from rent?
Richard Sokolov
There has really not been any change in the negotiating dynamics on the TA. I think slight increases again if you look at the 34 we have had increased box activity.
So that is a little more of the dollars but in terms of specialty stores same trends we have experienced.
Operator
That concludes the Q&A portion of today’s call. I would like to turn the call back over to Mr.
Simon for closing remarks.
David Simon
Thank you everyone. We appreciate your interest and we look forward to talking to you soon.
Take care.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect.