Oct 25, 2013
Executives
Elizabeth A. Zale - Senior Vice President David E.
Simon - Chairman and Chief Executive Officer Stephen E. Sterrett - Chief Financial Officer and Senior Executive Vice President Richard S.
Sokolov - President and Director
Analysts
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Michael Bilerman - Citigroup Inc, Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Craig R.
Schmidt - BofA Merrill Lynch, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Cedrik Lachance - Green Street Advisors, Inc., Research Division Richard C.
Moore - RBC Capital Markets, LLC, Research Division Omotayo T. Okusanya - Jefferies LLC, Research Division Vincent Chao - Deutsche Bank AG, Research Division Benjamin Yang - Evercore Partners Inc., Research Division Josh Patinkin Haendel Emmanuel St.
Juste - Morgan Stanley, Research Division Daniel Oppenheim - Crédit Suisse AG, Research Division Jeremy Roane David Harris - Imperial Capital, LLC, Research Division John P. Kim - CLSA Limited, Research Division
Operator
Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Simon Property Group Inc. Results Conference Call.
My name is Gwen, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to Ms.
Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.
Elizabeth A. Zale
Thank you. Good morning, everyone, and welcome to Simon Property Group's Third Quarter 2013 Results Conference Call.
Presenting on today's call is David Simon, our Chairman and Chief Executive Officer; Rick Sokolov, our President and Chief Operating Officer; and Steve Sterrett, our Chief Financial Officer. Before we begin, just a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors.
We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please also note this call includes information that maybe accurate only of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the company's supplemental information included in today's Form 8-K filing. The supplemental information is available on the investors.simon.com.
I would now like to introduce David Simon.
David E. Simon
Good morning. It was a strong quarter with excellent performance in our core business.
We had strong progress on our growth strategy, which includes redevelopment and expansion of existing properties to meet retailer demand and enhanced productivity, development of new Premium Outlets and our continued smart acquisition strategy. FFO was $2.21 per share, up 11.1% from the third quarter of 2012.
Our FFO exceeded the first call consensus estimate by $0.05 per share. For the malls and the Premium Outlets, comparable property NOI growth was 4.9% for the quarter, driven by tenant sales up 3% to $579 per square foot.
Occupancy up 90 basis points to 95.5%. Our releasing spread was a positive 15.2%, or $8.05 per square foot.
Retailer demand for space in our properties remained strong and healthy, driving our occupancy increases. Our retailers sales continues -- growth continues to be ahead of GDP.
And more important to us, our existing leases are under market rent. And keep in mind, we see almost no or very little correlation between tenant sales growth and our NOI growth due to our ability to replace underperforming retailers.
We have good visibility for strong NOI growth over the near term. New development, just quickly, we opened 3 new Premium Outlet Centers during August, all of which have exceeded expectations.
All were nearly 100% leased at opening, and sales per square foot of all 3 properties are trending above our portfolio average. The total net development cost of the 3 were $400 million, that's not our share, but in total, we expect a first year return of 10.5% on our cost.
We broke ground on Premium Outlets in Charlotte and in Montréal. And we finalized joint ventures that are under construction in Eagan, Minnesota, which is in St.
Paul, Minneapolis; and Vancouver, British Columbia, Canada in our new partnership with McArthurGlen. On the redevelopment expansion highlights, The Shops at Nanuet opened in October, a complete transformation into an open-air environment, providing everyday shopping and activities plus dozens of fashion and specialty retailers unique to the area.
It's 98% leased. Community acceptance and early reports on sales have exceeded expectations.
We also opened a 105,000 square-foot expansion of Orlando Premium Outlets in October. It's 100% leased.
Redevelopment and expansion projects ongoing at more than 35 properties in the U.S. and Asia.
Overall, our multi-year pipeline of new development and redevelopment and expansion projects is key to driving growth in NOI. We continue to expect development investment at least $1 billion annually, from '13 through '16 go projects.
Go projects include Roosevelt Field, Houston Galleria, Woodbury, Stanford, Del Amo, just to name a few. In other words, they are under construction.
International, just let me mention a few things. Finally, we completed the closing of our joint venture with McArthurGlen.
It includes ownership interest in 5 McArthurGlen Designer Outlets located in Vienna, Venice in Naples, in the Netherlands, near Düsseldorf and one in the U.K. near Kent.
We also own a 50% interest in their management and development company, which has a strong pipeline of future projects and opportunities. We're excited to partner together.
Great platform for high quality retail real estate in Europe and a strong team of professionals. This partnership supports and extends our international growth strategy.
Important industry synergies will be taken advantaged of in upcoming years, similar to what we're accomplishing with Klépierre. Total consideration for the recent investments is approximately $500 million at a cap rate of slightly north of 6.5%.
Klépierre announced the revenues a couple of days ago. We continue to believe we are well-positioned to assist them in delivering greater value from their platform.
European retail recovery is just getting started, and they are beating financial and operational expectations. Capital markets, annuities, investor service upgrade at SPGs, senior unsecured debt to A2 with a stable outlook.
We are 1 of only 2 REITS with an A-rating from S&P and Moody's. We completed a $750 million Eurobond offering to complement our McArthurGlen and Klépierre investment.
It taps into broad market, expands our access to capital, provides a natural hedge and a strong demand enabled more favorable terms for lending for leading European real estate players. Rate of 2.375 for 7-year notes.
Dividend, quickly, we increased our quarterly dividend from $1.15 to $1.20 per share, as a result of continued strong performance and a raise of our taxable income estimate, a year-over-year increase of 9.1%. Total dividends paid in 2013 will be $4.65 per share compared to $4.10 in 2012, an increase of 13.4%.
We will, again, raise our first quarter dividend after our taxable income estimate is complete in the first quarter 2014. Today, we're raising our FFO guidance to a new range of $8.72 to $8.78 of FFO per share.
The primary driver of this increase is strong operating performance across all platforms. This increases the midpoint by $0.10 from our last one in July and $0.30 from the midpoint of the range from the beginning of the year in February.
Our commitment to shareholder return and our ability to execute has built an unprecedented track record of meeting or exceeding expectations on a quarterly and annual basis for at least the last decade. Our nearly 20-year history as a public company since IPO in December of 1993 is as follows.
Total shareholder return of approximately 1,975%, or 17% annually for 20 years. Our FFO grew in 1993 from $150 million to over $3.15 billion in 2013, using the midpoint of our guidance range.
Our equity market cap grew from $1.8 billion to approximately $58 billion today. And we're not resting, the range of opportunities in front of us is exciting and we'll continue to focus and work very hard to produce strong results.
We're now ready for questions.
Operator
[Operator Instructions] Our first question comes from the line of Alexander Goldfarb with Sandler O'Neill.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
To use a favorite metaphor for Steve, we're going to tee off with you. On the Eurobonds, just sort of curious what the reception was over there as far as -- is there a dedicated REIT bond community?
Or do people -- are they generally -- as in do they look at you guys as a real estate company or do they look at you as a corporate America, Fortune 500 company?
Stephen E. Sterrett
Alex, it's really the latter. The real estate market over there, the investment grade real estate market isn't deep enough that there are people who are dedicated real estate bond investors.
So the interest was very high. I think we met with almost 50 investors during a 4.5-day roadshow.
Almost all of them ended up coming into the deal. They are money managers, insurance companies, pension funds, really sticky, good, patient money.
But they are -- they certainly viewed us not only as a best-in-class real estate company, but as a major U.S. corporate who has a presence in Europe, but also gets 90% of its income from the U.S., which was an important diversification element for them.
Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division
Okay. And just as a follow-up to that.
Should we expect you guys to issue in Japan if you are looking at outside the country for long-term capital?
Stephen E. Sterrett
It's a good question, Alex. I mean, I would say this.
Right now, we have a multi-currency tranche on our credit facility, and we do have yen outstanding that acts as a hedge against our equity investment in our Premium Outlets portfolio in Japan. No plans, at the present time, to go to the bond market in Japan, but that's certainly an option that would be available to us.
Operator
Our next question comes from the line of Michael Bilerman with Citi.
Michael Bilerman - Citigroup Inc, Research Division
David, a question on the outlet business. So the recent openings, you're up to probably 25%, 30% of NOI housed within outlets.
And I'm sort of curious, one, we sort of reevaluate at this point sort of breaking that out as a stand-alone in terms of metrics, in terms of performance, just given the size and how good it's performing. But also, as you think about the pie assignment on Page 19 of your supplemental, where the sort of outlet to go over the next 5 years from what you can see relative to the other pieces in there?
And maybe you can talk about sort of that range of opportunities that you see that you ended your comments with.
David E. Simon
Well, no, the fact is we really run this together, even though we have separated some personnel. The fact is, we really run the business as one entity on the outlets and the malls.
So we don't see any reason to separate it out. And the fact is, both are -- we couldn't produce these results if both weren't producing very favorable results.
They're both material enough. So the fact of the matter is, this is -- our numbers are a real good indication of what's going on in our business, whether you want to just look at malls or outlets.
It's really -- it really is -- requires to deliver, both have to produce these kind of results to have it shown together. Now, with respect to the outlet business, look, that's where our new development is focused.
As you know, we just opened 3, which is pretty good work. We've got a good pipeline of 4, 5, 6 others, a couple of which are already under construction.
We've got another 3 or 4 that are in the pipeline. So that's going to continue to move the outlet business percentage up.
On the other hand, as I mentioned to you, we are under construction, or about to be under construction, in Stanford, the Field, Del Amo, Houston Galleria, just a -- I won't -- I know Rick wants to list them all, but I will not let him. So just to name a few.
And I think that will start to kick in '15, '16, '17, that will probably rebalance the pie chart as we look back in 3, 4 years from now.
Michael Bilerman - Citigroup Inc, Research Division
What you're saying, the range of opportunities, as you sort of -- you ended your comments with that you're not resting on your laurels, you see a range of opportunities. Obviously, you talked about the development in outlets and all the redevelopment that's happening, what other sort of scope should we think about and how it impacts that -- your pie chart or the company in terms of opportunities?
That's what I sort of want to dig into a little bit.
David E. Simon
If I told you, then you would upgrade somebody and the price would go up. So I'd rather just keep that to myself.
Stephen E. Sterrett
Michael, this is Steve. Just to put a pin in it, though.
Over the last 4 years, we spent over $12 billion in acquisition of assets, so not an insignificant number.
David E. Simon
Yes, look, I think, as Steve said, is as we look back since 2010 -- and these are gross numbers, we've purchased about $12.8 billion -- these are gross, so it includes debt assumption, all these other stuff, not necessarily our share. But we've acquired about $12.8 million.
We disposed about $2.7 million. And we've developed $1 billion of new stuff ground up.
So, again, I know it gets lost in the sauce, but we're always very focused on upgrading and reconstituting the portfolio. And we see -- look we see, international growth ahead of us, Michael, if that's what you're asking.
And in the U.S., we've got the expansion pipeline, which is overwhelming. I mean, literally, nobody in our industry is doing what we're doing, expanding our existing great assets.
Nobody. And also complementing that is all the new development we're doing in the outlet business, of which, as you know, we're executing consistent with the returns that we've done historically.
Toronto is great. St.
Louis is great. We're under construction in Charlotte.
Montréal based upon Houston is great. Vancouver, now that we're in the McArthurGlen partnership, that's going to be good.
We got a couple of new sites that we're working on, some ourselves, some with partners. Tampa is an example, and so on.
So there's a lot to do. And how that pie chart changes, we'll see.
But the fact of the matter is, we see pretty good growth organically just assuming we can execute the way we have in the past.
Operator
Our next question comes from the line of Ross Nussbaum with UBS.
Ross T. Nussbaum - UBS Investment Bank, Research Division
David, we understand that you've joined some of your mall peers to do a beta test of same-day delivery with Deliv. And I'm remembering back to a conversation we had, maybe 10 years ago, where you had talked about Domino's Pizza and the fact that they weren't in the pizza business, but they were really in the 30-minute logistics business, and wouldn't that be cool if the mall could figure out how to do that.
Is that affectively what you're trying to accomplish here with this beta test? And is that really the future of the mall in order to compete with the Amazons of the world?
David E. Simon
Well, look, I do think the mall has a unique advantage in that it's already got the infrastructure -- physical infrastructure to satisfy consumers that want same-day delivery. Now it sounds great, it's a little more complicated than that.
But to the extent, one of the things having spent yesterday with our mall team, just kind of going -- not property by property, that we look forward to on a couple of weeks. But the thing that I am focused on in our mall business -- and when I say mall business, I include the outlets, is that we have to make -- we've always made retailer service a priority.
So Rick and I are as good at sucking up to retailers as possible, okay? Sometimes, Rick is better than I am, but we both can suck up when required.
The one thing we don't do the way I would like us to, is I really want to -- I want to provide better service to our consumers, the actual shoppers. And whether that's -- something we instituted last year was just surprising delights, come to the mall and we're going to give you a free cup of coffee, we're going to schlep your bags.
We're going to make your visit really better. Think about the hotel level of service at a good hotel when you're checking in and they're taking care of you to make your stay pleasant.
With that said, we do think delivery, or schlepping, you remember we started YourSherpa -- probably not politically correct, but whatever. But we started this years ago, we are actually too far ahead of our time.
But the fact of the matter is, we want to increase the level of customer service that we provide to our shoppers. We think this is consistent with that, whether this venture will do that or not, we don't know, we'll going to continue to experiment, we've got a whole smorgasbord of things that we're investing to do that and the sole purpose is to make the consumer visit more pleasant, which is a huge focus for us this year, next year and the year after.
Ross T. Nussbaum - UBS Investment Bank, Research Division
That makes sense. As I thought about this, I said to my myself, is the next evolution that I go to your website for whatever mall I'm shopping at, and I can do a search for white shirt, and then instantly your website brings up every white shirt that's being sold in the mall, I can click on which one I want and buy it.
Is that the next evolution that you have to get to, the integration of inventory of all your retailers onto your website so -- that is the interface?
David E. Simon
Well, I would say that would be terrific if we could ultimately get to their store-level inventory and be able to communicate that to the consumer, much like the mall aggregates all the physical stores. If we could figure out how to do that, that would be great.
It's not that easy because you have to essentially get into the customer -- or the retailer's inventory. But the one thing I want you to do is when you do go to the mall, I want to be able to tell you, when you go to the mall, here's what's new in retailer XYZ, here's what promotion XYZ retailer has.
Here's who does have a white shirt, to go to what retailer. So you have a -- your first stop at the mall is going to be able to communicate to you what's new and what's exciting so that makes your visit that much more pleasant if, in fact, we can do that.
And more profitable for you. So I think it's interesting to do it while you're in the physical environment, as it is whether you're at home or on your mobile device.
Operator
Our next question comes from the line of Jeffrey Spector with Bank of America.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
I'm actually Craig Schmidt. I'm noticing the new development blended stabilized rate of return is 9%.
Is that more due to higher cost or are the rents unable to be pushed as much as say maybe 1 year ago?
Stephen E. Sterrett
Craig, it's Steve. It's really neither.
That number, the mix changes from time to time. We opened some projects, as David mentioned, the first year return on the stuff that has opened, which is no longer on the list, was 10.5%.
So it's simply a mix change. But there's been no real fundamental change in our ability to get rents or cost control or our expectations for our development pipeline.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
Okay. And I just -- I noticed the leasing spreads have been up 4 quarters in a row and, on a dollar basis, have grown from $4.86 to $8.05.
I'm wondering, where can they go from here? And is that from limited supply of quality space or just a growing demand from retailers?
David E. Simon
Well, it's a function of demand is solid, and you got to look at what's expiring. So as I said, we -- there's a huge focus of our retailers sales.
We've tried to explain the correlation is slight, if at all, and it's in a lag. The fact is, as you know, retail sales have gone up dramatically since the Great Recession.
And you look at what's expiring and you look at the supply and demand characteristics, you put it all together, it's more of an art than a science, and that's why we're able to have pretty good releasing spreads. Now, the fact of the matter is $8 is pretty damn good.
We're finishing our budget for next year. We're going to see good comp NOI growth just like we had in the last 2 or 3 years.
And that ultimately does not take into account when we look at what the Houston Gallerias and the Fields and the Del Amos are going to do after those developments are done. And those malls have been transformed to take the rightful position in the 21st century of great real estate that can't be duplicated.
So I can't -- we're not going to give you a number, but things are okay and we'll continue to pound away.
Operator
Our next question comes from the line of Mike Mueller with JPMorgan.
Michael W. Mueller - JP Morgan Chase & Co, Research Division
I was wondering, did you see anything change in terms of traffic during the third quarter?
David E. Simon
Well, generally, September was a pretty bad month in terms of traffic and sales for all retailers. And we're starting to hear and feel the traffic is bouncing back in October.
But clearly, clearly, the general economy has slowed. And we're no -- the fact is, we get impacted by that less than most others because of where our properties are positioned and the depth and breadth and the diversity of our properties.
But the fact is, we're not denying that the world -- the U.S. has actually slowed.
We could talk philosophically about why, but it's nothing with what we're doing. But we're -- we certainly have seen that from our retailers generally across the board to both high-end, middle and at the more moderate customer base.
Craig R. Schmidt - BofA Merrill Lynch, Research Division
Got it. And then, I guess going back to one of your answers before where you mentioned -- if I mentioned the stock, it would go up, upgrade it, blah blah blah.
Off-the-cuff comment there?
David E. Simon
Yes, and probably a stupid one. Yes, off the cuff and stupid.
It's a little early. We're usually at 11:00, 9:00 we're trying to get our groove on.
So the fact is, it's probably off the cuff.
Operator
Our next question comes from Cedrik Lachance from Green Street Advisors.
Cedrik Lachance - Green Street Advisors, Inc., Research Division
I just wanted to think about outlets for a second and when we look at some of the recent projects, some of them -- just in the industry in general, some of them have been more, or been far more correlated with population centers rather than being further outside. What do you think it means for the projects you must develop over the next 10 years and what does it mean for the existing real estate -- in the outlet business that tends to be at the outskirts of town?
David E. Simon
Well, again, Cedrik, I believe there's been one that's been built that's more infilled. So we do not hear -- I will just tell you this, our outlet business is great.
We're building terrific products. We will not make pronouncements about what the future of the world is going to be, we're not that good or arrogant.
We're going to continue to do what we do. We're picking -- we've always picked, over the last several years, major, important metro markets, usually suburban locations -- Toronto, St.
Louis, New Hampshire, go down list, all of which have been very successful. We're continuing to do that.
There may be 1 or 2 built that's more urban. But one does not make a trend.
We will not make pronouncements here. We're not in that business.
We're in running our business day in and day out to increase our cash flow, make smart investments, smart developments. And our track record indicates, so far, knock on wood, we're pretty good at that.
But I will not make pronouncements if that's the new trend, one does not make a trend.
Cedrik Lachance - Green Street Advisors, Inc., Research Division
Okay. What do retailers say about their preferred locations in terms of outlets, and whether or not they do you have an interest in trying to move more infill?
David E. Simon
Well, the fact that we're 100% leased on every outlet that we opened gives you an indication what they're telling us.
Stephen E. Sterrett
I think, Cedrik, the retailers want to be where they can be as productive as possible. And what you're finding in all of our properties is that we continue to add high impact retailers, making them more and more attractive to consumers, which drive sales, which drives retail interest.
There's no magic to this business.
Operator
Our next question comes from the line of Rich Moore with RBC Capital Markets.
Richard C. Moore - RBC Capital Markets, LLC, Research Division
Thinking about dispositions for a second. I don't think you addressed those, Dave.
You sold off 2 this quarter, and I'm curious, have you given more thought to maybe selling off a bigger chunk or spinning out a group of your lower tier regional mall assets in the U.S.?
David E. Simon
Well, Rich, the fact is, we're always looking to do as much portfolio management as we can. And as I mentioned to you earlier, I mean, since 2010, basically, $12.8 billion of acquisitions, $2.7 billion of dispositions, $1 billion of new development, not including the redevelopment.
So that's part of our focus day in and day out, and that will always be an important thing in terms of what we do. And the form of which that takes will depend on market conditions, but we'll continue to do portfolio management.
It's very important, very vital. It's been something that we've been pretty good at over the 20-year history of a public company.
So we'll continue to do that, Rich.
Richard C. Moore - RBC Capital Markets, LLC, Research Division
But no real thought, Dave, to a big chunk, I guess, of assets as opposed to 1 or 2 at a time as opportunities arise?
David E. Simon
Well, again, I'm not going to share exactly the internal workings that we do day in and day out in terms of how do you do the best portfolio management possible. But needless to say, if you look at our history, it's an important thing that the senior management team needs to do.
And we'll continue to do it to the best of our ability. So I'm not saying one way or another exactly how that will be done, it'll just -- we will portfolio manage to the best of our abilities.
Operator
Our next question comes from the line of Tayo Okusanya with Jefferies.
Omotayo T. Okusanya - Jefferies LLC, Research Division
I just wanted to go back to -- along the line of Craig's questioning, and again, releasing spreads, ability to keep raising rents going forward. Steve, could you give us a sense of where occupancy costs are right now relative to historical levels, and how much that gives you confidence about pushing rent going forward?
Stephen E. Sterrett
Tayo, the occupancy costs are 11.4%. I think we give you about 5 quarters of trailing in the supplemental on Page 23.
And that's down 100 to 150 basis points from where it would have been going back to 2010. But I think, the other point I would add, is that it's been very stable over those 5 quarters.
So we are -- we've been at that 11.3% to 11.4% range, and we still have momentum in our business. And that bodes, I believe, very well for our ability to hopefully continue our performance going forward.
Omotayo T. Okusanya - Jefferies LLC, Research Division
Okay, that's helpful. But with your -- with the tenants at this point, when you're going through a lease negotiation like, how much are they really kind of bringing up this issue of slowing tenant sales in general in a tough retail outlook when they're negotiating with you?
Or do they just want the space so badly, it doesn't really come up?
David E. Simon
Well, let me answer that, I mean, the perception that retailers negotiate -- let's take an example, let's say, their comp NOI is up 4% and they're willing to pay $11. And the comp sales are flat, they go to $10.
It's not reality, okay? If they look at it over a longer period of time, what they're going to do, what the return on equity and profitability in that store is.
So, again, we try to give you a sense of these numbers generally, what's happening in the -- from our retailers. But the fact is, comps -- the immediate ups and downs of comps have no bearing on what rent we can charge overall.
And so -- over a long period of time, potentially. But the one thing you have to remember is, our comp sales also include the retailers that are going out of favor.
And if they were in favor 5 or 7 years ago, sometimes, they're able to negotiate whatever rents because we think they are a new and exciting retailer. If that wanes or waxes, the fact is, we're able to replace that retailer with someone else that's there.
So there is no, "Boy, I had a bad quarter of sales; therefore, I'm going to charge -- I want to pay you less rent." It doesn't work that way.
Omotayo T. Okusanya - Jefferies LLC, Research Division
That's definitely helpful color. I think I was up along the line of, if you've had 3 quarters of bad sales, so that's kind of what I was kind of thinking.
What happens at that point. But I think the explanation has been very helpful.
David E. Simon
Sure. No worries.
Stephen E. Sterrett
Don't lose sight of the fact that between 2010 and 2012, over that 3-year period, sales were up 25% in our portfolio.
Operator
Our next question comes from the line of Vincent Chao with Deutsche Bank.
Vincent Chao - Deutsche Bank AG, Research Division
Just since no one asked it here, I'll just throw it out there. Just wondering if you could give us your latest thoughts here on what you're seeing from JCPenney.
And given that they are discounting pretty heavily to try to claw back some share and sales, just wondering if you're seeing or noticing any impact on other parts of the mall as a result of those efforts.
David E. Simon
Now, I would say, generally, it's not -- there's not a real impact of the mall environment. Both with the old Penney, the potential new-transformed Penney, and now the recovering to back-to-basics Penney.
I mean, if you go through kind of the 3 cycles the way they were doing it, the radical change, now back-to-basics Penney. The fact of the matter is, it really hasn't impacted kind of the entire mall environment than what we have.
If they get back to the basic Penney, having them -- they do broaden the mix generally in the environment and they appeal to a more moderate consumer, which we'd love to have in a number of cases, in a number of malls, as well as the higher-income consumer. And that market is there for them to appeal to that consumer in the mall environment, which they've done historically for 100-plus years.
So -- and even before the mall environment. So we'll wait and see how they do that.
But it's really had no impact on the -- what I'll call, the mall environment.
Vincent Chao - Deutsche Bank AG, Research Division
Okay. So, I mean -- so as they -- I mean, they are making some progress on the sale declines, so I'm just curious if that's hurting anybody else.
But it sounds like not.
David E. Simon
Well, look, we're glad that they are. But again, it's not a huge impact on what's going on in the mall.
Operator
Our next question comes from the line of Ben Yang with Evercore.
Benjamin Yang - Evercore Partners Inc., Research Division
Maybe for David. I'm curious if you any thoughts on the B mall or even C mall sales market, which has been surprisingly active this year.
Maybe in terms of the prices being paid for this type of assets. What that might mean for the value of your stock, if anything?
And then, also, maybe building off of Rich's question. Do you think spending on a B-mall portfolio would unlock some value for guys?
David E. Simon
Well, there's a lot there. So -- and you broke up out on the end.
Did you hear the end part?
Stephen E. Sterrett
The potential of...
Benjamin Yang - Evercore Partners Inc., Research Division
I guess, maybe just starting, just what your thoughts are in terms of the prices being paid for the B and C malls, and what that might mean for the value of your stock, if anything at all?
David E. Simon
Well, I'm not going to comment on the value of our stock other than you look -- you need to look at us as a company that can increase its cash flow and its dividend and it has a lot of future, very high returns on equity investments, underlevered, ability to execute its game plan. We get caught up too much on A malls, B malls, tenant sales, all of that stuff.
Put it all in the blender, you allocate it, you figure out what's most important to you. What's most important to me is cash flow growth and return on investment and equity, and that's what we strive to execute.
And ability to finance our business appropriately, making smart investment decisions, which all kind of factors in. Then the market decides what the value of the stock should be.
I don't -- I don't get carried away one way or the other. And the fact is, we look at every asset as it's very important to our business.
We look at the future growth prospects. If we might dispose of them, we look at what the price we might get.
We'd factor in the taxable income, what we might have to do in terms of dividends if we sold it. Because, as you know, we're at our taxable income number, it's growing rapidly.
Our dividend is going to grow. We put all those things in and we try to do the best we can, and we'll see where it takes us.
So it's good -- the big picture -- I'm not going to comment on price other than it's, I think, is very positive, generally speaking, that there's a lot of activity in -- if you want to call it B or C malls, call it B or C mall. And I think that never hurts us as an owner of -- if you want to say we're an owner of B and C, that's fine, it never hurts us that there's a lot of capital activity in that business.
Benjamin Yang - Evercore Partners Inc., Research Division
Okay, that's helpful. And maybe for a follow-up instead.
Can you maybe talk about your expectations for cash flow growth in your A malls versus the B malls, and whether you think that's going to compress in the coming few quarters or even years?
David E. Simon
Well, I think, historically, the better the center or the more -- let me say it differently, the more market share any piece of real estate has, the better its cash flow growth characteristics they have. So whether it's A or B, is irrelevant.
It's really a question of, does it have market share, what's the competitive outlook. And those that have that position have better growth characteristics, generally speaking.
Operator
Our next question comes from the line of Josh Patinkin with BMO Capital Markets.
Josh Patinkin
Thinking about McArthurGlen in the European outlet business, specifically the leasing side. We have upside exposure in the U.S.
with overage rents? Is it similarly structured there?
Or any other nuances we should be thinking about?
David E. Simon
It's very much structured towards sales. But it's even more clever in the sense that they have -- in their leases, they get a percent of sales.
But the high watermark is then fixed at kind of their base rent, so you get the best of both worlds in a sense. And these centers, on average, do just a -- if you convert, you all can convert, but we'll do it.
These things average about $900 a foot. So it is a -- the ones that we've invested in.
And as we think over time, we'll be able to invest in other outlets in Europe through McArthurGlen. We think it's a very productive portfolio and extension opportunities and the like.
So we think it's -- we like it and we expect it to be a very good investment for us over time. And I think we're coming in at a decent valuation.
So again, that's our ability to assess real estate, handle the complexity of a partnership like this, different countries, different personalities. We're one of the few companies that are able to do a deal like this.
And that is a, respectfully I say, a competitive advantage for the company.
Josh Patinkin
In terms of growth there, how penetrated do you think Europe is with outlets relative to U.S. and what's the opportunity set in your view?
David E. Simon
It's good. Because the right to build in Europe continues whether it's an outlet or even a full priced, it continues to be very high -- or very hard, I should say.
Operator
Your next question comes from the line of Haendel St. Juste with Morgan Stanley.
Haendel Emmanuel St. Juste - Morgan Stanley, Research Division
So we see quite a bit of a mall trades here in the last couple of months, and given the activity in the market, was curious on your assessment of recent A- and B-mall asset pricing. Has there been a notable change in cap rates or return expectations giving -- given rising rate expectations and flowing sale trends?
David E. Simon
No.
Haendel Emmanuel St. Juste - Morgan Stanley, Research Division
Okay. One more follow-up, if I may, on the releasing spread question.
You guys also had a pretty good pickup in CapEx spend this quarter versus prior quarters. How much of this improved releasing spread, would you say, was bought this quarter with the higher CapEx spend?
David E. Simon
None.
Stephen E. Sterrett
None.
David E. Simon
Yes, you really -- yes, none. I mean, that -- there's some -- always going to be some quarter-to-quarter volatility, but no issue there.
We don't buy -- we're very frugal, as you know, when it comes to tenant allowance and the like.
Operator
Your next question comes from the line of Dan Oppenheim with Credit Suisse.
Daniel Oppenheim - Crédit Suisse AG, Research Division
I was wondering if you can talk a little bit about the comments in terms of upgrading the assets, and you've done a great job over time and very strong redevelopment pipeline now. And when you go through the mall portfolio, mall-by-mall in the next couple of weeks, how much do you have in terms of shadow redevelopment pipeline, where you look at it and say, "We'd love to do this redevelopment, but don't want to do so until we -- as we look at the struggling anchors here, if this were to happen, we'd do it."
Just trying to think about that -- the opportunity in terms of that shadow pipeline there.
David E. Simon
Well, look, let me just -- if I could just comment generally on it. We are in the midst, again, of doing the biggest extensions and the biggest redevelopments that we have.
So as an example, I'm not going to do the list. We are under construction in the Field, Roosevelt Field, we are under construction in Stanford, we're under construction shortly in Houston Galleria.
And we're getting the approvals in the King of Prussia to create the extension between the 2 big assets. We just got approval from the BRA at Copley, we still need another hurdle.
So we are literally -- we just finished Nanuet, Shops at Nanuet, which -- if anybody that's seen the mall prior to what we've done before, you would be pleasantly surprised not only just with the transformation but with the lease-up. So we are -- so for Del Amo, to name another one, we're in the midst of a huge construction there, bringing Nordstrom in and all the rest.
So right now, the biggest focus is executing these huge, big redevelopments that are going to be really exciting. And there's a lot of opportunities beyond that.
And our pipeline, in terms of redevelopment, is in the $4 billion to $5 billion range. But beyond discussing it, because everybody can have the shadow, the fact of the matter is, it's happening right now.
Right now it's happening. So this is no longer, "We're going to do this," it's actually happening.
And I've got the pictures to prove it, if you're interested.
Stephen E. Sterrett
And the only thing I would add is David touched on the major redevelopment projects, we're also adding 39 new anchors across the platforms this year, and we've been adding that every year, and each of those additions just make our properties stronger. We also have an ongoing renovation program, where we're renovating a number of projects every year.
And all that is just part of what we're doing to keep our products relevant and enhance their market share.
Operator
Your next question comes from the line of Jeremy Roane with Hilliard Lyons.
Jeremy Roane
I was wondering if you could speak on what has driven the property operating expenses down and maybe shed some light on if this type of expense reduction can be expected going forward?
Stephen E. Sterrett
Jeremy, it's Steve Sterrett. It's a couple of things.
One is, as David mentioned earlier, we have sold some assets. We also had a wholly-owned asset that converted into a joint venture in 2013.
So there are fewer properties which is causing part of the decline that you're seeing. The rest of the decline is caused by the fact that insurance costs are a little lower.
It's really those 2 items that are driving it.
Operator
Your next question comes from Michael Bilerman with Citi.
Michael Bilerman - Citigroup Inc, Research Division
Rick, I got a -- just a question on sort of occupancy. 95.5%, I recognize that includes the outlets, but I think that's the peak, overall, and certainly ahead of where you were even in the fourth quarter of last year.
And so I'm just curious, as you head into the holiday season when you start including some of that temp spaces, how should we think about occupancy and full the portfolio is? How you're balancing that with rent, which continues to move up in terms of the spreads?
And then as you think about '14, given the fact that you've already leased a lot of that space and done your renewals, what's that visibility that you have into '14 in terms of occupancy? It seems like a great place to start from at 95.5% today.
Richard S. Sokolov
Well, first, we don't include temp space in the occupancy. Secondly, what we're doing is making our space more efficient, and we are going to be able to continue to generate increases in NOI because we're constantly looking to see how we can make our space more effective by bringing in more productive tenants.
David made the point earlier, by decreasing the amount of the space allocated to given tenants. And frankly, we still have leasing going on in the pipeline.
So we're never going to be satisfied and never get to the point where we say to you, "Well, we're fully occupied." The bottom line is, look in the Premium Outlets, they're 100%, for all intents and purposes, and we're still driving our NOI and driving spreads, because we're doing more effective leasing, more effective space allocation to more productive tenants.
Michael Bilerman - Citigroup Inc, Research Division
So where does occupancy go then? I'm just -- I know you don't include temps, so what does that mean for the fourth quarter in terms of...
Richard S. Sokolov
I would certainly hope that we continue to show advances over where we are.
Michael Bilerman - Citigroup Inc, Research Division
And your '14 outlook in terms of how much you've already done relative to that role?
Richard S. Sokolov
We're certainly going to anticipate that we're going to be able to increase it in '14.
Operator
Your next question comes from David Harris with Imperial Capital.
David Harris - Imperial Capital, LLC, Research Division
This still a little early for us old folks.
David E. Simon
I know. You know what?
No doubt, okay? No doubt.
David Harris - Imperial Capital, LLC, Research Division
I know you talked a little bit about sales on this call, but if you look at your percentage rent growth line, in the first half of the year it was growing about 30% or more, and we're down to 10% year-over-year growth in the third quarter. That seems consistent with the slowdown that we're hearing from a lot of the mall retailers.
Is that -- I mean, can we assume that you're all thinking that for temporary slowdown and that we will pick up even in this quarter?
David E. Simon
Well, the fact is that some of our percentage rents -- we've had certain tenants that have run into harder sales and then some that have picked the balance up, so it's all over the lot. But we'll see how it -- we'll see how the next couple of months pan out, David.
It's very hard for us to give you a really specific answer to that question. We do have certain earnings tie -- risk tied to percentage rent.
We gave -- we took that into account in raising our guidance. And -- but it's clear, and we're not denying this.
It is clear that -- and it's not Simon Property Group, it is clear that the economy has slowed. You've seen it with wages, you've seen it with employment, needless to say, we don't have to get into what's going on in terms of leadership in our country.
None of which we use as an excuse because we put blinders on, the best of our abilities, when it comes to that kind of stuff. But we're operating at a high level in a very slow growth economy.
And we are outpacing the growth in the economy, and that's all that we can do. But we are affected by the economy.
I mean, I wish I wasn't, but we are. And...
David Harris - Imperial Capital, LLC, Research Division
What period does this most remind you of in, say, the last 10 or 15 years, David?
David E. Simon
Good question. Good question.
The fact is, I don't have an immediate -- usually I would just make something up, but I can't even come up with that at this point. But I would say a little bit like coming out of -- my initial reaction would be coming out of the -- when we were public, coming out of kind of the '97, that era where we're just kind of -- we weren't -- we hadn't ended, we'd survived and it was just grinding -- we were grinding about.
And by the way, we we're grinding, I got double digits FFO increase, okay? So just keep that in perspective.
But kind of like that, David, would be the initial off-the-cuff reaction.
David Harris - Imperial Capital, LLC, Research Division
Okay. Can I sneak in with a quick one for Steve?
David E. Simon
Sure. Sure.
David Harris - Imperial Capital, LLC, Research Division
Steve, with the issuance of the Eurobond, it reminded me, are you embracing -- have you used any of these tax structures that have sort of coming under greater scrutiny like double Irish or even The Netherlands, Luxembourg to structure your offshore interest?
Stephen E. Sterrett
Not really, David. It's pretty plain vanilla.
We record -- as an example, we record tax expense as it relates to the Klépierre earnings that we picked up our share of every quarter. So relatively plain vanilla structure.
David E. Simon
Yes. In fact, it's -- just to reinforce what Steve said, if you look at our -- we did -- as we made more international investments, we're having to pay taxes in those jurisdictions.
And if you see in our P&L, we actually separated that out so that you can see that impact, because it's becoming less than trivial.
David Harris - Imperial Capital, LLC, Research Division
Right. Simon is not Apple.
David E. Simon
No, no. I wish I were.
And I like its stock quote [ph]. But I don't want the pearl icon on me, but I do wish I were Apple.
David Harris - Imperial Capital, LLC, Research Division
Well, isn't he urging share buybacks and dividends, so you're kind of halfway there.
Operator
Our last question comes from the line of John Kim with CLSA.
John P. Kim - CLSA Limited, Research Division
I just wanted to follow-up on your comments on international opportunities. Right now, international is about 8% of your NOI.
What level do you feel comfortable just going to in the next few years? And then also geographically, where do you see the most compelling opportunity between Europe, Asia and South America?
David E. Simon
Well, we don't -- our only goal is to make smart investments, and investments that we can add value to. So the fact of the matter is, if the -- if our international business stays the same or goes up slightly, it doesn't -- that's not how we think.
We're only looking to make smart investments where we can add value. And we have a higher threshold in international investments, because it's a lot of work and it's got to be -- there's no desire here just to do international for the sake of international.
The desire here is to make international investments because, one, we think we can add value; and, two, is because we think at the end of the day, we're going to make money, and Klépierre is a perfect example of that. So I don't have, in my mind, it ought to go from X to Y.
And each jurisdiction that we're in is different, but we are doing new development in Asia. We're not an acquirer of assets in Asia just because it's a tougher market.
And we're sticking to the outlet business and markets that we're in where we can develop and it meets our threshold return requirements, which has been, certainly a real challenge in China, as an example. And that's why we did an investment in '08 and '09, we got out of it, and we haven't done anything since.
John P. Kim - CLSA Limited, Research Division
I was going to actually follow-up on -- if there had been any update on your view to China and Brazil?
David E. Simon
Well, China, I gave to you. Brazil, we continue to look at opportunities there in the outlet sector, a few sites that we're in, but nothing really imminent in the marketplace.
Operator
That concludes the question-and-answer part of today's call.
David E. Simon
Okay, thank you. I know you have a number of calls to go to, so thanks for your participation.
Operator
Ladies and gentlemen, thank you for your participation. This concludes your presentation, you may now disconnect.
Have a wonderful day.