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Inc management discusses q1 2014 results

Good day, ladies and gentlemen, and welcome to general growth properties’ first quarter 2014 earnings conference call.[Operator Instructions] As a reminder, today’s meeting is being recorded.

I would now like to introduce your host for the conference,Mr.Kevin berry.Mr.Berry, please begin.

Good morning, everyone, and welcome to general growth properties’ first quarter 2014 earnings conference call hosted by sandeep mathrani, our chief executive officer;And michael berman, our chief financial officer.

Certain statements made in the call may be deemed forward looking statements within the meaning of the safe harbor of the private securities litigation reform act of 1995.Actual results may differ materially due to a variety of risks, uncertainties and other factors.Please reference our earnings press release and sec filings for a more detailed discussion.

Statements made during this call may include time sensitive information accurate only as of today, april 29, 2014.Reconciliations of non gaap financial measures to the most directly comparable gaap measures are included in the earnings release and supplemental filed in form 8 k with the sec and also available on our website.

It’s my pleasure to now turn the call over to sandeep.

Thank you, kevin.Good morning, everyone, and thank you for joining our call this morning.Yesterday, we reported our first quarter results and outlook for the remainder of the year.I’ll highlight a few metrics and let michael cover the results and guidance in more detail before we open it up to calls.

Ffo per share increased 21.4% to $0.31 from $0.25 in the prior quarter.Earnings growth was driven primarily from property operations, as evidenced by the 5.7% increase in the same store mall NOI and also keeping our property management and overhead cost in check and continued savings from refinancing activity.

Our company’s consistent earnings growth is the product of our disciplined focus on our business plan and strategy we established over 3 years ago, which is to be the pure play owner of high quality retail properties in the united states.We have executed to this plan and will continue to do so, never losing focus on the 3 drivers of long term organic growth:Increasing permanent occupancy, achieving positive rental rate spreads and generating income from our development and michael kors australia outlet expansion activities.

Operating metrics at quarter end are evidence of our continued efforts.The mall portfolio was over 96% leased and over 94% occupied.Permanent occupancy increased to 90.4%, almost 2% higher than 1 year ago.The increase in permanent occupancy represents approximately 1 million square feet of space now leased on a long term basis.We set a target of 93% permanent occupancy by year end 2014, and we leased 90% of the space required to achieve our target.

Our development activities remain on track and set to deliver a 9% to 11% return on our $2.2 billion of invested capital, of which $300 million have opened and over $1 billion is under construction.

Initial lease spreads continued to come in strong, with michael kors sale australia 2014 commencements approximately 11% or $6.60 of [indiscernible] above expiring rent.We expect these positive leasing spreads to continue.Our reported lease spreads have been fairly consistent in the 10% to 12% range, as both the new rents are growing and the expiring rents have dropped.

Expiring leases originally took occupancy 7 years ago on average, and in general, the rent growth hasn’t kept pace with the sales growth, thus keeping the related occupancy costs low.Upon expiration, they’re reselling rents to market, up creating the tenant mix and overall productivity of the sector.Given there is virtually no new supply of high quality mall space expected for several years and a strong demand for space from retailers, restaurants, entertainment venues and other users, we’re in a strong position to continue seeing positive rent spreads and, thus, growth in in place rent.

Turning to sales.Over the past year, total portfolio sales recorded, excluding anchors, increased approximately 3% from $18.9 billion to $19.5 billion on a comparable basis, indicating the portfolio continues to capture market share.This metric covers approximately 85% of our in line gla.On a comparable basis, for stores occupying less than 10, 000 square feet and an occupancy of at least 13 months, sales were slightly up.This metric covers approximately half our in line gla.

The current level of retail spending is at a healthy level, approximately 22% above the previous peak in 2007 and 39% higher than the trough in 2009.The ggp portfolio sales peaked at $462 per square foot in 2007, dropped to $406 per square foot in 2009 and ended the first quarter at $565 per square foot.Let me emphasize, sales today are 39% higher than they were during the 2009 trough.During the same short time period, the economy has cumulative grown approximately 9.5%.

Since late 2012, i’ve been discussing the growth in retail sales compared to the economy.And clearly, it is simply impossible for the growth in retail sales to consistently outpace the broader economy and at as such a spread.However, we’re seeing sales continue to grow, albeit at a more reasonable pace.The primary reason for the continued growth is consumer confidence.The economy is experiencing real economic growth that is creating opportunities throughout the country.Overall, consumer confidence has improved steadily since mid 2011 as total employment and personal net worth have risen.

Coming out of the recession, consumers practically halted all spending on discretionary goods.Spending was more concentrated on non durables.Last year, the consumer redirected some spending to durable goods such as autos and housing items, which naturally led to a moderation in retail sales.Sub spending patterns are cyclical, and it usually takes time, 12 to 18 months, for consumers to adjust to a new spending level.I expect, by the third quarter this year, we’ll start to see higher growth in retail sales.

I’d like to spend a moment on teen apparel.It’s no surprise that sales within this category have declined, which also impacts mall sales since the stores generally occupy less than 10, 000 square feet.There are 4 main reasons for the decline.The product offering are not necessarily unique.Prices are high.The teen consumer segment is experiencing high unemployment.High school graduates and high school students have unemployment in the 20 plus percentage range.And lastly, they are burdened by ever increasing smartphone bills, which run an average of $120 per square month square $120 per month.As a result, you have seen an evolution in the teen consumer where you’ve seen impacting sales at certain brands.It’s not that the teen segment has stopped shopping on clothes and accessories.It’s that they are now shopping at fast fashion retailers.Fast fashion has quickly evolved to capture this segment by regularly updating their product offering and keeping their prices low.For example, within our portfolio, h is reporting double digit sales growth.And are targeting high quality centers.Their stores are usually larger than 10, 000 square feet.

Turning to omni channel.We continue to see the benefits our retailers are experiencing from adopting an integrated omni channel sales and distribution platform.During our last earnings call, i discussed the segment.I want to emphasize several points.

Consumers today want instant gratification and are increasing their use of brick and mortar stores as pickup points for merchandise they have bought online.Half of online consumers use a ship to store option because it’s easier to pick up and return merchandise to a store.Retailers are increasingly meeting their customer demands by syncing their online and physical store inventories.This leads to better inventory management, minimizes markdown and ultimately results in higher profit margins.Higher margins allow retailers to afford higher rents.

The reported growth in online sales is not coming at the expense of stores but from other sales channels, namely the catalog and direct mail.In 1995, before the internet, the catalog and direct mail accounted for 10% of total sales.Today catalog, direct mail and online purchases combined account for less than 9% of total sales.

Let me emphasize, 95% of all retail sales are by brick and mortar retailers.I will not be surprised if we see retailers no longer differentiating amongst the various channels dealing their complementary functions.

I’ve seen the initiative benefit the consumer and support our tenants by helping them meet their customers’ demand.Over 80 retailers have signed on the program, and the early results are promising.We have a plan to open several more centers during the year.The playing field is starting to become more even as states get more aggressive ensuring sales sectors charge on [ph] all purchases regardless of how or where the sale is made.The advantages, once exploited by online retailers, stays in consumer’s mind.The products are exclusive, the customer service and experience is unique and the format satisfies consumer’s demand for instant gratification.

Let me make a few comments about jcpenney and sears.We have 81 penney stores and 69 sears stores.Typical stores average 140, 000 square feet and they generate an average of $20 million per store.Occupancy costs are very low at about $4 per square foot.So on an average, a store owned and leased is generating more than $0.5 million in annual rental income.

We have created significant value from redeveloping anchor boxes.And i believe there are further opportunities to do so within our portfolio given the strong demand from retailers, restaurants and other entertainment venues that stays at high quality centers.Just for example, let’s say we acquire a typical 140, 000 square feet box and replace it with a 50, 000 square feet new leasable area and rent is for $30 a square foot.You can do the math.It’s highly profitable.There are extraordinary value creation opportunity within these centers.

In closing.We are pleased with the strong start to 2014 and are confident in achieving our target for the year.I will be remiss if i did not thank all my colleagues for living by our core values of high performance attitude, do the right thing, being together and owning it to achieve these great results.

Michael, i turn it over to you.

Thanks sandeep, and good morning, everyone.

I’ll walk you through some details on our first quarter results, followed by second quarter 2014 guidance and an update on our full year guidance.Finally, i will provide an update on our balance sheet activities before we open it up for questions.As always, please remember my guidance numbers are intended to be points on a range.

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