西蒙地產 (SPG) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2006 Simon Property Group earnings conference call. My name is Michelle and I will be your audio coordinator for today. At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of today's presentation. [OPERATOR INSTRUCTIONS]. I would now like to turn the presentation over to today's call Miss Shelly Doran, Vice President of Investor Relations. Please, proceed. Ma'am.

Welcome to the Simon Property Group third quarter 2006 earnings conference call. Please be aware that the 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 fillings with the securities and exchange commission for detailed discussion of these risks and uncertainties. Acknowledging the fact that this call may be webcast for sometime to come, we believe is it important to note that today's call include time sensitive information that may be accurate only of today's date, October 31, 2006.

The company's quarterly supplemental information package was filed yesterday as a Form 8-K. The filing is available via mail or email and it posted on the Simon website in the investor relations section under financial information quarterly supplemental packages. If you would like to be added to the list for email distribution of this information, please notify me, Shelly Doran, at SDoran@Simon.com. Participating in today's call Will be David Simon, Cheif Executive Officer, Rick Sokolov, President and Cheif Operating Officer and Steve Sterrett, Chief Financial Officer.

Now, I will turn the call over to Mr. Simon. Good morning and thank you all for joining us today. Given than our press release and supplemental reporting package disclosures are comprehensive and we know that all of you are particularly busy at this time the quarter, we have opted to streamline our call. I will provide some highlights for the quarter and then open up the call to your questions. We are very pleased to once again report solid results with third quarter diluted SFL up 9.2% over the prior year to $1.30 per share, $0.02 higher than first call consensus estimate.

For the first nine months, diluted FFO per share grew 9.5% to $3.82. Comparable sales were up 6.5% to $474 per square-foot in our mall portfolio of 170 properties comprising 63 million square feet of small shop space. Sales increased 6% to $462 per square-foot and our U.S. premium outlet portfolio of 35 centers, comprising 13.5 million square feet. Our comparable regional mall NOI growth was 3.9% for the quarter and 4.3% for the first nine months. Comparable NOI growth for our premium outlet portfolio was 7.5% for the quarter and 4.9% for of the first nine months. Both businesses include 96% of our comparable NOI. Occupancy in our mall portfolio was 92.5% at quarter end, a decrease of 10 basis points over the September 30, 2005 levels, yet 100 basis points higher than occupancy at June 30, 2006.

Again, we anticipate that our mall occupancy, regional mall occupancy will be consistent with 2005 levels by year end. Our premium outlet portfolio remains effectively occupied at 99.3% leased. Releasing spreads for the first nine months of our mall portfolio with $6.06 per-square-foot representing a 17% increase. This spread drops somewhat due to our focus on releasing the Music Land and Casual Corner space, but is consistent with our plan of about a $6 spread per year.

Releasing spreads for our premium outlet portfolio were strong at $6.38 per-square-foot, representing a 28% increase. And as we previously noted, a year ago we restructured our gift card program, converting from a structure in which Simon as program administrator, managed most revenue and expense for the cards, to one to which Simon markets the Simon branded cards in exchange for marketing fee per card. As such the program revenues are not as high but the net contribution is what we are most focussed about and in this category the program is expected to be up significantly in 2006 versus 2005. You will see that in the fourth quarter. In addition, I think it's important to note the gift card sales are running 20% over 2005 and we anticipate exceeding $500 million in sales for 2006. During the quarter, we completed a successful $1.1 billion senior unsecured notes offering as a result of bond offering and credit facility pay down. Floating rate debt is 930 comprised at 7% of our total debt and 3% of our total market capitalization. We now have $2.7 billion available on our credit facility of $3 billion. We recently opened several new retail projects and expansions that are meeting or exceeding expectations.

They include the new developments of Round Rock premium outlets north of Austin, Texas, and a shopping center in Lovichi, Poland and expansions are at TOKAI premium outlets. A shopping center in [Inaudible] France and the addition of the Neiman Marcus at South park, Charlotte, North Carolina. Later this week we will Open Rio Grand Valley premium outlets in Mercedes Texas. On November 10 we will open Coconut Point, in Bonita Springs, Florida. Over the course of the last four months we started construction on three new projects in the U.S. One premium outlet in South Korea and four new shopping centers in China. On our last quarterly call we provided an overview of our development pipeline for 2007 through 2010.

We continue to refine several of the redevelopment projects that came about as a result of the May Federated merger and progressed on our asset intensification projects. As a result, the size of the pipeline has increased. Our share now of estimated cost of projects currently under construction or identified are likely to proceed and be completed during the time period, is expected to approximate $5.3 billion. We moved into our new state of the art corporate headquarters building, consolidating all of our Indianapolis operations into one location. The new building has been very well received for our employees, as well as the city.

And finally, based upon results for the first nine months of the year, and our outlook for the remainder of 2006, we increased our guidance to $5.36 per share for 2006 which includes a charge of $0.02 per share related to the October redemption of our series at preferred stock. Our guidance is equal to current consensus first call estimates and $0.03 above the midpoint of the range provided in July. In summary, the third quarter was busy and productive time for us. And we are prepared now to answer any questions that you may have.

Thank you , sir. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Craig Schmidt of Merrill Lynch. Please proceed.

Good morning.

Good morning.

David, it sounds like from your comments that the leasing spreads in the fourth quarter will increase from the third quarter, is that right?

Well, we are still focussed on leasing, a couple things. One, is we had a -- we always pointed to kind of the five to $6 spread range. And, you know, the Musicland space is causing somewhat of a decrease because that's tougher space. Also, the first six months, $8 is a little bit higher than we have historically. So again, I wouldn't read too much into this. The year to date number other than we were meeting our plan of about a $6 spread. And again, a little bit depends on the mix. We are hopeful we will be able to continue to lease up most of the remaining Musicland space.

Great. And in your three previous years you were active in mall dispositions. Will '06 by the end of '06 will you be equally active?

We sold Trolly square in Salt Lake, I was taken to the other one and Wabash is a small strip center in the third quarter. Both resulted in net gain that you saw in the P&L. And we do have a handful of deals that are working in the fourth quarter. Our expectations is that some of those will happen. Obviously we are not at liberty to discuss which ones. But we will continue to prune the portfolios in thanks a lot.

Our next question comes from the line of Christy Mc Elroy of Banc of America securities. Please proceed.

I'm here with Russ Nussbaum as well. Do you expect Wal-Mart's plan purchase of Trust Mart, in China to change or slow Wal-Mart's plans to development there in your joint venture strategy to build Wal-Mart anchor centers.

Right now we have only decided to build five of them. So we are, four of which are under construction. So the fact is that, we don't anticipate that changing what we are doing there at all. We are not an exclusive Wal-Mart developer just like we intend and will pursue other retailers just like we have here. So the answer is, no, it won't. It won't affect those five deals at all. And it's obviously a very good way for us to learn the market. But we would expect to do more business with other retailers as well.

Okay. Then just a follow top that, on the four projects you started in the last quarter, what do you expect development yields on those?

In the fourth year or so it should be -- they should be around 10. On a conservative basis. And we have gotten nonrecourse financing which has been very, very just actually kind of new product. People there have not been able to achieve and we were able to do it. Leasing is going-- small shop leasing is going very well. We hope the markets, I think will hope to bring those in above that. Right now we are planning ten and it's given the leverage high return equity on the 15% plus range.

Finally Steve, can you walk us through what the biggest drivers were behind the increase in your full year guidance?

Sure. It's a couple of things. Number one, as David mentioned, we did have some recovery in the third quarter on occupancy and obviously at this point in time of the year we have much better visibility in terms of fourth quarter openings. Part of it is economy driven. Sales obviously were very strong in the third quarter. We continue to see a very low level of bad debt. We think we were through the tenant bankruptcy season. And we also seen an easing of energy prices which gives us some confidence into the fourth quarter. And then the third element of it is related to the balance sheet. We saw the fed pause. We did the bond deal. Exchange rates have held relatively constant. When you put that into the mix and add it all up, that got us to where we are in terms of the guidance.

Great. Thanks, guys.

Thank you.

Our next question comes from the line of Scott Crowe of UBS. Please proceed.

Good morning. Just another quick follow-up of China. The recent announcement by Pro Lodges, was that it was partnering up with Civic?

Yeah.

Was it something a deal you had a look at and how does that affect your plan?

It really doesn't in that Civic is our partner in the five developments. We are happy to see pro lodges as shoring up the Civic financial where withal. And our focus has been Civic does other activities other than what we are interested in. So from that standpoint, we are pleased that it happened and it really has no impact other than making our partners stronger which is obviously positive. And we don't have an exclusive arrangement with Civic either way. So it's really a nonevent for us. And we continue to think this is a good way to understand and learn the market on a conservative basis and actually get something done and under development there to see if that's a market we want to continue with.

In a similar vein, I suppose you have seen a number of retail rates particularly in the shopping center business ramp up their investment management business and joint venture activity. Is this something that you guys may revisit particularly given, it will allow you to sort of have into the markets or overseas markets using third party capital?

You know, I think at this point we like managing for our own accounts. And that's not to say we won't do it occasionally and partner with institutional investors if we think that's the appropriate way to adjust for risks. But I think, you know, we decided that the fees, though are interesting, aren't really going to drive our business at the end of the day, you know, for us to worry about a promote, It's insignificant. It's not going to drive our business. And if we put capital to account to work, we want to make sure that capital makes sense to invest in and if we make the value, then I think that will pay for the shareholders and them worrying if we get a small promote on the back end.

Okay, thank you. And just finally. Are you looking to do any full price in Japan?

We have a great partnership there. It is starting to look at other opportunities. You know, we are partners with Mitsubishi standards which is one of the preeminent real estate firms in that area. So the answer is that we are beginning to. We still have some opportunities in the outlet side that we want to pursue. We have major expansion of one of our major properties that we will tell you about sometime down the road here, shortly. So there is still stuff to do in the outlet side, but I think ultimately we will want to take that entity and see what they can do in the full price side, as well.

Thank you.

Thanks.

Our next question comes from the line of Jonathan lit of Citigroup.

This is Andy [Inaudible] with Jon. What are your frictional occupancy point for your mall portfolio?

Frankly, I think we still have room to grow that occupancy at least 200 basis points. And we are working hard to do that. At a certain point when you get around 95% it does get to be frictional vacancy which you need to have space available. But think we still have room to grow the occupancy.

And how long do you think, you know, when do you think you could that get that 200, in a year?

We were picking up 30 to 60 basis points a year in our occupancy. This year we will be flat because we dealt with the Musicland and the other bankruptcies as we retender to those and I think we will be able to continue to increase it on that kind of basis as all of our redevelopment efforts take hold throughout the portfolio.

Okay. And then could you provide an update on just in general if retailers are continuing their aggressive expansion plans?

They are. In fact, it's interesting. One area that is a major focus of ours is bringing the mall retailers into the Chelsea portfolio and literally in 2006 we've had about 12 or 13 mall based retailers that have opened space in Chelsea, really driving their new development program which is significant and we also continue to see significant demand from the manufacturers like a Liz Claiborne and Jones and Polo and este Lauder that are looking for alternate outlets to distribute their goods given the department store consolidation. So it still remains strong.

Okay. Thank you. My last question, just looking at Simon brand venture and Simon business networks revenues, you had mentioned that more of a shift from third quarter to fourth quarter rather than, you know, being a trend of it going down. Can you give an idea what you think will be year-over-year growth?

Well, the growth will be consistent with what we said. We also changed the program. So we won't be booking as much revenue as we have historically because we don't administer the program now. And we also won't have as much expense. And the net contribution will increase as the sales of the program increased. But you have kind of a straddling of '05 versus '06 because in '05 we had a half a year when we changed the program from Banc of America, and that's kind of what you are seeing in the change. So I wouldn't worry about the revenue drop. The fact is the cards are selling and our net contribution is increasing. And obviously the fourth quarter is important. That's why we do get the fee for selling the card's fourth quarter is very important. And we would expect based on the fact that we are 20% up sales that we will have growth in the revenue side. But ,we are not the program administrator. All that's been off loaded to U.S. bank.

What percentage of the revenues from these two entities comes from the card business?

The cards business?

The gift card. We were just talking about the gift card. How much of your total revenues is SPV?

About 20% of SPV.

Of the total sponsorship income?

10 to 12.

And so you are saying the gift card business that's causing the reallocations from 3Q to 4Q, did something else as well?

We did have a interest in a processing company in the third quarter of last year, where we had warrants where we sold. So, the other income line is a little bit over -- not overstated. We got the cash but it's on a comparable basis. I think that number was $2 million.

That we recognized in the third quarter of '05 which did not repeat in '06.

You were still down year-over-year and you are saying the rest of that will push --

The rest of it is really a function of the restructure of the gift card program in the fact that we will be more back end weighted now in our revenue recognition.

From the gift card program or from all your sponsorships?

No,no, just from the gift card.

Obviously the fourth quarter.

The fourth quarter Is the biggest quarter anyway. And sponsorships as well.

Can you give us an update on what's going on the sponsorship side? Are there new things you are looking at?

The biggest thing that we are -- we have going is On-Spot and is that going to be essentially completed in about 49 malls hopefully by year end. And we were not going to see any real contribution of revenues from that this year. But that is the biggest. The sponsorship business continues to be a robust business. And I think you have seen the Arbitron validation of the numbers and the importance of the eye balls of the mall. So all the fundamental underpinnings and growth in that business is still there. Again, the only thing you are seeing is a restructuring of the gift card business that occurred last year, where we off loaded the administration to U.S. bank. I think the big thing will be On-spot. You will these in '07 as we roll that out. And as advertisers take more and more importance of the mall's medium, we expect that business to grow as well.

And do you have any contribution on what the view will be in '07?

Not yet.

You mentioned Musicland and Casual corner had hurt your comp numbers. Can you expand on that a little bit?

This hurt the spread somewhat. Again, but our goal has always been about a $6 spread. I think you saw a really robust first six months at $8, I think it was. So, we are making good progress on leasing that space. We still have a ways to go. That resulted in a spread coming down from about 8 to 6. Again, you can't get -- we don't over react here with quarter to quarter fluctuations in those kinds of things.

Is it tougher space?

Yeah. You obviously walked plenty of malls. You know where Musicland is located versus other retailers. And we had always put the Musicland space down near the department store space. That's not surprise.

Thank you.

Thanks.

Our next question comes from the line of Dennis Maloney of Goldman Sachs. Please proceed.

Hi, good morning. Now that we are about a month into the fourth quarter, how are sells -- sales trending versus expectations and do you have an outlook in the fourth quarter in general terms of sales?

I think we are all very pleased with sales. Especially the significant snapback that occurred from the summer doldrums. Not that those are hugely important in the scheme of retailers. But back to school was strong. October and a number of cases was solid for retailers. And I think the fact is that things change now very rapidly in our environment. Not just -- for all hosts of reasons. The internet, consumer Not just for all hosts of reasons. The internet, consumer confidence goes up and down. Gas price goes up and down. But what we see right now we expect to be a very solid Christmas. A lot can happen either way given how information gets dispersed to the consumer these days.

Is it fair to say that the moderate priced malls saw more of a pickup with the back of gas prices or can you not say that?

I don't think the gas price impact is really kind of filtered its way through yet. Again, I don't think you can generalize that. I think as I said, if you look historically, the back to school season and its results have had a big impact on ultimately Christmas. There is a correlation there and based on the fact that things seem to be stable and the fact that back to school was pretty strong, even though back to school is more spread out than it has been historically, indicate to us that Christmas ought to be strong. You know, a lot can change.

And then, our retail team wants to know, how is traffic trending at the outlet centers.Is it safe to assume it's commensurate with the sales growth?

The outlet centers are trending to traffic. Traffic is up quite not as high as the sales growth because the sales growth has been very robust. And I think that reflects the fact that the average visit to our outlet center is longer and the average spend is a lot higher per visit. But the traffic is trending up between 3 and 4% in our outlet centers.

And just looking a little bit toward '07, any initial thoughts on what bankruptcies might look like in '07?

You know, there are some out there that were concerned about. I think that's going to be a little bit dependant upon Christmas. Some of these are more tied to Christmas. But we will have to wait and see on that. I think the one thing that is important to note, is that no matter what the bankruptcy scenario is, we are reasonably capable of figuring it out, being ahead of the curve, and dealing with the vacancy that is potentially created in a chapter proceeding. Now, the fact is that the process moves a lot faster than it used to. When someone like Musicland went Chapter 11, ultimately to liquidation, they in that process took a lot longer. Now there is -- now this thing moves a little quicker. We have to understand that and plan accordingly.

And then lastly, wondering what accounts for the lower yield and going yield at Pier Park and are there any asset intensification opportunities there?

At Peer Park, basically the stabilized years we think will yield the higher results frankly, the land was very expensive because it literally fronts the Gulf of Mexico. It is a very strong growth market. And we are getting a very good collection of small shops there. We also have two additional projects that are going to be part of Pier Park that we have not proceeded with one piece of land that we own another that we have under option and will enhance our overall investment. In terms of asset intensification opportunities there, there is not residential. That was reserved to the seller of the land. But happily, given the position of our property between front beach road and back beach road, we will get the benefit of no less than eight to ten high-rise condominium developments fronting on the gulf, that will be within a five minute walk of our project.

Thank you very much.

Thank you.

Our next question comes from the line of Lou Taylor of Deutsche Banc. Please proceed.

Thanks and congrats on the corner. Along the lines of the asset intensification program, are you far enough along on the projects you have underway to make any conclusions about that effort in terms of expanding more rapidly or doing it differently?

In terms of the asset intensification, we have a lot going on and there is going to be an expansion of that program. It takes time to add the incremental elements to our existing property because you're basically utilizing your parking lot and utilizing more deck parking and have an incremental approval process to go through. But happily, on the hotel and the residential front we have a number of projects that are in various phases of predevelopment. On the residential front we have five projects that are currently under construction with great partners and are in -- integrated very well into our mostly newer development. And the ones that we have more experience, like St. Johns in Jacksonville, they are adding a significant dimension to the overall shopping environment and given this success of the one hotel, we have two other hotels that want to come in given the success of the one condo project. We basically have sold land for two additional condo projects. So, success builds upon success and it's going to be an expanding program.

Okay. Secondly, could you talk a little bit about the yields. I think the four -- at least with the residential component are listed around 8%. What land base is in that number and can you just thack about the expected returns?

Well, look, I think it's such a -- there is no way to generalize other than to say that the yields obviously the yields and development on retail or I'm sorry, residential are lower than with a they are on retail. And we are going through the hotel opportunities. Now those yields obviously given the risk are higher and are more consistent with the yields that we will see in retail, if not a little bit more. You know, someone complained last time that we weren't -- the yields weren't low enough on the residential side so we must not be getting the value for the land. You know, the fact is, I think we can charge a little bit higher rent on that because we were creating an environment. higher rent on that because we were creating an environment. So I think that is a little bit of the reason why we are able to generate the yields. But residential yields are low in the scheme of what we were used to historically on one hand. On the other hand it does create uniqueness to the property and I will just reaffirm what Rick said. The mixed use opportunities in our portfolio are immense. They take time. We want to be thoughtful. We don't want to rush to do it. But, we think the opportunities are there to not only create additional value, but also to create a unique interesting shopping experience. It is obviously much easier to design it in a new development, which we were undertaking very successfully. The best example will be that of what we will do when we open domain in March of 07. That's the Neiman-Macy's retail development. We're going to open up in '07 in Charlotte with a similar thing. You know, it is in the existing properties, there is a lot of opportunities, but it's going to take time to mine the field. We are patient and we do think that even if the yields in residential are at that level, given kind of where the pricing is, you still create value and that's what we were focussed on.

Great. Thank you.

Thanks.

And our next question comes from the line of Matt Ostrower from Morgan Stanley.

Good morning. Just a couple of minor questions. On the unconsolidated side, it looked like other income was the increase there for our estimate and anything that is attributable to?

I think in the third quarter we had a couple of things that you may -- one is land sales. Our land sales were skewed a little bit more to the unconsolidated properties of the third quarter. And then earlier this year we had ownership interest in the Simon Idaho from 34% to 50% and so this would be a full quarter at 50% compared to last year at 34% of that venture. Those are the two things that jump out.

And did you make any comment on the recovery ratio which seemed like it was at a higher level? I didn't find a reference last quarter to that?

Generally speaking we were closing in on 50% conversion at 6 cam. And I think that has clearly helped in terms of the overall recovery ratio and the mall portfolio. So I think it's just a continuation of the trend that we are seeing that is conversion to 6 cam.

Thank you.

Our next question comes from the line of Jeff Donnelly of Wachovia, securities.

Good morning guys. If I could build on I guess maybe Lou's earlier question, with changes in residential demand are you approaching a point where you might rethink the residential component of your announced or planned intensification projects?

Not really. Again, we have to think long term in this business. So things will go -- things are going to fluctuate. There is volatility in the business environment. But, as a great example of this as some of you may know, we are trying to get the right to build residential in Coply place. And if the condo residential market in the back bay of Austin fluctuates, the fact of the matter is, getting the right to build that and ultimately building that, is such a unique opportunity that we can't be deterred by the vagaries of the marketplace. So far the answer to that is, no, to the extent that the it's a crummy market and we don't expect to sell condos or sell residential, we will scale it back. We are also dealing with pros in terms of joint venture opportunities. So, to a large extent we will rely on them and their ability to produce the results that they say.

Actually David, earlier on the call , I think you said you prefer to manage your own account rather than a JV. Nevertheless, you did recently explore a fund offering. Can you share with us what feedback you received when you explored that. What were the returns or asset management promote -- investors found acceptable?

Well, I don't have that in front of me. I think we got -- we would have had the opportunity to do it, without question. I don't have the fees that were contemplated as part of it in front of me. The fact of the matter is, I want our people focussed on what we can do to add value here and not get side tracked. And ultimately, we have a lot of opportunity within our portfolio and to go out and chase deals or hope to get - to justify with the back end promote we didn't feel comfortable with. Return expectations of the investor was something that I was concerned about. In order to achieve that, we might have to go down the lower quality spectrum which we felt from a strategic point of view, even though frankly it's other people's money, we didn't get excited about here organizationally. So for all of those reasons we decided we have a lot of opportunity here. Didn't want to not produce the right returns for the investors. And given the expectations again, we felt like we had to go down that quality spectrum and didn't get comfortable with that. At the end of the day, even though we could have had it a few cents a share, we are after the bigger picture. I don't know who put it best, but I think I was on a panel with -- and Mike said it best and Mike said at the end of the day they say it's a great deal I would rather make 500 million on it than 50 million on a promote or 30 million on a promote. And I agree with that philosophy.

Thanks. And, Steve, do you have a sense of what sort of growth in your cost structure you might see in '07? For example are you seeing quotes on insurance of insurance and utility or real estate tax bill?

You know, Jeff, we are just going through the '07 planning process right now. Our insurance rolls over at the end ever the year. I would tell you on the property casualty side because of the '04 and '05 hurricane season, property market, especially the winds market, is still very tight. On the flip side you have seen easing of energy pricing around the country. We are going through it all now. I don't expect it to be on an overall basis. Much different than what we seen in '06.

I would add on the energy side, we are very focussed on investing on the energy side to reduce our expenses. And we have had a number, you know, we keep winning these awards and I don't know what that means. But I do know, we are generating good returns. We were helping the environment by investing in our properties that reduce our dependency on electricity and the like.

And our kilowatt usage is going down.

On that side there is a lot of things that we can do to reduce our utility expenses. That helps us. Helps environment. Helps our tenants. Real estate tax, you know, obviously is a little bit out of our control. But again, we are very focussed on striking a balance of fairness between the value of the property, again, we do that on the behalf of our tenants because, as you know, they pay a big percent of that. But we are also sensitive to the community. And, you know, the insurance side, I'm worried about it because there does seem to be a level of aggression in that market that we are trying to deal with.

Actually, since you brought it up and maybe it's a little off the wall, but have you looked at alternative energy sources as part of your intensification plan, whether it's solar on the roof or wind in your parking lot.

Absolutely. In fact, we have one -- I have charged the group to -- we have one new development that is actually going to be, where at least we put the task force together, to be our first 100% green development. So, it will factor in all of that. We think the cost per-square-foot to do that will offset -- will make sense given the savings we may have on the utility cost. But we have a very competent team in this area that is very focussed on looking at all sorts of alternative energies to drive our operating cost, again for the reasons I mentioned.

Thanks, guys.

Thank you.

And our next question comes from the line of Rich Moore of RBC Capital Markets. Please proceed.

Hi. Good morning, guys. When you look at the fourth quarter again, how are -- maybe it's hard to gauge, this but how are temporary tenant rents coming? What do you see in the temporary tenant universe, I assume those are jumping because of the holiday season coming upon us.

We should be 100% leased there. And we are still driving rents in that area. But it's, you know these -- a lot of those are entrepreneurs. You can only drive them so much before you kill them. We've got to be sensitive there. My guess is that it will be consistent with kind of what we want to get from the NOI growth and I think the demand has been there.

I think the demand is there and I would make the point that we are trying to be very focussed on our inventory. So, that we are trying to have our team generate our growth by not adding significant incremental units where we think it is less appropriate. So, the team is doing a good job in driving the incremental revenue with a static inventory. And that's really our goal.

And Rick brings a good point because I think we, the organization is very focussed on consumer touch points. And the look, the feel of them all is very important to us. And we are focussed on improving that. The carts and the Kiosks are very important in delivering the appropriate product for the marketplace. So it's a long way of saying you can always put more Choshsky's in the mall, but sometimes they effect consumer flow and tenant relationships. Consumer reaction and that's a balancing act that's very important for us to do right.

Okay. Very good. If you compared it to last year at this time, would you -- I mean, obviously can't go over 100% leased and there are certainly a limit to the number you want to put in there anyway. Is the demand from these guys, is it comparable to last year? Better? Worse?

Certainly comparable the last year.

Then also, thinking about percentage rents, they were higher in the third quarter than I anticipated. And I'm wondering and this might be a stretch, I'm wondering if that bodes well to percentage rent in the fourth quarter, because you hit break point and some of those retailers that are paying higher third quarter percentage rents will be paying , again given the sales environment. What do you think of that?

It really is going to be a function of Christmas sales. We do have rents that expire all throughout the year, as you know. You have to account for percentage rents now. You don't record any rent until a tenant exceeds the break point. It will be a function of where fourth quarter sales are. As David mentioned earlier, we feel decent about the outlook for the Christmas season.

Okay. Good. Thank you, Steve. And then a couple line items. Advertising and promotion expense was down. What --

That's just timing.

Just timing. And then same thing with credit losses, the credit environment is good. Going forward into the fourth quarter should we assume credit losses similar to the third quarter?

If you look at the third quarter, we hardly had any expense at all. I don't think that I would be quite that optimistic. But, on a historical basis, we will run 50 basis points of revenue as bad debt expense. I would say on kind of a normalized basis, that is a decent run rate. We're probably in a little better credit environment now than average. So, maybe it is a little better than that. But it was virtually zero this quarter and I continue to see that.

And that's a good goal.

That's a very good goal. The last thing is JB earnings were up. Is there anything that was this there?

Compared to the last year?

Actually, I was thinking more, Steve, to what I was expected which was more like 2Q.

Unfortunately, I don't know what you were expecting.

Come to think of it, I'm not sure what I was expecting.

Three things to jump out. One, Mall of America will be in '06 but not in '05. In number two, we would own 50% of Simon Idaho, versus 34% a year ago. .And number three, as I mentioned earlier to someone's question, our land sales this quarter were skewed a little bit more than in our unconsolidated portfolio.

Very good. Thank you very much, guys.

Thank you.

And our next question comes from the line David Fick of Stifel Nicolaus. Please proceed.

Good morning. You already talked about the rent spread question, but I want to circle back on it because you have an awful lot of leasing volume the first half of the year and your spreads were very robust and really came down in Q3. It's -- and I'm wondering if you had -- you have a negative mark to market on some of this space?

You know, David, this is Steve, not really. But ,as David mentioned he talked about the Musicland space being not 50-yard line space. Another big chunk of space that we were dealing with not releasing was the Casual Corner space which tended to be the same thing. Not 50-yard line space and primarily not in a quality mall. And we were now about 80% released of that space which I think at the end of that second quarter we were in the 40% range. That is a large chunk of space kind of working its way through the pipeline that I think was released at lower than average rents in our portfolio.

So, I think David said that your spreads are hanging in around seven bucks and you feel comfortable as far forward as you can see with that kind of spread?

Yeah, we do. This is a little bit of a pig in a python because you had two big either bankruptcies or closings in casual corner and music land that we were dealing with. If you look at our expiration schedule for the next couple of years you still have leases expiring 35, $36 a foot and we are still doing new leases in a 41, $42 a foot. We feel very comfortable about the spread.

I would agree, if you look at our -- on 19, you look at our expiration, it's all in the mid-30s . And as Steve said, that we would expect to be in a low 40s. And whether it's 656, or 703, is not a science. I wish it was a science. One day it will be.

Thanks a lot.

Sure.

Our next question comes from the line of Michael Mueller of J.P. Morgan. Please proceed.

Thanks. Hi. Couple questions. First on the development pipeline. The $5 billion, can you split that up roughly between how much of that is new development versus redevelopment expansion?

Sure. This is Rick. Basically, there is a number of categories and the regional malls we are looking at about almost $2 billion. 1.9 billion of redevelopment projects over the next four years. New development in the regional malls will be about $370 million. When you go to our outlet centers, new development is closer to $575 million and expansions of $248 million and in the outlet sector those expansions are very exciting because we are in the process right now of expanding both Orlando and Las Vegas, which are two of the most successful outlet centers in the portfolio. Then in our community lifestyle centers, that's primarily a new development program and that would be about $590 million. And then we have incremental dollars allocated to our international platform and our asset intensification program.

Okay.

It seems like a lot of the malls are --including your peers have sizeable development pipelines at this point.

Do you still have a good feeling that supply is going to remain in check over the neck couple of years?

We do. And if you look at the anchor addition schedule that we included in the 8K, it gives you a lot of visibility as to the types of retailers we are adding to these properties in order to generate incremental demand for both our existing small shop space and the small shop space that we are adding. But we have over the next four years, we are adding seven Nordstroms throughout the portfolio. We are adding Dillards, Barnes, theaters, Neiman-Marcus. These are all high impact. We have three Crate and Barrels that are all enhancing the environment and really we had no step back to date on the demand for the small shop space that we are adding as part of this program.

And I will add this. If you look at our peer group, we all tend to -- I mean, we certainly compete at the corporate level, but when you go down to the property level, I would venture say there is very little is direct competition that we are building "X" and another developer mall is developing "Y" because we staked out kind of who is doing what and the incremental expansion will help their particular properties. It's not going to necessarily be zero some gain toward us or anybody else. Everybody is more or less in their own markets. There is very little that absolutely head to head competition with us verses the other mall rates.

And the last thing to come on is the supply side. If you look historically over any extended period of time, the-square-footage being added in new development and redevelopment, has been relatively low as a percentage of our overall retail available in the sector. So, I don't think you got, even though there is announced activity,there is a lot of-square-footage that is going out of service as well as in the sector. Keeping the supply dynamics relatively constant.

Okay. And just last question to follow-up on a prior sales question. If you are looking at the productivity I think it was around 6% were there any significant gaps between your higher productivity centers and your lower productivity centers or fairly broad based?

Pretty broad based.

Okay, thanks.

Yeah, the good news about us is because we are broad based the numbers actually mean something.

Okay, thanks.

Mathematically, that is.

Our next question comes from the line of Paul Morgan of FBR. Please proceed.

Good morning.

How you doing?

Rick, you went through part of the development breakout. Last quarter you went through. But it went up by $700 million. Where were the area where the pipeline has expanded?

We basically have been able to come up with several additional redevelopment opportunities that have been generated either by the department store consolidation. We also as David mentioned earlier, we are in a constant quest to find additional opportunities to add the residential or hotel components to our existing properties. And we were able to mature several others of those opportunities throughout the portfolio.

Does the new pipeline include any resolution at the Mission Viejo and federated?

We were hopeful and the number do include a resolution. They do not reflect any change in the federated boxes at either Houston or Mission Viejo where we have opportunities conference and we expect them to operate.

That is still being negotiated, basically?

Right now we are focussed on other aspects. In fact, both of those properties the Lord & Taylor building in Houston, we just completely redeveloped with Borders and four or five restaurants and small shop space and we have an additional expansion opportunity at Mission Viejo that will yield Crate and Barrel, Barnes and Noble, restaurants and small shop space so we are focusing on those opportunities at the present time.

And just on the maybe give your perspective on the lifestyle center developments. There are a lot of openings over the past year. Your feel for the market, may be how successful they have been. If there are any key ingredients for being successful, how important the anchors are mixed use, et cetera?

I will just say this. There is a lot on the drawing board. We view them as competition. We -- the ones that are small on scale don't produce a lot of sales volume. We are surprised that capital is running to them in a lot of cases. And obviously there are some competition with our markets. If they are bigger and grandeur in scale and have the department stores and big boxes, you know, they turned out to be as we have shown, we built several of them. Be very good retail projects. The ones that are 100 to. 200,000 square-foot unless they are really a great unique marketplace we don't see them doing anywhere near the mall volumes.

Have any of them -- have you been seeing many come to market yet?

We have. We decided to the to bid on them and a lot of them got put together with kickouts and not doing, number of the ones that have been up for sale have been around 300 bucks a foot in sales. So you know, there is some capital chasing there but not us at this point.

And the only other thing I would add on the lifestyle component, we have already added to our portfolio five or six lifestyle components facing out where we were able to absorb the demand from those notion types of tendance that existed in our market and we have another 18 of those projects that are included in the numbers I gave you in our redevelopment program that served to both help us get good returns on our capital, from an offensive perspective but also defensively absorb whatever demands exists in the markets where we are operating to try and prevent any additional competitive projects from being created.

What's a typical incremental GLA for those 18 projects.

It will vary from not less than 40,000 to as high as -- 115 or 120,000. And in those instances we are taking advantage of department stores we got back from Federated at University park, Fessant lane, Greenwood and Castle to add those kinds of components in a bigger scale project.

And what's interesting is those four or five tenants that do really like the format, they would prefer to be associated with the mall. So, when they aren't going to the mall because lack of opportunity at the mall either it's full or something else is going on.

All right, thanks.

Ladies and gentlemen, this does conclude the question and answer portion of today's conference call. I would like to turn the presentation over to Mr. Simon for any closing remarks.

Thank you. We are interested in your feedback on our call. We have decided to streamline it. I was told by Steve I was eight minutes. My goal was to do about four or five minutes and open up Q&A. We thought that might be more useful to you but obviously we were interested in your feedback on that. And thanks for your interest and we will talk to you soon. Bye-bye.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude your presentation and you may disconnect. Have a great day.