西蒙地產 (SPG) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2011 Simon Property Group earnings conference call. My name is Tania and I will be your conference moderator for today.

At this time all participants are in a listen only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to hand the presentation over to our host, Shelly Doran, Vice President of Investor Relations. Please proceed.

Thank you. Good morning and welcome to Simon Property Group's third-quarter 2011 earnings conference call. Please be aware that statements made during this call may be deemed forward-looking statements and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to our reports filed with the SEC for detailed discussion.

Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time sensitive information that may be accurate only as of today's date, October 25, 2011.

During today's call we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release or the Company's supplemental information package that was included in this morning's 8-K. This package is also available on the Simon website in the Investor section.

Participating in today's call will be David Simon, Chairman and Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Steve Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.

Thank you for joining us today. And I will just give you a quick update on some of the highlights and then we will open it up for Q&A. First of all we reported funds from operations of $1.71 for the quarter, which represents an increase of 19.6% over the FFO in the third quarter of 2010 as adjusted for the third quarter in 2010, which adds back -- add backs -- add back our debt extinguishment charge. This result beats First Call consensus by $0.05 per share. We have now met or exceeded expectations for 29 of the past 31 quarters.

Let me talk about some statistics. Total sales on a rolling 12-month basis were $517 per square foot, up 9.3% from $473 as of September 30, 2010, which is nearly 60 million square feet of GLA. Now that we have owned Prime for a year, this quarter we have begun to include the Prime portfolio in our statistics, and so we have adjusted September 30, 2010 to give you a sense of comparability.

There were a couple of analysts out there that suggested that our average base rents went down sequentially. Keep in mind that we did not go back and adjust 630 numbers for Prime. So that reduction in base rent is all associated with adding Prime into our portfolio. And, in fact, when you add Prime in on 630, we have had -- we did have sequential average base minimum rent growth and Shelly can give you those details later.

Occupancy was 93.9%, 10 basis points higher than the year-earlier period, and 30 basis points higher than the end of the second quarter. This was achieved despite the loss of over 160,000 square feet due to liquidations of Borders and Anchor Blue.

The releasing spread for the 12 months was $4.77 per square feet, a positive 9.6%. Our releasing spread continues to include all in-line space, including spaces larger than 10,000 square feet. And most importantly, comparable property NOI growth was 3.8% for the quarter and 3.2% year-to-date, and was driven by increases in minimum and overage rent.

Development activity, quickly, we have three new developments under construction, all are Premium Outlets -- two in the US and one in Malaysia. We have 22 renovation and expansion projects under construction in the US with completion dates scheduled for this year and 2012. And the restoration of Opry Mills continues with the completion expected in the spring of 2012.

We also have expansion -- significant expansions underway at three Premium Outlet centers in Japan. As we have discussed with you in the past couple quarters, our development or redevelopment programs in the US and abroad is accelerating. We are seeing good value creation opportunities. We expect our share of development spend to approximate nearly $500 million in 2011. And the potential for 2012, again depending on timing, could approximate $1 billion.

As always, details on the cost and returns and timing of these projects are provided in our supplemental reporting package. On the acquisition front we continued to demonstrate our ability to strategically invest capital. We completed two in this quarter. First of all, in July, we acquired ABQ Uptown, a 220,000 square feet -- square foot lifestyle center in Albuquerque, New Mexico. This center generates sales of approximately $650 per square foot, and adds to our presence in the growing Albuquerque market where we also own Cottonwood Mall.

And in we acquired a controlling interest in King of Prussia, one of the truly iconic shopping destinations in the US, increasing our ownership from 12% to 96%. In addition, we have the contractual ability to acquire the remaining 4% interest in the fall of 2013. This acquisition will be immediately accretive to earnings. And the property has excellent growth prospects as we expect to increase the NOI at KOP by approximately 30% in the next three years.

Capital markets, we closed on in early October on a new unsecured revolving credit facility well ahead of its maturity date. That increased our revolving borrowing capacity to $4 billion with the ability to increase it to $5 billion during its term, and can be extended to October 30, 2016 at our sole option.

The interest-rate is LIBOR plus 100. And the facility provides for a money market competitive bid option which we expect to even lower the indicative pricing of LIBOR plus 100. We also have a lower pricing grid from our previous facility. And the new maturity, as I mentioned, up to five years, which further enhances our already strong financial position.

We also have nearly $930 million of cash on hand, including our share of joint venture cash.

On dividends, we are very pleased to announce that our common stock dividend for the fourth quarter will total $1.10 per share. This is comprised of two separate dividends. First of all, we have now increased our regular quarterly dividend to $0.90 from $0.80. This represents a 12.5% increase of the dividend. It is payable on November 30 to shareholders of record on November 16.

We also announced a special cash dividend of $0.20 per share. This dividend is payable on December 30 to shareholders of record on December 16. These two dividends, as I mentioned to you earlier, total $1.10 for the quarter and increases our total payout from $3.50 for the 2011 calendar year, which we expect to approximate our 2011 taxable income.

The new $0.90 quarterly dividend rate also positions us to have a trajectory of at least $3.60 per share in 2012. And we would expect to revisit our dividend again in October to ensure that we are paying 100% of our 2012 estimated taxable income.

Now let me turn to guidance. Based upon our strong results for the quarter and expectations for the balance of the year, we increased the low end of our 2011 FFO guidance range by $0.15 per share to $6.80 and raised the top end by $0.12 to $6.85 per share. The midpoint of our current guidance is now a full $0.30 above the midpoint of our original 2011 guidance provided to you in February.

Before I open it up for questions, let me just conclude by saying we are pleased with 2011 thus far with our performance. We have had strong performance at our core properties, accretive acquisitions. We continued to strengthen our already industry-leading balance sheet. All of which will serve us well in 2011, but also position us for more good stuff in the future.

We are now ready for questions.

(Operator Instructions).

Ross Nussbaum, UBS.

David or Rick, with respect to Gap's plans to close a chunk of their stores, specifically where are their rents relative to the $54 level you have been signing leases at?

And maybe from a broader perspective, do you see this as a trend at some of your older, more established chains of rightsizing their store counts now that they're coming up upon lease expirations?

Well, let me start, and then Rick can add. First of all, I think with respect to Gap, Ross, it is very important to put in perspective they have been shrinking their fleet for the last few years. And I think the recent announcement was nothing new to us, and in fact, as I mentioned to you, we have been seeing a reduction in their fleet with us for the last three or four years as they continue to have very anemic sales per square feet as well as decreasing sales per square feet.

Now just to put the Gap in perspective to your next question is kind of where do we think rents are with Gap, they were very effective in being able to negotiate a large amount of space -- a great space in highly productive malls at below market rents when they were going through their growth phase.

Now, obviously, those days are over, and it is -- even though we are likely to lose some space in less productive malls, we will more than make it up, and I think we have already -- I don't want to get too granular in rollovers for certain Gap stores, but we will more than make that up as we reclaim the space in the higher producing malls that we will either shrink their footprint or, in fact, eliminate their brand in those centers.

Is this a trend that we are seeing outside of Gap? And the answer to that is, not really. But it is a trend that we have seen -- years and years of experience where concepts tend to get bigger than what they should, and it is a natural evolution in retail, but frankly, they are the only one going through this kind of downsizing in a material -- on a material basis.

Okay, I appreciate that. Then my final question, there has been a few what we will call A malls that have traded this year.

Yes.

But the trend of B malls changing hands didn't occur. Can you talk a little bit about the pricing differential between those two categories, and do you think that they have been overdone on both extremes?

Well, I can only speak to our point of view. We were able to buy King of Prussia, and though we don't talk about individual mall transaction, we are extremely comfortable with the going in yield and the expected yield that we will get from that asset.

As you might know, we didn't really run the property. We kind of ran it through a joint venture and there was a terrific relationship over the years with our partners. The fact is we are very comfortable that there is a lot of upside to achieve from that asset. So I can only talk about what we have bought and there is absolutely no concerns on my behalf in terms of what we paid and the growth that we have from the assets that we bought.

The B malls, look, I think we are still trying to figure out kind of where that market is. There're not right now natural buyers, so it is going to require a group of opportunity type funds or entrepreneurs that are going to want to gobble these up. And a lot of that is dependent upon financing. There will be strategic assets here and there that certain mall companies might buy.

But I still think price discovery is going to eventually occur there, and I don't think it will be all that earth shattering in terms of cap rates. I still think where the talk is, assuming the market comes back on financing, will ultimately deliver the values that people are circling for those assets.

I appreciate it. Thank you.

Steve Sakwa, ISI Group.

Maybe the first question is for Steve. When I look at the implicit fourth-quarter FFO that you're giving, given the full-year number, it is just up a little bit from the first -- fourth quarter of last year. I am just trying to understand why earnings would only be up 1% or 2%. What was nonrecurring last year, just given the strength in the core business, the acquisitions that you have done and probably some savings on refinancings?

So you are accusing us of being conservative? Is that (laughter)? If that is the case, I hope you're right. One thing that you do need to think about, Steve, is that the Prime acquisition does anniversary and so it is in the full fourth-quarter of 2010, so that will meet the difference.

No, I understand, but if you -- and I understand you won't be up 19% again, but at the midpoint of your new range you are talking about earnings of kind of $1.85 against $1.82. So I know you like to be conservative. I know you got a very good track record of beating, but is there anything else that is one-time that occurred last year like lease termination fees or gains that may not come up in the fourth quarter this year?

Well, lease termination fees generally speaking were higher in 2010. We have had very little lease termination activity in 2011. The other thing that you do have is that in 2011, and I would have to look at the fourth-quarter specifically, but bad debt expense turned out to be a credit for most of 2011, where because of some of the bankruptcies that have occurred this year we have seen, while still below normal level of activity, we have seen some bad debt expense.

Okay, and then, David, maybe you can just talk about some of the international opportunities. I guess there has been a lot of chatter about your interest in Brazil and Europe over the last three to six months, and as you travel around the world and look for opportunities. As we look through the European business in terms of the assets that you own, occupancy was up a bit, but the sales were kind of flat. I'm just wondering how you're thinking about some of these markets today in light of the sort of dislocation that is going on in Europe and the stronger growth in the emerging markets?

Well, look, I think Europe is going to be in for a challenge for sure. So we still like the outlet business worldwide, and right now that continues to be our primary focus worldwide. We have a worldwide franchise in the outlet business, so that is the primary focus to take advantage of. And that could be Europe, that could be South America, certainly Asia. We want to -- you see all the stuff we are doing in Japan expanding that platform. Korea, we think we have another deal on the horizon there. Malaysia, we open up in December.

So I think from an international point of view the priority will continue to be the outlet business. Look, I think -- generally, I think we have proven that we have a unique model that allows us to acquire, develop and improve real estate worldwide. We certainly want to look at everything that is out there to do it. We do believe that there is some -- if there is a company that could really turn into a global retail real estate company, it is us.

That is going to require us to look at everything there. There could be dislocation in Europe that could create buying opportunities. On the other hand, sometimes those things never come to fruition. But day to day we are looking at how to grow the outlet business internationally. That is the number one priority.

Okay, thanks.

Jay Habermann, Goldman Sachs.

David, just back to the original question in terms of store closings. As you think about leasing spreads over the next 12 months, is your assessment that there really should be a minimal impact, I guess, to maybe leasing spreads and occupancy?

From the Gap or generally?

Just in general from some of the store closings that has been talked about recently or planned store closings.

Look, I think not everything is robust in retail real estate; it never seems to be. And every year we have got to fill the book again from people that are scaling back. But we believe strongly that as we look at our rents and our occupancy costs, we will have the ability to increase our rents as we recapture space. We have proven that almost 20 years now as a public company.

So I don't expect that to change at all. I think the Gap is a great opportunity. They are underperforming. A lot of those spaces are well below our average rents, and we look to take advantage of that as well. We are going to look at those one by one individually. So I would expect our ability to produce rent spreads, assuming we generally have a decent economy, to certainly be produced again next year. Rick.

The only thing that I would add is that we are focusing on Gap announcement, but there is a significant number of tenants that are doing well, are looking to expand and, in fact, have already come to us and said -- well, if you get that Gap room back, we want it.

So I would not just view this through the prism of a Gap contraction. You have to also bear in mind all the tenants out there that are doing well, looking to expand, and the fact that there is virtually no new development. So whatever demand is being created among our retailers it is going to be satisfied out of the existing inventory in the industry.

Okay, no, that's helpful. And, Rick, maybe as well, can you give us some sense of perhaps demand for 2012 or commitments at this point, or is it still too early?

Well, we are in the midst of our leasing now, and demand has maintained pretty stable. There are a number of tenants that I have just said like Apple, Forever 21, Loft, Love Culture that are expanding. You have seen a significant number of IPOs being done by retailers that are active in the Mall area and they are recapitalized and looking to grow. And we are sanguine about our prospects, but as David emphasized, we are at the mercy of the macroeconomics environment. So if things stay as they are, we should be okay.

Okay, and just a final question in terms of some of the Class A transactions that we have seen in the mall category, with the 30% increase in NOI are you really look at stabilized yields of 6% plus?

Oh, yes.

Yes.

Okay, thank you.

Quentin Velleley, Citigroup.

I am here with Michael Bilerman as well. Just in term -- just going back to the international question, I believe you're down in Brazil recently. And it sounds like internationally you are more focused on the outlet center business. But I would be just curious to get your takeaways on the Mall business in Brazil and whether or not that is something that could interest you at some point?

Well, it's a vibrant economy. The malls there produce a significant amount of cash flow -- higher cash flow per foot or per meter, however you would like to look at it, than they do in the US, which to me was very interesting. They charge for parking, which is very interesting given that you've got an emerging customer there that you would think would be hard to charge for parking.

A lot of positives. I think long-term Brazil is -- I am sure there will be lots of ups and downs given its historical nature, but long term I think the country, obviously, has got a tremendous amount going for it.

There are some worries, because the cash flow per foot or per meter is so high, it is counterintuitive versus say an emerging market. You would think it would be low and growing. But despite that I think a lot of that has to do with supply and demand. It is a very intriguing market. Lots of supply coming on, so it will be interesting to see how that all shakes out. But an impressive group of companies and malls and an overall impressive marketplace.

David, it is Michael Bilerman speaking. Just a question on the dividend. Just thinking about how you thought through the process in terms of paying out a special to get to 100% payout ratio versus setting a dividend run rate without doing the sort of top-up specials at the end of the year, and how you discuss that with the Board and how you came to this decision.

And I assume you could have paid out the bare minimum to 90%, but you went to 100%. And just thinking about where you stand and how you think about next year?

Well, look, I think this year, to put our dividend in perspective, there is a thing called bonus depreciation that we took advantage of. And the reason we -- so our taxable income is lower probably than a normal run rate, because the fact of the matter is that we took advantage of the bonus depreciation that has -- that Congress has put forward to stimulate the economy.

Whether that has worked or not that is for another debate. Next year we don't know if that is going to be there or not. And I think we have told you from day one we want to payout our taxable income at a bare minimum. So our run rate now is $3.60. We probably will have a higher taxable income than that next year. And I kind of like having a run rate that is going to grow over time. And then the ability to top it off based upon our taxable income, which includes a lot of different things.

So I actually think it is the more elegant way than raising it significantly and beyond where the raise was, and then in terms of if your taxable income ends up less than that you are paying out more than that. And given what is going on with taxable income for corporate America today, we thought this was the best, more prudent.

It also reinforces our strategy to provide a growing dividend. Not many REITs are growing their dividend, certainly not many are growing on a 12.5% basis -- and being able to use the extra capital that we have to fund our business and generate even more earnings, and I think it is a pretty good cycle to be on.

So I read your thing. I was confused that you would say disappointed. I don't know, I have had a lot of shareholders that were very happy, including the Board.

Look, it is a question more so of do you get paid for a $0.20 special at the end of the year or do you generate more institutional interest, especially from generalist investors, about having a consistent quarterly dividend that increases over time, and (multiple speakers).

It did increase. It went from $0.80 to $0.90. And if we had -- we have to payout -- we have to pay out $3.50. And so if you take the logic of what you're saying is that we would have to payout $1.10 in the quarter, and that would be $4.40 for next year. And that is not the trajectory that we really want to convey. So I think it is the right thing to do. We appreciate your input on it. We are very pleased with the outcome of it.

What was the bonus amount -- the depreciation in terms of how much it affected taxable income for 2011?

It was roughly, I am going to say $0.25, something like that. (multiple speakers).

So you're set up for $3.75 for next year, so you already --.

I think next year will be higher than that. And that allows us to put -- to be put on a trajectory higher than that.

Okay, thank you.

Ki Bin Kim, Macquarie.

So if you guys take a broader view of the economy, it seems like for one of the very few times in history it seems like retail sales are doing very well despite the lack of customer confidence. How long do you think this divergence can last, especially in light of today's pretty bad print?

Today's what? I didn't hear the last question.

Especially in light of today's bad consumer confidence number.

Well, I think we have a bifurcated consumer, and generally the people that shop at our malls are -- the unemployment for the college-educated is in the 4% to 5% range. Certainly we would like all the people to be benefiting from a growing economy, but the general view of our business is that we want to attract the better consumer that does have disposable income to spend, and we have been successful in doing that.

We don't always do it. We have certain properties that don't do that. But generally, I think as long as the economy continues to at least have some GDP growth, we will be able to continue to attract the better customer that has -- that I think has disposable income to spend.

Okay, and just to follow up on a previous question. What would your sale per square foot and same-store NOI numbers be without the Prime inclusion?

This is Steve. The sales without Prime, I think, would have been $3 a square foot higher. And the -- excuse me, $7 a square foot higher. And the comp NOI number does not include Prime. It won't include prime until the next quarter.

All right, thank you, guys.

Paul Morgan, Morgan Stanley.

We know from what the retailers have been saying on their calls that there is (multiple speakers).

Paul, can you speak up?

We can barely hear you.

We just know from what the retailers have been saying that there is a lot of demand for the As. And when they comment about space in the Bs they talk about there being (technical difficulty) [more give still]. But from your perspective has there been any shift in the negotiations for space in the Bs this year as retailers maybe get a bit more encouraged by their sales or is it still much harder slogging than in your top quartile?

This is Rick. I think we have always seen a pretty direct relationship with the productivity of our properties and our ability to drive our rent. As we have been able to increase the productivity of our properties we are making them more attractive to retailers and we have been able to drive occupancy and rents in those properties.

We put in our press release the fact that in 2011 we are opening 39 new anchors and big boxes, or almost 1.7 million square feet, across the portfolio. We are renovating another 18 properties. All of this is making our properties more attractive, driving marketshare, driving sales and helping us lease the properties.

Is it always going to be a function of the market position and productivity? Sure, but we think we are creating better product for our leasing guys to sell.

Okay, on a similar thing, [if you all] look at the expiring leases for 2012 at $32, that is like 20% almost below where your in-place average is. How should I think about -- is that an opportunity to take releasing spreads higher from where they are now or is it maybe representative of -- you know, it is a big portfolio [but could] representative of the types of malls where you have more expirations? How do we think about next year based on that $32 number?

Well, I think it is very positive (inaudible). Look, our size is such that these numbers actually mean something, whereas others with smaller portfolios may have statistics that could indicate something other than what it is just because they are smaller.

So the fact is at the end of the day that rollover is a great opportunity for the Company, and we intend to take advantage of it. And we have said consistently that our leases are under-market. I think that helped us perform in the Great Recession. Recall, if I could, Paul, that we did not have negative NOI growth in our portfolio during the Great Recession. And I think that that is a good statistic that creates the insurance policy of our ability to generate comp NOI growth.

The size of that spread is dependent upon a lot of macro things. But the bottom line it a great spot to be in. And additionally it lasts for a long time, so it is not a -- it is not a one-year event. So let's hope we can continue on the track that we have demonstrated for the past several years.

Okay, great, thanks.

Craig Smith, Bank of America Merrill Lynch.

Actually this is Jeff Spector; I am here with Craig. We have a few questions, if I could just ask a couple first. David, I guess just thinking about the bumps in 2011 in your guidance, what were some of the surprises, I guess, you e felt happened during the course of the year? And as you are laying out your 2012 budgets, I guess from a macro standpoint what the are you thinking at this point?

Well, the biggest surprise -- pleasant surprise is that we have had comp NOI that has been higher than the budget. To me that is the most important thing that we can do. Sometimes it is out of our control, because it is tied to retailer sales, bankruptcies could impact that. We have had more of that this year than last year, if you recall. So to me that is always the number one focus is how do we increase the cash flow on a comp basis from the property.

So with that said -- I mean, that is the focus with Prime. Prime is -- we have outperformed on our Prime portfolio in terms of our underwriting and our expectations there. That has helped fuel our growth.

Rates were a little lower than what we projected as well. And so those were kind of the material things. We had -- offsetting that was some bankruptcies, less lease settlement income, but that is the ups and downs.

How are you then thinking about your 2012 budgets from a macro standpoint? I know you're not providing guidance, but any thing you could comment on?

Well, look, we are just about to start that excruciating process, don't remind me. We actually do bottoms-up, property-by-property, so if we look a little dazed -- if you see us at the end of Thanksgiving, we kind of get dazed by that time. But we actually do that. It is a little early.

I think the fact of the matter is we -- the biggest caveat that we have is all about the macro. Where is the economy? Where is consumer confidence? The election-year throws a whole set of psychological issues at the consumer, none of which are positive.

But, you know what, we will figure it out, and I expect to have another good year and another year of growth. But we are right now in that process -- as you know, we do that beginning of, or kind of right when we do our year-end results. So -- but we would expect to have another good year.

Maybe just one more question before Craig asks his. I guess thinking about the different formats it is pretty clear that Premium Outlets continues to shine, outperform. Could you provide any information on your shopping center portfolio versus the malls as we head into Christmas, the holiday season? Any feedback from tenants, whether it is the smaller tenants or the big-box?

I will let Rick take -- go ahead.

A couple of things. One, all four of our platforms are positive to both budget and to actuals last year, so they are performing well year-to-date.

In terms of the holiday, we literally have four tenants in here today, and talking to them they are all anticipating up probably 2% to 3%. Inventories are very tight. People are not chasing sales. They would rather leave a few sales on the table and make sure that they drive their margins and are not over-inventory.

And the other on the other point I would say is there is a -- and as we think about our world there is a pretty high correlation to the better retailers than how the S&P 500 does. So we are, to a degree, I think really focused on how that better consumer is thinking about their position, and that will be reflected to a degree by the S&P 500.

This is Craig. I had a question on the King of Prussia, the potential 30% increase in NOI, clearly the conversion of Strawbridge will be a big part, but are there other things that will be helping you push towards that goal?

Well, I think, that is part of that for sure. But, additionally, it is just we believe that in putting in all of the Simon programs that we didn't put in previously because of the partnership limitations, all of that led to that cash flow. And whether they are -- all of our marketing programs are going to fix CAM, as an example, we feel like the rents weren't at the level they should be given the quality of the asset.

So all of that, plus what is really interesting, and it is probably somewhat premature to talk about it, but I'll go ahead, is that we are looking to put Strawbridge aside, because as you know that is under construction. But our ultimate focus in this property will be to combine the Plaza with the Court with additional retailer -- retail. And we have the [FAR] ability to do that. And we are just discussing that concept with the Village, where we think that is a great opportunity to really integrate both of these properties and make it one unbelievable shopping destination beyond what it is today.

But just to be clear, this is Steve, that is not in the 30%. The 30% is just executing the redevelopment of the Strawbridge and then Simonizing the property by doing some of the things that David talked about, like the conversion to fixed CAM and the full implementation of the marketing programs.

Great, and then just one last question. If you could talk a little bit about what you're doing with Nanuet Mall. I understand it might be more of an outdoor or mixed use, and if you're going to be doing any kind of repositioning by the future tenants?

We're about to demolish the mall in the next month or so. And we will end up creating a -- what I will call for better or worse, a lifestyle center, open air center that will be anchored by Sears, Macy's. They will stay in place. There will be a road and retail kind of through the property. We will add a health club. We will add a high-end food operation, restaurants and specialty retail. And all systems go there. We are just about done with all the planning. And the demolition, as I said, should occur here in the near future.

Great, thank you.

Jim Sullivan, Cowen and Company.

A question -- the first question for me, it is in the area of the several other questions we have kind of been on. Maybe coming at it from a slightly different angle, David, looking at your average portfolio base rent to average sales, obviously, sales trends have been very, very positive in spite of the negative productivity contribution I guess from Gap. And your average base rent in the portfolio is now at 7.5%, about as low as it has been in a long, long time now.

We know the outlet center portfolio is included in that metric now. I just wonder if you could help us think about how you think about the -- that 7.5% number? Over the course of a cycle in the past it can run up to the mid-8%s or higher. And do you think it will have that upside potential given the change in the composition of the total portfolio?

There is no reason, assuming we have a stable economy, growing economy, that we are not going to work our way back to that level. Now retail -- I mean, there is a lot of pressure in retail. We have the consumer under pressure. So it is going to take work. It is going to take some level of stability. It is going to require the mood to get a little bit better generally in the country. But I am actually feeling that these things will work their way through the system in that way.

And it is hard to give you a specific number, but we do think that presents a lot of opportunity on the rent; there is no question about it.

And I guess going to point about Gap, given that Gap's productivity trend is negative to the rest of the portfolio, presumably the sooner you get that space back, the better off it will be in terms of that metric.

There is no doubt you will have a step backward and then two steps forward. Because as you reclaim the space you're going to have downtime, and in some cases it is going to take a little bit of period of time to lease it up. But at the end of the day, and we've done all sorts of analysis on this, at the end of the day we just think there is tremendous upside overall.

It is not to say there aren't going to be some holes that will be generated as we lose some of the Gap stores, Gap brands, whether it is Old Navy, Banana or just the Gap brand. But over a -- not a long period of time, but over a two-year period of time, as you lease the space that we reclaim there is going to be a tremendous upside.

And even in A malls their productivity did not allow them to essentially pay market rents where others do. And the benefit that we see in A malls from them there versus others has been diminished somewhat as they shrink their portfolio appetite.

Okay, just a quick question regarding the projected rate of return on development spend, in the quarter that projected stabilized return on the anchor/big-box segment of the development went down a little bit from 12 to 10. I know there was movements in and out of what is on that schedule. Was there any changes in cost projections on projects or was it simply -- is the lower number simply because of what came out in the third quarter?

It is just a matter of the mix of projects. In fact, we have had very good forecasting, and in the overall environment are construction costs have been coming in at or below what we have been using for our capital allocation approval.

And I would say one thing. Our people are used to -- hopefully, the conservative nature and how we present ourselves resides throughout the building. And certainly when we approve projects the level of sandbagging and our projects depends on who's doing the project, but it is institutional in nature. So I would hope over time that we would produce better results than that.

But, Rick is right. It is in the mix. But we are being very aggressive and really focused on trying to make our properties the best they can be -- spending a lot of time. Part of the reason to do more quicker -- the reason why we hired Contis to help in that area. He is very focused on it. So -- but hopefully we will outperform those numbers.

Now, Jim, you did mention in one of your report, I tried to address it. I garbled; I'm not very good at reading those things. But I do hope you realize that the [630] base rent did not include Prime. When you do we actually do have sequential growth. So I just wanted to reinforce that with you.

Okay, good. And final question for me, David, the Marketplace Equity Act recently introduced in Congress, I know it is a modification from the prior bill that was posed or proposed. I just wonder if you would like to make a comment about it. And I don't know if you're hearing anything from people you work with about what kind of success it might have.

Well, look, I think we are very focused on it. ICSE is very focused on it. I would like to thank David Henry and ICSC for finally recognizing -- I think David has been the key to this, to really -- to create the level playing field.

There is two or three or four different approaches on how to do it. The good news is I think Congress is beginning to understand the difference -- the fact that the field is not level. We are still educating certain congressmen and women about the fact that this is not a new tax. That is going through it's process.

Everybody that we talked to understands the fairness of it. And I think even Amazon with their different deals that they're doing state-by-state recognizes that the days are over where they get the level -- where they get the unfair advantage.

But it would be much better to do it at a national level, that is what is really being cried for than to do it on a state-by-state level. But as you might imagine, it is a process. But we are actually feeling -- Rick is involved too; you can add to it -- but we are actually feeling like there is hope to get something -- to get something out there that can be passed by Congress.

And the only thing I would add is that you're talking about billions of dollars in lost revenue from the states, and it is a tax that is already on the books. So the combination of factors are coalescing that I believe it is going to happen in this cycle after it being in the conversation for 12 years.

Okay, good, thanks.

Jeffrey Donnelly, Wells Fargo.

If I could actually stick on that topic, David, the Marketplace Equity Act. Are you concerned that solution could actually prove to be something of a Trojan Horse, and that by leveling the playing field, really the door is open for online retailers like Amazon to actually provide same-day delivery service to major markets, because --?

Well, look, I think they are looking to do that anyway. Right?

Right.

So that is going to happen. I wouldn't be surprised if people like ourselves play a role in that. Believe me, we are focused on that. So, Jeff, the fact is that is what Amazon wants to go to. We have got it to create the mall version of that. But we still not want to give them the benefit of exempting sales tax.

I don't think it is a Trojan Horse. I don't think it is going to hugely change the fact that Internet shopping is important. But the fact of the matter is there is a lot of people, the more research you do, that do a lot of -- it used to be they researched online and then went to shop physically. Now they go shop physically. They understand the difference that they don't have to pay the sales tax. And actually go to the physical environment, do all the research and buy online. All you have to do is ask Best Buy to get their perspective on it.

I think that needs to be eliminated. There is no reason why Amazon and certain others need that benefit. So same-day delivery is a different issue as far as I'm concerned.

And the only thing that I would add is that our retailers that are operating the malls are also very focused on fulfillment and allowing their customers that want to have an online experience to fulfill those purchases at the property. And that just emphasizes one of the benefits we have of being able to facilitate those things in a much more efficient manner.

I think I would agree that it is not necessarily all one nor the other -- online or bricks and mortar. In some ways you saw that with the Gap announcement where they were scaling back on their mall stores. But I think ultimately retailers are trying to find a way to provide value. And in that case you saw Gap increase -- they are looking to increase their outlet store account. They kind of switched gears to that.

Do you think that -- you mentioned that you did not see a trend among mature retailers looking to scale back their store count, but do you think we are at the beginning of maybe another secular growth period for outlet demand as retailers maybe begin to discover that channel, if not here then maybe more broadly outside of the US?

Well, look, I think the outlet business has been going strong for a number of years, partly because I think we had a little bit to do with it, if I could, in that we took it out of the back room more into the front room. We personally -- Rick and I personally talk to a number of retailers talking about how it is not brand negative, but brand positive for them. And what is the brand negative is when they do want to sell merchandise to sell it in their store, their full-priced store, it creates all sort of promotional issues. And it in a lot of cases clouds what they're trying to do at the full-price level.

So that change has been going on for a number of years. Plus the quality of the product that we built, how we execute it, the tenant mix, the marketing kind of all has been upgraded to the next level. And we are still making improvements on it to make it the best experience that we can make it.

So I think that trend continues. They still want -- there still is a high amount of outlet demand. We are seeing a lot of demand in our Mills portfolio, because that is representing an outlet distribution channel.

So I think it is -- we are seeing that internationally. I just happened to talk to a worldwide retailer that is talking to us about -- he wants to talk to us about China outlet, which I am always a little bit worried about for all sorts of reasons. But for crying out loud we are building an outlet in Malaysia. It is going to open in a month. So it is there. We expect to take advantage of it in other markets as well.

If I can just ask a last question on -- back on this B and C mall topic. As a property investor what realistically is the [bold case] for being C mall investment today? Do you think it is a fundamental story about occupancy and rent, or is it really a capital market story about leverage? Because your earlier comment, it is more of a play for the entrepreneurial crowd, kind of implies an unattractive risk/return profile.

And not to leave Steve out, I was curious what does the state of the capital markets look like for B and C products, because there are a lot of anecdotes out there that the traditional equity and debt capital providers to the mall space really don't look at malls anymore under [$350] a square foot in sales.

Well, look, it is very simple, the operating story is that if it is a B and C mall and there is a reason for it to exist, it is going to have a stable cash flow. In fact, if that area continues to have economic growth that cash flow will grow.

And the fact of the matter is if you have appropriate management running it, you're able to add to the critical mass of that B and C property. The market may not be overly exciting, but the cash flow ought to maintain itself. And in fact, if you execute appropriately you may even increase market share, because there is a lot of -- where the marketshare got confused with a lot of these strip centers that are -- that in a lot of cases are suffering from oversupply and not clear winner and loser, and a lot of box movement back and forth.

So from that standpoint, I think you're going to -- and I think frankly, from our B malls they have actually performed reasonably well in a lot of cases in the Great Recession.

Obviously, depending on the cap rate and depending on the financing, there is a pretty good return on equity that they are generating. And I think the ability to gain marketshare is all part of the story.

Today the CMBS market, one week it is on; one week it is off. We are getting bids, so I think it is back on. Last week it wasn't. I still think that market still has a lot -- it is more affected by what is going on in the risk on/risk off trade that it is what is going on in the real estate world.

That is helpful. Thanks.

Alex Goldfarb, Sandler O'Neill.

We are coming up on roughly the year anniversary of the Capital Shopping Centre saga. And looking at their stock price performance over the past year, looking at your stock price performance, I am just curious if any of their stockholders have called you up and said -- hey, if you make another run you have our blessing and we would be supportive?

Well, that is not the British way, is it now, to admit that they may have made a mistake. The answer to that is no. But, again, we have no interest in doing that either. We put our best foot forward, at that point the Board for whatever strange reason turned down that deal. They shouldn't have in hindsight.

We felt comfortable that we would have been able to execute a better growth story than they would've had by themselves. We are still waiting. We are still shareholders. I have more faith, frankly, today than I did before, because at least Mr. Whittaker is a large shareholder. I think he is a very capable gentleman to reignite that company. So we are assessing how that proceeds, but we have no interest in buying the company.

So right now you are more just a passive shareholder who obviously would be there for advice, but you're not looking to get active in the company, is that correct?

That is correct. That is correct.

Then sort of following that trend, what is your strategy for the -- is it simply now a stock investment or is it something that you would look to unwind then?

Well, I think in this case we will look at all of our options. That market is relatively depressed just from a lot of macro issues, so we are adopting a wait-and-see approach. That could change, but right now it is wait and see.

I do think Mr. Whittaker is the kind of entrepreneur that that company needs to get it reinvigorated. So we're waiting to see whether or not that can happen. And, look, we are certainly an important shareholder. We are certainly there to help anything we can do to make the company perform better.

Okay, the second question is recently there have been a number of items sort of public/private, whether it is, obviously, Westfield going back into world trade. There is the whole Willets Point here in New York where it looks like Macerich and Taubman are looking at putting together bids. The Journal this morning featured the Fulton Street subway stop, adjacent to World Trade, where maybe there is an opportunity for a retail landlord to come in and manage some of that retail space.

I am curious from your perspective, you guys have spoken a lot about development and redevelopment, but none of it has involved public/private. I am just curious if that is by design. Maybe it is not worth the headache or the opportunities are -- the yields just don't make sense, or if those opportunities are truly few and far between for the real out-of-the-park type situations?

Well, I would say all the above. We have never been a real -- we have never -- we have kind of always adopted the approach not to do RFPs, whether it is from a private -- whether it is just a private company or individual is looking to sell his land, whether it is a public entity trying to redevelop something, we just don't really like the RFP process. We won't rule it out, but the fact of the matter is I have never personally gotten excited about it.

And the public/private stuff is hard to make money. I think if we felt like we didn't have a lot of opportunities with our existing fleet of assets and our ability to look at things throughout the world, maybe we would resort to that, but at this point we just -- I just have never personally got excited about it.

Okay, thank you.

Carol Kemple, Hilliard Lyons.

Only question I have that hasn't been answered is relating to the income statement. Is there a reason why G&A grew so much in the quarter?

Part of that is our recent LTIP program that we have had with the senior management.

So is that a good run rate going forward then?

Yes.

It is, Carol, yes.

Okay, great, thank you.

Michael Mueller, JPMorgan.

I am not sure I saw it disclosed anywhere, but what was the investment in King of Prussia and how was it financed?

That we -- again, we don't disclose individual mall transactions. And it was financed -- I think we announced that -- partly cash and partly from a line of credit.

Correct.

Okay. And, secondly, the leasing spread is up about 10% for -- or for the year-to-date spread is up about 10%. What is the difference between the cash spread and the GAAP spread?

This is Steve. That is a cash spread. That is ending cash rent at the time the lease expired or terminated to beginning cash rent with the new tenant or with the renewal of the existing tenant. So if you convert it to GAAP it would be higher.

Yes, about how much higher roughly?

I don't have the number in front of me. It is not something that we tend to look at, because as David has said on many, many occasions, his laser focus tends to be cash. But let us take a look at it and I will get you a number.

Got it. Okay, thank you. Bye.

Rich Moore, RBC Capital Markets.

Steve, following up on that for a second, the line of credit is at about $1.8 billion at this point. What are you guys thinking there in terms of -- you are up about $900 million from the last quarter. I assume, again, mostly because of the acquisitions. What are you thinking about in terms of terming that out?

Well, as you know, the spreads in the bond market GAAP out late summer, and have been at kind of wide for the year over the course of the last two or three months. The good news is they have gotten better -- the tenor in the bond market has clearly gotten better, so it is something that we are paying attention to. And the good news is have the flexibility to be patient, but as we think about that level of outstandings on the credit facility, if the bond market continues to improve we would love to term it out.

Okay, so doing CMBS it sounds like is not really something that is an option at this point but that maybe an unsecured note over the next six months would be the way to go?

You know, the CMBS market, as David mentioned earlier, we are getting quotes, and on many assets we are getting very good quotes. But where we are focused there is primarily just to refinance existing mortgage debt that comes due as opposed to put mortgages on current unencumbered assets. I think --.

And I would just add, Rich -- this is David -- even with all of the ups and downs of the capital markets, both unsecured debt market and the CMBS market, it is more cost effective in the unsecured market versus the CMBS market, for sure. Especially as you look at -- factor in fees, amortization, you know, any --.

Audit costs --.

The whole nine yards.

Appraisals, yes.

All right, great, thanks, guys.

Rich, you made a comment about our sequential average base rent. You are clear on that now, I hope.

Yes, you made that very clear. Thanks, Dave, I appreciate that. Let me ask you guys if I could on --.

Pardon my jabber.

No, that was good, I got you. I got you loud and clear. On the redevelopment scene, I think you guys have said you were looking to do a couple billion dollars of deliveries over the next, say, five years. Should we think in terms of $500 million average per year deliveries as we look out to 2015? Is that the scope of the redevelopment scene?

I think it is -- Rick can elaborate -- but I think right now 2012 could shape up to accelerate some of that. So it could end up in 2012 that we would have committed $1 billion in our redevelopment portfolio. So it actually -- that number could accelerate in terms of the timing of it.

This is Steve. If you recall, the number that we floated out was a quarter or two ago, and it was primarily centered around the 17 or 18, what we call transformational opportunities. I think, number one, we have added to that list as we have continued to examine the portfolio. And, two, the ordinary course of business stuff like Rick mentioned 40 boxes and all that is kind of on top of those transformational opportunities.

Okay, good. And would you -- are you guys doing any densification sorts of efforts? I didn't really see that, but I'm guessing they're in there somewhere -- but you know, where you add apartments or you add condos or office, or that kind of thing.

Well, we are very focused on that. And if you look at the projects that we have open, several of them have both office and res multifamily, and hotel components. The primary one being Domain where we have a Weston plus multifamily in both phases, plus office in both phases.

And, obviously, we are working right now on the approval process for a very substantial residential tower over Copley in Boston. So it is very much a part of our focus, and we in fact have a dedicated team looking to bring those incremental uses into our properties.

All right, good guys. Thank you, Rick. And then the last thing I had was, David, it seen that on the last call the Chinese outlet scene was a little closer than you made it sound, just on one of the previous questions here. How close are you guys to doing something in China with -- as far as outlet centers goes?

Well, I think we will make a decision here in the next couple of months. So it will either happen or it won't, but it won't drag on for two or three years. So it is -- we are in the discussion -- serious discussion phase and that will either come to fruition in the next couple of months or it won't.

Okay, all right, great. Thank you, guys.

Cedrik Lachance, Green Street Advisors.

David, listening to your comments earlier in regards to B malls, or at least those that are legitimate in terms of their existence, given the quality in the market and their ability to maintain cash flow, I know I have heard [a relevant] question perhaps in the past, but do you feel more inclined to be a consolidator of the mall space at this point, or is it still something that is far in the future?

I don't -- I don't think we will be, other than we will always look at what is there, and if there is a strategic fit for us we could do a few deals. That is not to say we will run away from the product, it is just that we have got a lot to do within our mall portfolio as it exists. And unless there is a strategic view of that asset, or something to do really something special with it, we probably wouldn't.

The fact of the matter is, look, we have grown in the mall business, frankly, through M&A. We will never rule that out. And when you tend to do bigger deals you tend to get -- despite what we all say in the mall business, we don't all have A properties, nobody does. So you tend to -- if there's ever deals to be done or kind of on the broader more portfolio basis, we will tend to get some Ds in that area. And that would be a natural way for us to have more exposure in that product.

Which is -- we're fine with, but to go out and look to grow that business on a one-off basis just doesn't excite us as much as taking what we have and making it better.

And just to emphasize David's point on not running away from it, if you look at our capital expenditures we are actively renovating, redeveloping and adding anchors to a number of the properties that are perhaps lower productivity just because they're in smaller markets. But they're providing very stable cash flow, and with renovations and anchor additions, an opportunity to contribute to our comp mall NOI growth.

Great, thank you.

Ben Yang, Keefe, Bruyette & Woods.

I have another question on the international plan. David, you did make a few comments on China, and I realize it is not an immediate priority, but one of your peers recently purchased a real estate consulting firm based in China. I am curious, you mentioned maybe building outlet centers here, but if you ever decide to reenter China, do you see yourself maybe taking a similar path as this peer?

You broke up on the last part.

Well, I'm just wondering, you mentioned it maybe building outlet centers in China. Could we possibly see you buying a company already on the ground there instead?

No.

Okay.

It would be our people. We would likely joint venture with an existing Chinese company, whether they own the land or whether they were in the development business or a retailer, much like we did when we built Wal-Mart stores, but we would not buy a company to do that, no.

Okay, great. And just a last question. You mentioned the Gap closing more stores than they had previously planned being no surprise to you. And since it sound like they're basically not [re-upping] upcoming leases -- and I assume you can look through your portfolio to figure out how many leases are expiring over the next few years, where they are located, good centers or bad -- what is your expectation for store closures from the Gap and how many of those spaces are spoken for today?

Well, let me just clarify what I did say. They're not closing all their stores. They're closing certain stories that they want to close, and we are taking over space that we want them to close. And we are trying to find a happy middle ground on other -- of the majority of the stores. So that is the first point that I just want to clarify.

But the -- and I will tell you that I don't think their acceleration of store closures is all that different than what they have done the last couple of years. Now it may be marginally accelerated, but it is not all that different than what they have been doing, frankly, since 2009, 2010 and 2011 and going into 2012.

So that is -- the second point is at the end of the day when we look at everything there, if we got all the real estate back, for whatever reason -- they want to get out, we want them out, they decided not to do any US deals -- whatever the reason, at the end of the day we think the income stream that would come from those spaces would be higher than it is today that they are paying.

Can you just remind us how many Gap branded stores are in your portfolio, and of that amount who many do you think are going to close based on this [rent]?

Let me just say this. If you look at our schedule, we have 300 -- we have 386 stores, if I am right. Take away 138 of those, because those are in the outlet business. So that gets you down to kind of the whole Gap fleet, so that is like 240?

Yes.

Then I would say roughly 50% is Gap, 25% is Old Navy and that balance is Banana, somewhere in that range.

So it sounds pretty modest overall.

Well, it is a big relationship, but we are certainly focused that we are going to replace as much of the real estate where we don't think they're paying market rent.

Okay, thank you.

Tayo Okusanya, Jefferies & Company.

Most of my questions have been answered, but just two very quick ones. Going into Christmas, I know you talked a little bit about just what you're seeing from your retailer perspective, but in regards to the typical temporary tenants that show up during Christmas, what are you seeing demand-wise from those guys to take up space?

Demand has been pretty stable. We are finding that happily there are more and more national tenants that are also now looking to establish stores on a short-term basis as a way to seeing if there are customers located in that property. So that demand is constant pretty much year-over-year, and we are very pleased with where we are today on that.

Okay, that's helpful. And then just in regards to the recent deal that you have done. Steve, I know pricing-wise you weren't talking about King of Prussia, but could you give any pricing details on Albuquerque?

Again, we don't do individual mall deals. But, look, we are great stewards of capital. Both of these deals are very accretive and they have got good rent growth in both of them.

Just one more last question. With the Davis Street assets any reason why you were not involved in those deals? Is that something you were interested in, but you just didn't play a part in this process just given that Class A malls don't come up that often in the market?

We just had no interest. No interest.

Any reason why you didn't have an interest?

No interest.

All right. Congratulations on a great quarter.

We have no additional questions at this time. I would now like to hand the conference back over to management for closing remarks.

Okay, thank you. Listen, we are very pleased with the quarter and we are very happy to be paying our shareholders $1.10 in cash this quarter. And we will talk to you soon. Thank you.

Thank you for attending today's conference. This concludes your presentation. You may now disconnect. And have a great day.