西蒙地產 (SPG) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2013 Simon Property Group, Inc., results conference call. My name is Gwen, and I will be your operator for today. (Operator Instructions).

I would now like to turn the conference over to Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.

Thank you. Good morning, everyone, and welcome to Simon Property Group's third-quarter 2013 results conference call. Presenting on today's call is David Simon, our Chairman and Chief Executive Officer; Rick Sokolov, our President and Chief Operating Officer; and Steve Sterrett, our Chief Financial Officer.

Before we begin, just a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please also note this call includes information that may be accurate only as of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the Company's supplemental information, including in today's Form 8-K filing. The supplemental information is available on investors.simon.com.

I would now like to introduce David Simon.

Good morning. We had a strong quarter, with excellent performance in our core business. We had strong progress on our growth strategy, which includes redevelopment and expansion of existing properties to meet retailer demand and enhanced productivity; development of new Premium Outlets; and our continued smart acquisition strategy.

FFO was $2.21 per share, up 11.1% from the third quarter of 2012. Our FFO exceeded the First Call consensus estimate by $0.05 per share. For the Malls and Premium Outlets, comparable property NOI growth was 4.9% for the quarter, driven by tenant sales, up 3% to $579 per square foot; occupancy, up 90 basis points to 95.5%.

Our re-leasing spread was a positive 15.2% or $8.05 per square foot. Retailer demand for space in our properties remained strong and healthy, driving our occupancy increases. Our retailer sales growth continues to be ahead of GDP.

And more important to us, our existing leases are under market rent. And keep in mind, we see almost no or very little correlation between tenant sales growth and our NOI growth. Due to our ability to replace underperforming retailers, we have good visibility for strong NOI growth over the near term.

New development -- just quickly, we opened 3 new Premium Outlets centers during August, all of which have exceeded expectations. All were nearly 100% leased at opening, and sales per square foot of all 3 properties are trending above our portfolio average.

The total net development cost of the three were $400 million. That is not our share, but in total. We expect a first-year return of 10.5% on our cost. We broke ground on Premium Outlets in Charlotte and Montreal, and we finalized joint ventures that are under construction in Eagan, Minnesota, which is in St. Paul/Minneapolis; and Vancouver, British Columbia, Canada, in our new partnership with McArthurGlen.

On the redevelopment expansion highlights, The Shops at Nanuet opened in October -- a complete transformation into an open-air environment, providing everyday shopping and activities, plus dozens of fashion and specialty retailers unique to the area. It is 98% leased. Community acceptance and early reports on sales have exceeded expectations.

We also opened a 105,000-square-foot expansion of Orlando Premium Outlets in October. It is 100% leased. Redevelopment and expansion projects are ongoing at more than 35 properties in the US and Asia. Overall, our multi-year pipeline of new development and redevelopment and expansion projects is key to driving growth in NOI. We continue to expect development investment at least $1 billion annually from 2013 through 2016.

GO Projects -- GO Projects include Roosevelt Field, Houston Galleria, Woodbury, Stanford, Del Amo, just to name a few. In other words, they are under construction.

International -- just let me just mention a few things. Finally, we completed the closing of our joint venture with McArthurGlen. It includes ownership interest in 5 McArthurGlen Designer Outlets, located in Vienna, Venice, and Naples; in the Netherlands, near Dusseldorf; and one in the UK, near Kent.

We also own a 50% interest in their management and development company, which has a strong pipeline of future projects and opportunities. We're excited to partner together. Great platform for high-quality retail real estate in Europe, and a strong team of professionals.

This partnership supports and extends our international growth strategy. Important industry synergies will be taken advantage of in upcoming years, similar to what we have been accomplishing with Klepierre.

Total consideration for the recent investments is approximately $500 million, at a cap rate of slightly north of 6.5%. Klepierre announced their revenues a couple of days ago. We continue to believe we are well positioned to assist them in delivering greater value from their platform. European retail recovery is just getting started, and they are beating financial and operational expectations.

Capital markets -- Moody's Investors Service upgraded SPG's senior unsecured debt to A2, with a stable outlook. We are one of only two REITs with A ratings from S&P and Moody's.

We completed a EUR750 million bond offering to complement our McArthurGlen and Klepierre investment. It taps into a broad market, expands our access to capital, provides a natural hedge. And strong demand enabled more favorable terms for lending for leading European real estate players. A rate of 2.375% for 7-year notes.

Dividend, quickly -- we increased our quarterly dividend from $1.15 to $1.20 per share as a result of continued strong performance and a raise of our taxable income estimate. A year-over-year increase of 9.1%.

Total dividends paid in 2013 will be $4.65 per share compared to $4.10 in 2012, an increase of 13.4%. We will again raise our first-quarter dividend after our taxable income estimate is complete in the first quarter of 2014.

Today we are raising our FFO guidance to a new range of $8.72 to $8.78 of FFO per share. The primary driver of this increase is strong operating performance across all platforms. This increases the midpoint by $0.10 from our last one in July and $0.30 from the midpoint of the range from the beginning of the year in February.

Our commitment to shareholder return and our ability to execute has built an unprecedented track record of meeting or exceeding expectations on a quarterly and annual basis for at least the last decade. Our nearly 20-year history as a public company since IPO in December of 1993 is as follows.

Total shareholder return of approximately 1,975%, or 17% annually for 20 years. Our FFO grew in 1993 from $150 million to over $3.15 billion in 2013, using the midpoint of our guidance range. Our equity market cap grew from $1.8 billion to approximately $58 billion today.

And we're not resting. The range of opportunities in front of us is exciting, and we will continue to focus and work very hard to produce strong results.

We are now ready for questions.

(Operator Instructions) Alexander Goldfarb, Sandler O'Neill.

To use a favorite metaphor for Steve, we are going to tee off with you. On the Eurobonds, just curious what the reception was over there, as far as -- is there a dedicated REIT bond community? Or do people -- are they generalists? And do they look at you guys as a real estate company, or they look at you as a corporate America Fortune 500 company?

Alex, it is really the latter. The real estate market over there -- the investment-grade real estate market isn't deep enough that there are people who are dedicated real estate bond investors. So the interest was very high. I think we met with almost 50 investors during a 4.5-day roadshow.

Almost all of them ended up coming into the deal. They are money managers, insurance companies, pension funds -- really sticky, good, patient money. But they certainly viewed us not only as a best-in-class real estate company, but as a major US corporate who has a presence in Europe but also gets 90% of its income from the US, which was an important diversification element for them.

Okay. And just as a follow-up to that, should we expect you guys to issue in Japan, if you are looking outside the country for long-term capital?

It's a good question, Alex. I would say this. Right now, we have a multi-currency tranche on our credit facility, and we do have yen outstanding that acts as a hedge against our equity investment in our Premium Outlets and portfolio in Japan. No plans at the present time to go to the bond market in Japan, but there's certainly an option that would be available to us.

Thank you.

Sure.

Michael Bilerman, Citi.

David, question on the Outlet business. So with the recent openings, you're up to, probably, 25%, 30% of NOI housed within Outlets. And I am curious -- one, will you reevaluate at this point breaking that out as a standalone in terms of metrics; in terms of performance, just given the size and how good it is performing? But also, as you think about the pie of Simon, on Page 19 of your supplemental, where do Outlets go over the next five years, from what you can see relative to the other pieces in there? And maybe can talk about that range of opportunities that you see that you ended your comments with.

Well, no; the fact is, we really run this together. Even though we have separated some personnel, the fact is we really run the business as one entity on the Outlets and the Malls. So we don't see any reason to separate it out.

And the fact is both are -- we couldn't produce these results if both weren't producing very favorable results. They are both material enough, so the fact of the matter is, our numbers are a real good indication of what's going on in our business, whether you just want to look at Malls or Outlets. It really requires to deliver -- both have to produce these kind of results to have it shown together.

Now, with respect to the Outlet business, look, that is where our new development is focused, as you know. We just opened 3, which is pretty good work. We've got a good pipeline of 4, 5, 6; others, a couple which are already under construction. We've got another 3 or 4 that are in the pipeline.

So that is going to continue to move the Outlet business percentage up. On the other hand, as I mentioned to you, we are under construction -- or about to be under construction -- in Stanford, the Field, Del Amo, Houston Galleria. I know Rick wants to list them all, but I will not let him.

So just to name a few. And I think that will start to kick in in 2015, 2016, 2017. That will probably rebalance the pie chart as we look back in three, four years from now.

Are you there?

Yes.

You can go ahead and ask me something else, even though I know we instructed you not to.

Well, I was just saying, the range of opportunities, as you ended your comments with -- that you are not resting on your laurels; you see a range of opportunities. Obviously, you have talked about the development in the Outlets and all the redevelopment that is happening. What other scope should we think about, and how it impacts your pie chart, or the Company, in terms of opportunities? I just wanted you to dig into it a little bit.

If I told you, then you would upgrade somebody, and the price would go up. So I would rather just keep that to myself.

But Michael, this is Steve. Just to put up a pin in it, though, over the last four years we have spent over $12 billion in acquisition of assets. So not an insignificant number.

Look, I think, as Steve said, as we look back since 2010 -- and these are gross numbers -- we have purchased about $12.8 billion. These are gross, so it includes debt assumption, all this other stuff. Not necessarily our share.

But we have acquired about $12.8 billion. We have disposed about $2.7 billion. And we have developed $1 billion of new stuff, ground-up. So again, I know it gets lost in the sauce, but we're always very focused on upgrading and reconstituting the portfolio. And we see it -- look, we see international growth ahead of us, Michael, if that is what you're asking.

And in the US we've got the expansion pipeline, which is overwhelming. I mean that literally. Nobody in our industry is doing what we're doing, expanding our existing great assets. Nobody.

And also complementing that is all the new development we're doing in the Outlet business, of which, as you know, we're executing consistent with the returns that we have done historically. Toronto is great; St. Louis is great; we are under construction in Charlotte; Montreal, based upon Houston, is great.

Vancouver, now that we're in the McArthurGlen partnership, that is going to be good. We've got a couple of new sites that we are working on; some ourselves, some with partners. Tampa is an example, so on. So there's a lot to do, and how that pie chart changes, we will see. But the fact of the matter is, we see pretty good growth organically, just assuming we can execute the way we have in the past.

Great.

Sure.

Ross Nussbaum, UBS.

David, we understand that you have joined some of your mall peers to do a beta test of same-day delivery with Deliv. And I'm remembering back to a conversation we had maybe 10 years ago, where you had talked about Domino's Pizza, and the fact that they weren't in the pizza business, but they were really in the 30-minute logistics business. And wouldn't that be cool if the mall could figure out how to do that?

Is that effectively what you are trying to accomplish here with this beta test? And is that really the future of the mall in order to compete with the Amazons of the world?

Look, I do think the mall has a unique advantage in that it's already got the physical infrastructure to satisfy consumers that want same-day delivery. Now, it sounds great; it's a little more complicated than that.

But to the extent -- one of the things, having spent yesterday with our Mall team, just going -- not property by property; that we can look forward to in a couple of weeks.

But the thing that I am focused on in our Mall business -- and when I say Mall business, I include the Outlets -- is that we have to make -- we've always made retailer service a priority. So Rick and I are as good at sucking up to retailers as possible, okay? Sometimes Rick is better than I am, that we can both suck up when required.

The one thing we don't do the way I would like us to is I really want to provide better service to our consumers, the actual shoppers. And whether that's -- something we instituted last year was just surprise and delights. Come to the mall, and we're going to give you a free couple of coffee; we're going to schlep your bags. We're going to make your visit really better. Think about the hotel level of service, at a good hotel, when you are checking in and they are taking care of you to make your stay pleasant.

With that said, we do think delivery, or schlepping -- you will remember, we started Your Sherpa -- probably not politically correct, but whatever. We started this years ago. We were actually too far ahead of our time.

But the fact of the matter is we want to increase the level of customer service that we provide to our shoppers. We think this is consistent with that. Whether this venture will do that or not, we don't know. We are going to continue to experiment. We have got a whole smorgasbord of things that we're investing to do that. And the sole purpose is to make the consumer visit more pleasant, which is a huge focus for us this year, next year, and the year after.

That makes sense. As I thought about this, I said to myself, is the next evolution that I go to your website for whatever mall I am shopping at, and I can do a search for white shirt, and then instantly your website brings up every white shirt that is being sold in the mall; I can click on which one I want and buy it? Is that the next evolution that you have to get to, is the integration of inventory of all your retailers onto your website so that that is the interface?

I would say that would be terrific if we could ultimately get to their store-level inventory and be able to communicate that to the consumer, much like the mall aggregates all the physical stores. If we could figure out how to do that, that would be great.

It's not that easy, because you have to essentially get into the retailers' inventory. But the one thing I want you to do, when you do go to the mall, I want to be able to tell you when you go to the mall -- here is what is new in retailer XYZ; here is what promotion XYZ retailer has; here is who does have a white shirt, to go to what retailer.

So you have a -- your first stop at the mall is going to be able to communicate to you what's new and what's exciting. So that makes your visit that much more pleasant -- if, in fact, we can do that -- and more profitable for you. So I think it is as interesting to do it while you're in the physical environment as it is whether you are at home or on your mobile device.

Appreciate it.

Jeff Spector, Bank of America.

It is actually Craig Schmidt. I'm noticing the new development blended stabilized rate of return is 9%. Is that more due to higher costs, or are the rents unable to be pushed as much as, say, maybe a year ago?

Craig, it is Steve. It is really neither. That number -- the mix changes from time to time. We opened some projects. As David mentioned, the first-year return on the stuff that is open, which is no longer on the list, was 10.5%. So it is simply a mix change. But there's been no real fundamental change in our ability to get rents, or cost control, or our expectations for our development pipeline.

Okay. And I noticed re-leasing spreads have been up four quarters in a row, and on a dollar basis have gone from $4.86 to $8.05. I'm wondering, where can they go from here? And is that from limited supply of quality space, or just a growing demand from retailers?

It's a function of demand is solid. You've got to look at what is expiring.

So as I said, we -- there is this huge focus on our retailer sales. We have tried to explain the correlation is slight, if at all; and it's in a lag. The fact is, as you know, retail sales have gone up dramatically since the Great Recession.

And you look at what is expiring, and you look at the supply and demand characteristics. You put it all together. It's more of an art than a science. And that is why we are able to have pretty good re-leasing spreads.

Now, the fact of the matter is $8 is pretty damn good. We are finishing our budget for next year. We are going to see good comp NOI growth, just like we had the last two or three years.

And that ultimately does not take into account when we look at what the Houston Gallerias, and the Fields, and the Del Amos are going to do after those developments are done. And those malls have been transformed to take their rightful position in the 21st Century of great real estate that can't be duplicated.

So we're not going to give you a number, but things are okay. And we will continue to pound away.

Mike Mueller, JPMorgan.

I was wondering, did you see anything change in terms of traffic during the third quarter?

Well, generally, September was a pretty bad month in terms of traffic and sales for all retailers. We are starting to hear and feel that traffic is bouncing back in October. But clearly, clearly, the general economy has slowed. And we're no -- the fact is, we get impacted by that less than most others because of where our properties are positioned and the depth and breadth and the diversity of our properties.

But the fact is, we are not denying that the US has actually slowed. We could talk philosophically about why, but it is nothing with what we're doing. But we certainly have seen that from our retailers generally across the board, of both high and middle and at the more moderate customer base.

Got it. And then going back to one of your answers before, where you mentioned -- if I mentioned the stock, it would go up; you would upgrade it, blah, blah, blah. Off-the-cuff comment there?

Yes, and probably a stupid one. Yes, off-the-cuff and stupid. It's a little earlier. You know, we're usually at 11.00; 9.00, we are trying to get our groove on. So the fact is, probably off-the-cuff.

Got it.

Cedrik Lachance, Green Street Advisors.

I just want to think about Outlets for a second. When we look at some of the recent projects, some of them have been -- just in the industry in general -- some of them have been more urban, or more correlated with population centers rather than being further outside.

What do you think it means for the projects you must develop over the next 10 years, and what is that mean for the existing real estates in the Outlet business, that tends to be in the outskirts of town?

Well, again, Cedrik, I believe there has been one that has been built that is more in-filled. So we do not hear -- I will just tell you this. Our outlet business is great. We're building terrific products.

We will not make pronouncements about what the future of the world is going to be. We're not that good or arrogant. We're going to continue to do what we do.

We are picking -- we have always picked, over the last several years, major important metro markets, usually suburban locations. Toronto, St. Louis, New Hampshire -- go down the list -- all of which have been very successful.

We are continuing to do that. There may be one or two built that is more urban, but one does not make a trend. We will not make pronouncements here. We're not in that business. We are in running our business day in and day out to increase our cash flow, make smart investments, smart developments. And our track record indicates, so far, knock on wood, we're pretty good at that.

But I will not make pronouncements that that's the new trend. One does not make a trend.

Okay. What do retailers say about their preferred locations in terms of Outlets and whether or not they do have an interest in trying to move more infill?

Well, the fact that we are 100% leased on every outlet that we opened gives you an indication of what they are telling us.

I think, Cedrik, the retailers want to be where they can be as productive as possible. And what you are finding in all of our properties is that we continue to add high-impact retailers, making them more and more attractive to consumers, which drives sales, which drives retail interest. There is no magic to this business.

Rich Moore, RBC Capital Markets.

Thinking about dispositions for second, I don't think you addressed those, Dave. You sold off two this quarter. And I'm curious -- have you given more thought to maybe selling off a bigger chunk, or spinning out a group of your lower-tier regional mall assets in the US?

Rich, the fact is we're always looking to do as much portfolio management as we can. And as I mentioned to you earlier, since 2010, basically, $12.8 billion of acquisitions; $2.7 billion of dispositions; $1 billion of new development, not including the redevelopment.

So that is part of our focus day in and day out. And that will always be an important thing in terms of what we do. And the form which that takes will depend on market conditions. But we will continue to do portfolio management. It's very important, very vital. It's been something that we've been pretty good at over a 20-year history of a public company. So we will continue to do that, Rich.

But no real thought, Dave, to a big chunk of assets as opposed to one or two at a time, as opportunities arise?

Again, I'm not going to share exactly the internal workings that we do day in and day out in terms of how do you do the best portfolio management possible. But needless to say, if you look at our history, it's an important thing that the senior management team needs to do, and we will continue to do it to the best of our ability.

So I am not saying one way or another exactly how that will be done. We will portfolio-manage to the best of our abilities.

Tayo Okusanya, Jefferies.

Just wanted to go back to along the line of Craig's questioning -- and again, re-leasing spreads, ability to keep raising rents going forward. Steve, could you give us a sense of where occupancy costs are right now relative to historical levels, and how much that gives you confidence about pushing rents going forward?

Tayo, the occupancy costs are 11.4%. I think we give you about five quarters of trailing in the supplemental on Page 23. And that is down 100 to 150 basis points from where it would have been going back to 2010.

But I think the other point I would add is that it has been very stable over those five quarters. We have been at that 11.3% to 11.4% range, and we still have momentum in our business. And that bodes, I believe, very well for our ability to hopefully continue our performance going forward.

That is helpful. But with your tenants at this point, when you're going through re-lease negotiations, how much are they really bringing up this issue of slowing tenant sales in general in a tough retail outlook when they are negotiating with you? Or they just want the space so badly, it doesn't really come up?

Let me answer that. The perception that retailers negotiate -- let's take an example. Let's say their comp NOI is up 4%, and they are willing to pay $11; and the comp sales are flat, they go to $10 is not reality. Okay? They look at it over a longer period of time -- what they are going to do, what their return on equity and profitability in that store is.

So, again, we try to give you a sense of these numbers generally, what is happening from our retailers. But the fact is, comps -- the immediate ups and downs of comps have no bearing on what rent we can charge overall.

And so over a long period of time, potentially, but the one thing you have to remember is our comp sales also includes retailers that are going out of favor. And if they were in favor five or seven years ago, sometimes they are able to negotiate whatever rents, because we think they are a new and exciting retailer. If that wanes or waxes, the fact is we are able to replace that retailer with someone else that is there.

So there is no -- boy, I had a bad quarter of sales; therefore, I want to pay you less rent. It doesn't work that way.

That is definitely helpful color. I think I was up along the lines of if you have three quarters of bad sales. That is what I was thinking -- what happens at that point? But I think the explanation has been very helpful, so thank you.

Sure. No worries.

Don't lose sight of the fact that between 2010 and 2012, over that three-year period, sales were up 25% in our portfolio.

Vincent Chao, Deutsche Bank.

Since no one else has asked this here, I will just throw it out there. Just wondering if you could give us your latest thoughts here on what you are seeing from JCPenney. And given that they are discounting pretty heavily to try to claw back some share in sales, just wondering if you are seeing or noticing any impact on other parts of the Mall as a result of those efforts?

No. I would say generally there's not a real impact on the Mall environment. Both with the old Penney; the potential, new transformed Penney; and now the recovering, to back-to-basics Penney -- if you go through the three cycles, the way they were doing it; the radical change; now, back-to-basics Penney, the fact of the matter is it really hasn't impacted the entire Mall environment that what we have.

If they get back to the basic Penney, having them -- they do broaden the mix generally in the environment, and then they appeal to a more moderate consumer, which we'd love to have in a number of cases, in a number of malls, as well as the higher-income consumer. And that market is there for them to appeal to that consumer in the Mall environment, which they have done historically for 100-plus years, and even before the Mall environment.

So we will wait to see how they do that. But it's really had no impact on what I will call the Mall environment.

Okay. So they are making some progress on the sale to the clients. I was just curious if that is hurting anybody else, but it sounds like not.

We're glad that they are, but again, it's not a huge impact on what's going on in the Mall.

Ben Yang, Evercore.

Maybe for David, I'm just curious if you had any thoughts on the B Mall or even C Mall sales market, which has been surprisingly active this year -- maybe in terms of the prices being paid for these type of assets; what that might mean for the value of your stock, if anything. And then, also, maybe building off of Rich's question, do you think spinning out the B-mall portfolio would unlock some value for you guys?

There was a lot there. And you broke up at the end. Did you hear the end part?

Yes, the potential of the --

Maybe just starting what your thoughts are in terms of the prices being paid for B and C Malls, and what that might mean for the value of your stock, if anything at all.

I'm not going to comment on the value of our stock, other than you need to look at us as a company that can increase its cash flow and its dividend. And it has a lot of future, very high returns on equity investments, underlevered, ability to execute its game plan.

We get caught up too much on A malls, B malls, tenant sales -- all of that stuff. Put it all in a blender. You allocate it; you figure out what's most important to you.

What's most important to me is cash flow growth and return on investment and equity, and that is what we strive to execute. And the ability to finance our business appropriately, making smart investment decisions, which all factors in. And then the market decides what the value of the stock should be.

Got it.

I don't get carried away one way or another. And the fact is, we look at every asset, as it is very important to our business. We look at the future growth prospects; if we might dispose of them, we look at what -- the price we might get.

We factor in the taxable income; what we might have to do in terms of dividends if we sold it, because, as you know, we're at our taxable income number. It is growing rapidly. Our dividend is going to grow. We put all those things in. We try to do the best we can, and we see where it takes us.

So it's good that -- the big picture. I'm not going to comment on price, other than I think it is very positive, generally speaking, that there is a lot of activity in -- if you want to call it B or C Malls, call it B or C Malls. I think that never hurts us. As an owner of -- if you want to say we are an owner of B and C, that's fine. It never hurts us that there is a lot of capital activity in that business.

Okay, that's helpful. And maybe for a follow-up instead, can you maybe talk about your expectations for cash flow growth in your A Malls versus the B Malls, and whether you think that is going to compress in the coming few quarters or even years?

I think, historically, the better the center, or the more -- let me say it differently. The more market share any piece of real estate has, the better its cash flow growth characteristics they have. So whether it is A or B, it's irrelevant. It's really a question of does it have market share? What is the competitive outlook? And those that have that position have better growth characteristics, generally speaking.

Josh Patinkin, BMO Capital Markets.

Thinking about McArthurGlen and the European Outlet business, specifically the leasing side, we have upside exposure in the US with overage rents. Is it similarly structured there? Or any other nuances we should be thinking about?

It's very much structured towards sales, but it's even more clever, in the sense that they have -- in their leases they get a percent of sales, but the high-water mark is then fixed at their base rent. So you get the best of both worlds, in a sense.

These centers on average do -- if you convert -- you all can convert, but we will do it. These things average about $900 a foot. So it is a -- the ones that we have invested in, and as we think over time, we will be able to invest in other Outlets in Europe through McArthurGlen.

We think it's a very productive portfolio, and extension opportunities, and the like. So we think it's -- we like it. And we expect it to be a very good investment for us over time. And I think we're coming in at a decent valuation.

Again, that's our ability to assess real estate, handle the complexities of a partnership like this -- different countries, different personalities. We are one of the few companies that are able to do a deal like this. And that is a -- respectfully, I say, a competitive advantage for the Company.

In terms of growth there, how penetrated do you think Europe is with outlets relative to the US? What is the opportunity set, in your view?

It's good, because the right to build in Europe continues, whether it is an outlet or even a full price, continues to be very high. Very hard, I should say.

Haendel St. Juste, Morgan Stanley.

We have seen quite a bit of mall trades here the past couple of months. And given the activity in the market, I was curious on your assessment of recent A and B Mall asset pricing. Has there been a notable change in cap rates or return expectations, given rising rate expectations and the slowing sales trends?

No.

Okay. One more follow up, if I may, on the re-leasing spread questions. You guys also had a pretty good pickup in CapEx spend this quarter versus prior quarters. How much of this improved re-leasing spread would you say was bought this quarter with the higher CapEx spend?

None.

None.

Yes, you really -- yes, none. There is some -- always going to be some quarter-to-quarter volatility, but no issue there. We don't buy -- we're very frugal, as you know, when it comes to tenant allowance and the like.

Dan Oppenheim, Credit Suisse.

Was wondering if you can talk a little bit about the comments in terms of upgrading the assets? And you've done a great job over time, and very strong redevelopment pipeline now.

And when you go through the Mall portfolio mall-by-mall in the next couple of weeks, how much do you have in terms of a shadow redevelopment pipeline, where you look at it and say, we'd love to do this redevelopment, but don't want to do so until -- as we look at these struggling anchors here -- if this were to happen, we would do it? Just trying to think about the opportunity in terms of the shadow pipeline there.

Let me just, if I could, just comment generally on it. We are in the midst, again, of doing the biggest extensions and the biggest redevelopments that we have.

So as an example -- I'm not going to do the list -- we are under construction in the Field, Roosevelt Field; we are under construction in Stanford; we are under construction shortly in Houston Galleria. And we're getting the approvals at King of Prussia to create the extension between the two big assets.

We just got approval from the BRA at Copley. We still need another hurdle.

So we are literally -- we just finished Nanuet -- The Shops at Nanuet, which if -- anybody that has seen the Mall prior to what we've done before, you would be pleasantly surprised. Not only just with the transformation, but with the lease-up. So we are -- I'm sure -- Del Amo, to name another one -- we're in the midst of a huge construction there, bringing Nordstrom in and all the rest.

So right now the biggest focus is executing these huge, big redevelopments that are going to be really exciting. And there's a lot of opportunities beyond that.

And our pipeline, in terms of redevelopment, is in the $4 billion to $5 billion range. But beyond discussing it, because everybody can have the shadow; the fact of the matter is, it is happening right now. Right now it is happening. So this is no longer we're going to do this. It's actually happening. And I have got the pictures to prove it, if you are interested.

And the only thing I would add is, David touched on the major redevelopment projects. We are also adding 39 new anchors across the platforms this year. And we have been adding that every year. And each of those additions just make our properties stronger.

We also have an ongoing renovation program, where we are renovating a number of projects every year. And all that is just part of what we're doing to keep our products relevant and enhance their market share.

Jeremy Roane, Hilliard Lyons.

I was wondering if you could speak on what has driven the property operating expenses down, and maybe shed some light on if this type of expense reduction can be expected going forward?

Jeremy, it is Steve Sterrett. It's a couple of things. One is, as David mentioned earlier, we have sold some assets. We also had a wholly-owned asset that converted to a joint venture in 2013. So there are fewer properties, which is causing part of the decline that you are seeing.

The rest of the decline is caused by the fact the insurance costs are a little lower. It is really those two items that are driving it.

Michael Bilerman, Citi.

Rick, I've got a question on occupancy. 95.5%, I recognize that includes the Outlets, but I think that is a peak overall. It's certainly ahead of where you were even in the fourth quarter of last year.

And so I'm just curious, as you head into the holiday season, when you start including some of the temp spaces, how should we think about occupancy and how full the portfolio is; how you are balancing that with rent, which continues to move up in terms of the spreads? And then as you think about 2014, given the fact that you've already leased a lot of that space and done your renewals, what is that visibility that you have into 2014 in terms of occupancy? It seems like you have a great place to start from at 95.5% today.

Well, first, we don't include temp space in the occupancy. Secondly, what we're doing is making our space more efficient. And we are going to be able to continue to generate increases in NOI, because we're constantly looking to see how we can make our space more effective by bringing in more productive tenants -- David made the point earlier -- by increasing the amount of space allocated to given tenants.

And frankly, we still have leasing going on in the pipeline. So we're never going to be satisfied, and never get to the point where we say to you, well, we are fully occupied.

The bottom line is, look in the Premium Outlets that are 100%, for all intents and purposes, and we're still driving our NOI and driving spreads, because we're doing more effective leasing, more effective space allocation to more productive tenants.

So where does occupancy go, then? I know you don't include temp. So what does that mean for the fourth quarter in terms of --?

I would certainly hope that we continue to show advances over where we are.

And your 2014 outlook in terms of how much you've already done relative to that role?

We are certainly going to anticipate that we are going to be able to increase it in 2014.

David Harris, Imperial Capital.

This is still a little early for us old folks, you know.

You know what, no doubt. Okay? No doubt.

I know you talked a little bit about sales on this call, but if I look at your percentage rent growth line, in the first half of the year it was going about 30% or more. And we're down to 10% year-over-year growth in the third quarter.

That seems consistent with the slowdown that we're hearing from a lot of the mall retailers. Can we assume that you are thinking that is a temporary slowdown, and that we will pick up even in this quarter?

The fact is that some of our percentage rents -- we have had certain tenants that have run into harder sales, and then some that have picked the balance up. So is all over the lot.

But we will see how the next couple of months pan out, David. It's very hard for us to give you a really specific answer to that question.

We do have certain earnings -- risk tied to percentage rent. We took that into account in raising our guidance. But it is clear, and we're not denying this, it is clear that -- and it's not Simon Property Group. It is clear that the economy has slowed.

You have seen it with wages; you seen it with employment. Needless to say, we don't have to get into what is going on in terms of leadership in our country, none of which we use as an excuse. Because we put blinders on to the best of our abilities when it comes to that kind of stuff.

But we are operating at a high level in a very slow-growth economy. And we are outpacing the growth in the economy, and that is all that we can do. But we are affected by the economy. I wish I wasn't, but we are.

What period does this most remind you of in, say, the last 10 or 15 years, David?

A good question. Good question. The fact is, I don't have an immediate -- usually I would just make something up. But I can't even come up with that at this point. But I would say a little bit like coming out of -- my initial reaction would be coming out of -- when we were public, coming out of that -- the 1997, that era, where it was just kind of -- we hadn't ended. We had survived, and it was just grinding -- we were grinding about.

Now, by the way, when we were grinding, I got double-digits FFO increase. Okay? So just keep that in perspective. But kind of like that, David, would be the initial off-the-cuff reaction.

Can I sneak in with a quick one for Steve?

Sure.

Steve, with the issuance of the Eurobond, it reminded me -- are you embracing or have you used any of these tax structures that are coming under greater scrutiny, like double Irish, or using the Netherlands, Luxembourg to structure your offshore interests?

Not really, David. It is pretty plain vanilla. As an example, we record a tax expense as it relates to the Klepierre earnings that we pick up our share of every quarter. So relatively plain vanilla structure.

Yes. In fact, just to reinforce what Steve said, if you look at our -- as we have made more international investments, we're having to pay taxes in those jurisdictions. And if you see on the P&L, we actually separated that out so that you can see that impact. Because it's becoming less than trivial.

Simon is not Apple.

No. I wish I were. I like his cash flow. I don't want Carl Icahn on me, but I do wish I were Apple.

Well, isn't he urging share buybacks and dividends? So you are kind of halfway there. All right, guys, thank you.

John Kim, CLSA.

I just wanted to follow up on your comments on international opportunities. Right now international is about 8% of your NOI. At what level do you feel comfortable of this going to in the next few years?

And then, also, geographically, where do you see the most compelling opportunities between Europe, Asia, and South America?

We don't -- our only goal is to make smart investments, and investments that we can add value to. So the fact of the matter is if our international business stays the same or goes up slightly, that's not how we think. We're only looking to make smart investments where we can add value. And we have a higher threshold in international investments, because it's a lot of work. And it has got to be -- there's no desire here just to do international for the sake of international. The desire here is to make international investments because, one, we think we can add value; and two is because we think at the end of the day, we're going to make money. Klepierre is a perfect example of that.

So I don't have in my mind it ought to go from X to Y. And each jurisdiction that we're in is different. But we are doing new development in Asia. We're not an acquirer of assets in Asia, just because it's a tougher market, and we're sticking to the Outlet business -- and in markets that we're in; where we can develop; and it meets our threshold return requirements, which has been certainly a real challenge in China, as an example. And that's why we -- though we did in investment in 2008, 2009, we got out of it. And we haven't done anything since.

I was just going to actually follow up on that. Has there been any update on your views of China and Brazil?

Well, China I gave to you. Brazil -- we continue to look at the opportunities there in the Outlet sector. A few sites that we're in, but nothing really imminent in that market place.

That concludes the question-and-answer part of today's call.

Okay, thank you. I know you have a number of calls to go to, so thanks for your participation.

Ladies and gentlemen, thank you for your participation. This concludes your presentation. You may now disconnect. Have a wonderful day.