西蒙地產 (SPG) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 Simon Property Group Inc's earnings conference call. My name is Sara and I will be your operator for today. (Operator Instructions)

As a reminder, this conference is be recorded for replay. I would now like to turn the conference over to Tom Ward, Vice President of Investor Relations. Please proceed.

Thank you, Sara. Good morning and welcome to Simon Property Group's third-quarter 2014 earnings conference call. I am Tom Ward, Vice President, Investor Relations.

Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Steve Sterrett, Chief Financial Officer; Andy Juster, current Treasurer and incoming Chief Financial Officer; and Liz Zale, Senior Vice President of Corporate Affairs.

Before we begin, 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 note that 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 supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.Simon.com.

Also, due to the completion of the Washington Prime spinoff in the second quarter, we are providing operating statistics in our supplemental 8-K for the prior-year period to show performance on a comparable basis excluding the Washington Prime properties.

For our prepared remarks, I am pleased to introduce David Simon.

Thanks, good morning. We had a productive quarter. We opened two new premium outlets in Charlotte and the Twin Cities in Minnesota, nearly 100% leased. They are both off to a great start.

We successfully tendered and redeemed approximately $1.6 billion of notes and concurrently issued $1.3 billion of new notes, which extended our average duration and reduced our weighted average interest cost. And we became the first US REIT to establish a global commercial paper program. We agreed to buy two high-quality assets from the recently announced WP Glimcher deal with great growth opportunities. And most important, we continued to produce strong operating and financial performance, both industry-leading.

Now, let me talk about the results. FFO reported was $1.90 per share. For those of you who updated your estimates to include the $0.35 per share charge related to our tender offers and redemption, the $1.90 exceeded the consensus by $0.05 per share. On a comparable basis, excluding the charge related to the debt extinguishment in the third quarter and the operating results from the WP properties in the prior-year period, FFO diluted per-share increased 14.2% year-over-year to $2.25 from $1.97, or $0.28 in total. And on the same basis it's been increased 14.5% year-over-year to $6.48 from $5.66.

Overall business conditions remain favorable, driving increases in our key operating metrics and cash flow. We continue to see strong demand for space across the portfolio. Occupancy increased across the portfolio.

Leasing activity is healthy. The mall and premium outlets recorded re-leasing spreads of $9.67, an increase of 17%. Comp NOI increased 5.3% in the third quarter, 5.4% year-to-date. Again, industry-leading. And over 95% of our domestic NOI is included in our comp NOI calculation.

Total sales in our portfolio increased 2.8% in the third quarter compared to last year and increased 2.6% for the trailing 12 months, even with major redevelopment occurring at several of our premier properties. These results are a testament to the strength of our assets and their locations and the ability to once again continue to execute.

New development, as I mentioned, Charlotte and Twin Cities both opened, July 31 and August 14, respectively. Premium Outlets Montreal will open October 30, where we expect that to be another great deal, very similar to what we built in Toronto, which is doing well, doing great. Construction continues on new premium outlet developments in Vancouver and in southern New Jersey's Gloucester Township, where the center will serve the Greater Philly area, both high-quality major markets.

In Canada, a year from now we will have centers in three of the best markets: Toronto, Montreal, and Vancouver. And we started construction just recently on two new premium outlets in two great markets, Tucson and Tampa, and both scheduled to open in October of 2015. And we will continue to focus our outlet projects in major and selective markets where we know there is a clear demand from the retailers that matter and provide solid returns to our shareholders.

Redevelopment, just quickly. We opened the residential (technical difficulty) we also opened Nordstrom and additional square footage at St. Johns Town Center and a new Bloomingdale's Stanford Shopping Center. We also announced plans for the addition of luxury residence in an AC Hotel by Marriott to Phipps Plaza to open in -- both to open in early 2016 and construction for the residence will commence tomorrow.

[This into these] mixed-use will make our great real estate even better and continue to make our centers the places to be from shopping to dining to living.

Redevelopment expansions, projects are ongoing at 31 properties across all three of our platforms in the US, Asia, and Mexico, which expand and enhance some of the most productive properties. We started construction on two expansions, one at Livermore Premium Outlets in the Bay Area that will add 185,000 square feet and is expected to open in August of 2015, and an expansion at The Colonnade at Sawgrass, expected to open December 2015, that will bring 56,000 of high-end luxury retailers to this productive mill center.

And as a reminder, construction continues on major redevelopment expansion projects at some of our most productive mall properties including, but not limited to, Roosevelt Field, Houston Galleria, Stanford Shopping Center, and our premium outlets including the Woodbury, Las Vegas North, and Chicago. When you put it all together, we have a total committed spend of $2.2 billion over the next three years, all committed to and all underway.

Now turning to acquisitions, we signed a definitive agreement to acquire Jersey Gardens and University Park Village concurrent with the closing of the Glimcher acquisition by WPG. We are excited to add these two great properties to our portfolio when the deal closes in early 2015. We are also pleased with our investment in Klepierre and, as they are the largest shareholder, we are excited for them and their proposed transaction to acquire Corio. Both of these transactions will be accretive to SPG's earnings and again demonstrate our industry-leading creativity to find unique opportunities.

Capital markets, again very busy. I told you about the $1.3 billion notes. We retired average duration of 1.7 that were at interest rates of 5.6%. We also redeemed another $250 million of notes at 7 7/8% coupon rate.

Concurrently we issued $1.3 billion of notes with an average duration of 16 years and an average coupon of [3 point 6 point 4 percent]. This takes our senior notes from 6.3 duration to 7.6 duration and lowers our average interest rate from 4.64% to 4.4%.

In addition, as I mentioned, we are the first US REIT to establish a global unsecured commercial paper program. We received an A1, P1 rating from S&P and Moody's, respectively. The program has $500 million.

We can issue CP in dollars and euros and, in fact, we already have. So we placed $100 million of US CP, which we are borrowing at LIBOR plus zero to 2 basis points. And our euro LIBOR -- we also placed EUR100 million at a euro LIBOR rate of zero to 7 basis points. That compares to our revolving credit of 80 basis points above LIBOR.

We announced our dividend of $1.30, an increase of 8%. Including the November dividend, we will pay to Simon's shareholders $5.15 in 2014, which is an increase of 10.8% compared to 2013, and does not include the dividend that if you've maintained your WP investment, which is essentially on a share-adjusted basis at $0.50 per share. We expect to raise our dividend again. Of course, subject to Board approval in the first quarter of 2015.

Guidance. We raised our guidance to a range of $8.84 to $8.88 per share. The midpoint of this raised range is an increase of $0.15 from our prior guidance after giving effect to the charge related to the debt extinguishment.

Now let me take a deep breath, because obviously there's a lot going on. I wanted to just give you a real brief update on management team.

When we announced Steve Sterrett's retirement early this year we also said that we would source both internal and external candidates for the CFO job and that Steve would remain the CFO through 2014. We then announced a (technical difficulty) Treasurer Andy would become our new CFO.

Since Andy's announcement, Andy, Steve, and the rest of our financial service team -- who, by the way, have on average 20 years of experience with SPG -- have paved the way for a smooth transition. And since that transition is now complete, effective in December, Andy will become our CFO and Brian McDade, now our Assistant Treasurer, will become our Treasurer. Steve will be available to us as needed for specific tasks.

So summing it up, we had a great third quarter. We expect a strong year-end and, of course, we are very focused on continuing to enhance the value of our properties. And now we are open for any questions.

(Operator Instructions) Christy McElroy, Citi.

Good morning, everyone. Michael is on the line with me as well. David, just to follow up on your comments around building outlet centers in major markets, in buying a center like Jersey Gardens, in what type of markets do you think indoor outlet concepts could work?

Can you also provide your most recent thoughts around the growing number of outlet centers and stores opening (technical difficulty) price stores? What that means for retailers, for both the outlets and the street overall, in the future [outlets]?

Well, Jersey Gardens is -- we consider it more of a Mills as opposed to an outlet center. You know, it was essentially modeled after the Mills, so it's -- it appeals to a broad consumer base but it's got the entertainment, it's got the big boxes. It does have a smattering of pure outlet retailers, but I wouldn't -- Christy, I wouldn't consider that an outlet center, so to speak.

Unfortunately, we did have not such a good connection on your question, but I think you mentioned about the potential about outlets coming closer to major metropolitan marketplaces. Was that your question?

Right. Yes, and what that means for obsolescence, future obsolescence of existing outlets.

Well, look, outlet business is very competitive. We have a good portfolio. You know our results speak for themselves and I think we will continue to be able to grow our comp NOI and our portfolio.

I think, in all of retail real estate, you can never stand still. You've got to invest in the product. You got to make it better, whether it's outlets, full priced, lifestyle, etc. That is what we are all about. That's what we are grounded in.

We focus on lease-by-lease, market-by-market, deal-by-deal and we will -- we live in a very competitive market. We will continue to, hopefully, do well.

David, it's Michael Bilerman speaking and there's an echo I guess when we are asking questions. I don't know if that's partially why, I think (technical difficulty) cranky.

Sorry about that. We will check in to see if we can change that by the time the call is done.

No worries. I just wanted to [ask] a question on global. You obviously have Klepierre 2 1/2 years ago that you went into. You're leveraging Klepierre now effectively to buy Corio and consolidate in Europe. You have McArthurGlen that you made an investment in. You obviously have the outlet business that you've been growing internationally.

All the Australian journalists think that they spotted your plane in Australia, which you've denied, but it's out there. And I'm just -- I'm curious how much time are you spending US versus non-US? As you think about the growth of Simon, how important is that international aspect going to be?

You mean me personally?

Yes, as strategic growth initiatives, how much time are you spending outside the US versus inside the US?

Look, generally, roughly our outlet business represents 10% of our -- from Asia to Europe to McArthurGlen, so let's say it's around 10% international. I'm sorry, our international business.

And, honestly, other than where you had the episodic nature of deals, I would tell you that I work very hard. Don't feel sorry for me, okay? So I would say to you that generally, other than the episodes of deal making, I spend around the same amount of time.

But we have a great team in our international. I have added a colleague that you probably haven't met that's done an unbelievable job to relieve the (technical difficulty), but I wouldn't say it's abnormally different than what the international business represents in terms of our investment.

Now at the end of the day, we haven't made a huge -- the good news is we are in the money in everything that we have done, but when you put it in the scheme of our roughly $90 billion asset base, we haven't made this huge unbelievable bet internationally. And I spend roughly 10% of my time.

Right. And I was thinking more going into the future whether that would change at all and we see that percentage move up to a quarter of the Company or 30% or 40% of the Company.

You know, I think the -- given that what we are doing in the US, it's not -- that's probably not likely in any short- or medium-term time horizon.

Thank you.

Tayo Okusanya, Jefferies.

Good morning, everyone. Just a quick question on the development, (technical difficulty) development. It does seem like with the supplementals this quarter that (technical difficulty) yields unexpected developments, and other developments came down slightly for the mall redevelopments. (multiple speakers)

I'm glad you were very perceptive and I'm glad you asked the question. So King of Prussia is now go deal; it's a big deal and it did drop our redevelopment yield a little bit, because it's --. I know you grow accustomed to Simon having 10% returns on every deal we do. Sometimes they are a little lower, but it's still very accretive when you look at where that property is valued today.

But we don't hand out or give out returns. But it is a major development -- redevelopment I should say -- and that did lower the return.

On the outlet side, I would say two things. We have taken out Charlotte and Minneapolis. We have added Tucson and Tampa. Charlotte and Minneapolis were very high double digits. Tucson and Charlotte -- I'm sorry, Tucson and Tampa are on average 11%. The others were higher than that, so when you bring that two together it dropped it a touch.

Now I will say to this we are very conservative on our new development. Both Tucson and Tampa are double digits, but the way they are coming in and the other two that are coming out dropped it oh so small.

Okay, so it's really more of a mix issue than anything else? (multiple speakers)

Let me be perfectly clear. We have no execution issue. We have no cost overrun. It's just the mix change to buy the addition of the plaza, the King of plaza, and then the two outlets opened and the two new ones coming in.

Great, that's very helpful. Thanks for the explanation.

Paul Morgan, MLV.

Good morning. The re-leasing spreads also just ticked down a bit. I know there's some noise, but you've kind of been in an upward trend and it is a rolling 12. So just want to maybe get any comments on spreads, your outlook for them, whether the change is -- whether the sales volatility has had any impact. That's the question.

Look, it wasn't that long ago, say less than a year ago, that spreads were 14%, 15%. So I will just tell you, from our standpoint, we are pleased with basically having $9, $9.50-plus spread and 17%. I wouldn't -- we have to look at this a little bit on a longer-term basis, so I would say we are very pleased with 17%. It's higher than it was a year ago.

Yes, it is a little bit lower than Q1 and Q2. I certainly wouldn't overreact on that on any basis. The re-leasing spreads are driving our industry-leading 5.4% year-to-date comp NOI growth, and we are executing this in clearly a cautious consumer-oriented environment. And obviously last year the consumer shutdown a little bit because of weather, this, that, and the other thing.

So I am pleased. I am happy and I think we are executing very well. We are going through our -- in terms of how we look at that next year, very simple, as you know. We have been doing this 20 years. We have the pleasure of, starting November 10 I believe, going through each and every mall lease by lease, deal by deal, which rolls into our plan which we will share with you in early next year.

And so, until that's done, I don't have a prediction about what our spreads will be other than we continue to believe our rollovers are under market (technical difficulty) the future growth of our business. Industry-leading opportunities, in my opinion, as been reinforced by year after year after year of continual unabated outperformance.

The only thing I would also add is that our occupancy costs remains very moderate, which shows you that we still have plenty of room to grow those ranks.

Yes, Paul. This is Steve. I would just add one thing. If you look at our 8-K, over the last eight quarters, we have consistently signed new leases between $63 and $67 a foot. And if you look at our lease expiration schedule, you can see that they are still in the mid-40s for the next several years. So still feel very good about marking the expiring leases to market.

I know you haven't given guidance, but that kind of high teens number is -- there's no reason to think that that's not sustainable, it's not maybe potential upside?

Look, I know, Paul, you're smart and you want us to talk about next year. We have tremendous confidence in our business and our platform. The thing that I would have you rely on is what we have done year after year, and as I said to you, we will share our guidance early next year.

Great, thanks.

Jeff Spector, Bank of America.

Good morning. I am also here with Craig, who will have a question after me. My question was to put -- focus on to Sears' decision to lease space to Primark. Also Amazon's announcement to open a store in New York City.

We've been getting a lot of incoming calls, questions on those announcements and what that could mean. If you could just provide some thoughts on those announcements and maybe where you think things continue with Sears and their leasing efforts.

Let me -- I will have -- I will give you two quick top-of-the-head remarks and then I will let Rick add whatever he wants. Look, on Amazon leasing space, I'm not -- all the details aren't out, but there's clearly a benefit for the overused word, omnichannel, bricks and clicks, however you want to describe it. There's a real benefit.

In fact, it's very interesting when I see Sears as an online retailer. Depending on which study you look at, they are anywhere from -- they are clearly in the top 10. They may be as high as number five and I would argue it's because of their physical presence that allows them to be so important in the online presence.

You've heard it from retailers that the synergy between having the physical and the online presence and now the move toward mobile and how it's all being integrated. And clearly we have seen a number of pure online retailers going to physical stores, so it has got to be in the equation for a retailer to have a physical presence. I don't think there's any question in that.

As our retailers have gotten more sophisticated in the online world, I think that is going to play to our benefit.

On the Sears leasing, we have one that we have consented to in King of Prussia. That was part of their agreement to consent to our ability to expand the two centers. We worked very collectively to do that.

I think Sears would be the first to tell you that in certain markets and certain stores they don't underperform or, in fact, they have too much space and they will look to re-lease some of that space or sell some of the real estate. We still think they have a physical presence that is going to be important to them and we will continue to work with them on a collaborative basis that meets our needs and our shoppers' needs and theirs. We expect at the end of the day for both of us to benefit from that.

What I would add is that, focusing on the Primark side, they are a highly productive iconic retailer in Europe and the UK. We have been working with them for over six months. We have already visited them at their headquarters and toured their stores where they operate and we are very excited about their entry into the US. We anticipate that there will hopefully be several other opportunities both within our portfolio or other Sears stores which they have already alluded to.

And I would also point out that we got involved with Primark early on as our Klepierre team already had a pre-existing relationship with them.

Thank you and before I pass on to Craig, he has a quick question, congratulations, Steve, on your retirement. Craig has one question.

Thank you.

By the way, we have all concluded that we are all (technical difficulty) so we just want to go on record for that, all right?

Us too. I was just going to ask: what were some of the takeaways from your shopping block events? And just maybe some general thoughts on the Millennials and the malls.

Look, I think they are an important customer base. They represent a unique opportunity for us. The Millennials represent a bigger population than the Baby Boomers, so it's very important for us to connect with them the way they want to be connected. I think they like mall shopping and we are going to experiment and do lots of things oriented around them to continue to make them an important consumer base in our properties, but we are not going to ignore the Baby Boomers either because they have a lot of spend.

So I think as Millennials get older and we can continue to offer them entertainment, restaurant, and the right retailers in the properties and connect with them the way they want to be connected, it's a great opportunity for us. Rick, do you want to add anything?

The only thing I would say, to echo David's point, the research that we have done has shown that the Millennials are, in fact, very supportive of the mall channel and are very much focused on going there. So it's a natural thing for us to try and exploit and enhance.

I was also noticing you used two outlets to do the initial rollout with Refinery 29. How did those go?

Very well. That relationship is early, but I'd say generally we are very pleased. We are creating buzz in that whole marketplace.

And along those lines, Craig, we are making some initial investments in early-stage companies really to enhance the environment. But I think all the good news is that there is a lot that we can do to enhance our environments and we are as committed as anyone to do that. We've got the balance sheet, the capital, hopefully the creativity, and the willingness to take risk to do that, which all companies I think need to be in this position to do.

It would be easy for us to rest on our industry-leading growth, but as you know us very well, that is not in our DNA. And so we are going to do it from marketing to leasing to development and everywhere in between.

Thank you, I agree.

Andrew Rosivach, Goldman Sachs.

This is actually Caitlin Burrows. Retailers have been open about the need for physical presence to showcase, even though much of their sales are generated online. Can you talk about how you capture the economic value of a store that doesn't necessarily run through that store's cash register?

Look, there is -- in our leases, even if it's done in the store but fulfilled online, that's part of our sales. That's not really too much of an issue. I think for all physical retailers, the important -- and even with their online business they have a multiplier effect that is very important that they see when they have a physical presence with their online consumer. And they can describe it in great detail. It's anywhere from 3x to 4x.

So the convergence is there. It's happening, and the good news is our retailers are combating effectively the pure online retailer. And the online retailer understands for them to -- beyond the first-mover advantage that someone like Amazon had, in order for them to really grow their business I think, and many, many believe, they need to have a physical presence because of the way it has moved to mobile and the way it has -- the multiplier effect that the omnichannel world is presenting itself in.

So that bears, I think, extremely well for us in creating the next wave of retailers. We don't -- we see that just beginning.

The interesting thing is the online retailers have still got this unbelievable advantage, and we see it ourselves, in nexus and giving that benefit, even though they should be collecting that use tax instead of sales tax, but taking advantage of that benefit that the consumer is not necessarily entitled to. As that has begun to swing, because a lot of them have nexus now with warehouses and the like -- as that has balanced that's going to level the playing field.

Obviously, it would be great. We could get Congress to level that playing field, which they should be doing, then I think that's going to reinforce the advantages of bricks and mortar. Because at the end of the day, when you are looking to shop, the mobile device or even the desktop really can't present the goods and services that are available with that retailer that a physical environment can.

Yes, they can save you to sales or use tax. Yes, they may have an advantage in convenience, which is slowly being dealt with by our retailers through pickup in store, ship from store. But once that sales tax/use tax advantage is eliminated, which I think it will be through nexus or the government, we will see. I think our retailers are going to be really damn competitive.

Just on the topic of equal playing field, so Amazon now charges sales tax in 23 states. What else is remaining to be done on the topic of tax parity? Is there anything that you guys are doing?

We are trying, but there are roadblocks in Congress and we are not here to complain that the government, believe me. But we just want a level playing field and then the consumer is going to make that choice. But they shouldn't be -- and we should let the states decide how they want to deal with it, but it should be level.

And at the end of the day, the best retailer or the best mall operator ought -- will come out ahead. It's got to be level. It's got to be level, it's just not right.

Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thank you. Steve, congrats and thanks for all your help over the years.

Thanks.

You're welcome. So a couple quick questions. First, going back to the Sears topic. If Sears decides to sublease their space on their own, do you guys generally have veto power or do other anchors at the center have veto power? And is there any chance that you can partake on the upside, assuming --? Granted there was probably a significant upside in rent.

There's two questions there. We certainly have substantial ability to control what Sears can do with their stores based on existing leases or reciprocal leasing agreements, so that is yes.

With respect to the upside, to the extent the transaction is being done by Sears within their store with their capital, it's their transaction. But we certainly benefit in a position like where you are adding a Primark at King of Prussia or a Dick's at King of Prussia. That certainly will strengthen our overall offering for our shoppers, but not financially if it's being done inside the Sears store with Sears capital.

Do other anchors have a say?

Depends on the documents and depends on the scope of what Sears is contemplating with their building.

Okay, thanks for that. Just last question from me. On Klepierre, if I understand that deal correctly, it's going to be a full-stock deal between Klepierre and Corio, which would, in effect, dilute your equity stake from the 29% roughly to sub 20%. I'm sure you will let me know if I got this wrong. Any thoughts on re-upping your equity stake in Klepierre?

Well, you don't have it wrong, but I'm not going to answer that question. We like the investment. It's been a very good investment for us.

We think as a reference shareholder and as -- being on the Board, we have added real value. And we are in a -- obviously we do believe in the merger or acquisition of Corio. We support it and we believe that scale in our business is really important because on all sorts of fronts -- capital, retail relationships, ability to invest in the consumer experience, etc.

So we are optimistic that that investment will continue to be good for us and grow in value, but I really can't tell you about whether or not going forward we will increase our stake. But we are pleased and we think there is still opportunity going forward with our investment in Klepierre.

Okay, the reason I asked was it seems (technical difficulty).

I understand and I hope you understand why I couldn't answer.

No, I get that. It just seems like a nice area where you could put maybe $1.5 billion of additional capital at a very attractive -- well, relative to your cost of capital, very attractive yield. So that's why I asked. But thank you for your answer.

Listen, the yield on our investment in Europe, both at Klepierre and McArthurGlen, and in Asia have been fantastic. They have been great yields and that's what has helped drive our industry-leading growth.

All right, thank you.

Alex Goldfarb, Sandler O'Neill.

Good morning. Steve, congrats on the even earlier retirement.

I just want to go on record, you will have him. You can hug him and kiss him because he will be going to NAREIT. You can bring him gifts, but don't bring him too much because we would have to report it, given our conflict of interest policy. But you can hug him and kiss him and whatever else you want, buy him a drink, whatever else you want to do with him.

As long as he gets plenty of strokes on the course that's what matters. So question on Japan, I'm going to try to channel my inner David Harris. If we read the headlines correctly, retail sales in Japan have been impacted because of the -- because of the increase in sales tax, and yet your productivity over there is actually up year-over-year.

So is it just a nuance of when the tax hit, or is there a difference going on from what the newspapers are reporting versus what's going on at your outlets?

Well, I think our outlets are just so uniquely positioned. And with the increase in that there, clearly you had some forward spending and then it did have an initial monthly impact, but then it's kind of leveled back. I just think the consumer there is going to look for even more value given the higher VAT rate.

We just have a unique portfolio that will continue to perform, but it has affected retail sales generally. But it's really good to be in the value space there with great product and a great retailer lineup. But don't kid yourself; when you increase your VAT, you are going to affect consumption. We are just a little bit better positioned to deal with it than some other property types.

Okay. Then as far as the Sears transaction goes, did -- the fact that Eddie is going direct with retailers, does this sort of indicate that basically the gap is too wide versus what he thinks his boxes are worth and what the mall landlords think it's worth and, therefore, he is just going direct? Or do you think that we will see some more trades?

Because it would seem like the value of his boxes is maximized if you guys can get control of it and do what you want to do with it versus him doing something with it.

Well, look, there's a long -- we've had a 50-some-odd-year relationship with Sears through a lot of ups and downs and good times and so on. We expect to continue to have an excellent relationship.

I don't think anything is off the table -- buying, selling, leasing, subleasing, working cooperatively. Nothing is off the table there. Again, I think the market wants to take one scenario, extrapolate it. I appreciate that; just like they want to take the one Amazon space, if in fact they are doing it, and extrapolate it.

I don't think you can extrapolate anything like that and we will --. They were -- on the Primark at King of Prussia, given where they are situated in the mall and what they had already done with the one level which we cooperated, we felt like Primark would be a very good replacement where they are situated. Plus, we needed their cooperation on what we are trying to accomplish.

It happened to be that we were absolutely aligned in that set of circumstances and we think we created a win-win. I would expect, given the 55-year history, that we will continue to find those kind of situations with Sears in most cases.

Okay, thanks a lot.

Steve Sakwa, ISI Group.

Thanks. Wanted to follow-up on the Primark situation. We understand in Europe and London there are kind of primarily 35,000 foot boxes and I think in the initial seven they are taking much larger footprints. So I know you haven't announced direct deals with them, but do you anticipate or would you envision sort of more Sears sublease space, or do you actually think you could do direct deals with them?

And would you envision them kind of being an in-line tenant (technical difficulty)?

(technical difficulty) properties and others, they won't. And it will depend upon the set of circumstances.

And just because the King of Prussia is one deal that we consented to doesn't necessarily mean that that's going to be the model on all the others. So Steve, like I said, it's going to be a case-by-case scenario. I would be -- if their model is a success here, which certainly by every indication of the presence they have in Europe you would potentially anticipate, but others have come here and have not done as well, but let's --.

If it is, then I think it will be a combination of all of the above, where there will be some consents with Sears on subleases. We will lease directly. We will redevelop pads and the like. And it's all going to depend upon the set of circumstances that present itself at that property.

Okay, thanks. Part of your first answer got cut off, so I apologize, I didn't hear the whole thing. Just in terms of kind of the type of tenant they are or the price point, do you envision that they could sort of fit into a large part of the portfolio, or do you see them in different kind of segments within the portfolio?

Well, I don't -- they are certainly not a luxury, so our higher-end properties probably not a great fit. But I'm going to wait and see how -- see what their store looks like in the US, what kind of consumer they are delivering and we will go from there.

The King of Prussia was relatively a simple decision for us because of where that Sears box is and -- but I think, again, it's going to be dependent upon the circumstances. I hope you are hearing this, but I guess we are having serious problems with our communication. But I hope you can hear it, Steve.

I did, thanks. Then I guess just last question. In terms of the home delivery, how has that sort of progressed for the mall REITs in general? Are there changes you are making for this upcoming holiday season? And just kind of what has been the early -- I guess maybe coming up on one year, how do you think that system and service are working?

Well, [the Liv] is just one of our efforts along those lines. I think we are pleased as a group. They have signed up a couple of major, major retailers and they are starting to do shipping this holiday season. And I do think over time there clearly is going to be the ability to deliver or pick up a lot of mall goods at the mall environment. And I think we are -- as an industry and individually, we are just scratching the surface there.

Okay, thanks. That's it for me.

[Jeremy Metz, UBS Securities].

Thanks for taking my call. Most of my questions have been answered; just one quick one. It looks like you sold an asset this quarter and recorded a close to $18 million gain. Just any color on that sale?

No, just a couple of assets that didn't fit the portfolio.

Okay, thank you.

Haendel St. Juste, Morgan Stanley.

Good morning, thanks for taking my question. David, I wanted to get an updated read from you on the upcoming holiday season.

Look, some of your peers noted last quarter that the consumer was in a bit of a cautious state. How would you assess that mood today? And in conjunction with that, I would love to hear your thoughts on how this year's back-to-school shopping season materialized versus your expectations and what your read on the consumer pulse today and your expectation for the approaching holiday season.

Simplistically, consumer I believe is -- continues to be somewhat cautious. The good news is there is an environment where I think at some point in the near future they will be less cautious. Lower oil, lower gas prices, better job environment, hopefully wage growth, continuation of lower interest rates -- just some of those out there. But they are still cautious and that is how we are planning to -- we are running our business.

I don't make a -- I am not equipped to make a forecast on the holiday season. Others might; I will not. There's lots of forecasters out there on the holiday season. The ones that I see are generally feel like it's going to be (technical difficulty) last year. Weather hopefully won't replicate itself the way it was; longer season to name a couple. But I don't -- I'm not in that business.

Care to share any comments on this year's back-to-school shopping season?

I think it was generally spotty. I think it certainly wasn't robust and I think it still represented a cautious consumer.

Okay, fair enough. And just wanted to confirm one or two things here. First, that the recent Jersey Gardens and UPV acquisitions will hit the same-store in 1Q 2016? And then any color on the lease termination fees? Was wondering if there were any other nonrecurring items in the quarter beyond it looks like $0.02 about lease termination fees and the debt prepayment charges.

Simply on Jersey Gardens, it wouldn't be in our comp NOI for 2016, that's correct. And, listen, we've got -- given we are a big company so we are always going to have other income that could be higher or lower quarter to quarter, same thing on the expense side.

The -- but as far as I can -- having examined the financials extremely closely, nothing jumps out at me. The lease settlement income, probably in the scheme of the total year, is not all that different than some other previous years.

It does ebb and flow. We have always got a little bit of extra income here and extra expense year in and year out, given the nature of our business. But nothing to highlight, frankly.

Jeff Donnelly, Wells Fargo.

Good morning. Question about just I guess I would call it the value proposition of SPG asset management. If you were to benchmark the in-place rents to the two malls that you are buying from Glimcher to similar malls that you already own, what do you think the delta is in revenue or NOI per square foot that you could realize under your management? Is there a way to estimate or quantify that for us?

Well, very good question, Jeff. I would say to you generally we don't buy any asset if we don't feel like we can improve it, so that's kind of a theme that we have regardless of what we do. Whether it's new development, redevelopment, or importantly acquisitions, what can we do to beat the growth rate that may exist if that asset just sits there and owns?

But the fact of the matter is I am not going to give you a number on that. People are -- again, not to put this in context, but Sawgrass is a unique animal, but when we took it over -- I remember the numbers more or less correctly -- it was around $55 million of NOI. And next year -- now we did add a little bit of space here and there and stuff, but next year generally I think it is going to do around $130-million-ish.

Now we haven't gone lease by lease. There we might skip lease by lease because it could take us three days. But I think the fact that we were able to do that not only helped our investors, but also helped the consumers and the retailers because I think they did a lot more business with it in our hands.

So we invested more in it. We drove the tourism. We got better retailers. We got more consumers. The retailers did more business and everybody was copacetic, even though Mills had done a good job it $55 million or whatever the rough number was.

So we think we can drive more traffic to Jersey Gardens, though I firmly believe Glimcher has done a great job with that asset. So that -- we are experts in tourism. It's right by Newark Airport. I think we can figure out how to get a few more buses from Newark to go to jersey before they go to --. Rick and I will flag them ourselves if we have to to make the numbers work.

Maybe, Steve, that could be your next career move.

Actually a follow up also, David, as it relates to the project that you are looking at at Copley Place in Boston, there's a lot of residential product in the pipeline in Boston for sale as well as for rent. Does that give you any pause with proceeding on that project, or are you sort of past the point of no return, or are you just not as concerned about it?

Look, no, we are always focused on supply. We are not past the point of no return and we are still working on approval rights, both within the appropriate agencies in Boston but also we have to work through some of the retailer issues. So we are not at a point of no return and we study the supply (technical difficulty) carefully and it's going to be a gut-check decision here I would say, Jeff, in the next three or four months.

Generally, we still feel very, very confident about it, but that's -- it is a little bit different than what we have done historically, as you might imagine. We are really good experts on supply, understanding supply in retail. What is going to get done, what is going to have an impact; competitive world, very competitive world in retail.

This one is a little bit different. We hired a couple great experts to do Copley, so we've got the in-house expertise. We also obviously have hired the right people in Boston to help us go through that exercise.

But it's a good question. It's going to be a gut-check time, but we are not past the point of no return. And as you know, in real estate, whether it's office, retail, whatever, there's always announcements of supply. The real question is what gets built and who gets there first and who's got staying power.

I will tell you this, it's an iconic asset. It's only getting better. The design is fantastic. Boston is a great long-term city and, Lord, I hope we have staying power. So we've got a lot of stuff on our side of the equation that gives us confidence that if we do pull the trigger we will execute.

Maybe just a last question for Rick. I know you had touched on spreads and I'm sympathetic to looking at it over long-term, but as someone had asked earlier about the pullback in the dollar spread. It came back a little bit slightly this quarter. Is that just a function of mix maybe in the quarter or was there any kind of pushback from retailers in light of the softer retail sales?

There really has been no pushback from the retailers in terms of their demand and it's basically a function of mix, what deals come in in a given period of time. So we are still seeing a very focused retailer [in the] one space and, candidly, you can look at that with our occupancy and with all the activity that we have going on in the portfolio.

Let me -- because again this is a good question, it's a good focus, but let me --. I want you to understand how we think about the business.

If we owned one property, we could absolutely maximize rent to the last penny because at the end of the day that's all we would care about. Jeff, we believe in repeat business with our retailers, so we are always calibrating and we don't -- we are not perfect at this. Believe me, we make mistakes all the time, but we are always trying to calibrate the win-win.

All right, how do you keep the retailer, who is our customer in addition to the consumer, happy? How do we reach our financial goals? But we are not getting the last dollar because we do multiple deals, multiple business with them year after year, day after day. And so we are never going to maximize rents if we just own one asset.

You just need to have that lens on. Yes, even with that lens on we still out produce everybody else, but we are not trying to get to the point of no return. We are trying to find that balance and I will be the first to tell you sometimes we don't do it. Sometimes we make mistakes, but we are always trying to find that balance for future positive relations with our clients going forward, just like any other business. So let's put that in that perspective, okay?

But that's why we have the opportunity to find other opportunities that, even though we may not maximize -- the spread being $9.67 -- is that the right number? It could have been $10. Maybe that $0.33 we picked up because they are going to do this, that, and the other thing for us. So there is always that balance and you've got to put it in that lens. It's important to understand that.

Jim Sullivan, Cowen.

Thank you, just a quick follow-up to Jeff's question on Copley. And I understand it's not -- the plans are not finalized as you've explained, but can you give us kind of a ballpark number that that project would entail in terms of total cost?

Yes, sure. It's around -- the total cost, Jim, is around $550 million. Again, the vision that we have on the top roughly 10 floors would be condo sales. We are also expanding Neiman's as part of it and other retail. So we look at it gross, but then we have condo sales to net and (technical difficulty) differential, though it is an art not necessarily a science, that differential. And then we would own the multifamily.

That differential is roughly -- don't hold me to these numbers -- is roughly a $300-million-ish differential but that puts it in it's kind of financial consequence box. And that number, from a return, as we look at it, that return is acceptable given what we are doing there. I don't want to -- I'm not going to give you that number just yet, but when we go it will be in our 8-K. But that's essentially how we are thinking about the deal.

Good, thanks for that. Just a kind of follow-up question on the earlier discussion about Primark as well. You had mentioned Primark, Zara, H&M on the second-quarter call and obviously they are European retailers.

They are kind of categorized as fast-fashion apparel. I guess Primark is more promotional. And all three already have sizable market shares in Europe, where they operate alongside smaller, higher price point apparel retailers. Also we obviously have Forever 21, Uniqlo growing aggressively here.

I'm just curious, if we assume that these large-format retailers continue to grow their share of apparel sales, do you view that as a positive or a negative regarding the same-property NOI growth prospects for the domestic Simon portfolio?

It's Rick. I think that we price our real estate based on what we believe is the value of the real estate, and everyone is going to have to compete for that real estate. The bottom line is that it's taken H&M a very long time. They are now happily established and growing substantially. We are working with Zara, but, frankly, we have a lot of very established domestic retailers here that are very competitive and continuing to grow.

So the more people we have interested in our properties, the better off we are. It just enhances demand and our job is to do the right tenant mix and to price the space right. And I think we've been doing pretty well so far.

Yes, it's a good question and again it's a little more art than science. You've got to weigh the traffic that they may generate versus the competitive nature. They may put certain retailers under and whether or not they are bringing a different consumer in. So you put it all together and you got to make judgment calls day in and day out.

But it's a good question. It's an art and you've got to be very, very thoughtful about that, Jim.

Okay. Then finally from me, and I may be asking you to repeat yourself, David, but I think you did cut out on this. In terms of the Primark deal at King of Prussia, you mentioned it was I think you said an easier decision because of the specific location. Can you just clarify what you meant by that?

Well, if you have been to the mall, in this case the Sears box is not as well located as if it were in the middle of the mall and our decision may have been a little bit different had it been. So it's really a location issue.

The power of that mall is shifting in terms of kind of the focal point, given our expansion, is now -- we are actually under construction. And it was really -- we felt good about it and we got Sears' cooperation on what we were trying to accomplish to improve the mall. We did think that, because of their position, Primark would be great. They would drive traffic down to that wing.

Very good, thank you.

Vincent Chao, Deutsche Bank.

Just a quick question. Last quarter you guys talked about a couple deals on the development side that were not outlets. Just curious if there's anything to update on that front.

You mean on full price?

Yes.

We are getting closer, not quite there, but we are working diligently on one ground-up, full-price development that I would say over the next short period of time that we will be making an announcement on. It's not quite everything is done, but we are optimistic that this will be a partnership that we are looking forward to working on, but it's not quite all done. Handshake is in place, but stay tuned on that.

We think it will be great. And it will be -- besides the redevelopment, it will be our first full-price in quite some time.

And (technical difficulty).

(technical difficulty) in fact because every dollar is the same, it doesn't really -- it obviously doesn't do that. But the fact is we could do it, but I don't have it (multiple speakers).

It's about 10% higher.

10% higher?

10%.

Steve Sterrett's --.

Parting shot.

He's leaving, so I wouldn't count on any numbers that he says. Steve Sterrett says it's 10%, but I think we could probably do a little bit more6 work and get a better number. But it's a very interesting question.

Got it. That was it, thanks.

There are no further questions. I will turn it back to David Simon for closing remarks.

Thank you and look forward to seeing you in the future.

Ladies and gentlemen, that concludes today's conference. You can disconnect and have a great day.