Simon Property Group, Inc. (SPG) Q3 2011 Earnings Report, Transcript and Summary

Richard S. Sokolov - President, Chief Operating Officer, Director and Member of Executive Committee Stephen E. Sterrett - Chief Financial Officer and Executive Vice President Shelly J. Doran - Vice President of Investor Relations David E. Simon - Chairman, Chief Executive Officer and Chairman of Executive Committee

Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division Cedrik Lachance Jonathan Habermann - Goldman Sachs Group Inc., Research Division Ross T. Nussbaum - UBS Investment Bank, Research Division Michael W. Mueller - JP Morgan Chase & Co, Research Division Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division Richard C. Moore - RBC Capital Markets, LLC, Research Division Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division Michael Bilerman - Citigroup Inc, Research Division James W. Sullivan - Cowen and Company, LLC, Research Division Ki Bin Kim - Macquarie Research Craig R. Schmidt - BofA Merrill Lynch, Research Division Paul Morgan - Morgan Stanley, Research Division Quentin Velleley - Citigroup Inc, Research Division Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division Carol L. Kemple - Hilliard Lyons, Research Division Jeffrey Spector - BofA Merrill Lynch, Research Division Steve Sakwa - ISI Group Inc., Research Division

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Simon Property Group Earnings Conference Call. My name is Tanya, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to hand the presentation over to our host, Shelly Doran, Vice President of Investor Relations. Please proceed.

Thank you. Good morning, and welcome to Simon Property Group's Third Quarter 2011 Earnings Conference Call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties and other factors. Please refer to our reports filed with the SEC for detailed discussion. Acknowledging the fact that this call may be webcast for some time to come, we believe it's important to note that our call includes time sensitive information that may be accurate only as of today's date, October 25, 2011. During today's call, we will discuss certain non-GAAP financial measures. Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information package that was included in this morning's 8-K. This package is also available on the Simon website, in the Investors section. Participating in today's call will be David Simon, Chairman and Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Steve Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.

Thank you for joining us today and I'll just give you a quick update on some of the highlights and then we'll open up for Q&A. First of all, we reported funds from operations of $1.71 for the quarter, which represents an increase of 19.6% over the FFO in the third quarter of 2010 as adjusted for the third quarter in 2010, which adds back -- add back our debt extinguishment charge. This result beats First Call consensus by $0.05 per share. We have now met or exceeded expectations for 29 of the past 31 quarters. Let me talk about some statistics. Total sales on a rolling 12-month basis were $517 per square foot, up 9.3% from $473 as of September 30, 2010, which is nearly 60 million square feet of GLA. Now that we've owned Prime for year this quarter, we have begun to include the Prime portfolio in our statistics, and so we've adjusted our September 30, 2010, to give you a sense of comparability. There were a couple of analysts out there that suggested that our average base rents went down sequentially. Keep in mind that we did not go back and adjust 630 numbers for Prime. So that reduction in base rent is all associated with adding Prime into our portfolio. And in fact, when you add Prime in on 630, we've had -- we did have sequential average base minimum rent growth, and Shelly can give you those details later. Occupancy was 93.9%, 10 basis points higher than the year earlier period, and 30 basis points higher than the end of the second quarter. This was achieved despite the loss of over 160,000 square feet due to liquidations of Borders and Anchor Blue. The releasing spread for the 12 months was $4.77 per square feet to positive 9.6%. Our releasing spread continues to include all in-line space, including spaces larger than 10,000 square feet, and most importantly, comparable property NOI growth was 3.8% for the quarter and 3.2% year-to-date. It was driven by increases in minimum and overage rent. Development activity. Quickly, we have 3 new developments under construction, all are Premium Outlets, 2 in the U.S. and 1 in Malaysia. We have 22 renovation and expansion projects under construction in the U.S. with completion dates scheduled for this year and 2012, and the restoration of Opry Mills continues with the completion expected in the spring of 2012. We also have expansions, significant expansions underway at 3 Premium Outlet centers in Japan. As we have discussed with you in the past couple of quarters, our development or redevelopment programs in the U.S. and abroad are accelerating. We're seeing good value creation opportunities. We expect our share development spend to approximate nearly $500 million in 2011, and the potential for 2012, again, depending on timing, could approximate $1 billion. As always, details on the cost and returns and timing on these projects are provided in our supplemental reporting package. On the acquisition front, we continue to demonstrate our ability to strategically invest capital. We completed 2 in this quarter. First of all, in July, we acquired ABQ Uptown, a 220,000 square feet -- square foot lifestyle center in Albuquerque, New Mexico. The center generates sales of approximately $650 per square foot and adds to our presence in the growing Albuquerque market, where we're also on Cottonwood Mall, and in August, we acquired a controlling interest in King of Prussia, one of the truly iconic shopping destinations in the U.S., increasing our ownership from 12% to 96%. In addition, we have the contractual ability to acquire the remaining 4% interest in the fall of 2013. This acquisition will be immediately accretive to our earnings and the property has excellent growth prospects as we expect to increase the NOI at KOP by approximately 30% in the next 3 years. Capital markets. We closed on -- in early October on a new unsecured revolving credit facility well ahead of its maturity date that increased our revolving borrowing capacity to $4 billion, with the ability to increase it to $5 billion during its term, and can be extended to October 30, 2016, at our sole option. The interest rate is LIBOR plus 100, and the facility provides for money market competitive bid option, which we expect to even more lower the indicative pricing of LIBOR plus 100. We also have lower pricing grid from our previous facility and the new maturity, as I mentioned, up to 5 years, which further enhances our already strong financial position. We also have nearly $930 million of cash on hand, including our share of joint venture cash. On dividends. We're very pleased to announce that our common stock dividend for the fourth quarter will total $1.10 per share. This is comprised of 2 separate dividends. First of all, we've now increased our regular quarterly dividend to $0.90 from $0.80. This represents a 12.5% increase of the dividend that's payable on November 30, to shareholders of record on November 16. We also announced the special cash dividend of $0.20 per share. This dividend is payable on December 30, to shareholders of record on December 16. These 2 dividends, as I mentioned to you earlier, total $1.10 for the quarter and increases our total payout from the $3.50 for the 2011 calendar year, which we expect to approximate our 2011 taxable income. The new $0.90 quarterly dividend rate also positions us to have a trajectory of at least $3.60 per share in 2012, and we would expect to revisit our dividend again in October to ensure that we're paying 100% of our 2012 estimated taxable income. Now let me turn to guidance. Based upon our strong results for the quarter and expectations for the balance of the year, we increased the low end of our 2011 FFO guidance range by $0.15 per share to $6.80 per share, and raised the top end by $0.12 to $6.85 per share. The midpoint of our current guidance is now a full $0.30 above the midpoint of our original 2011 guidance provided to you in February. Before I open it up for questions, let me just conclude by saying, we're pleased with 2011 thus far with our performance. We've had strong performance at our core properties, accretive acquisitions. We continued to strengthen our already industry-leading balance sheet, all of which will serve us well in 2011 but also position us for more good stuff in the future. We're now ready for questions.

[Operator Instructions] Our first question will come from the line of Ross Nussbaum with UBS.

David or Rick, with respect to Gap's plans to close a chunk of their stores, specifically, where are their rents relative to the $54 level you've been signing leases at? And maybe from a broader perspective, do you see this is a trend to some of your older more established chain of rightsizing their store counts now that they're coming up upon lease expirations?

Well, let me start and then Rick can add. First of all, I think with respect to Gap, Ross, it's very important to put in perspective. They've been shrinking their fleet for the last few years, and I think the recent announcement was nothing new to us, and in fact, as I mentioned to you, we've been seeing a reduction in their fleet with us for the last 3 or 4 years as they continue to add very anemic sales per square feet, as well as decreasing sales per square feet. Now just to put The Gap in perspective to your next question, it is kind of where do we think rents are with Gap. They were very effective in being able to negotiate a large amount of space, a great space in highly productive malls at below market rents when they were going through their growth phase. Now obviously, those days are over, and even though we're likely to lose some space in less productive malls, we will more than make it up, and I think we've already have -- I don't want to get too granular in rollovers with certain Gap stores, but we will more than make that up as we reclaim the space in the higher producing malls that we will either shrink their footprint or in fact, eliminate their brand in those centers. It's a trend that we're seeing outside of Gap and the answer to that is not really, but it's a trend that we have seen years and years of experience, where concepts tend to get bigger than what they should and it's a natural evolution in retail, but frankly, they're the only one going through this kind of downsizing in a material -- on a material basis.

Okay, I appreciate that. And then my final question, there's been a few, what we'll call, A malls that have traded this year.

Yes.

But the trend in B malls changing hands didn't occur. Can you talk a little bit about the pricing differential between those 2 categories? And do you think that they've been overdone on both extreme?

Well, I can only speak to our point of view. I mean, we were able to buy King of Prussia and though we don't talk about individual mall transaction, we're extremely comfortable with the going in yield and the expected yield that we will get from that asset. As you might know, we didn't really run the property. We kind of ran it through a joint venture and that was a terrific relationship over the years with our partners. The fact is we're very comfortable that there's a lot of upside to achieve from that asset, so I can only talk about what we've bought and there's absolutely no concerns on my behalf in terms of what we paid and the growth that we have from the assets that we bought. The B malls, look, I think we're still trying to figure out kind of where that market is. There's not right now natural buyers, so it is going to require a group of opportunity type funds or entrepreneurs that are going to want to gobble these up, and a lot of that is dependent upon financing. There will be strategic assets here and there that certain mall companies might buy, but I still think price discovery is going to eventually occur there, and I don't think it will be all that earth shattering in terms of cap rates. I still think kind of where the talk is. Assuming the market comes back on financing, we'll ultimately deliver the values that people are kind of circling in those -- for those assets.

Our next question comes from the line of Steve Sakwa with ISI Group.

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

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

I understand but if you -- and I understand you won't be up 19% again, but at the midpoint of your new range, you're talking about earnings of kind of $1.85 against $1.82, so I know you like to be conservative. I know you've got a very good track record of beating, but is there anything else that's one-time that occurred last year, like lease termination fees or gains that may not come up in the fourth quarter this year?

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

Okay. And then David, maybe can you just talk about some of the international opportunities. I guess, there's been a lot of chatter just about your interest in Brazil and you're up over the last 3 to 6 months, and as you kind of traveled around the world and look for opportunities. As we kind of look through the European business in terms of the assets that you own, occupancy was up a bit but the sales were kind of flat. I'm just wondering how you're thinking about some of these markets today in light of sort of the dislocation that's going on in Europe and the stronger growth in the emerging markets.

Well, look, I think Europe is going to be in for a challenge for sure. So we still like the outlet business worldwide, and right now, that continues to be our primary focus worldwide. We had a worldwide franchise in the outlet business, so that's the primary focus to take advantage of, and that could be Europe, that could be South America and certainly Asia. We want to -- you see all the stuff that we're doing in Japan, expanding that platform. Korea, we think we have another deal on the horizon there. Malaysia, we open up in December. So I think from a international point of view, the priority will continue to be the outlet business. Look, I think -- generally, I think we've proven that we have a unique model that allows us to acquire, develop and improve real estate worldwide. We certainly want to look at everything that's out there to do it. We do believe that there is some -- if there's a company that could really turn into a global retail real estate company, it's us, and that's going to require us to look at everything there. There could be dislocation in Europe that could create buying an opportunities. On the other hand, sometimes, those things never come to fruition, but day to day, we're looking at how to grow the outlet business internationally. That's the #1 priority.

Our next question comes from the line of Jay Habermann with Goldman Sachs.

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

From The Gap or generally?

Yes, just in general from some of the store closings that have been talked about recently or planned store closings.

Yes. Look, I think not everything is robust in retail real estate. It never seems to be, and every year we got to fill the book again from people that are scaling back, but we believe strongly that, that as we look at our rents and our occupancy cost, we will have the ability to increase our rents as we recapture space. We've proven that almost 20 years now as a public company, so I don't expect that to change at all. I think The Gap is a great opportunity. They're underperforming. A lot of those spaces are well below our average rents, and we look to take advantage of that as well, and we're going to look at those one by one, individually, so I would expect our ability to produce rent spreads, assuming we generally have a decent economy, to certainly be produced again next year. Rick?

Yes, the only thing that I would add is that we're focusing on a Gap announcement, but there is a significant number of tenants that are doing well, are looking to expand and in fact have already come to us and said, "Well, if you get that Gap room back, we want it." So I would not just view this through the prism of a Gap contraction. You have to also bear in remind all the tenants out there that are doing well, looking to expand and the fact that there's virtually no new development, so whatever demand is being created among our retailers, it's going to be satisfied out of the existing inventory in the industry.

Okay, that's helpful. And Rick, maybe as well, can you give us some sense of perhaps demand for 2012 or commitments at this point? Or is it booked early?

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

Okay, and just final question in terms of some of the Class A transactions that we've seen in the mall category. With the 30% increase in NOI, are you really looking at stabilized yields of 6 plus percent?

Oh, yes.

Our next question comes from the line of Quentin Velleley with Citigroup.

I'm here with Michael Bilerman as well. Just in terms -- just going back to the international question, I believe you were down in Brazil recently and it sounds like internationally, you're more focused on the outlet center business, but I'd be just curious to get your takeaways on the mall business in Brazil and whether or not that something that could interest you at some point?

Well, it's a vibrant economy. The malls there produce a significant amount of cash flow, higher cash flow per foot or per meter, however you'd like to look at it, then they do in the U.S., which to me was very interesting. They charge for parking, which is very interesting given that you've got an emerging customer there that you would think would be hard to charge for parking, but a lot of positives. I think, long term, Brazil is -- I'm sure there will be lots of ups and downs given its historical nature, but long term, I think the country, obviously, has got a tremendous amount going for it. There are some worries because the cash flow per foot or per meter is so high. It's counterintuitive versus, say, an emerging market. You would think it would be low and growing, but despite that, I think a lot of that has to do with supply and demand. It's a very intriguing market. Lots of supply coming on, so it'll be interesting to see how that all shakes out, but an impressive group of companies and malls and overall, an impressive marketplace.

David, its Michael Bilerman speaking. Just a question on the dividend, just thinking about how you sort of thought through the process in terms of paying out a special to get to a 100% payout ratio versus setting sort of a dividend run rate without doing this sort of top-up specials at the end of the year, and how you discuss that with the Board and sort of how you came to this decision, And I assume you could have paid out the bare minimum to 90%, but you went to 100%, and to thinking about where you stand and how you think about next year.

Well, look, I think this year, to put our dividend in perspective, there's a thing called bonus depreciation that we took advantage of, and the reason we -- so our taxable income is lower probably than a normal run rate because the fact of the matter is that we took advantage of the kind of the bonus depreciation that has -- the Congress has put forward to kind of stimulate the economy. Whether that's worked or not, that's for another debate. Next year, we don't know if that's going to be there or not, and I think we told you from Day 1, we want to pay out our taxable income at a bare minimum, so our run rate now is 360. We probably will have a higher taxable income than that next year, and I kind of like having a run rate that's going to grow over time and then the ability to top it off based upon our taxable income, which includes a lot of different things, so I actually think it's the more elegant way than raising it significantly and beyond the kind of where the raise was and then in terms of a few taxable income ends up less than that you're paying out more than that, and given what's going on with taxable income for corporate America today, we thought this was the best, more prudent. It also reinforces our strategy to provide a growing dividend. Not many REITs are growing their dividends. Certainly, not many are growing on a 12.5% basis, and being able to use the extra capital that we have to fund our business and generate even more earnings, and I think it's a pretty good cycle to be on. So I read your thing. I was confused that you'd said disappointed. I don't know. I've had a lot of shareholders that we're very happy, including the Board.

But it's a question more or so of, do you get paid for a $0.20 special at the end of the year? Or do you generate more institutional interest especially from generalist investors about having a consistent quarterly dividend that increases over time?

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

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

It was roughly, I'm going to say, $0.25, something like that.

Yes, about $0.20. Yes.

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

No. I think next year will be higher than that, and that allows us to be put on a trajectory higher than that.

Our next question comes from the line of Ki Bin Kim with Macquarie.

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

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

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

Well, I think we have a bifurcated consumer, and generally, the people that shop at our malls are -- the unemployment for the college educated is in the 4% to 5% range. Certainly, we would like all the people to be benefiting from a growing economy, but the general view of our business is that we want to attract the better consumer that does have disposable income to spend, and we've been successful in doing that. We don't always do it. We have certain properties that don't do that, but generally, I think as long as the economy continues to at least have some GDP growth, we'll be able to continue to attract the better customer that has -- that I think has disposable income to spend.

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

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

Our next question comes from the line of Paul Morgan with Morgan Stanley.

We know from what the retailers have been saying on their calls that there's...

Paul, can you speak up?

We can barely hear you.

We just know from what the retailers have been saying that there's been a lot of demand for the As and what they comment about the As and Bs, they talk about [indiscernible] still, but from your perspective, has there been any shift in the negotiations for space in the Bs this year, as retailers maybe get a bit more encouraged by their sales? Or is it still much harder slogging than in your top kind of quartile?

Paul, this is Rick. I think we have always seen a pretty direct relationship with the productivity of our properties and our ability to drive our rents. As we have been able to increase the productivity of our properties, we're making them more attractive to retailers and we have been able to drive occupancy and rents in those properties. We put in our press release the fact that in 2011, we're opening 39 new anchors and big boxes or almost 1.7 million square feet across the portfolio. We're renovating another 18 properties. All of this is making our properties more attractive, driving market share, driving sales and helping us lease the property. Is it always going to be a function of the market position and productivity? Sure, but we think we're creating better product for our leasing guys to sell.

Okay. Just sort of on a similar thing, as I look at the expiring leases for 2012 at $32, that's like 20% almost below where you’re in-place average is. How should I think about -- I mean, is that an opportunity to take releasing spreads higher from where they are now? Or is it maybe representative of the big portfolio but could be representative the type of malls where you have more expirations? How do we think about next year based on the $32 number?

Well, I think it's very positive, right? So -- look, our size is such that these numbers actually mean something, whereas others with smaller portfolios may have statistics that could indicate something other than what it is just because they're smaller. So the fact is, at the end of the day, that rollover is a great opportunity for the company and we intend to take advantage of it, and we've said consistently that our leases are under market. I think that helped us perform in the Great Recession. Recall, if I could, Paul, that we did not have negative NOI growth in our portfolio during the Great Recession, and I think that, that is a good statistic that creates the insurance policy of our ability to generate comp NOI growth. The size of that spread is dependent upon a lot of macro things, but the bottom line, it's a great spot to be in, and additionally, it lasts for a long time, so it's not a 1-year event. So let's hope we can continue on the track that we've demonstrated for the past several years.

Our next question comes from the line of Craig Schmidt with Bank of America Merrill Lynch.

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

Well, the biggest surprise, a pleasant surprise, is that we've had comp NOI that's been higher than the budget. To me, that's the most important thing that we can do. Sometimes, it's out of our control because it's tied to retailer sales. Bankruptcies could impact that. We've had some -- we've had more of that this year than the last year, if you recall. So to me, that's always the #1 focus, is how do we increase the cash flow on a comp basis from the properties. So with that said -- I mean, that's the focus, what -- Prime is -- we have outperformed on our Prime portfolio in terms of our underwriting and our expectations there that helped fuel our growth. Rates were a little lower than what we projected as well, and so those were kind of the material things we had. Offsetting that was some bankruptcies, less lease settlement income, but that's kind of the ups and downs.

And how are you then thinking about your 2012 budget from a macro standpoint? I know you're not providing guidance, but anything you could comment on?

Well, look, we're just about to start that excruciating process. Don't remind me. We actually do bottoms up property by property, so if we look a little dazed, if you see us at the end of Thanksgiving, we kind of get dazed by that time, but we actually do that work. It's a little early. I mean, I think the fact of the matter is, the biggest caveat that we have is all about the macro. Where is the economy? Where is consumer confidence? The election year throws a whole set of psychological issues at the consumer, none of which are positive, but you know what? We will figure it out, and I expect to have another good year and another year of growth, but we're right now in that process. As you know, Jeff, we do that beginning or kind of right when we do our year-end results, so -- but we'd expect to have another good year.

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

I'll let Rick. Rick, go ahead.

A couple of things. One, all 4 of our platforms are positive to both budget and to actuals last year. So they're all performing well year-to-date. In terms of the holiday, we literally have 4 tenants in here today and talking to them, they're all anticipating up probably 2% to 3%. Inventories are very tight. People are not chasing sales. They'd rather leave a few sales on the table and make sure that they drive their margins and are not over inventory. Then the only other point I would say is, there is a -- and as we think about our world, there's are pretty high correlation to the better retailers and how the S&P 500 does. So we're to a degree, I think, really focused on how that better consumer is thinking about their position, and that will be reflected to a degree by the S&P 500.

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

Well, I think that is part of that, Craig, for sure, but additionally, it's just we believe that in -- putting in all of the Simon programs that we didn't put in previously because of the partnership limitations, all of that led to that cash flow, and whether they're all of our marketing programs going to fix cam [ph] as an example, we feel like the rents weren't at the level they should be given the quality of the asset, so all of that -- plus it's really interesting and it's probably somewhat premature to talk about it but I'll go ahead, is that we are looking to put Strawbridge aside because as you know, that's under construction, but our ultimate focus in this property will be to combine The Plaza with The Court, with additional retail, and we have the FAR ability to do that, and we're just discussing that concept with the Village, but we think that's a great opportunity to really integrate both of these properties and make it one unbelievable shopping destination beyond what it is today.

But just to be clear, Craig. This is Steve. That's not in the 30%. The 30% is just executing the redevelopment of the Strawbridge and then finalizing the property by doing some of the things that David talked about, like the conversion to fix cam [ph] and the full implementation of the marketing programs.

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

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

Our next question comes from the line of Jim Sullivan with Cowen and company.

A question -- first question for me, it's in the area of the several other questions have kind of been on, and maybe coming out of from a slightly different angle, David, looking at your average portfolio base rent and average sales. Obviously, sales trends have been very, very positive in spite of the negative productivity contribution, I guess, from Gap, and your average base rent in the portfolio is now at 7.5%, about as low as it's been in a long, long time now. We know the outlet center portfolio is included in that metric now, and I just wonder if you could help us think about how you think about that 7.5% number over the course of the cycle. In the past, it can run up to the mid-8s or higher, and do you think it will have that upside potential given the change in the composition of the total portfolio?

There's no reason, assuming we have a stable economy, growing economy, that we're not going to work our way back to that level. Now retail, I mean, there's a lot of pressure in retail. We have the consumer under pressure. So it is going to take work. It's going to take some level of stability. It's going to require the mood to get a little bit better generally in the country, but I'm actually feeling that these things will work their way through the system in that way, and it's hard to give you a specific number, but we do think that, that presents a lot of opportunity on the rent. There's no question about it.

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

Yes. There's no doubt you will have a step backward and then 2 steps forward because as you reclaim the space, you're going to have downtime, and in some cases, it's going to take a little bit of period of time to lease it up, but at the end of the day -- we've done all sorts of analysis on this. At the end of the day, we just think there's tremendous upside overall. It's not to say there aren't going to be some holes that will be generated as we lose some of The Gap stores, Gap brands, whether it's Old Navy, Banana or just The Gap brand, but over a -- not a long period of time, but over a 2-year period of time, as you lease up the space that we reclaim, there's going to be tremendous upside, and even in A malls, their productivity does not allow them to essentially pay market rents where others do, and the benefit that we see in A malls from them there versus others has been diminished somewhat as they shrink their portfolio appetite.

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

It's just a matter of the mix of projects, Jim. In fact, we've had very good forecasting in the overall environment. Our construction costs have been coming in at or below what we have been using for our capital allocation approvals.

And I think -- I would say one thing. Jim, our people are used to -- hopefully, the conservative nature and how we present ourselves resides throughout the building, and certainly, when we approve projects -- I mean, the level of sandbagging in our projects depends on who's doing the project but it's institutional in nature. So I would hope over time that we would produce better results in that, but Rick's right. It is in the mix, but we're being very aggressive and really focused on trying to make our properties the best as they can be, spending a lot of time. A part of the reason to do more quicker are the reason why we hired Contest [ph] to help in that area. He is very focused on and so -- but hopefully, we will outperform those numbers. Now, Jim, you did mention in one of your reports -- I tried to address it. I garbled. I'm not very good at reading those things, but you -- I do hope you realize that the 630 base rent did not include Prime. When you do, we actually do have sequential growth, so I just wanted to reinforce that with you.

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

Well, look, I think we're very focused on it. ICSC is very focused on it. I'd like to thank David Henry and ICSC for finally recognizing. I think David's been the key to this to really to get -- to create a level playing field. There's 2 or 3 or 4 different approaches on how to do it. The good news is, I think, Congress is beginning to understand the difference. The fact that the level -- the field is not level. We're still educating certain congressmen and women about the fact that this is not a new tax. That's going through its process. Everybody that we talked to understands the fairness of it, and I think even Amazon, with their different deals that they're doing state by state, recognizes that the days are over where they get the level -- where they get the unfair advantage, but it would be much better to do it at a national level. That's what's really being cried for than to do it on a state-by-state level. But as you might imagine, it's a process, but we're actually feeling -- Rick is involved, too. He can add to it -- but we're actually feeling like there is hope to get something out there that can be passed by Congress.

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

Our next question comes from the line of Jeffrey Donnelly with Wells Fargo.

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

Well, look, I think they're looking to do that anyway, right? So that's going to happen. I wouldn't be surprised if people like ourselves play a role in that. Believe me, we're focused on that. So Jeff, the fact is that's what Amazon wants to go to. We've got to create the mall version of that, but we still not want to give them the benefit of exemplary sales tax. I don't think it's a Trojan horse. I don't think it's going to hugely change the fact that Internet shopping is important, but the fact of the matter is, there's a lot of people, the more research you do -- that do lot of -- it used to be they researched online and went to shop physically. Now they go shop physically. They understand the difference that they don't have to pay the sales tax and actually go to the physical environment, do all the research, and buy online. All you have to do is ask Best Buy to get their perspective on it, and I think that needs to be eliminated. There's no reason why Amazon and certain others need that benefit, so same-day delivery is a different issue, as far as I am concerned.

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

Yes, I think, I would agree, and it's not necessarily all one or other, online or bricks and mortar. I mean, in some ways, you saw that there's a Gap announcement, whether it's a scaling back on our mall stores, but I think ultimately, retailers are trying to find a way to provide value, and in that case, you saw The Gap increase or looking to increase their outlet store count. They kind of switched gears to that. I mean, do you think that -- you mentioned that you did not see a trend among mature retailers looking to scale back their store count, but do you think we're at the beginning of maybe another secular growth period for outlet demand as retailers maybe begin to discover that channel, if not here, then maybe, I call it, more broadly outside of the U.S.?

Well, look, I think the outlet business has been going strong for a number of years partly because I think we had a little bit to do with it, if I could, in that we took it out of the back room, more into the front room. We personally -- Rick and I, personally talked to a number of retailers talking about how it's not brand negative but brand positive for them, and what's brand negative is when they do want to sell merchandise to sell it in their store, their full price store, it creates all sorts of promotional issues, and in a lot of cases clouds what they're trying to do at the full price level. So that change has been going on for a number of years, plus the quality of the product that we build, how we executed the tenant mix, the marketing kind of all has been upgraded it to the next level, and we're still making improvements on it to make it the best experience that we can make it. So I think that trend continues. They still want -- there still is a high amount of outlet demand. We're seeing a lot of demand in our Mills portfolio because that's representing an outlet distribution channel. So I think it's -- we're seeing that internationally. I just happened to talk to a worldwide retailer that was talking to us about -- wants to talk to us about China outlet, which I've always a little bit worried about for all sorts of reasons, but for crying out loud, we're building an outlet in Malaysia, right? It's going to open in a month. So it's there. We expect to take advantage of it in other markets as well.

If I can just ask a last question back on the B and C mall topic. As a property investor, what realistically is the bull case for B and C mall investment today? I mean, do you think it's a fundamental story about occupancy and rent? Or is it really a capital market story about leverage because your earlier comment, it's more of a play for the entrepreneurial crowd. It kind of implies non-attractive risk return profile, and not to leave Steve out, I was curious, what does the state of the capital markets look like for B and C products because there a lot of anecdotes out there that the traditional equity and debt capital providers do to mall space. They really don't look at malls anymore under $350 a square foot in sales.

Well, look, it's very simple. The operating story is that if it's a B and C mall and there's a reason for it to exist, it's going to have a stable cash flow. And in fact, if that area continues to have economic growth, that cash flow will grow. And the fact of the matter is, if you have a appropriate management running it, you are able to add to the critical mass of that B&C property. The market may not be overly exciting, but the cash flow ought to maintain itself, and in fact, if you execute appropriately, you may even increase market share because there's a lot of -- where the market share got the fuse, where a lot of the strip centers that are -- then in a lot of cases are suffering from oversupply and not clear winner and loser in a lot of box movement back and forth. So from that standpoint, I think you're going -- and I think frankly, from our B Malls, they've actually performed reasonably well in a lot of cases in the Great Recession. Obviously, depending on the cap rate and depending on the financing, there is a pretty good return on equity that they're generating, and I think the ability to gain market share is all part of the story. Today, the CMBS market, 1 week it's on, 1 week it's off. We're getting bids, so I think it's back on. Last week, it wasn't. I still think that, that market still has a lot of -- it's more affected by what's going on in the risk on, risk off trade than it is what's going on in the real estate world.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a -- we're coming up on roughly the year anniversary of the Capital Shopping Centres saga, and looking at their stock price performance over the past year, looking at your stock price performance, I'm just curious if any of their stockholders have sort of called you up and said, "Hey, if you make another run, you have our blessing and we'd be supportive."

Well, that's not the British way, is it now? To admit that they may have made a mistake. The answer to that is no, but again, we have no interest in doing that either. We put our best foot forward. At that point, the Board, for whatever strange reason, turned down that deal, they shouldn't have in hindsight. We felt comfortable that we would have been able to execute a better gross story than they would have had by themselves. We’re still waiting. We're still shareholders. I have more faith, frankly, today than I did before because at least Mr. Whittaker is a large shareholder. I think he is a very capable gentleman to reignite that company. So we're assessing how that proceeds, but we have no interest in buying the company. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: So right now, you're more of just a passive shareholder who obviously would be there for advice, but you're not looking to get active in the company. Is that correct?

That's correct. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Then sort of following that trend, what's your strategy for -- is it just simply now a stock investment? Or is it something that you would look to unwind then?

Well, I think in this case, we'll look at all of our options. That market is relatively depressed just from a lot of macro issues. So we're kind of adopting a wait-and-see approach. That could change, but right now, it's wait and see. I do think Mr. Whittaker is the kind of entrepreneur that, that company needs to get it reinvigorated. So we're kind of waiting to see whether or not that can happen. And look, we're certainly an important shareholder. We're certainly there to help anything we can do to make the company perform better. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. Second question is, recently, there have been a number of items, sort of public-private, whether it's -- obviously, Westfield going back into World Trade. There's the Willet's Point here in New York, where it looks like Mays, Rich [ph] and Topman, are looking at putting together bids. The journal this morning featured the Fulton Street subway stop adjacent to World Trade, where maybe there's an opportunity for a retail landlord to come in and manage some of that retail space. I'm curious from your perspective, you guys have spoken a lot about development, redevelopment, but none of it has involved public-private. Just sort of curious if that's by design, maybe it's not worth the headache or the opportunities are -- the yields just don't make sense or if those opportunities are truly few and far between for the real, out of the park type situations?

I'd say all of the above. I mean, we've never been -- we've never -- we've kind of always adopted the approach not to do RFPs, whether it's from a private -- whether it's just a private company or individual that's looking to sell his land, whether it's a public entity trying to redevelop something. We just don't really like the RFP process. We won't rule it out, but the fact of that matter is I've never personally gotten excited about it, and the public-private stuff is hard to make money. I think if we felt like we didn't have a lot of opportunities with our existing fleet of assets and our ability to look at things throughout the world, maybe we would resort to that. But at this point, we just -- I just have never personally gotten excited about it.

Our next question comes from the line of Carol Kemple with Hilliard Lyons.

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

Well, a part of that is our recent LTIP program that we've had with the senior management.

So is that a good run rate going forward then?

Yes.

Our next question comes from the line of Michael Mueller with JPMorgan. Michael W. Mueller - JP Morgan Chase & Co, Research Division: I'm not sure I saw it disclosed anywhere, but what was the investment in King of Prussia and how is it financed?

That -- again, we don't disclose individual mall transactions, and it was financed, I think we announced that, partly cash and partly in the line of credit. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. And secondly, the leasing spreads of about 10% for the 9 months -- or for the year-to-date spreads of 10%, what is the difference between the cash spread and the GAAP spread?

Michael, this is Steve. That is a cash spread. That is ending cash rent at the time the lease expired or terminated to beginning cash rent with the new tenant or the renewal of the existing tenant. So if you convert it to GAAP, it would be higher. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Yes, about how much higher roughly?

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

Our next question comes from the line of Rich Moore with RBC Capital Markets.

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

Well, as you know, Rich, the spreads in the bond market gapped out late summer and have been in kind of wide for the year over the course of the last 2 or 3 months. The good news is they have gotten better. The tender in the bond market has clearly gotten better, so it is something that we're paying attention to, and the good news, is have the flexibility to be patient, but as we think about that level of outstandings on the credit facility, if the bond market continues to improve, we'd love to term it out.

Okay, so doing CMBS, it sounds like it's not really something that's an option at this point but maybe an unsecured note over the next 6 months would be the way to go.

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

Yes, and I'd just add. Rich, this is David. Even with all of the ups and downs of the capital markets, both unsecured market and the CMBS market, it is more cost-effective in the unsecured market versus the CMBS market for sure, especially as you look at -- factor in fees, amortization, any...

Audit costs.

The whole 9 yards.

Appraisals.

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

Yes. You made that very clear. Let me ask you guys...

That's part of my job.

Yes -- no, that was good. I got you on that quick. On the redevelopment scene, I think you guys have said you were looking to do a couple billion dollars of deliveries over the next, say, 5 years. I mean, should we think in terms of $500 million kind of average per year deliveries as we look out to 2015? Is that sort of a scope of the redevelopment scene?

Well, I think -- Rick can elaborate, but I think right now, '12 could shape up to accelerate some of that, so it could end up in '12 that we would have committed $1 billion in our redevelopment portfolio, so it would actually -- that number could accelerate, Rich, in terms of the timing of it.

Yes, and Rich, this is Steve. If you recall, the number that we floated out was a quarter or 2 ago and it was primarily centered about the 17 or 18, what we called transformational opportunities. I think, number one, we've added to that list as we've continued to examine the portfolio; and two, the ordinary course of business stuff, like Rick mentioned with 40 boxes and all that, is kind of on top of those transformational opportunities.

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

Well, we are very focused on that, and if you look at the projects that we have opened, several of them have both office and res multifamily and hotel components, the primary one being domain, where we have a Weston [ph] plus multifamily in both phases, plus office in both phases, and obviously, we're working right now on the approval process for a very substantial residential tower over Copley in Boston, so it's very much a part of our focus and we, in fact, have a dedicated team looking to bring those incremental uses into our property.

Okay, good guys. And then the last thing I have was, David, it seemed that on the last call, that the Chinese outlet scene was a little closer than you made it sound just on one of the previous questions here. I mean, how close are you guys are doing something in China with -- as far as outlet centers go?

Well, I think we'll make a decision here in the next couple of months. So it will either happen or won't, but it won't drag on for 2 or 3 years, so it's -- we're in the serious discussion phase and that will either come to fruition in the next couple of months or it won't.

Our next question comes from the line of Cedrik Lachance with Green Street Advisors.

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

I don't think we will be other than we'll always look at what's there and if there's a strategic fit for us, we could do a few deals. That's not to say we run away from the product. It's just that we've got a lot to do within our mall portfolio as it exists, and unless there's a strategic view of that asset or something that do really -- something special with it, we probably wouldn't, and the fact of the matter is, what? We've grown in the mall business, frankly, through M&A. We'll never rule that out, and when you tend to do bigger deals, you tend to get -- despite what we all say in the mall business, we don't all have A properties. Nobody does. So you tend to -- if there was ever deals to be done or kind of on the broader, more portfolio basis, we'll tend to get some Bs in that area and that would be a natural way for us to have more exposure in that product, which is we're fine with, but to go out and look to grow that business on a one-off basis just doesn't excite us as much as taking what we have and making it better.

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

Our next question comes from the line of Ben Yang with Keefe, Bruyette & Woods. Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division: I have another question on the international plan. David, you did make a few comments on China, and I realized that's not an immediate priority, but one of your peers recently purchased a real estate consulting firm based in China. So I'm curious, you mentioned maybe building outlet centers here, but if you ever decide to re-enter China, do you see yourself maybe taking a similar path as this peer?

You broke up on the last part. Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division: Well, I'm just wondering. I mean, you mentioned maybe building out with centers in China, could we possibly see you buying a company already on the ground there instead?

No. It would be our people. I mean, we would likely joint venture with an existing Chinese company, whether they own the land or whether they were in the development business or retailer much like we did when we built the Wal-Mart stores, but we would not buy a company to do that now. Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division: Okay, great. And just last question, you mentioned The Gap closing more stores than they had previously planned being no surprise to you, and since it sounds like they're basically not renewing upcoming leases and I assume you can look through their portfolio to figure out how many leases are expiring over the next few years, where they are located, good centers or bad, what's your expectation for store closures from The Gap and how many of the spaces there are spoken for today?

Well, let me just clarify what I did say. I mean, they're not closing all their stores. They're closing certain stores that they want to close, and we're taking over space that we want them to close, and we're trying to find a happy middle ground on the majority of the stores so -- but -- so that's the first point that I just want to clarify, but the -- and I will tell you that I don't think their acceleration of store closures is all that different than what they've done in the last couple of years. Now it may be marginally accelerated, but it's not all that different than what they have been doing, frankly, since '09, '10 and '11 and going into '12. So that's -- the second point is at the end of the day, when we look at everything there, we've got all the real estate back for whatever reason, they want to get out, we want them out, they decided not to do any U.S. fields, whatever the reason, at the end of the day, we think the income stream that would come from those spaces would be higher than it is today that they're paying. Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division: Can you just remind us how many Gap branded stores are in your portfolio? And of that amount, what do you -- how many do you think are going to close based on this?

Let me just say this. If you look at our schedule, we have 386 stores, if I'm right. Take away 138 of those because those are in the outlet business, so that gets you down to kind of the whole breadth, whole Gap fleet. So that's like 240, and then I would say roughly 50% is Gap, 25% is Old Navy, and then the balance is Banana, somewhere in that range. Benjamin Yang - Keefe, Bruyette, & Woods, Inc., Research Division: So it sounds pretty modest overall?

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

Our next question comes from the line of Tayo Okusanya with Jefferies & Company. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Most of questions have been answered, but I have just 2 very quick ones. Going into Christmas, I know you talked a little bit about just what you're seeing from your retailer perspective, but in regards to the typical temporary tenants that show up during Christmas, what are you seeing demand-wise from those guys to take up space?

Demand has been pretty stable. We are finding that happily, there are more and more national tenants that are also now looking to establish stores on a short-term basis as a way to seeing if there are customers located in that property, and so that demand is constant pretty much year-over-year, and we're very pleased with where we are today on that. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay, that's helpful, and then just in regards to the recent deals that you've done, Steve, I know you -- pricing-wise, you went talking about King of Prussia, but could you give any pricing details on Albuquerque?

Again, we don't do individual mall deals, but we're great stewards of capital. Both of these deals will -- are very accretive and they've got good rent growth in both of them. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Okay. Just one more last question with the Davis Street [ph] asset, any reason why you were not involved in those deals? Is that something you were interested in, but you just didn't play, obviously, a part in that process just given that class A malls don't come up that often in the market?

We just had no interest. Omotayo T. Okusanya - Jefferies & Company, Inc., Research Division: Any reason why you didn't have an interest?

No interest.

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

Okay. Thank you. Listen, we're very pleased with the quarter, and we're very happy to be paying our shareholders $1.10 in cash this quarter, and we'll talk to you soon. Thank you.

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