Simon Property Group - Q3 2011

Transcript

Operator (participant)

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. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If at any time you require operator assistance, please press star zero, and an operator will be happy to assist you. 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.

Shelly Doran (VP of Investor Relations)

Thank you. Good morning and welcome to Simon Property Group's Third Quarter 2011 Earnings Conference Call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties, and other factors. Please refer to our reports filed with the SEC for detailed discussion. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time-sensitive information that may be accurate only as of today's date, October 25th, 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 8K.

This package is also available on the Simon website in the Investor section. Participating in today's call will be David Simon, Chairman and Chief Executive Officer, Richard Sokolov, President and Chief Operating Officer, and Stephen Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.

David Simon (Chairman and CEO)

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 it up for Q&A. First of all, we reported funds from operations of $1.71 for the quarter, which represents an increase of 19.6% over the FFO in the third quarter of 2010 as adjusted for the third quarter in 2010, which adds back 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 sq ft, up 9.3% from $473 as of September 30, 2010, which is nearly 60 million sq ft of GLA.

Now that we've owned Prime for a year, this quarter we have begun to include the Prime portfolio in our statistics, and so we've adjusted September 30, 2010, to give you a sense of comparability. There were a couple of analysts out there that suggested that our average base rents went down sequentially. Keep in mind that we did not go back and adjust 6/30 numbers for Prime. That reduction in base rent is all associated with adding Prime into our portfolio. In fact, when you add Prime in on 6/30, 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 sq ft due to liquidations of Borders and Anchor Blue. The releasing spread for the 12 months was $4.77 per sq ft, a positive 9.6%. Our releasing spread continues to include all inline space, including spaces larger than 10,000 sq ft. Most importantly, comparable property NOI growth was 3.8% for the quarter, and 3.2% year to date was driven by increases in minimum and overage rent. Development activity quickly. We have three new developments under construction, all are premium outlets, two in the U.S. and one 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 significant expansions underway at three premium outlet centers in Japan.

As we have discussed with you in the past couple of quarters, our development and redevelopment programs in the U.S. and abroad are accelerating. We're seeing good value creation opportunities. We expect our share of development spend to approximate nearly $500 million in 2011, and the potential for 2012, again, depending on timing, could approximate $1 billion. As always, details on the cost and returns and timing of these projects are provided in our supplemental reporting package. On the acquisition front, we continue to demonstrate our ability to strategically invest capital. We completed two in this quarter. First of all, in July, we acquired ABQ Uptown, a 220,000 sq ft lifestyle center in Albuquerque, New Mexico. The center generates sales of approximately $650 per sq ft and adds to our presence in the growing Albuquerque market, where we also own Cottonwood Mall.

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

The interest rate is LIBOR plus 100, and the facility provides for a money market competitive bid option, which we expect to even lower the indicative pricing of LIBOR plus 100. We also have a lower pricing grid from our previous facility and a new maturity, as I mentioned, up to five years, which further enhances our already strong financial position. We also have nearly $930 million of cash on hand, including our share of joint venture cash. On dividends, we're very pleased to announce that our common stock dividend for the fourth quarter will total $1.10 per share. This is comprised of two separate dividends. First of all, we've now increased our regular quarterly dividend to $0.90 from $0.80. This represents a 12.5% increase. The dividend is payable on November 30 to shareholders of record on November 16. We also announced a special cash dividend of $0.20 per share.

This dividend is payable on December 30 to shareholders of record on December 16. These two dividends, as I mentioned to you earlier, total $1.10 for the quarter and increases our total payout from $3.50 for the 2011 calendar year, which we expect to approximate our 2011 taxable income. The new $0.90 quarterly dividend rate also positions us to have a trajectory of at least $3.60 per share in 2012, and we 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 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've 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 (participant)

Ladies and gentlemen, if you wish to ask a question, please press star one on your touch-tone telephone. If your question has been answered and you would like to withdraw your question, press star two. You may begin by pressing star one at this time for all audio questions. Our first question will come from the line of Ross Nussbaum with UBS. Please proceed.

Ross Nussbaum (Equity Analyst)

Hi, everyone. Good morning. 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? Maybe from a broader perspective, do you see this as a trend of some of your older, more established chains right-sizing their store counts now that they're coming up upon lease expirations?

David Simon (Chairman and CEO)

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. I think the recent announcement was nothing new to us. In fact, as I mentioned to you, we've been seeing a reduction in their fleet with us for the last three or four years as they continue to have very anemic sales per square feet, as well as decreasing sales per square feet. Now, just to put Gap in perspective to your next question, 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, and highly productive malls at below-market rents when they were going through their growth phase. Obviously, those days are over.

Even though we're likely to lose some space in less productive malls, we will more than make it up. I think we've already had, and 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 footprints or, in fact, eliminate their brand in those centers. Is this a trend that we're seeing outside of Gap? 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. It's a natural evolution in retail, but frankly, they're the only one going through this kind of downsizing on a material basis.

Ross Nussbaum (Equity Analyst)

Okay. I appreciate that. My final question, there's been a few, what we'll call Class A malls that have traded this year. Yeah, but the trend of B malls changing hands didn't occur. Can you talk a little bit about the pricing differential between those two categories, and do you think that they've been overdone on both extremes?

David Simon (Chairman and CEO)

I can only speak to our point of view. We were able to buy King of Prussia, and though we don't talk about individual mall transactions, 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. It 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. 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.

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's dependent upon financing. There'll be strategic assets here and there that certain mall companies might buy. I still think price discovery is going to eventually occur there, and I don't think it'll 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 for those assets.

Ross Nussbaum (Equity Analyst)

Appreciate it. Thank you.

Operator (participant)

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

Steve Sakwa (Senior Equity Research Analyst)

Thanks. Good morning. Maybe the first question's 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 fourth quarter of last year. I'm just trying to sort of understand why earnings would only be up 1% or 2%. What was non-recurring last year, just given the strength in the core business, the acquisitions that you've done, and probably some savings on refinancings?

Stephen Sterrett (CFO)

You're accusing us of being conservative? Is that? 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 it is in the full fourth quarter of 2010. That will make a difference.

Steve Sakwa (Senior Equity Research Analyst)

I understand. If you're, 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. I know you like to be conservative. I know you 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 of this year?

Stephen Sterrett (CFO)

Lease termination fees, generally speaking, were higher in 2010. We have had very little lease termination activity in 2011. The other thing that you do have is that in 2011, and I'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.

Steve Sakwa (Senior Equity Research Analyst)

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

David Simon (Chairman and CEO)

I think Europe is, you know, going to be in for a challenge for sure. We still like the outlet business worldwide, and right now that continues to be our primary focus worldwide. We have a worldwide franchise in the outlet business. That's the primary focus to take advantage of. That could be Europe, that could be South America, certainly Asia. 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. I think from an international point of view, the priority will continue to be the outlet business. 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 if there's a company that could really turn into a global retail real estate company, it's us. That's going to require us to look at everything there. There could be dislocation in Europe that could create buying opportunities. On the other hand, sometimes those things never come to fruition. Day-to-day, we're looking at how to grow the outlet business internationally. That's the number one priority.

Steve Sakwa (Senior Equity Research Analyst)

Okay. Thanks.

David Simon (Chairman and CEO)

Sure.

Operator (participant)

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

Jay Habermann (Research Analyst)

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

David Simon (Chairman and CEO)

From the Gap or generally?

Jay Habermann (Research Analyst)

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

David Simon (Chairman and CEO)

Yeah, look, I think not everything is robust in retail real estate. It never seems to be. Every year we've got to fill the, you know, fill the book again from people that are scaling back. We believe strongly 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, you know, almost 20 years now as a public company. I don't expect that to change at all. I think Gap's 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. We're going to look at those one by one individually. I would expect our ability to produce rent spreads, assuming we generally have a decent economy, to certainly be produced again next year. Rick?

Richard Sokolov (President and COO)

Yeah. 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, "If you get that Gap room back, we want it." I would not just view this through the prism of a Gap contraction. You have to also bear in mind all the tenants out there that are doing well, looking to expand, and the fact that there's virtually no new development. Whatever demand is being created among our retailers is going to be satisfied out of the existing inventory in the industry.

Jay Habermann (Research Analyst)

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

Richard Sokolov (President and COO)

We are in the midst of our leasing now, and demand has maintained pretty stable. There are a number of tenants that I 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. We are sanguine about our prospects. As David emphasized, we are at the mercy of the macroeconomic environment. If things stay as they are, we should be okay.

Jay Habermann (Research Analyst)

Okay. Just final question in terms of some of the, you know, 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%+?

David Simon (Chairman and CEO)

Oh, yes.

Jay Habermann (Research Analyst)

Okay, thank you.

David Simon (Chairman and CEO)

Sure.

Operator (participant)

Our next question comes from the line of Quintin Deleulli with Citi. Please proceed.

Speaker 20

Hi. Good morning. I'm here with Michael Bilerman as well.

David Simon (Chairman and CEO)

How are you?

Speaker 20

Good. Just in term, just going back to the international question, I believe you're down in Brazil recently, and it sounds like internationally you're more focused on the outlet center business. I'd be just curious to get your takeaways on the mall business in Brazil and whether or not that's something that could interest you at some point.

David Simon (Chairman and CEO)

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, than 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. A lot of positives. I think long-term Brazil's, I'm sure there'll be lots of ups and downs given its historical nature. 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'd be low and growing. 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. It'll be interesting to see how that all shakes out. An impressive group of companies and malls and an overall impressive marketplace.

Michael Bilerman (Analyst)

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

David Simon (Chairman and CEO)

I think this year, to put our dividend in perspective, there's a thing called bonus depreciation that we took advantage of. 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 Congress has put forward to 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. I think we've told you from day one we want to pay out our taxable income at a bare minimum. Our run rate now is $3.60. We probably will have a higher taxable income than that next year.

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. I actually think it's the more elegant way than raising it significantly beyond where the raise was. In terms of if your taxable income ends up less than that, you're paying out more than that. 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. Being able to use the extra capital that we have to fund our business and generate even more earnings. I think it's a pretty good cycle to be on. I read your thing.

I was confused that you'd say disappointed. I don't know. I've had a lot of shareholders that were very happy, including the board.

Michael Bilerman (Analyst)

It's a question more so of, you know, 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?

David Simon (Chairman and CEO)

It did increase. It went from 80 to 90. If we have to pay out, we have to pay out 350. If you take the logic of what you're saying, we would have to pay out $1.10 in the quarter, and that would be $4.40 for next year. That's not kind of the trajectory that we really want to convey. I think it's the right thing to do. We appreciate your input on it. We're very pleased with the outcome of it.

Michael Bilerman (Analyst)

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

David Simon (Chairman and CEO)

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

Michael Bilerman (Analyst)

$25.20, yeah. Right. You're set up for $3.75 for next year. You're already.

David Simon (Chairman and CEO)

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

Michael Bilerman (Analyst)

Okay, thank you.

David Simon (Chairman and CEO)

Sure.

Operator (participant)

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

Ki Bin Kim (Analyst)

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

David Simon (Chairman and CEO)

Did I age what? I didn't hear the last question.

Ki Bin Kim (Analyst)

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

David Simon (Chairman and CEO)

I think we have a bifurcated consumer, and generally, the people that shop at our malls are, you know, the unemployment for the college-educated is in the 4%-5% range. Certainly, we would like all the people to be benefiting from a growing economy. The general view of our business is that we want to attract the better consumer that does have disposable income to spend. We've been successful in doing that. We don't always do it. We have certain properties that don't do that. 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.

Ki Bin Kim (Analyst)

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

Stephen Sterrett (CFO)

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

Ki Bin Kim (Analyst)

All right. Thank you, guys.

David Simon (Chairman and CEO)

Thank you.

Operator (participant)

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

Paul Morgan (Analyst)

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

David Simon (Chairman and CEO)

Hey, Paul, can you speak up?

Stephen Sterrett (CFO)

Yep, he can barely hear you.

Paul Morgan (Analyst)

Is this any better?

Stephen Sterrett (CFO)

That's a little better.

Paul Morgan (Analyst)

Okay. Sorry. We just know from what the retailers have been saying that there's, you know, there's a lot of demand for the As. When they comment about space and the Bs, they talk about there being more gifts still. 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?

Richard Sokolov (President and COO)

Hi, 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 rent. 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 sq ft 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 properties. Is it always going to be a function of the market position and productivity? Sure. We think we're creating better products for our leasing guys to sell.

Paul Morgan (Analyst)

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

David Simon (Chairman and CEO)

I think it's a very positive rate. 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. 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. 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. I think 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. The bottom line, it's a great spot to be in.

Additionally, it lasts for a long time. It is not a one-year event. Let's hope we can continue on the track that we've demonstrated for the past several years.

Paul Morgan (Analyst)

Okay, great. Thanks.

David Simon (Chairman and CEO)

Thanks.

Operator (participant)

Our next question comes from the line of Craig Smith with Bank of America. Please proceed.

Jeff Spector (Analyst)

Good morning. 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 you felt happened during the course of the year? As you're laying out your 2012 budgets, I guess from a macro standpoint, what are you thinking at this point?

David Simon (Chairman and CEO)

The biggest pleasant surprise is that, you know, 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 last year, if you recall. To me, that's always the number one focus, how do we increase the cash flow on a comp basis from the property. With that said, I mean, that's the focus. What?

Stephen Sterrett (CFO)

Prime.

David Simon (Chairman and CEO)

You know, Prime is, you know, we have outperformed on our Prime portfolio in terms of our underwriting and our expectations there. That's helped fuel our growth. Rates were a little lower than what we projected as well. 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.

Jeff Spector (Analyst)

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?

David Simon (Chairman and CEO)

Look, we're just about to start that excruciating process. Don't remind me. You know, we actually do bottoms up property by property. If we look a little dazed, if you see us at the end of Thanksgiving, we kind of get dazed by that time. We actually do that. It's a little early. 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. You know what? We'll figure it out. I expect to have another good year and another year of growth. We're right now in that process. As you know, Jeff, we do that beginning of or kind of right when we do our year-end results. We'd expect to have another good year.

Jeff Spector (Analyst)

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

David Simon (Chairman and CEO)

I'll let Rick go ahead.

Richard Sokolov (President and COO)

A couple of things. One, all four of our platforms are positive to both budget and to actuals last year. They're all performing well year to date. In terms of the holiday, we literally have four tenants in here today. Talking to them, they're all anticipating up probably 2%-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 overinventoried. The only other point I would say is, as we think about our world, there's a pretty high correlation to the better retailers and how the S&P 500 does. We're, to a degree, I think, really focused on how that better consumer is thinking about their position, and that'll be reflected to a degree by the S&P 500.

Craig Smith (Analyst)

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 are there other things that'll be helping you push towards that goal?

David Simon (Chairman and CEO)

I think that is part of that, Craig, for sure. 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. Whether they're all of our marketing programs going to Fixed Cam as an example, we feel like the rents weren't at the level they should be given the quality of the asset. All of that, plus, you know, what'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. Our ultimate focus in this property will be to combine the plaza with the court with additional retail.

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.

Stephen Sterrett (CFO)

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 Simonizing the property by doing some of the things that David talked about, like the conversion to Fixed Cam and the full implementation of the marketing programs.

Craig Smith (Analyst)

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

David Simon (Chairman and CEO)

We are about to demolish the mall in the next month or so. We will end up creating a, what I'll call for better words, a lifestyle center, open-air center that will be anchored by Sears, Macy's. They will stay in place. There will be a road and a 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. All systems go there. We're just about done with all the planning. The demolition, as I said, should occur here in the near future.

Craig Smith (Analyst)

Great. Thank you.

David Simon (Chairman and CEO)

Thank you.

Operator (participant)

Our next question comes from the line of Jim Sullivan with Talon and Company. Please proceed.

Speaker 21

Thank you. Good morning. Question, first question for me, it's in the area that several other questions have kind of been on and maybe coming at it from a slightly different angle, David. Looking at your average portfolio base rent to average sales, obviously, sales trends have been very, very positive in spite of the negative productivity contribution, I guess, from Gap. 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. I just wonder if you could help us think about how you think about that 7.5% number. Over the course of a cycle in the past, it can run up to the mid 8% or higher. Do you think it'll have that upside potential given the change in the composition of the total portfolio?

David Simon (Chairman and CEO)

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. 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. I'm actually feeling that these things will work their way through the system in that way. 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.

Speaker 21

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'll be in terms of that metric.

David Simon (Chairman and CEO)

Yeah, there's no doubt you will have a step backward and then two steps forward because as you reclaim the space, you're going to have downtime. In some cases, it's going to take a little bit of period of time to lease it up. 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. Over a, not a long period of time, but over a two-year period of time, as you lease up the space that we reclaim, there's going to be tremendous upside.

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

Speaker 21

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 were movements in and out of what's on that schedule. Was there any changes in cost projections on projects, or was it simply the lower number simply because of what came out in the third quarter?

Richard Sokolov (President and COO)

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

David Simon (Chairman and CEO)

I think I would say one thing, Jim, our people are used to, hopefully, the conservative nature in how we present ourselves resides throughout the building. Certainly, when we approve projects, the level of sandbagging in our projects depends on who's doing the project, but it's institutional in nature. I would hope over time that we would produce better results than that. Rick's right, it is in the mix. We are being very aggressive and really focused on trying to make our properties the best that they can be, spending a lot of time. Part of the reason to do more quicker is the reason why we hired Contis to help in that area. He's very focused on it. Hopefully, we'll outperform those numbers. 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. I do hope you realize that the $6.30 base rent did not include Prime. When you do, we actually do have sequential growth. I just wanted to reinforce that with you.

Speaker 21

Okay. Good. 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 proposed. I just wonder if you'd 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.

David Simon (Chairman and CEO)

I think, you know, 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 create the level playing field. There are two or three or four different approaches on how to do it. The good news is, I think Congress is beginning to understand the difference, the fact that the field is not level. We'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 talk to understands the fairness of it. 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 unfair advantage. 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. As you might imagine, it's a process. We're actually feeling, Rick is involved too, you can add to it, but we're actually feeling like there is hope to get something out there that can be passed by Congress.

Richard Sokolov (President and COO)

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. 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.

Speaker 21

Okay, good. Thanks.

David Simon (Chairman and CEO)

Thank you.

Operator (participant)

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

Jeffrey Donnelly (Equity Research Analyst)

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

David Simon (Chairman and CEO)

I think they're looking to do that anyway, right?

Jeffrey Donnelly (Equity Research Analyst)

Right.

David Simon (Chairman and CEO)

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. 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 want to give them the benefit of exempting 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. The fact of the matter is there's a lot of people, the more research you do, that do a lot of research. It used to be they researched online and then went to shop physically. Now they go shop physically. They understand the difference that they don't have to pay the sales tax and actually go to the physical environment, do all the research, and buy online.

All you have to do is ask Best Buy to get their perspective on it. I think that needs to be eliminated. There's no reason why Amazon and certain others need that benefit. Same-day delivery is a different issue as far as I'm concerned.

Richard Sokolov (President and COO)

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. That just emphasizes one of the benefits we have of being able to facilitate those things in a much more efficient manner.

Jeffrey Donnelly (Equity Research Analyst)

Yeah, I think I would agree that it's not necessarily all one or the other, online or bricks and mortar. I mean, in some ways, you saw that through the Gap announcement where they were scaling back on their mall stores. I think ultimately, retailers are trying to find a way to provide value. In that case, you saw Gap increase or looking to increase their outlet store count. To kind of switch gears to that, do you think that you mentioned that you did not see a trend among mature retailers looking to scale back their store count, 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, you know, call it more broadly outside of the U.S.?

David Simon (Chairman and CEO)

I think the outlet business has been, you know, going strong for a number of years, partly because, you know, 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. Rick and I personally talked to a number of retailers talking about how it's not brand negative, but brand positive for them. 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. In a lot of cases, it clouds what they're trying to do at the full price level. That change has been going on for a number of years.

Plus, the quality of the product that we built, how we execute it, the tenant mix, the marketing, kind of all has been upgraded to the next level. We're still making improvements on it to make it the best experience that we can make it. I think that trend continues. 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. I think 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, you know, I've always been a little bit worried about for all sorts of reasons. For crying out loud, we're building an outlet in Malaysia, right? It's going to open in a month. It's there. We expect to take advantage of it in other markets as well.

Jeffrey Donnelly (Equity Research Analyst)

If I can just ask a last question, and I'm back on this BNC Mall topic. You know, as a property investor, what realistically is the bull case for BNC 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 that it's more of a play for the entrepreneurial crowd kind of implies an unattractive risk return profile. Not to leave Steve out, I was curious, what does the state of the capital markets look like for BNC product? There are a lot of anecdotes out there that the traditional equity and debt capital providers to the mall space really don't look at malls anymore under $350 a square foot in sales.

David Simon (Chairman and CEO)

It's very simple. The operating story is that if it's a BNC mall and there's a reason for it to exist, it's going to have a stable cash flow. In fact, if that area continues to have economic growth, that cash flow will grow. The fact of the matter is, if you have appropriate management running it, you're able to add to the critical mass of that BNC property. The market may not be overly exciting, but the cash flow ought to maintain itself. In fact, if you execute appropriately, you may even increase market share because there's a lot of where the market share got diffused with a lot of these strip centers that are, in a lot of cases, suffering from oversupply and not clear winner and loser and a lot of box movement back and forth.

From that standpoint, I think you're going to, and I think, frankly, from our B malls, they 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's a pretty good return on equity that they're generating. I think the ability to gain market share is all part of the story. Today, the CMBS market, one week it's on, one week it's off. We're getting bid, so I think it's back on. Last week it wasn't. I still think 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.

Jeffrey Donnelly (Equity Research Analyst)

That's helpful. Thanks.

Operator (participant)

Our Next question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed with your question.

Alex Goldfarb (Equity Research Analyst)

Good afternoon.

David Simon (Chairman and CEO)

Hey, Alex.

Alex Goldfarb (Equity Research Analyst)

We're coming up on roughly the year anniversary of the Capital Shopping Center saga. Looking at their stock price performance over the past year, looking at your stock price performance, just curious if any of their stockholders have called you up and said, "Hey, if you make another run, you have our blessing and we'd be supportive.

David Simon (Chairman and CEO)

That's not the British way, is it now, to admit that they may have made a mistake? The answer to that is no. We have no interest in doing that either. We put our best foot forward. At that point, the board, for whatever strange reason, turned down that deal they shouldn't have in hindsight. We felt comfortable that we would have been able to execute a better growth story than they would 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. Whitaker is a large shareholder. I think he's a very capable gentleman, to reignite that company. We're assessing how that proceeds, but we have no interest in buying the company.

Alex Goldfarb (Equity Research Analyst)

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?

David Simon (Chairman and CEO)

That's correct.

Alex Goldfarb (Equity Research Analyst)

Okay.

David Simon (Chairman and CEO)

That's correct.

Alex Goldfarb (Equity Research Analyst)

Following that trend, what is your strategy for the, is it just simply now a stock investment, or is it something that you would look to unwind then?

David Simon (Chairman and CEO)

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. We're kind of adopting a wait-and-see approach. That could change, that could change. Right now, it's wait and see. I do think Mr. Whitaker is the kind of entrepreneur that that company needs to get it reinvigorated. We're kind of waiting to see whether or not that can happen. We're certainly an important shareholder. We're certainly there to help anything we can do to make the company perform better.

Alex Goldfarb (Equity Research Analyst)

Okay. Second question is, you know, recently, there have been a number of items of, you know, sort of public-private, whether it's, you know, obviously Westfield going back into World Trade. There's the whole Willets Point here in New York where it looks like Maysurich and Taubman are looking at putting together bids. The Journal this morning featured the Fulton Street subway stop, you know, adjacent to World Trade where, you know, maybe there's an opportunity for a retail landlord to come in and manage some of that retail space. 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, you know, the yields just don't make sense, or if those opportunities are truly few and far between for the real, you know, out-of-the-park type situations.

David Simon (Chairman and CEO)

I'd say all the above. I mean, we've never been a real, we've kind of always adopted the approach not to do RFPs, whether it's from a private, you know, whether it's just a private company or individual that's looking to, you know, 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. The fact of the matter is, I've never personally gotten excited about it. 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, you know, throughout the world, you know, maybe we would resort to that. At this point, I just have never personally got excited about it.

Alex Goldfarb (Equity Research Analyst)

Okay, thank you.

David Simon (Chairman and CEO)

Sure.

Operator (participant)

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

Carol Kemple (Analyst)

Good morning. 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?

David Simon (Chairman and CEO)

Part of that is, you know, our recent LTIP program that we've had with the Senior Management.

Carol Kemple (Analyst)

Is that a good run rate going forward then?

Stephen Sterrett (CFO)

Yes, it is, Carol. Yes.

Carol Kemple (Analyst)

Okay. Great. Thank you.

Operator (participant)

Our next question comes from the line of Michael Muller with JPMorgan. Please proceed.

Michael Muller (Senior Analyst)

Yeah. Hi. I'm not sure I saw it disclosed anywhere, but what was the investment in King of Prussia and how was it financed?

David Simon (Chairman and CEO)

Again, we don't disclose individual mall transactions. It was financed, I think we announced that, partly cash and partly from Atlanta Credit.

Michael Muller (Senior Analyst)

Correct. Okay. The leasing spreads of about 10% for the nine-month or for the year-to-date spreads of about 10%. What is the difference between the cash spread and the GAAP spread?

Stephen Sterrett (CFO)

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. If you convert it to GAAP, it would be higher.

Michael Muller (Senior Analyst)

Yeah, about how much higher, roughly? You know.

Stephen Sterrett (CFO)

Michael, I don't have the number in front of me. It's not something that we tend to look at because, as David has said on many, many occasions, his laser focus tends to be cash.

Michael Muller (Senior Analyst)

Sure.

Stephen Sterrett (CFO)

Let us take a look at it, and I will get you a number.

Michael Muller (Senior Analyst)

Got it. Okay, thank you. Bye.

Operator (participant)

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

Rich Moore (Equity Research Analyst)

Yeah. Hi. Good afternoon, guys.

David Simon (Chairman and CEO)

Hey, everybody.

Rich Moore (Equity Research Analyst)

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

Stephen Sterrett (CFO)

As you know, Rich, the spreads in the bond market gapped out late summer, and then it kind of widened for the year over the course of the last two or three months. The good news is they have gotten better. The tenor in the bond market has clearly gotten better. It is something that, you know, we're paying attention to. The good news is we have the flexibility to be patient that as we think about that level of outstandings on the credit facility, if the bond market continues to improve, we'd love to turn it out.

Rich Moore (Equity Research Analyst)

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

Stephen Sterrett (CFO)

You know, Rich, the CMBS market, as David mentioned earlier, we're getting quotes and on many assets, we're getting very good quotes. 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.

David Simon (Chairman and CEO)

Yeah. I'd just add, Rich, that 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 it, factor in fees, amortization, any audit costs, the whole nine yards.

Rich Moore (Equity Research Analyst)

Appraisals, yes. Okay. All right. Great. Thanks, guys.

David Simon (Chairman and CEO)

Rich, you made a comment about our sequential average-based rent. You're clear on that now, I hope.

Rich Moore (Equity Research Analyst)

Yeah, you made that very clear. Thanks, Steve. I appreciate that. Let me ask you guys if I could.

David Simon (Chairman and CEO)

Part of my job.

Rich Moore (Equity Research Analyst)

Yeah, that was good. I got you. I'm clear. On the redevelopment scene, I think you guys had said you were looking to do a couple billion dollars of deliveries over the next, say, five 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 the scope of the redevelopment scene?

David Simon (Chairman and CEO)

I think that, you know, I'll let Rick elaborate, but I think right now, you know, 2012 could shape up to accelerate some of that. It could end up in 2012 that we would have committed $1 billion in our redevelopment portfolio. It actually, that number could accelerate, Rich.

Rich Moore (Equity Research Analyst)

Okay.

David Simon (Chairman and CEO)

In terms of the timing of it.

Stephen Sterrett (CFO)

Yeah. Rich, this is Steve. If you recall, the number that we floated out was a quarter or two ago, and it was primarily centered around the 2017 or 2018, what we called transformational opportunities. I think, number one, we've added to that list as we've continued to examine the portfolio. Two, the ordinary course of business stuff, like Rick mentioned with the 40 boxes and all that, is kind of on top of those transformational opportunities.

Rich Moore (Equity Research Analyst)

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

Stephen Sterrett (CFO)

We are very focused on that. If you look at the projects that we have opened, several of them have both office and multifamily and hotel components, the primary one being Domain, where we have a Westin plus multifamily in both phases, plus office in both phases. Obviously, we're working right now on the approval process for a very substantial residential tower over Copley in Boston. It is very much a part of our focus, and we, in fact, have a dedicated team looking to bring those incremental uses into our properties.

Rich Moore (Equity Research Analyst)

Okay. All right. Good, guys. Thank you, Rick. The last thing I had was, David, it seemed that, you know, 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 to doing something in China as far as outlet centers goes?

David Simon (Chairman and CEO)

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

Rich Moore (Equity Research Analyst)

Okay. All right. Great. Thank you, guys.

David Simon (Chairman and CEO)

Sure.

Operator (participant)

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

Cedrik Lachance (Analyst)

Thank you. 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 asked that question perhaps in the past, but do you feel more inclined to be a consolidator of B-mall space at this point, or is it still something that's far in the future?

David Simon (Chairman and CEO)

I don't think we will be, other than we'll always look at what's there. 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. Unless there's a strategic view of that asset or something to do, really something special with it, we probably wouldn't. The fact of the matter is, look, we've grown in the mall business, frankly, through M&A. We'll never rule that out. 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. Even 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.

That would be a natural way for us to have more exposure in that product, which we're fine with. 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.

Stephen Sterrett (CFO)

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

Cedrik Lachance (Analyst)

Great. Thank you.

David Simon (Chairman and CEO)

Sure. Thanks.

Operator (participant)

Our next question comes from the line of Ben Yang with Keith Boulette Woods. Please proceed.

Speaker 22

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

David Simon (Chairman and CEO)

You broke up on the last part.

Speaker 22

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

David Simon (Chairman and CEO)

No.

Speaker 22

Okay.

David Simon (Chairman and CEO)

It would be our people. I mean, we would likely joint venture with, you know, an existing Chinese company, whether they own the land or whether they were in the development business or a retailer, much like we did when we built the Walmart stores. We would not, you know, buy a company to do that. No.

Speaker 22

Okay. Great. Just last question. You mentioned Gap closing more stores than they had previously planned being no surprise to you. Since it sounds like they're basically not renewing upcoming leases, and I assume you can look through your portfolio to figure out how many leases are expiring over the next few years, where they're located, good centers or bad, what's your expectation for store closures from Gap, and how many of those spaces are spoken for today?

David Simon (Chairman and CEO)

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. That's the first point that I want to clarify. I will tell you that I don't think their acceleration of store closures is all that different than what they've done the last couple of years. It may be marginally accelerated, but it's not all that different than what they've been doing, frankly, since 2009, 2010, and 2011 and going into 2012.

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

Speaker 22

Can you just remind us how many Gap-branded stores are in your portfolio? Of that amount, would you, how many do you think are going to close based on this?

David Simon (Chairman and CEO)

Let me just say this. If you look at our schedule, we have 300 in our 8-K, we have 386 stores, if I'm right.

Speaker 22

Right.

David Simon (Chairman and CEO)

Take away 138 of those because those are in the outlet business. That gets you down to kind of the whole Gap fleet, so that's like 240.

Speaker 22

Yeah.

David Simon (Chairman and CEO)

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

Speaker 22

It sounds pretty modest overall.

David Simon (Chairman and CEO)

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

Speaker 22

Okay, thank you.

David Simon (Chairman and CEO)

Sure. Thanks.

Operator (participant)

Our next question comes from the line of Omotayo Okusanya with Jefferies & Company. Please proceed.

Omotayo Okusanya (Analyst)

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

Stephen Sterrett (CFO)

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 see if their customer is located in that property. That demand is constant pretty much year-over-year. We're very pleased with where we are today on that.

Omotayo Okusanya (Analyst)

Okay. That's helpful. Just in regards to the recent deals that you've done, Steve, I know you know pricing-wise you weren't talking about King of Prussia, but could you give any pricing details on Albuquerque?

David Simon (Chairman and CEO)

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

Omotayo Okusanya (Analyst)

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

David Simon (Chairman and CEO)

We just had no interest. No interest.

Omotayo Okusanya (Analyst)

Any reason why you didn't have an interest?

David Simon (Chairman and CEO)

No interest.

Omotayo Okusanya (Analyst)

All right. Congratulations on a great quarter.

David Simon (Chairman and CEO)

Thank you.

Stephen Sterrett (CFO)

Thank you. Thank you.

Operator (participant)

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

David Simon (Chairman and CEO)

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. We'll talk to you soon. Thank you.

Operator (participant)

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