Simon Property Group Q3 2010 Earnings Call Transcript

Simon Property Group (SPG)

Q3 2010 Earnings Call

November 01, 2010 11:00 am ET

Executives

Stephen Sterrett - Chief Financial Officer and Executive Vice President

Richard Sokolov - President, Chief Operating Officer, Director and Member of Executive Committee

Shelly Doran - Vice President of Investor Relations

David Simon - Chairman, Chief Executive Officer and Chairman of Executive Committee

Analysts

Benjamin Yang - Keefe, Bruyette, & Woods, Inc.

Omotayo Okusanya - Jefferies & Company, Inc.

Steve Sakwa - ISI Group Inc.

Christy McElroy - UBS Investment Bank

Alexander Goldfarb - UBS

Quentin Velleley - Citigroup Inc

Andrew Fenton - Cliffwood Partners

Michael Bilerman - Citigroup Inc

Ross Nussbaum - UBS Investment Bank

Richard Moore - RBC Capital Markets Corporation

Nathan Isbee - Stifel, Nicolaus & Co., Inc.

Michael Mueller - JP Morgan Chase & Co

Jay Habermann - Goldman Sachs

Cedric Lachance - Green Street

Craig Schmidt - BofA Merrill Lynch

Paul Morgan - Friedman, Billings, Ramsey & Co.

David Harris - Gleacher & Company, Inc.

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Simon Property Group Earnings Conference Call. My name is Michele, and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to your host, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Shelly Doran

Welcome to Simon Property Group's Third Quarter 2010 Earnings Conference Call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.

Acknowledging the fact that this call may be webcast for some time to come, we believe it's important to note that today's call includes time-sensitive information that may be accurate only as of today's date, November 1, 2010.

During today's call, we will discuss certain non-GAAP financial measures as defined by the SEC's Regulation G. 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 Form 8-K. This package is also available on the Simon website, in the Investors section under Financial Information, quarterly supplemental packages.

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.

David Simon

All right. I'll go through some financial and operations. Good morning. I'll go over some financial and operational results. First of all, we reported funds from operations of $0.90 per diluted share for the quarter, which was first call consensus estimate. This was accomplished despite the recording of transaction expenses of $47.6 million in the quarter or $0.14 per share. As you may know, GAAP now changed at the beginning of 2010 to require the expensing rather than the capitalizing of transaction expenses. FFO as adjusted, which excludes the impact of the debt extinguishment charge related to our August unsecured debt tender was $1.43 per diluted share, very importantly, an increase of $0.05 from $1.38 in the third quarter of 2009. It was another quarter of industry-leading operational performance. We continue to see improvement in our business conditions.

And let me talk -- the next few comments will focus on our Mall and Outlet business, which contributes over 90% of our domestic NOI. Top sales on a rolling 12-month basis were $483 per square foot, up 7.6% as compared to $449 per square foot as of 9/30 '09. Tenant-reported sales were 10.6 higher during the third quarter of 2010 as compared to the third quarter of 2009. We're pleased to see this increase in our tenant sales, however, were more focused on growing our own revenues, and I'm pleased to report that our third quarter consolidated revenues grew $54 million or 5.9% over the prior-year period. Comparable property NOI growth was 3.6% for the quarter, 2.8% for the nine months. Drivers of the increase in comparable NOI continue to be rent growth from higher occupancy, higher overage rent, and lower bad debt expense. During the quarter, growth in base rents contributed 210 basis points to our comp NOI growth number. Overage was 80 basis points, and lower bad debt expense was roughly 60 basis points.

As of 9/30, occupancy was 93.6%, sequentially 50 basis points higher than 6/30 and 80 basis points higher than one year ago. As of September 30, the releasing spread for the trailing 12 months was $1.13 per square foot, and we're seeing gradual improvement in deal flow in the pricing of our space.

Acquisitions, let me just give you an update on that. And disposition activity on August 30, we completed the acquisition of Prime at a value of approximately $2.3 billion. The transaction added 21 outlet centers, outlet properties comprising 8 million square feet to our portfolio as of September 30. The properties were 94.7% occupied, with average base rents of $24.52 per square foot. And they generated sales of $406 per square foot. This portfolio is an excellent fit for us. It presents a compelling opportunity to benefit from shopper's demand for brand-name merchandise at attractive pricing, and we believe that our strong track record of operational excellence, financial resources, history of successful acquisition position us to meaningfully improve the performance of these assets for the benefit of tenants, retailers and consumers.

On the disposition front, on July 15, we completed the sale of Simon Ivanhoe, our 50-50 joint venture, Simon and Ivanhoe Cambridge, our JV partner, received consideration of EUR 715 million. We recorded a gain of $281.3 million on the transaction. And as we discussed, we retained a 25% interest in core development properties with Ivanhoe and Unibail.

Capital markets, again, we were very active in the third quarter. In August, we purchased for cash, outstanding notes maturing in 2013 and 2014. $1.3 billion of the bonds were tendered at a weighted average duration of 3.5 years, the weighted average coupon of 6.06%. We recorded a $185.1 million loss on the extinguishment of debt as was recorded in the quarter in connection with this purchase. And currently, we sold $900 million of 4 3/8 senior unsecured notes due 2021. The notes were priced to yield 4.42%. The lowest coupon of a 10-year REIT bond in history, net proceeds from the offering were used to partially fund the purchase of the senior unsecured notes tendered.

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