Simon Property Group (SPG)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET

Executives

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

Analysts

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

Presentation

Operator

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.

Shelly J. Doran

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.

David E. 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 NOI 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 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.

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