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Simon Property Group (NYSE: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.

Operator

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.

As a result of these activities, we've significantly extended the duration of our senior unsecured notes portfolio from 6.8 years to 7.5 years and slightly decreased the weighted average interest rate on that portfolio. In the third quarter, we also closed five new loans totaling $700 million. Our share of that was approximately $300 million. The weighted average interest rate on the loans was 5.3% with a weighted term of 9.8 years.

Noteworthy, we recently locked rate at Fashion Valley Mall in San Diego on a 10-year basis at 4.3%. Beginning of year, many of you are interested on how we planned on using our significant cash on hand. And at 12/31/'09, we had $4 billion. This gives you a sense of kind of how we deployed the cash in primarily three ways. The reduction of our unsecured debt including the net use of cash in connection with the tenders of $1.5 billion, retirement of secured debt and the unencumbering of assets of $1.1 billion, cash investment in prime and other acquisitions of roughly $550 million. At the end of the quarter, we had approximately $1.3 billion of cash on hand, which includes our share of joint venture cash and our availability on our corporate facility of over $3 billion for a total liquidity position of $4.3 billion.

Capital expenditures, if I could turn to that, is a little bit higher than we originally planned, approximately $200 million, which reflects an increase in the redevelopment activity as a result of the improving economic conditions and demand. This capital spend in 2010 includes the completion of our expansion to South Shore Plaza in Boston, The Domain in Austin and the expansion of the Houston Premium Outlets, which will open this month. The expansion and renovation of the Las Vegas Outlet Center, which is projected to open in March 2011 and more than 35 anchor and big box replacements in 2010. You'll be happy to know, I will not read them. You can find them in our 8-K.

And during the third quarter, we started construction on two Premium Outlet Centers, Merrimack Premium Outlets in Merrimack, New Hampshire, which is a 380,000-square-foot center projected to open in June of 2012. There are 1.7 million residents living within 30 miles of the site with an average household income of $87,000. And the center is located one north of metropolitan Boston and sales tax-free New Hampshire. Johor Premium Outlets in Johor, Malaysia, which is 175-square-foot center projected to open in November of 2011, is located one hour's drive from Singapore, and Johor Premium Outlets is being developed in a joint venture with Genting Group. Our interest in that is 50%. By the end of 2011, we will have 11 Premium Outlet Centers open and operating in Asia, generating total NOI at the property level of well over $200 million.

We continue to look at opportunities to upgrade existing department store. Our representation are working to identify future department store availability based on existing performance. We have been very successful on our efforts to re-tenant department store and other big-box space and have another 25 deals approved with openings expected in 2011. And again, you'll be happy to note, I won't read those.

As part of our renewed redevelopment push, we've identified 16 Regional Mall assets as potential transformational properties. The scope of these project ranges from adding department stores, restaurants, specialty store tenants to the redevelopment of the entire asset, and we expect work to commence on some of these in 2011.

Finally, let me conclude by saying that we are extremely pleased to announce an increase in our quarterly dividend from $0.60 to $0.80, an increase of 33%. This number will -- this getting to $2.60 for the year, which will approximate our taxable income, and it also position us on a trajectory to pay at least $3.20 per share in 2011. Based upon our results in the quarter and the expectations for the balance of the year, we're also pleased today to increase our 2010 FFO guidance as adjusted by $0.13 on the low end and $0.08 on the high end. And again, we are pleased to re-affirm to you that we expect to be sector-leading growth in 2011 and beyond and we're ready for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Christy McElroy of UBS.

Christy McElroy - UBS Investment Bank

I've got Ross [Nussbaum] on the line with me as well. Dave, just following up on your comments on redevelopment, can you give us some of the economics behind expected redevelopment starts over the next couple of years relating to those 16 malls? Like total spend, timing of starts, that type of thing?

David Simon

Well, redevelopment is an art, not a science. But I think our projected spend on these 16, depending on the scope, will be approximately $1.5 billion. And we would certainly, of the 16, hope to get a couple of them started in 2011. We're making some good progress on securities and commitments. And then with those commitments, I think we'll begin to actually start the projects. So I would hope that we would have two to four next year, and then at least get to 16 going by 2013.

Christy McElroy - UBS Investment Bank

And as you were looking at those opportunities, what kind of returns are you targeting?

David Simon

I would say to you that they're consistent with what we've done historically. And in the redevelopment, we're still striving to get double digits around 10% at some will average a little bit lower than that, but some will be above that. So I would hope that we would be able to generate about 10% on the total investment over that three- or four-year period of time.

Christy McElroy - UBS Investment Bank

What's your occupancy today including temp tenants? Can you give us a sense for how temp leasing has trended so far in the second half relative to past years? And can you discuss some of the economics of the Toys "R" Us pop-ups as compared to normal temp leasing?

David Simon

Well, let me just say, as you know, we don't include seasonal or temporary tenants in our occupancy. Unless a tenant, unless a retailer is in there for over a year, it is not included in our occupancy. So the seasonal tenants, if you've been -- and as you know, you've walked through plenty of our malls, our malls look 100% occupied even though there may be some temporary tenants, or handful of temporary tenants in the malls. So it does not include that number. So with that said, I think the demand is reasonably better this year than last year. And the rents, I don't talk specifically about particular tenants, but I think Toys record are doing more deals this year than last year substantially. But we don't talk specific rents about tenants. But I assume they had a successful Christmas last year, otherwise they wouldn't commit to more this year.

Richard Sokolov

And the only other thing I would add is that of the temporary tenants that Toys opened with us last year, we were able to convert a significant number than in the long-term permanent deals. This gives them an opportunity to see how a given property is going to react to their offering. And if it is encouraging, they are prepared to commit long term, and we're anticipating to have a number of those convert this year as well.

Christy McElroy - UBS Investment Bank

And then Ross has a question or two as well.

Ross Nussbaum - UBS Investment Bank

Are you looking to monetize that investment anytime soon?

David Simon

Well, I don't comment on stuff like that, I try not to, I'm not perfect in that area. Actually, it's really gallery commercial, GCI as we call it. So I really have no comment on that, I'm sorry to say.

Ross Nussbaum - UBS Investment Bank

The other question I have is can you break out the same-store NOI growth on the malls versus the Premium Outlets to get a sense of whether those numbers are consistent or was one number driving it?

David Simon

The answer is given the fact that they're both material contributors, they both contributed significantly to our growth. And I will just say this, that based upon what I have seen, the mall top NOI growth is still industry-leading if that helps you in any way, but we don't break those out as you know.

Ross Nussbaum - UBS Investment Bank

And I would assume fair to say that outlets are perhaps leading, the industry-leading mall number?

David Simon

That's correct.

Operator

Your next question comes from the line of Quentin Velleley of Citi.

Michael Bilerman - Citigroup Inc

Michael Bilerman here with Quentin. David, just in terms of the dividend, I think you said that this would be at least to start off, and it sounds like maybe some of the gain offset by some of the charges pushing the taxable for this year. How are you thinking about the dividend heading into 2011 as to where you would want to set it? And is it going to be a few quarters for an increase? Or you would think about it relative to when you provide the '11 guidance in January to what level the board is comfortable moving that $3.22?

David Simon

Well, let me just say this. You may not have caught this in my last remarks. We expect, obviously, it's subject to board discussion, but I think it's safe for you to assume that we're going to be paying out $0.80 per quarter next year. And there is a possibility. Obviously, we're going to have to pay out or we want to pay 100% of our taxable income. As we look at '11, even though we haven't finalized our budget process for '11 and there's a lot of things that go in and out in taxable income, and there are obviously government has some involvement in that. For instance extending bonus depreciation, there's certain states that have an input on that. But I would say that we expect to pay out at least $3.20. And to the extent that our taxable income is higher then we would pay out more, and that would be determined in the fourth quarter of next year.

Michael Bilerman - Citigroup Inc

And then in terms of the steps, in your supplemental, you broke out Prime, it's on Page 24, in terms of the occupancy and the sales per foot, but you still kept in the Premium Outlets in with the malls. I'm just curious why you did that.

David Simon

Just because we wanted to make them scrub all the numbers, make sure it's all -- we wanted to give the market a sense of what the Prime portfolio was by itself. And then next quarter, we intend to meld those into our numbers, but we felt since it was just a month old, there hasn't been a lot of data out there. We wanted to give the market a chance to see the portfolio, but it will be melded in next quarter.

Michael Bilerman - Citigroup Inc

Rather than melded out and split all?

David Simon

Well, we understand your opinion on that, and I have an opinion on certain things as well, and we'll continue to welcome those opinions.

Operator

Your next question comes from the line of David Harris from Gleacher & Company.

David Harris - Gleacher & Company, Inc.

I have a question on credit quality, tenant credit quality. Many of us saw Gymboree taken out by private equity interest as recently. And obviously, we've seen the JCPenney move. Tell me, is there anything in your leases that sort of protects your position from a deterioration credit? I mean many of these private equity deals seem to involve, will seem to involve additional debt on the balance sheet. So you got a less credit-worthy tenant theoretically than you have before?

Richard Sokolov

David, it's Rick. In certain of our leases, we do have those constraints. And we have requirements for annual certifications and minimum net worth requirement. In the large public companies, typically that would not be present. What we are focused on going forward, and what they're going to focus on going forward is the ability to convince us that they're going to be able to pay their rent as it comes due. And I would tell you that we very give you an example, Golden Gate acquired Express. That was acquired all cash, now went public. The fact that something goes private is not synonymous with a significant lease up, adding of debt and a decrease of the result in EBITDA. We monitor that, literally on a biweekly basis for all of our tenants. And if we see a tenant that is going the wrong way, we will reach out to them and tell them we're not going to be able to do more business with you until you get that more in line.

David Simon

Yes, I'll just say, this is David, that I still call them LBOs, but the model has changed somewhat with respect to leverage buyouts. And first of all, there's been enough historical bad deals done where leverage was pushed too high, and I assume that a number of the sponsors understand that. Second, and it gets back to Rick's point, with express and others, the model today, frankly, is to grow the business. And what we're seeing is when there are companies thinking private, the growth plans in a lot of cases actually accelerate as opposed to decelerate. So we don't expect much of a change from Gymboree. They had a pretty good growth trajectory. We expect that to continue, if not increase. So the model's a little bit different, and we can only hope that some of the past mistakes have been thoroughly reviewed about too much leverage. But let's face it, it is a reasonable concern for us to be focused on.

Richard Sokolov

And I would say generally, the credit profile of our tenants has frankly never been better in terms of their free cash flow and their multiples of EBITDA to debt. So in that regard, it's a macro consideration. Things are more favorable today by a significant margin than they've been in the past.

David Harris - Gleacher & Company, Inc.

David, I've got a question for you in the global. Obviously, this is an environment where there's a great deal of volatility in FX and particularly the expectation that the dollar may be a weak counter against a number of leading currencies. As that includes to your thinking about where you want to take the company as a global entity over the next, over recent times?

David Simon

Well, I guess in a sense if you had a really negative view on the dollar and we felt like we could put our capital to work outside of the U.S., and add value to that real estate, then we would be somewhat motivated to do that. But it's very tough to have a kind of a permanent view on the dollar or where it's going. I mean obviously, the last couple of months are wonderful indications of that where we thought we're going to have parity, not we but the world thought we were going to have parity with the euro. And now we're headed it back in the other direction. So it's certainly much factor in now. The factor matters. We could still, aside from a number of emerging markets, we still hedge a pretty good chunk of your investment if you wanted to. But if you did have the view that the dollar was going to be in a permanent decline, then as a steward of capital, would make potentially more sense to have assets outside of U.S. than it does more assets outside of U.S. than we currently have. But at the end of the day, we've got to make real estate decisions. We're real estate people, and we've got to believe that whatever we buy, we're buying at the right value. We could add value to it. Steve, I don't know if you look at anything to it?

Stephen Sterrett

Well, I think David's right. I will just say one thing, David, that one of the things that we do is because we finance our existing JV in the local currency. As you know, we do have a bit of a natural hedge anyway and that we're collecting rent as an example in Italy in euros, but the entity is also financed primarily with euro-denominated debt.

David Harris - Gleacher & Company, Inc.

If we just set aside then the currency issue for the moment, David, if you look at the world as a sort of range of opportunities, do you still see the U.S. as offering you predominantly the most attractive area to allocate your capital?

David Simon

Well, David, I would say that the activity in the U.S. and our sector has considerably slowed. But that doesn't mean that there aren't going to be opportunities. I mean sometimes, they arise when you don't expect them and sometimes, you have to be patient. And that's been our mantra for quite some time. If you look at the history of our company, we've been -- the consistent history of it is we've been criticized every step of the way, but the good news is I think we've made a lot of right decisions. So when we bought CPI, nobody was expecting malls to really trade, and everybody thought we overpaid. But obviously, the history is that we did a hell of a deal. When we got into the outlet sector and after a few years of experience understanding the business, in 2000, we built a couple. We bought it in '04, we've grown that business. We brought it out of the kind of the dark ages into respectability both in terms of the returns it could generate, but also in terms of what retailers thought about it. And we brought more retailers into the marketplace. So my view of it is we've just got to be ready. You don't necessarily know when it might happen. We don't do deals just to do deals. Occasionally, our discipline has not been perfect. So every once in a while, we've done that, but we've done it on a basis that obviously financially, we could handle that. And so I'm not -- even though there's nothing eminent in the U.S., I'm certainly not thinking that, that won't have opportunities for us. But I also think internationally and in Asia, it kind of gets lost in the sauce here because of the size. But as I said in my opening remarks, we're going to have 11 centers in Asia. This is a portfolio. So our share in Japan is 40%, in Korea, it's 50% and so on. But that's going to generate over $220 million of NOI next year with the other growth prospects. In fact, tonight in New York, I have dinner with our Japanese partner. There's other areas in Asia that we're going to examine, so we've got lots of ways to grow the company. I'm not discouraged in the U.S. at this moment, but it's not like it was a year ago. Good news is we made a deal in '09 when others didn't, and we've also made the right decisions like in 2004. We didn't buy Rouse where others did. So I'm cool about everything.

Operator

Your next question is from the line of Paul Morgan of Morgan Stanley.

Paul Morgan - Friedman, Billings, Ramsey & Co.

So if I look at your lease metrics, you've done 9 million, 10 million square feet of deals this year at $41 a foot, and lease expiration has been around $40. Could you help me kind of connect the dots between that? And next year or the year after, you've got 18 million square feet expiring between $33 and $34? And how much of that is just not really comparable, or I mean what we expect to see I think in terms of lease spreads, lease opening rates to go down significantly? Basically, what you've done so far or your spreads are going to widen out significantly?

Richard Sokolov

Paul, it's Rick. First of all, when you're dealing with our numbers, when you say 8 million or 9 million, that's a whole lot of activity that is going to transcend any specific for the most part qualitative skewing in the Mall business. What we are seeing is increasing activity from our tenants as the sales have gone up, our occupancy costs have come in. And we're hopeful that we're going to be able to improve upon our spread next year over this year. That's the anticipation. We've been able to hold our numbers, and one of the things that has obviously helped, we're in a benign bankruptcy market. And so as we are getting more demand, we have less spaces that are going out whether we have to replace them when we weren't anticipating. So all those factors will hopefully give us a little better pricing.

Stephen Sterrett

Paul, this is Steve. I'll just add two things. We talked a little bit about it on the last call, but in 2010, we did lose higher renting tenants like the jewelry stores. And so the dollar of the square footage that was the denominator in the equation is certainly higher than what you'd see in the lease expiration schedule going forward. So absent that, in 2010, we had much fewer square footage lost, certainly the last couple of quarters. I didn't expect our closures to be closer to our lease expiration. I think that's one. And so that does suggest that you could see an increase in spreads next year. Another indicator that I would offer you that I think supports that is our calculation is an apple and an orange. We add up all the leases that we do, and we compare it to all the leases that closed, but they're not necessarily the same leases. But we do track internally a same-space leasing spread, and that number on a rolling 12-month basis is about $2.30. So it's a fair bit higher than what you'd see in the publicly reported spread. And I think that goes to Rick's point and just seeing an improved quality of the yield, and I think again, as we go into 2011, knock on wood, I would think you would start to see acceleration in our spread.

Paul Morgan - Friedman, Billings, Ramsey & Co.

That $2.30 same-space number, does the pattern of it over time look similar to the number you reported here, the apples-and-oranges number? I mean was that in the order of kind of $8 or $10 a couple years ago?

Stephen Sterrett

It was higher a couple of years ago, for sure. Yes.

David Simon

I would say it masks pretty much the openings and closings until. Obviously, that number is depressed from where we reported in '08, '07 and '06 given the economic conditions that exist. And I would underline Steve's point in that, what drove our closings was unanticipated jewelry stores and what not. But if we get back to kind of the natural expirations, then our spreads ought to migrate toward where they have been historically.

Paul Morgan - Friedman, Billings, Ramsey & Co.

And then on the occupancy side, how do you include Chelsea in there, I have a little bit harder time figuring out where you were in terms of occupancy versus your -- and how far in the malls do you think you are off your 2007-or-so peak? And do you think you can, what's the timing for you to get back to that type of level?

Richard Sokolov

This is Rick. I think we're going to continue to make progress towards getting back towards that peak. We have our 80 bps spread that we had through 9/30. We should hopefully hold that through the remainder of the year end. We're anticipating continued progress on top of that going into '11. And so we should be creeping up on that 2007 occupancy, assuming that we don't have unanticipated bankruptcies and other things going out that we don't see today.

Stephen Sterrett

Paul, just to fill in the dots or the blank, if you will, we're between 100 and 150 basis points below the peak occupancy in the Mall business.

Paul Morgan - Friedman, Billings, Ramsey & Co.

Last question on the outlet side, obviously, there have been people who've been talking about new projects as well, have you done any analysis? I mean how much opportunity do you think there is for new outlet centers in the U.S.?

David Simon

Well, look, I don't have a specific number that I can tell you. There's a lot being talked about and we know what we want to build, which is the Premium Outlets. So we think there's some of those to be built, but I can't give you a specific number, Paul.

Operator

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

Jay Habermann - Goldman Sachs

Rick, you mentioned occupancy cost has trended down a bit as the sales have come back and clearly bad debts trending in a much better direction. I guess two questions. One, how widespread is the sales increase, I guess if you strip out Apple and other stores, how widespread is it? And even looking at Class A malls versus Class B? And number two, as you think about the leasing, just following on Paul's question, what is your target for occupancy cost I guess as you look out to 2011?

Richard Sokolov

Well, let me do the first. In the Mall business, it is pretty broad across project types and across the various categories. Obviously, in junior, some are going to be doing better than others because that's a highly quarter-to-quarter and fashion-driven business. But we've seem very good stability across those. In terms of our occupancy cost, I think we've always said that we'd like to be in the 13% to 14% range in the Mall business and outlets have been operating less than that. And so long as we can stay in that range, we've seen historically that our retailers can make very good profit. And we can make an acceptable return on our assets, and that's pretty much where we are trying to drive the business.

Jay Habermann - Goldman Sachs

And maybe for David, I guess even with the dividend increase, you guys are still going to have a fair amount of free cash flow per year. And you've got $1 billion of cash, the line is free and clear. Are you looking to build cash on the balance sheet? Or do you think you look to pay down debt? Because it looks that you're going to have $500 million to $600 million of free cash flow even after the dividend as well as the investment and redevelopment?

David Simon

Well, we'll continue to delever. It's a nice spot to be in. And absent specific investment opportunities, we'll continue to delever, which will obviously add to our growth rate and hopefully our multiple, even though it's not clear that, that's the case like at this particular point. But let me go back to Rick's earlier point. The thing that excites me is, yes, I loved tenant sales growth, but I get more excited about our own revenue growth. And there's a lot to the mall and to the outlet center that -- now I understand the correlation between tenant sales and potentially what our revenue is, but the fact of the matter is what's most important to me is our revenue growth and because part of our job is to merchandise the center where if our retailers aren't producing the revenues that are commensurate with that center, we ought to replace it. And that doesn't get picked up in the comp sales numbers. So that's our -- I don't want anybody mistaken about our focus, is to increase our revenues, which obviously, given the high operating margins we have in our business, that tends to drop disproportionately to the bottom line. That's our focus.

Jay Habermann - Goldman Sachs

And lastly, any quick comments on Florida? How trends are there?

David Simon

Better.

Jay Habermann - Goldman Sachs

Better than the average?

David Simon

Yes. Better than the average.

Richard Sokolov

Particularly in the tourist-driven properties, there have been a substantial increase in tours coming in from South America and Europe for that matter. And that's a significant number of properties we have in the state. And they are outperforming.

Operator

Your next question is from the line of Craig Schmidt of Bank of America Merrill Lynch.

Craig Schmidt - BofA Merrill Lynch

The 21 Prime properties, they are currently doing I guess $406 a foot and $24.52 at an average rent, is there any reason why those metrics after they've been managed through the Chelsea team they can't reach Chelsea's level? Or is there some geography or something constraints that they may not allow them to reach that sort of level?

David Simon

Well, we expect to enhance the properties like we would hope in anything that we've done, and Prime has done a good job over the years. But we would hopefully build upon that and continue to increase the productivity and the cash flow from those centers.

Craig Schmidt - BofA Merrill Lynch

And then in terms of Orlando, you already have about 550 square feet of outlet space, and you're adding almost another 1 million. Is there anything you need to do to adapt that space? Or given Rick's comments about the stronger tourist markets, that may not be necessary?

David Simon

Well, Orlando is an interesting market because it's really so many different markets by themselves. And they operate kind of independently because the tourism is such that they're different markets. So the answer is not really. They all serve their current market well, and the good news is that Orlando market is unique in terms of driving visitor traffic, there's nothing in the horizon that would, suggest that they can't continue to drive the 40-plus million visitors a year. And we're the beneficiary as long as we continue to maintain high-quality properties catering to those individual submarkets appealing to the tourists that go to each individual tourist destination.

Richard Sokolov

And to David's point that there are separate markets, substantial number of tenants are operating in both properties, because there are a lot of people that are going to Universal and staying on International Drive that are not going down to Disney and staying on the Disney compound. So there are two distinct properties and two distinct markets.

Craig Schmidt - BofA Merrill Lynch

And then finally, I noticed there has been a sales square foot improvement in The Mills as well as an occupancy pickup. Are you introducing more outlet conference than that? Or is that just a standard business as usual and it's...

David Simon

We aren't introducing more outlets, tenants. And additionally, some that we're changing, we're changing kind of what that center is going to be. For instance in Gurnee, we were actually expecting to modify a big chunk of that center to the full priced but the rest is a lot of just bringing in the better merchants, a number of which are brand-name outlet operators. Plus, Rick and -- I don't want to bore you with the details, he's got his list, he's dying to read it, but we won't let him. Is that we're adding, we're doing a good job of re-tenanting the boxes that we lost with Steve & Barry's, Linens 'n Things, Circuit City's, et cetera. We've got a couple of Bloomingdale outlets that we've brought in to the center, so just better leasing management and taking advantage of a better economic scenario. And Rick is available later to read you all of what he's done recently.

Operator

Your next question comes from the line of Alex Goldfarb of Sandler O'Neill.

Alexander Goldfarb - UBS

Just quickly on the capital side, and this is probably more for your JV properties. Just given where the portfolio lenders are, and it seems like they're a little behind. Maybe they caught up, but it seems like they're behind in allocating for the year. Has any of that caused you guys or your JV partners to reconsider refinancing plans? Or is it more that the thought of refinancing a property is a much bigger decision than just simply where you can get a rate and a sizable loan on a project?

Stephen Sterrett

Alex, this is Steve. I think it's the latter. Our refinancing decision is above and beyond just what your capital spend is. But having said that, it's a high-class problem to have because we do have many properties, JV properties where we've got substantial capital to spend. Rick whispered to me that we're in the midst of doing a renovation of Fashion Valley where we just refinanced. We have some other properties that are in that list of 16 assets that David mentioned that could potentially be transformational. And a couple of them that I can think of right off hand, it's very low leverage. So the opportunity to roll the source of capital for that transformation into a single financing is certainly there. So we'll look at it on a case-by-case basis.

David Simon

Look. If a mortgage does not subject to a prepayment penalty or yield maintenance penalty, we are actively talking to our partners about refinancing it. A traditional secured debt usually has something along those lines. But we don't have a lot of floating rate debt on our JV at all, period. But to the extent that it's not locked out or the yield maintenance is de minimis or there is none, then we're talking about a partner about refinancing, which is exactly what happened in Fashion Valley. Fashion Valley is a great scenario historically, thinking about kind of what happened, I think we had -- can't remember all the details other than it came to in '08. Both of us had to put capital in to pay off the mortgage, which I believe was a couple hundred million bucks. Then we got a $50 million loan. And then we got that $50 million went to $100 million, then that $100 million went to $200 million. And now the $200 million went $475 million, all in a span of 18 months. So maybe that's a pretty good recollection. So I mean that's kind of what happened. We actually had to put in equity, and thankfully, our partner and us had the equity do it. But we had to unencumber that asset for a while at the end of '08.

Alexander Goldfarb - UBS

And then moving to the Prime, now that the books have been closed, can you give us a split of -- originally, I think on the cash yields, you were talking about an 8% of what you think the gap yield will be.

David Simon

Well, no, but we'll do better.

Alexander Goldfarb - UBS

And then just finally, wrapping up on Prime, there was the item in their press release about the consent agreement. Is this just something that sort of just an ordinary document processing thing? Or is this anything that could linger for a while?

David Simon

We don't believe so. In other words, we do think it's ordinary course.

Operator

Your next question comes from the line of Michael Mueller of JPMorgan.

Michael Mueller - JP Morgan Chase & Co

Going back to the debt paydowns, not a lot coming due in terms of secured and unsecured notes next year. Should we expect anything in terms of maybe a pool of assets like we saw in 2010 get unencumbered?

Stephen Sterrett

Michael, we don't actually have a lot of opportunity to unencumber assets in 2011. But as David has already mentioned, we're looking at the balance sheet everyday. We're certainly working it. Absent of transaction opportunities, we will delever. It was interesting you said not a lot to do, but we still got $1 billion plus of mortgages to redo in 2011. There's sliver interest of bond figures about $400 million less than '11 that wasn't tendered. You could certainly see us pay that down. But we'll just pay attention to where the market is.

Operator

Your next question is from the line of Steve Sakwa of ISI Group.

Steve Sakwa - ISI Group Inc.

First, Rick, can you just talk about what percentage of leasing you might have already done for 2011 at this point in the year and compare it to, say, a year ago? And how much leasing you had done in 2010?

Richard Sokolov

We're through probably about 39%, 38%, 39% of our '11, and that's pretty much where we were this time last year.

Steve Sakwa - ISI Group Inc.

So even though you're feeling better about the world, I guess I'm just trying to figure out if may be that 39% got committed to a lower rate, now the world's better?

Richard Sokolov

Well, one of the things that were doing, and we said this last year, we're not in as much of a hurry because the world is getting better. And renewals in '11, some renewals are literally still 13 months out. So there is certainly no hurry to have to address those renewals that are in the fourth quarter where we think we're going to be in a much better shape. We could look. We can control that by deciding how we price our space, and so we're going to be very deliberate in how we price our space, and that's going to impact the pace of our renewals.

Steve Sakwa - ISI Group Inc.

And then I was wondering if you could maybe just spend a little bit of time talking about Prime, and as you kind of look at that portfolio today and maybe hearken back to when you bought Chelsea, I didn't see an occupancy cost David disclosed for that portfolio, but just what sort of upside do you see? I mean obviously a portfolio is not as productive as the Chelsea assets, but as you kind of look here today, you've owned it for a month, what kind of opportunities do you see embedded in that portfolio?

David Simon

Well, let's just say, there's no way to replicate what we got out of the Chelsea portfolio, other than a few individual centers here or there. As you know, that's the highest portfolio out there. Look, I think, Steve, it's relatively straightforward stuff. It's better marketing, and it is better leasing through better merchandise management. And when you do the two together, they kind of fuel off each other, and you get the desired impact that you're looking to. And there's also going to be the ability to reclaim, re-demolish certain space that we think we can make more productive. Little developments, we had our board at Queenstown last week as an example, and there's a little corner of the center, good center, good leasing, but there's a corner that's effectively not part of the nice atmosphere that was created there. So trying to figure out how to anchor that and re-tenant it and make it part of the center. It's going to be the kind of things that we do. And we've already identified a number of the better merchants that we think we'll be able to add to the portfolio. There's less and less of opportunities to better merchandise to the centers.

Steve Sakwa - ISI Group Inc.

Well, David, if you don't want to disclose the occupancy cost, can you just tell us if it's above or below where I guess the Chelsea portfolio or the Premium Outlet portfolio is?

David Simon

It's below.

Steve Sakwa - ISI Group Inc.

And Steve, I know it's sort of a technical question, but the $47 million in charges this quarter, any way to sort of just break out some of that amongst the different buckets of things you pursued?

Stephen Sterrett

No, Steve, it's just a composition and a compilation related to everything.

David Simon

The important point is that you don't expect to see that going forward.

Steve Sakwa - ISI Group Inc.

Are there any lingering charges that might occur in Q4 as a result of many of the activities you pursued this year?

David Simon

De minimis.

Stephen Sterrett

Yes, I wouldn't expect it.

Operator

Your next question is from the line of Nathan Isbee of Stifel, Nicolaus.

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

Just returning to the rent spread issue, can you just please provide some detail on the rent spread, just breaking out malls versus outlets?

David Simon

We put those together, Nate, if you hadn't noticed.

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

Yes, I know but you gave out a little bit of detail on the fixed NOI before in terms of saying that it was above the -- it was still industry-leading. Would you say that malls were positive this quarter or the trailing 12?

David Simon

Yes, I'd say malls are relatively flat.

Operator

Your next question comes from the line of Andrew Quentin of Credit Suisse.

Andrew Fenton - Cliffwood Partners

If you remove the Apple from your sales number, do you know how much of the percent growth that attributes?

David Simon

Very, very, very little. Remember, we have 65 million square feet, then we had the outlet stores. So it's 80 million, you had like 40 Apple stores so I don't have it off the top of my head, but it would be de minimis in terms of the growth. I mean obviously, we think they're a great retailer and a great company, and we want to do more and more stores with them. But in terms of having a major impact, it's just not there for us.

Operator

Your next question is from the line of Cedric Lachance of Glenn (sic) [Green] Street Advisors.

Cedric Lachance - Green Street

Do you have a small stake in value retail in Europe. What's your appetite for doing more on the outlet side on the European continent?

David Simon

Well, I would say that, put value retail aside, I would say that we have obviously a nice U.S. Outlet business. We have a nice Asian Outlet business. And strategically, given there is a commonality of the product and retailers, it would be nice to have a European presence in that business. But I won't talk specifically about value retail or anybody else, but it would make strategic sense for us to be represented in Europe with good quality outlet centers.

Cedric Lachance - Green Street

And what's the best way to approach that? Is it development primarily? Or do you think there are interesting acquisition targets over time?

David Simon

Well, I'd say both are tough, frankly, Cedric. Development is clearly the hardest to do, but we have looked at certain things in the past. And I would say on the acquisition side, there could be opportunities for us down the road. So I would lean more toward acquisitions than ground-up development just because of the length required to develop there and all of the uncertainties and all the stops and starts, but we look at both. We look at both.

Operator

Your next question is from the line of Tayo Okusanya of Jefferies & Company.

Omotayo Okusanya - Jefferies & Company, Inc.

Just a few quick follow-up points. Could you tell us what occupancy costs actually were at the end of third quarter?

Richard Sokolov

Yes, for the end of the third quarter, for combining malls and outlets, it was 12.1%.

Omotayo Okusanya - Jefferies & Company, Inc.

And then the reversal of the provisioning during the quarter, could you talk a little bit about the reasoning behind that and what we can kind of expect

in regards to provisioning on a going-forward basis?

Stephen Sterrett

What happened in the third quarter, quite frankly is we just collected some receivables that we had fully reserved for. And when you collect something in cash and there's no longer anything to offset it with on the balance sheet, you have to flow through income. I mean historically, Tayo, our bad debt expense runs about 50 basis points for 0.5% of revenue. I would tell you, it looks like 2010 is a year where we're going to end up with literally close to zero bad debt expense. But if you're looking on a go-forward basis, I think it would be difficult to replicate that experience in 2011. So I'd expect to see some return to a more normal level of bad debt.

Omotayo Okusanya - Jefferies & Company, Inc.

And last question, as we start to head into the holiday season, just could you give us a general sense of what you're hearing from your tenants about what sales look like and what their expectations are going to be?

David Simon

Look, I will tell you that the good news is Christmas, the holiday season, is no longer make or break for our retailers the way it's been 20 years ago. It's all you heard about was they had to have a good Christmas season to survive. Our retailers are much better operators, so it's not make or break the holiday season any longer. I can tell you that generally, the holiday season never meets expectations too. I think one out of the last 10 years, it's met expectations. So much has to do with the mood and psyche here of consumer, and there's obviously a lot out there to sway it one way or the another. I'll leave my political views to the side for the time being. So the long-winded answer is my own personal view is it won't meet expectations, but it's just because I'm betting on history that it never seems to. And when I say expectations probably more of what the media and our efforts and some of these other people put out. But I don't get overly excited one way or another what it meets or beats or doesn't, just because I think from a retailer's point of view, they've learned how to manage it appropriately. They do seem poised to have a better season because inventories have been built up. That's good and bad, right? That's good in the sense that if there is demand, they could drive sales. On the other hand, it is looking like the season could be a touch more promotional than it has been in the past. But again, I don't get caught up in -- it's almost like the politics is going to win and who's not going to win. Lots of pundits out there. The good news is from our retailers, they seem to be able to manage it either way.

Operator

Your next question comes from the line of Ben Yang of Keefe Bruyette and Woods.

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

David, you mentioned the occupancy cost is currently lower for Prime versus your other outlets. I'm curious if you have the same occupancy cost target for both outlet portfolios when you sign new leases? And if you don't, I'm wondering if there's any reason why you can't get to that same level for Prime?

David Simon

Well, look, I think we have enough experience that we know what market rents ought to be and given that, we feel good that there's growth in the Prime portfolio and not only because of where rents are versus were market rents are, but also because we're going to make the centers better. And by making them better, retailers are going to want to be there, and Ben, that's potentially -- I wish it were more complicated than that, but that's basically what our guys are charged to do.

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

I mean but will there come a day when you can maybe narrow that occupancy cost gap? Or do maybe less-productive outlet centers just naturally get a lower occupancy cost?

David Simon

Well, there's certainly part of that. There's no question there's part of that. Typically, what we've had in the Outlet business is even though rents have been increased, sales have increased even to the higher rates. So the occupancy costs still can't catch up to the number that make sense. But clearly, there are going to be centers that have lower productivity. You're not going to be able to charge the kind of rent that you could at higher productivity. So there's certainly part of that element with Prime and even existing outlets that we have today. And that's the same thing for malls as well.

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

Did you guys revise your same-store NOI guidance for the year? Because I think it currently stands at about 1% to 1.5%?

David Simon

I'm looking at '11, so the answer is no, but I think we'll do better.

Operator

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

Richard Moore - RBC Capital Markets Corporation

On percentage rent, we're looking at percentage rent as a percentage of sales, and those seem to go higher. Is that the inclusion of Prime, do you think, or is there something else going on there?

David Simon

It has nothing to do with Prime at all really. We only had Prime in for a month. It's really just better sales across the portfolio, obviously both in the Mall and in the Outlet side.

Richard Moore - RBC Capital Markets Corporation

So you think that to continue? You think that's sort of trending higher? Is that what it sounds like?

David Simon

Well, it's clearly trending higher as you can see by our growth of our retailers, that's for sure. But it is a variable number and once the retailer's in there, it's out of our control. It's really how they produce. But in audit, assuming it continues on that path, it ought to be certainly higher than last year.

Richard Moore - RBC Capital Markets Corporation

And then in the other income line, Steve, in the joint venture portfolio, that seemed to jump unusually, what was in there again?

Stephen Sterrett

It's two things that are primarily driving it, Rich, one is the property that we are a 25% owner of had a large out lot peripheral transaction, that it was about a $20 million gain. Our share of that was about $6 million. So even though you're seeing a large impact in the JV footnote, actually our share of it isn't that significant. The other one is just you see this in the consolidated financials as well. We had a higher level of lease termination activity. I think it was up about $10 million in the JVs, and I think our share of that was about $3 million. So that's the majority of the increase, the rest of it is just normal growth in business that we're seeing across some of the line items that flow through there.

Operator

You have a follow up from the line of Quentin Velleley of Citi.

Quentin Velleley - Citigroup Inc

Just in terms of the 16 transformational redevelopment projects you were speaking about earlier on, I think you sort of mentioned that a few of us those projects would be complete redevelopments of the assets. So I'm just curious which assets they were and whether or not we should be thinking about that as sort of defensive CapEx as well as expansion CapEx?

David Simon

Well, we have two malls that are basically have been de-malled and produce no income today. And in fact, they have a slight negative. So those certainly would be in that category. But I don't think, given the opportunity ahead of us and given the lack of new space out there, I would say to you that not any of this is really defensive. It's really because there's an opportunity in there, and demand has somewhat increased. When I think of defensive, the way you describe it is may be in connection with something else happening in the marketplace, these are just there to be done to improve upon.

Quentin Velleley - Citigroup Inc

And so of the $1.5 billion, it's a very small proportion?

David Simon

Clearly.

Operator

You will follow up from Dan (sic) [David] Harris of Gleacher & Company.

David Harris - Gleacher & Company, Inc.

I don't know if I dare ask this question, but general growth comes out of a bankruptcy shortly and it's got some powerful backers and a rebuilt balance sheet. Have you been briefing the troops for a tougher battle ahead?

David Simon

I'll let our performance speak for itself. So fact of the matter is, David, we have prospered whether general growth was growing in bankruptcy or emerging from bankruptcy. The bottom line is we've been able to grow our business and do well regardless of what they or anyone else has done. And I look back and say it's very interesting to me, and I know a lot of people are in earnings focused, but we're going to be one of the few -- let's just take First Call as a barometer. Based on '11, we're actually have the potential, if you use First Call as a barometer to actually have the best earnings per share that we've had. So yes, we've been some diluted deals. We've sold common stock, I'm not thrilled about the price that we did, but we felt like in the scheme of things, we had to do it. We're actually our growth is it such that we're going to, if you believe First Call -- and obviously we're going to come out with our guidance, but I wouldn't be talking like this if I didn't think that, that was a possibility. We're going to actually outgrow our dilution and, hopefully next year, do better than what we've ever done, which was an '08 record FFO per share. So our record FFO per share I think was $6.42. You can see that our dividend trajectory is back to where it was. You compare all of the other retail REITs out there and in particular, all the other retail REITs, they're 30%, 40% of their FFO per share and 30% and 40% of their dividend per share, and in some cases even a lot worse than that. So as an example, I won't say it, because I mean it's really -- so the fact of the matter is our troops know what we want them to do regardless of whether what happens with general growth or not. So I think I answered your question.

David Harris - Gleacher & Company, Inc.

Let's try to tackle it a slightly different way. Setting aside the public companies, and obviously we've got have had a fairly good handle on that, do you have a sense, David, that you picked up?

David Simon

We have an interesting chart, we'd be happy to share with you.

David Harris - Gleacher & Company, Inc.

Let me ask my question, maybe you can show me the visuals in a couple of weeks. Do you have a sense over the last couple of years, the stronger companies would obviously include most of the public companies within our group, have picked up substantial market share from some of the other layers in your marketplace?

David Simon

Well, certainly. And certainly at a property level, there's some of that, but more importantly, it's really at a company level that you can see that differentiation easiest.

David Harris - Gleacher & Company, Inc.

Does the chart show that? It must be bottom left to top right, all charts that I ever look at look go that way don't we?

David Simon

Certainly, when we do the charts.

David Harris - Gleacher & Company, Inc.

Is that what you're going to show me in a couple of weeks, David?

David Simon

We will now.

Operator

We have a follow up from Steve Sakwa of ISI Group.

Steve Sakwa - ISI Group Inc.

I just wanted to make sure, Steve, when you're providing that same-store NOI increase in the 8-K, that does include the benefit of lease termination income?

Stephen Sterrett

It does not include the benefit of lease termination income. We got a great lease termination income now.

Steve Sakwa - ISI Group Inc.

So I guess really then, the figure for the nine months does include the benefit of basically the reversal of the bad debt this year but not the increase in lease termination income?

Stephen Sterrett

That's correct. Bad debt is a component of lease...

David Simon

In our earlier comments, we've mentioned how much that was. It was at 3.6.

Stephen Sterrett

For the quarter, bad debt has added about 50 basis, points. So then 3% of bad debts would've been the same as last year.

Steve Sakwa - ISI Group Inc.

And Steve, do you know what it was for the year, the nine months number?

Stephen Sterrett

The bad debt is 80 basis points.

Operator

If there are no further questions, I would now like to turn the call back over to Mr. Simon.

David Simon

Sorry, operator, jumped on you there. Thanks to everybody. We'll talk to you soon.

Operator

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.

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