Nov 3, 2008
Executives
Shelly Doran - VP of IR David Simon - Chairman and CEO Rick Sokolov - President and COO Steve Sterrett - CFO
Analysts
Jay Haberman - Goldman Sachs Lou Taylor - Deutsche Bank Christy McElroy - Banc of America Mark Biffert - Oppenheimer & Company Paul Morgan - FBR Michael Dimler - UBS Michael Bilerman - Citi Jeff Spector - UBS Ben Yang - Green Street Advisors Michael Mueller - JPMorgan Rich Moore - RBC Capital Markets Jeff Donnelly - Wachovia Fred Taylor - MJX Asset Management Michael Bilerman - Citi
Operator
Good day, ladies and gentleman and welcome to the Q3 2008 Simon Property Group Inc. Earnings Call.
My name is Becky, and I will be your coordinator for today. At this time, all participants are in a listen-only mode.
We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions).
As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Shelly Doran, Vice President of Investor Relations.
You may proceed.
Shelly Doran
Thank you. Welcome to the Simon Property Group third quarter 2008 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 risk and uncertainties.
Please refer to our filings with the Securities and Exchange Commission for detailed discussion of these risks and uncertainties. Acknowledging the fact that this call maybe webcast for some time to come, we believe it is important to note that the call include time-sensitive information that maybe accurate only as of today's date November 3, 2008.
Company's quarterly supplemental information package was filed earlier this morning as a Form 8-K. This filing is available via mail or e-mail and it is posted on the Simon website in the investor relation 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
Okay, good morning and thank you for joining us today. We are pleased to report another strong quarter and I would like to just take a few minutes at this time to review highlights for the quarter, and then we will open the call up for your questions.
Third quarter FFO, funds from operation was $1.61 per share, up 10.3% over the prior year, all of our property platforms continue to perform well, occupancy in the mall portfolio was 92.5% as compared to 92.7% in the year earlier period despite the fact that square footage lost to bankruptcy for the first nine months of 2008 totaled 435,000 square feet as compared to 53,000 square feet during the first nine months of 2007. Our premium outlet portfolio remains nearly fully leased at 98.8%, comparable sales in the mall portfolio was $493 per square foot, up four-tenths of 1% as compared to the year earlier period, sales have been affected by the weak US economy, premium outlet sales growth remains strong, increasing 4.2% to $520 per square foot driven by our centers with substantial international tourist exposure as well as the US consumer seeking value.
Comparable property NOI was up 3.1% for the mall portfolio and 6.6% for the premium outlet portfolio for the nine months ended September, 30th. The releasing spread of our mall portfolio was $8.65 for the first nine months representing 23.6% increase.
The releasing spread for our premium outlet portfolio was $13.02, representing a strong 49.4% increase. We recently completed significant redevelopments at Tacoma Mall in Tacoma, Washington University Park in Mishawaka, Indiana and started construction on our eight Premium Outlet center in Japan.
In the last month, Nordstrom has open new stores at the Fashion Mall at Keystone in Indianapolis, Ross Park Mall in Pittsburgh and Tacoma. This week, we will open the fully leased expansion of Orlando Premium Outlets, and next week, we will open Jersey Shore Premium Outlets, which is over 90% leased.
We will continue to remain diligent in allocating capital only to those projects that meet our return requirements. In fact given the current economic conditions, we anticipate our capital spending will be down significantly in 2009.
In the third quarter, SPG completed six financing that totaled $1.220 billion of proceeds with a weighted average term of six years and an average interest rate of 5.72%. During the quarter, we also unencumbered six assets that generate over $57 million of annual EBITDA and our unencumbered portfolio today generates annual EBITDA in excess of $1.7 billion and sales of approximately 500 per square foot.
We have addressed all of our 2008 debt maturities; we are well-positioned financially given our significant cash position of over $950 million including our share joint-venture cash and our availability in our corporate credit facility of over $2.5 billion. Before I get to guidance and my concluding remarks, I would like to address two items out in the public domain, the first of which relates to traffic and occupancy.
There are a number of firms that monitor and report shopper traffic and occupancy at US malls. These firms issue releases and are interviewed by national media sources purportedly as industry experts on the topic.
I would like to go on record and state definitively that we do not report any data to these firms. I believe that several other owners of high quality retail real estate assets also do not participate.
Therefore, I leave to it your judgment as to whether or not their data is representative of the industry and certainly not us. Additionally there has been a great deal of public speculation about possibility of our acquisition of General Growth Properties.
While our policy is generally not to comment on specific rumors like this, I will tell you that in the current environment I can not envision a set of circumstances that would result in such a transaction. Now let me turn back to guidance and my concluding remarks.
Based upon third quarter results, projected activity for the rest of the year and our view of current market conditions today we gave 2008 FFO guidance of $6.40 to $6.45 per share increasing the lower end of our previously provided range by $0.02. Our initial guidance for 2008 was $6.25 to $6.45 per share, and did not anticipate the second quarter 2008 debt extinguishment charge of $0.07 per share.
I believe with the drastic change in the economy, we are probably one of the few real estate companies that have effectively increased our 2008 guidance. These are clearly challenging times, but I believe we will continue to be successful including generating positive NOI growth from our portfolio and FFO growth in 2009.
We anticipate, obviously, a slower leasing environment and have worked diligently to execute leases for upcoming exploration. As a result, we are ahead of where we were at this point in time last year in leasing our upcoming year's explorations, we are aggressively managing our cost and our capital spend and we have a strong balance sheet.
I remind you that we are more than a regional mall company with substantial income generated by our community center and premium outlet portfolios, both of which should offer benefits in a challenging economic environment as consumers continue to look for value. With that said, we are pleased with our results and we are now open for questions.
Operator
(Operator Instructions) And your first question comes from the line of Jay Haberman of Goldman Sachs. You may proceed.
Jay Haberman - Goldman Sachs
Hey, good morning, here with [Johan] as well. I guess, David, clearly the change in outlook in the credit markets, can you talk about sort of the 2009 outlook for debt maturities and what options remain available?
I mean you did do a substantial amount of refinancing in the quarter and that's certainly positive news, but it sounds like you're keeping some powder dry here, you want to keep cash in the balance sheet as well as your line free and clear?
David Simon
That's accurate. We have $900 million of senior unsecured notes that come due next year as well as our share of secured debt around 900 million.
We don't anticipate any concern about refinancing the secured debt. We're making progress.
Obviously the capital markets currently are more or less shutdown. I think we've been anticipating for a year now that the world was about to change.
We are well positioned to handle that, as evidenced by our credit facility as well as the amount of cash on our balance sheet.
Steve Sterrett
Hey Jay, this is Steve. I'd just add one comment on the secured debt that's coming due in 2009.
It's property that average $500 a foot. Its property that even at pretty conservative cap rates are 50% loan-to-value, so, I think even in a relatively difficult market, we feel good about our ability to roll that over.
Jay Haberman - Goldman Sachs
Okay, sounds good. And you mentioned as well reducing sort of the CapEx for next year.
Can you comment on specifically what percent decrease you expect and also, David, your comments with regard to a large competitor, I mean would you look at one-off acquisitions in terms of individual assets?
David Simon
Well, let me talk about capital spending. We anticipate, it's kind of a flexible number, because we continue to work very diligently.
We have a lot of value to our portfolio. We feel that there are going to be a number of unique opportunities to do that in the upcoming years.
I call kind of [flex off] and flex defense. Right now, we're in the flex defense.
Our share of capital spending, we anticipate being just under $400 million next year in '09 that can certainly increase opportunistically if the world stabilizes, which I think it will in '09, but we're certainly planning that it won't. That's just my judgment.
I went outside of our corporate policy on that commenting on M&A transactions, but I felt like given the size of the transaction, the importance of what's going on there. I felt like I had to answer it other than that, Jay.
I really can't shed anymore light on that other than those statements. We've been really good storage of capital here.
We will not do anything stupid. And we are very focused on continue to grow our company prudently.
Beyond that, I don't want to comment other than those statements.
Jay Haberman - Goldman Sachs
Sounds good, and then just last question, In terms of the NOI growth, you gave the year-to-date statistics. Obviously the third quarter result was a bit of a deceleration from the previous quarter.
Was there anything in there specifically, whether it was higher bankruptcies you referenced?
David Simon
Jay, let me just focus on that. I would always look to the year-to-date number.
I go back for instance in the second quarter of '07, the malls had 1.6% NOI growth and the quarterly numbers have a lot of variability to it. We still think very comfortably that in '08 we're going to grow the comp NOI of the mall portfolio consistent with the guidance we gave.
The third quarter was a little bit lower than that, but what we see in the fourth quarter, we think we'll make it up, so we're within that 3% to 4% range.
Jay Haberman - Goldman Sachs
Rick is there any comments on October sales, or any thoughts on the GAAP, the announcement to close stores.
David Simon
I'll just add Rick while Rick is gathering his thoughts. What GAAP is doing is not unusual and it's something that we've frankly have seen and been dealing with over the last couple of years.
We don't have October sales. We get those anywhere from 20 days to 30 days in arrears, But anecdotally, we think the October sales are going to be tough.
Rick now that you've gathered your thoughts.
Rick Sokolov
I think October sales are going to be tough. I will say to you that this environment from the credit side is certainly more unique by the terms of the give-and-take with our tenants.
We've gone through this a number of times before. We're working through with our tenants and we are still proceeding with all of our leasing activities and that is continuing a pace.
Jay Haberman - Goldman Sachs
Great, but it sounds like the spreads are still holding up which is good.
Rick Sokolov
There you are.
Jay Haberman - Goldman Sachs
Okay. Thank you.
David Simon
Thanks.
Operator
And your next question comes from the line of Lou Taylor of Deutsche Bank. You may proceed.
Lou Taylor - Deutsche Bank
Thanks, good morning, guys. David, can you talk a little bit specifically about your January (inaudible) and philosophically, how do you plan to address those either through secured financing, just using cash, using a line?
How do you specifically think if you are going to refinance those bonds?
David Simon
We are going to use our corporate facilities and/or our cash. We are assuming right now that the unsecured market is not going to be that attractive.
So at this point, that's why we have husband or capital appropriately and obviously that's not an issue for us. We believe that there is lot of opportunities for us to access capital of the company, of our position, and our liquidity, but right now we are not anticipating that, we'll just use our cash that we have husband on the balance sheet.
Lou Taylor - Deutsche Bank
Okay, thank you. And then second question for Steve, Steve in terms of the JV share of FFO or contribution FFO this quarter.
It's like kind of other income and other expense bounced around a bunch from Q2. Any major events or drivers there?
Steve Sterrett
Lou, there was jut one thing. We sold the residential component of the domain, which was a mall that we opened in Austin, Texas about 18 months ago.
That was a 50-50 venture with a multi-family developer and our share of that gain was about $9 million.
Lou Taylor - Deutsche Bank
Great. Thank you.
David Simon
Thanks.
Operator
And your next question comes from the line of Christy McElroy of Banc of America. You may proceed
Christy McElroy - Banc of America
Hi, good morning, everyone. Just following up on same-store sales growth, can you break that out by month during the quarter?
I know that you said that October is not going to be great, but I am specifically curious about the [churn] in September?
David Simon
We don't do it by month, but September was worse. Basically we were up July and August and September was a tough month in terms of sales.
We still ended up four-tenths of 1% but the important thing that we are not a retailer, so we don't live and die by monthly sales. September was a bad month and you saw the retailers but beyond that we do this on a quarterly.
I think it's more important to do on a quarterly basis because in fact we are not a retailer and what happens in one month really doesn't have any bearing on us at all.
Christy McElroy - Banc of America
And then I noticed in the regional mall portfolio, there was about a 2% decline in comp store sales. Would you say that type of a decline was fairly characteristic of the Class B, C malls in your portfolio in Q3?
David Simon
No, not really. I think you got to look at where the malls are and any new competition that comes to the market, nothing there that would cause us to be overly concerned.
Christy McElroy - Banc of America
Okay. And then, regarding to development leasing in this environment.
How much more difficult has it become over the last month to get a retailer to sign a lease on a new development project both in the US and internationally. And have you seen any tenants pulling out of projects.
David Simon
The fact is, we don't have much new development, we have the expansion of Domain under construction and we have Cincinnati Premium Outlet and we're open in New Jersey. And we have the options of starting some new stuff next year, but that's it.
So we don't have new development really undergoing this year. I will say though there are handful of retailers that have cut to open to buy a handful of retailers that are essentially waiting to decide how much they're going to spend next year in terms of CapEx, kind of waiting to see what happens for the next three to four months.
Some plans are on hold. And frankly, we anticipated.
That's why we're been pretty prudent on new development. But, Rick, you can add to that.
Rick Sokolov
And the only other thing I will tell you at Domain, we are done with our anchor down. We are probably about 65% leased as we sit here today for an opening in November of '09.
So, what we're finding is that on the good opportunities, people are still interested and happily we do not have a lot of inventory out there right now, but we need to deal with it's new.
Christy McElroy - Banc of America
Is it fair to say that redevelopment leasing has been already there?
David Simon
Well, it is. But we have been successful on our new development as well.
So for us, right now even thought we've had some volatility with certain retailers on a few stores here and there. We feel that we're executing both, our redevelopment and our development pipeline according to plan.
Now, we expect '09 for new store openings to be at a reduce level, that's why we're been a little bit cautious, we're listening to our clients. We're not forcing the issue.
We certainly could in some cases, but we are choosing not to. But we’re still seeing success and we're accomplishing, both through our redevelopment and development efforts.
Christy McElroy - Banc of America
Okay. And then and just last.
David Simon
As evidence, Rick and I were in Pittsburgh, I don't know it was last week, and what we did, I was in Boston the week before with Burlington, and what we've done there, so we are getting the job done.
Christy McElroy - Banc of America
On your lease explorations in 2009, I know you said you are ahead of last year, but how much of that is already addressed today and what should we be looking for in terms of kind of releasing spreads versus '08 levels?
Rick Sokolov
Well, just to give you a sense of the activity that we've had in the mall portfolio. Year-to-date this is all fully executed.
We have 6,900,000 square feet of leases that had been fully executed in '08. That includes new deals, relocations, expansions and renewals and that' 2,451 deals through September 30.
We have that for signature. Now these are in process, but once they get to a certain point in our system, we have a relatively high confidence that they are going to be executed an additional 4,230,000 square feet of space representing another 1,336 leases.
So as we've been saying for the last several quarters, we have been very focused on dealing with our tenants on a much broader outlook. In terms of years, we are substantially ahead, probably 10% to 15% as we sit here today.
On '09 renewals, where we were as against '08 and we are now substantially into renewals that are coming up in the first quarter of '10. And that was an increased focus on us.
We instituted it back in '06 and it's standing in very good stead with us, so to-date our spreads are holding up as we reported. And certainly, we are going to continue to make sure we price our space appropriately.
Christy McElroy - Banc of America
Great. Thanks, guys.
Rick Sokolov
Thank you.
Operator
And your next question comes from the line of Mark Biffert of Oppenheimer & Company. You may proceed.
Mark Biffert - Oppenheimer & Company
Good morning. David, my first question is regarding the redevelopment, development pipeline.
When you look out to '09, what are you guys raising your hurdle rates to when you assess new projects?
David Simon
Yeah. That's a good question.
Clearly, our cost of capital has increased reasonably, right? Not more than marginally, so now we do think that the volatility associated with it, and its rapid rise is not a stabilized number, so we are trying to get a handle on that.
But I think from new development standpoint, thankfully the new development focus continues to be with the Chelsea product. The returns continue to be probably in the 12% to 14% range conservatively underwritten.
That will continue to motivate us to build assuming we can still achieve those. And the redevelopment is a little bit lower than that.
We still are looking for double-digits. I think we can justify that given also what it does to the other parts of that asset and also how it positions it in the marketplace, but I would tell you that new development would be north of 12% to 14%.
And redevelopment would clearly we would be looking try around 10. And if the current volatility and rapid rise in our cost to capital and the industry's stabilizes at that level then we are going to have to reassess, but my guess is, we are dealing with the temporary phenomenon right now.
Mark Biffert - Oppenheimer & Company
And how temporary in your view do you think that will be?
David Simon
Well, I wish I knew. I really don't.
But I think historically, our cost to capital has been a lot lower than that, and I think it will trend toward the mean. I may not reach where we were in the 2007 period, but I do think it will revert back to the main and those kind of investments will add to our net asset value and the value of our firm overall.
Mark Biffert - Oppenheimer & Company
Okay. And then, Rick, if you can talk a little bit about the pent up demand you might have in any of your malls in terms of the replacement tenants for those that are closing stores like Boscov’s and inline retailers.
Rick Sokolov
I think we demonstrated over the years that we have been very successful in replacing those type of tenants. And an important thing to point out with the Boscov's stores that are closing, those are currently owned by others.
All the Mervyn's stores that are closing are owned by others, so we are working with those owners in order to coordinate activities. We have been actively solicitating interest and we have identified a number of users and it's a combination of working with the people that owned those stores and identifying users to come up with the way to go.
There are still boxes that are interested in taking these locations. But frankly as you saw with our Macy stores, a lot of the opportunity comes from just adding additional small shops and in the properties that are better properties that's the significant advantage for us, because we want additional small shops space to take advantage of the demand.
In the better properties, demand is unabated. There are still people that are interested in coming into the better properties.
And if we're going to obtain these boxes back, it gives an opportunity to do that.
Mark Biffert - Oppenheimer & Company
Okay. Thanks.
David Simon
Thank you.
Operator
And your next question comes from the line of Paul Morgan of FBR. You may proceed.
Paul Morgan - FBR
Good morning.
David Simon
Hi.
Paul Morgan - FBR
If I just stick on that point for second, does that suggest that this is one area where you still do have an apatite for investment in buying back some of these boxes like you did with Federated May, or is there less of interest than there was than given the market bit now?
David Simon
No. look I think there is.
I think the fact is though they are the people that bought those or refinanced those boxes, bottom in a robust market. And they have to understand that values associated with those boxes are different in our view than their view.
So the answer is, yeah, we're interested in buying them. It's probably not if the prices they have either on the books or what they would like to get.
And we'll see how it shakes out.
Paul Morgan - FBR
Okay. There have been a lot of retailers putting out various releases and comments about aggressively renegotiating their rents and requesting relief and various things like that.
Could you just give your comment about when you see those? What's going on right now and for example, are you giving the type of relief of going to percentage a only percentage rent only type structures or what your stance is in those negotiations?
David Simon
Sure, it's safe to say that this is we have dealt with rent relief and rent relief quests basically since I've been here since 1990, right? So that's about 18 plus years.
And it really is very retailer specific. And ultimately the judgment call mostly comes in if we think that the tenant is about to file Chapter 11 and whether we can help offset that through some combination of rent relief or negotiated store closings.
And we'll look at it. We have a basically an unbelievable staff that can assess viability and what we might get in Chapter 11, re-org versus the prospects of them going forward if we grant them rent relief.
Lot of that times, it's an industry issue. So if we are doing it, we'll find out what the other developers are doing and more or less come up with a consistent format.
So that really is retailer specific. If it's an existing lease and if it's a healthy retailer, we really won't entertain rent relief.
And the only other item is if it's at the expiration of a lease and that's a typical depending on the market value of the space, what the tenant brings and so on. And I will tell you that there is anecdotally some increase in rent relief, but our policy and procedures in how we deal with that hasn't changed in this market and I will say that I've been doing this for awhile not as long as Rick, but I will tell you that our approach to this has not changed and what we've seen really isn't anything that causes us by any stretch of the imagination alarm.
I mean, this is consistent with a down economic cycle and one that we know how to navigate through.
Rick Sokolov
I would only add two things. One, we have made it [incumbent] upon our leasing agents to look out a year to identify those tenants that David just mentioned that are coming to an end of the lease term with lower than appropriate productivity and we want to make sure that we have already started leasing their space to another tenant, which will enable us to hopefully maximize our ability to either renew that tenant with better rent or just say, thanks, we appreciate that you have to leave, good bye because we have a replacement tenant at market rate.
And the only other thing I would say and this is to David's point that we are not a retailer. We are very focused on the credit of our tenants and we have an entire department here that is constantly assessing that credit and [happily] in this cycle the credit of the tenants that we are doing business with happens to be substantially firmer than it was in previous downturns, say in 80 and in 90.
So you have many less people walking in and saying I'm out of business, now let's talk.
David Simon
And the only other thing I would add to that, Paul, is obviously our position in the industry, our quality portfolio, our Premium Outlets portfolio allows us to be best positioned to negotiate with the retailer the best possible outcome for us and for the retailer. So we have tools available to us that are somewhat distinctive.
Paul Morgan - FBR
Thanks. My last question on the rent spreads, there's a big healthy spread between where your expiring rents show up on your lease schedule versus the rate at which you've signed leases so far this year.
Is there any reason that we might be cautious in interpreting that as just a very healthy cushion? Is there some vulnerability?
I don't want to just all of a sudden assume that you are going to get the same spreads or even assume that the spreads will be positive, but is there anything that we should think about in terms of the size of that spread now and where you think it will come out next year given what retailers are saying?
Steve Sterrett
Paul, this is Steve. The mix of leases that are expiring does change from year-to-year, so looking at for example the leases that we signed in '08 and trying to compare them to '09 expirations is a bit of (inaudible), but what I would tell you is that you can go back and look at five years of history in our K.
and our rollover spreads in the mall business has been pretty consistently between 15% and 25% and I think we would expect that same range of outcomes in 2009.
Paul Morgan - FBR
Thanks.
Operator
Your next question comes from the line of Michael Dimler of UBS. You may proceed.
Michael Dimler - UBS
Hi, good morning, this question is for Steve. Just wanted to try to get a more numerical sense of what's going on at the mortgage level with respect to your JVs.
Compared to a year ago, maybe two years ago, what kind of a cap rate are the lenders putting on the properties now versus then? And what are you seeing in terms of the bids on the rates?
Steve Sterrett
The market is obviously much different than it was a year ago. The cap rate specifically is going to be very dependent upon the quality of the asset, but I think it's fair to say that cap rates are higher.
Loan-to-values are lower and spreads are wider and we've clearly seen all three of those moves in that direction over the course of the last six to 12 months.
David Simon
If you look at our historical [finance] policy, Michael, we have never been looking for that last marginal cost. So even though cap rates have moved up, say 9% to 9%, as we run through our maturity schedule on secured assets, it will be something abnormal for us not to be able to refinance our existing secured debt.
We may have a couple of once that even in today's environment that may require some level of capital contribution in terms of dealing with the amount of new mortgage. We have never been the next proceeds guy on secured financing.
And remember we also have partners in these and where you see most of the secured financing is with our JV partners. So to the extent that that does happen, our partners are going to have to come over the capital contribution, but I will tell you and underline that we don't anticipate other than a couple of mortgages here and there, assuming the world stabilizes even in the higher cap rates.
In addition, the most important fact that I can tell you is that we have $1.7 billion of EBITDA that's unencumbered. So whatever cap rate you want to put on that, I think I made it my statement $500 a foot in sales.
That gives you a sense of the fire power that we have to deal in today's volatile financial markets.
Michael Dimler - UBS
I just want to clarify; you said that 9% is not out of the question in terms of cap rate on some of these assets.
David Simon
Yes.
Michael Dimler - UBS
Okay. As a follow up, I'm curious as to there is a lot of noise out there, the life insurance companies might be pulling back on direct real estate investments and lending.
I was wondering if you could just sort through like who's really out there in the market right now and who's pulling back?
David Simon
I think it's safe to say and that's why '08 has done for us, a lot of life insurance companies that are on hold for the rest of this year. We've been told by them they are anxious to replenish their investment next year.
They are on the side lines. That's fine for us.
It doesn't matter because we are done, but there are a number of life insurance companies that aren't making commitments for the rest of the year, no big deal. We anticipate them coming back into the market.
It would be awkward for us to go through and list them other than we've been a wonderful borrower from life insurance companies. Sponsorship is more and more important as they go through credit committees.
They are going to want to put dollars out. We have tended to perform for them.
So we think when things normalize or stabilize in '09 that we will be able to tap into that market. As we did in the third quarter we closed, we closed a life insurance company deal at the end of the third quarter.
Michael Dimler - UBS
Okay, good color. Thanks.
David Simon
Thank you.
Operator
And your next question comes from the line of Michael Bilerman of Citi. You may proceed.
Michael Bilerman - Citi
Thank you, [Quinton] is with me as well. David, just going back to your comments on GGP, you are very specific to say that you can't envision a set of circumstances that would result in an acquisition of the entire company.
What are those circumstances that led you to say that?
David Simon
Well, Michael, we are important stewards of capital here. We will look at any and all transactions.
But we are also realist about capital markets, return expectations and so on. And that's kind of led us to the conclusion that where we are today.
Beyond that, I mean it's awkward for me, I would rather not comment more than what I've done. There's been lots of public speculation so we felt it was important to address it.
But obviously the size of the transaction is probably the biggest reason. And where capital markets exist today for size, we are realist, so that I think that's important to communicate to the market given the speculation out there.
Michael Bilerman - Citi
And I guess at the same time based on your relationship and your capital position if you are able to de-risk the transaction some how by bringing in partners, by craving up the portfolio and getting it at the right price and working with the lenders is not off the table. I mean this is just saying look and I am not me alone is going to do it in the current state.
David Simon
Beyond what I said I can’t elaborate, but I just want to reinforce the fact that in all of our transaction that we've done, we’ve done appropriate I think and hind side I think the market can attach to that. The last thing we want to do is absolutely make a mistake or an undue risk in today's environment and that's where we stand.
Jeff Quinton - Citi
It's [Jeff Quinton] here. You commented that same-store NOI and FFO growth would both be positive next year.
Can you just comment on the drivers behind that assumption?
David Simon
Well, again I mean just so everybody knows we have a consistent cycle on how we budget at the company. We do that basically unfortunately in the month of November, so we are actually we’ve been had a little bit longer so we’ve been doing that.
Then we announce our growth kind at the end of, I am sorry, at the beginning of '09 somewhere near our earnings, first quarter earnings our year end earnings call. We are going through the same process, but obviously we know what we’ve developed, we know what we redeveloped.
We have preliminary budgets that were going through from all of our various platforms and we can put it in the blender and get a sense of where things are headed. And that's what gives us confidence to state that.
The exact ranges and numbers well communicate that to the marketplace, I also want people that get some sense of comfort that even in today's world, we feel like we'll produced positive NOI growth. And we'll do that through leasing, cost containment and than what's coming in the pipeline.
So, I think that's the important statement that I wanted to convey the people.
Jeff Quinton - Citi
Okay. And just in license through liberty, you've increased your stake and there is obviously a lot of rumors out there at the movement.
Are you able to make a comment on that at all?
David Simon
No. Other than, we continue to own the stock.
We believe the stock we own is under the intrusive value of the company even at the world adjust in terms of what the cap rates are. And beyond that, we don't have any additional comment.
Jeff Quinton - Citi
Where is your stake currently?
David Simon
It is what --
Rick Sokolov
Same as we disclose at the end of the quarter, Michael.
Michael Bilerman - Citi
Think you haven't bought any more in the market?
Rick Sokolov
In the UK, you have to disclose additional increments of over 1%, so it's safe to say that we have not increased the stake beyond the 5% or else we had to disclose.
Michael Bilerman - Citi
And then I guess when you're talking in terms of same-store growth for next year, I guess it wrapped up in that is not a huge fall off in unexpected closures on the retail front, occupancy declines that you just are really out of your control.
David Simon
Well, look, we are certainly budgeting what we know in these numbers. And we are certainly being conservative, but as much as we would like to say I mean there are things out of our control, that's correct.
Biggest of which is that, but the biggest one also is to some extent percent sales and it doesn't, it's not a huge number, but I mean it's obviously hard for to us predict where sales for a particular retailers are going to be in '09. So, sure, there is some volatility.
That's why we give a range and that's why we will treat that the same way we've treated our earnings guidance in addition. The good news is I think I've had Shelly look at this thing.
I think, we've gotten really good at this. I think if Shelly knows these numbers, I mean I've looked at the last 20 quarters, I think we've beat 17 or whatever it is that once, twice.
It's really good performance. We would hope to be able to continue to do that next year.
Michael Bilerman - Citi
Just one last one. On the international Premium Outlets developments, it looks like two projects have dropped off the list, one in Italy and one in China.
Can you just comment on what has happened?
David Simon
Yeah. I'll take EMEA cull for the team even though it wasn't my typo.
We accidentally dropped off the deal in Sicily. It's not a Premium Outlets it's actually hypermarket anchored mall in Catania.
That is still all systems go, it's under construction. We just had a typo.
Don't lose confidence in the other data. It happened and Steve Sterrett, turning into our China expert with a little guidance for me, we have put that in kind of a holding pattern, waiting for just a little bit more data from some of our existing four centers there.
We may be pushing that back or we may be putting that on permanent hold. So at this point, we anticipate putting that on hold for the time being.
Michael Bilerman - Citi
Okay. That's great.
Thank you.
David Simon
Thank you.
Operator
And your next question comes from the line of Jeff Spector of UBS. You may proceed.
Jeff Spector - UBS
Good morning.
David Simon
Hey, Jeff.
Jeff Spector - UBS
Is there any way you could quantify some of the things that could impact same-store NOI in '09? And you talked about the pressure retailers are putting on renegotiating deals, some of the other things that we could see?
David Simon
Well, I think it's the same metrics that affect us every year. I don't think it's any different '09 versus what's transpired historically.
It's lease up, it's occupancy, it's sales growth, it's rent spreads and then it's what we can do on the cost side. So I mean all of the same fundamentals apply even in the more difficult retail environment that exists.
As I said, we still feel pretty good at the moment where we stand today that we are going to generate positive NOI growth out of both the material parts of our business being the mall business and the outlet business.
Jeff Spector - UBS
And you talk about leasing progress for '09? I'm not sure if you said it what percent you've completed so far?
David Simon
We are ahead of '09, as we sit here today we are probably about 70% through our '09 renewals, which is an advance of where we were at this time last year for going into '08 as we sat here on our third quarter call in '07.
Jeff Spector - UBS
Can you talk about the releasing spreads you've gotten so far on that 70%?
David Simon
Well, as we said earlier, the spreads as demonstrated in this quarter are holding up. We just have to get the leases.
We've already fully executed a substantial number this year and we hope to have more and the spreads are holding up.
Jeff Spector - UBS
Okay. And did you provide an update on King of Prussia?
David Simon
No.
Steve Sterrett
No.
Jeff Spector - UBS
No update?
David Simon
We haven't updated it as far as I know.
Jeff Spector - UBS
Okay. Thank you.
David Simon
Thanks
Operator
Your next question comes from the line of Ben Yang of Green Street Advisors. You may proceed.
Ben Yang - Green Street Advisors
Hi, good morning. David in the past, you've talked about your expectation that the company might take advantage of certain distressed real estate opportunities and not necessarily pertaining to GGP, given what's happening in the retail and credit markets yet, it sounds like you are clearly concerned about the availability of credit as well as your own capital needs, probably a few years from now.
So in light of that, how do you balance the desire to pursue attractive real estate opportunities versus maintaining a healthy balance sheet?
David Simon
Well, I mean that's what a CEO does. So, let me just say this, I'm not worried.
I just want to underline what you said, which is, I have no worries at all about our ability to deal with what we have to deal with here. So, there was a phrase in your question that suggested that we might have a worry about what our capital needs are here and how we are going to deal with it.
I want to underline this strongly, I have no worries about our ability to deal and meet with our capital needs here. I love opportunities.
I think we've been opportunistic historically. I think in this environment, we will be able to do that, Ben.
On the other hand, we've got to be thoughtful on how we do that and the world is a little bit unstable and I think we are just being extremely cautious, which is what I think appropriate to do given the environment. Now, my instinct is to be aggressive and opportunistic and I think we will continue to find those opportunities, but we've got to balance that with caution in this market.
We are not nervous. We are all steam-ahead.
We are doing pretty much what we want to do, but we are just adding a little more caution to our approach.
Ben Yang - Green Street Advisors
Is it premature to start thinking about your maturities in say 2010 and 2011?
David Simon
No, not at all, and obviously 2010 we have our secured debt, we have got a fantastic group of assets coming due including Forum Shops, Copley, Westchester. If you look at all of those in the amount of outstanding all those I think you'll see that those are under levered and again I just reinforce, it's never too early to plan for the future.
That's what we're all about. We don't see any issue there.
Ben Yang - Green Street Advisors
Okay. Thank you.
David Simon
Thank you.
Operator
Your next question comes from the line of Michael Mueller of JPMorgan. You may proceed.
Michael Mueller - JPMorgan
Hi, David, earlier when you were talking about lenders and underwriting, you said some of the weaker assets, you think the lenders would use maybe a [nine cap]. When you look at the opposite end of the spectrum for your strongest assets, where do you think, lenders are underwriting those today and do you think they are appropriate?
David Simon
I think everybody is being cautious right now. So, they are clearly under that.
The debt service coverage is higher than it was. I thought I stressed, but let me stress again, our model has never been the max leverage on individual assets.
So even with today's more stringent underwriting requirements, the vast majority of the mortgages that we will refinance in the upcoming years, we don't see any issue with refinancing the existing indebtedness. In addition, you look at our corporate cash, you look at our corporate facilities and then you couple that with $1.7 billion of unencumbered EBITDA, which is unprecedented in the real estate industry.
So, these are things that we are obviously focused on, but the strict underwriting requirements will not have an impact on us other than on the margin.
Steve Sterrett
Mike, this is Steve, just to add one comment; our financing model isn't dependent upon the ability for us to rollover mortgage debt and generate excess proceeds? In an environment where we can do that and it makes sense cost wise, we will do that, but our business model doesn't depend on that.
So as David said if we are in a scenario for '09, 2010, what have you, all we are doing is basically rolling over existing debt, That's fine because we've got other avenues of capital like the bond market, like free cash flow, like our unencumbered EBITDA to draw.
Michael Mueller - JPMorgan
Understood, but when you're looking at where others are pegging the value of the stronger assets on the lending community, are they using somewhere in the neighborhood of a seven? Are they in the sevens?
Is it higher than that or lower than that?
David Simon
Again, it depends on the asset. It would be in that range.
Michael Mueller - JPMorgan
Okay. Thank you.
Operator
Your next question comes from the line of Rich Moore of RBC Capital Markets. You may proceed.
Rich Moore - RBC Capital Markets
Hi, good morning, guys. Rick, do you have the list or thoughts on retailers that are opening stores in 2008, 2009?
I guess 2009, really, or has that sort of shrunk to irrelevant at this point?
Rick Sokolov
In the specialty area, we are continuing to do business with the retailers that we have done business with historically. We've got significant openings schedule in '09, Coach, Arrows PLS+T, Forever 21, Limited Brands, Express, [Suffora], Buckle, [Twin], Wet Seal, and all of those are things that have been reconfirmed in the last few weeks.
So I think David made the point that our retailers becoming more cautious. Certainly.
Are they evaluating how much incremental open-to-buy they are going to have in '09? Yes.
Is it going to be like May of '07 when retailers would come in and say, I want to open 20 new stores that have in my budget? Probably not, but where they've had budgets they are maintaining the budgets and they are continuing to open stores.
David Simon
I'd just underline another important point to that, Rich, is two things, one is there is no new development. so the open-to-buys that exist will reside in existing centers, which is a really important point for us in that what's happened with the economy and capital, basically eliminates new development and I mentioned this last quarter, quarter before, it could be as long as a decade of new development in a material sense.
There will always be a few deals here or there. Additionally the retailers are as focused on sponsorship and who they do business with as lenders as shareholders and as other constituencies and again that reinforces where we are in the industry.
Rich Moore - RBC Capital Markets
Okay. All right.
Good, thank you, David. And then on the debt side, Steve, you guys were talking about where you stand with insurance companies.
What's your feel for what the bank guys are saying? I realize you don't necessarily have to give mortgages, but when you talk to these guys, I'm sure you do the loan officers in particular, do you sense any improvement in their tone or are they just sort of dead in the water at this point?
Steve Sterrett
I think it's a little earlier to sense an improvement, Rich. Don't forget that the financial institutions have gone through a dramatic re-pricing of their own cost of capital.
And I think they are still [ferreting] out what their business model looks likes. They are in the business of lending money, but I think it's a bit early yet to say that they are back active in the market.
We expect that to happen. It may not be until the back half of 2009, but there is very little activity in that market right now.
Rich Moore - RBC Capital Markets
Okay. Great.
David Simon
I hate to say it, Rich. But again sponsorship and quality of assets and the team is an extremely important criteria that they will do, and I mean I think they want to go with the proven player.
Rich Moore - RBC Capital Markets
Okay, great. Thank you.
And then the last thing, guys, is same sort of thing on the private equity side. Is there anybody out there who has any interest in working with you to find again GGP-type things aside, just distressed opportunities, or is that sort of capital interested at this point, or are they sitting on the side lines?
David Simon
I would tell you that there is capital for those kind of investments. And again I hate to, I mean I think that they would love to align themselves with someone like us.
The good news is we've again been able to kind of avoid a mine field in a sense. I mean we looked at the fund business.
We chose not to do it after thoughtful consideration. I think given where that business is in hindsight it was the right decision to make.
But on the other hand we've been very successful in our mills deal and align ourselves with opportunistic capital. Rich, there's no doubt in my mind that that kind of capital is available for us depending upon the situation.
Rich Moore - RBC Capital Markets
Okay, great. Thank you, guys.
David Simon
Thank you.
Operator
And your next question comes from the line of Jeff Donnelly of Wachovia. You may proceed.
Jeff Donnelly - Wachovia
Good morning, guys. This might be for Steve.
But I think, David, you mentioned in your comments about 2009 about cost containment as one opportunity. Are those costs that can be trimmed a way today or are you speaking more about at the margin in terms of trimming expenses?
David Simon
Well, look we've provided ourselves on always being reasonably run, so it's a little bit of both. It's all on the margin given the size of our company, but look, we are out to be as profitable as we can.
So there are things that we can do and different environments. The good news at the property level, again, is if we are able to generate the savings at the property level that that adds to our bottom line given the fixed cam scenario.
Obviously inflation is out of the system, which is really good. That's going to help on utilities.
I think that's going to help on real estate taxes in terms of assessments. You can go down the road.
We were looking a few months ago at a tougher economic environment, higher utility costs and the like and now we've got a tough economic environment, but we are seeing savings on the cost side. So we are going to pull as many levers as we can to be as profitable as we can.
But yet we are not, this is a company that's been reasonably run. We can always be better.
So I don't think it's going to be a dramatic savings in totality.
Jeff Donnelly - Wachovia
And just a question concerning occupancy given what you're hearing from retailers, can you give us an update on when you think industry occupancy might hit a bottom in the future, what that bottom looks like versus say today or occupancy this year? And maybe and beyond that, when you think that turns a corner?
I could ask you questions all day long, I guess I'm trying to figure out variability between market size and mall productivity at this point.
David Simon
That's really hard one. I do think it will bottom some time in '09.
But that's a crystal ball thing and the important point here is even with the retailer restructurings that exist, the slower sales, somewhat reduced open-to-buys. We still think we are going to generate positive NOI growth and that's the important metric to look at.
Jeff Donnelly - Wachovia
Just a last question or two for Rick if I could. How is demand looking for your 2008 seasonal business around in-line and kiosk temporary tenants, and I know it's early, but do your gift cards sales pace at this point provide any indication for holiday sales?
Rick Sokolov
Well, let me address the former first. We are on track for our inline business and we really don't have any indications that that is going to setback.
And in terms of the gift cards, the vast significant percentage of that business is done in the fourth quarter and so it's really not a leading indicator as we sit here today. And but on the seasonal business, we still have the demand and there is still the entrepreneurs that want to take advantage of that and we've bench more focused now interestingly I think another enhancement is we are now really looking at those tenants as a source of incremental permanent tenants and we've been able to convert a number of the tenants that started in our portfolio as temporary tenants in carts into very successful, full inline tenants with good unique local businesses, so that's an important source of leads for us as well as just revenue.
Jeff Donnelly - Wachovia
Last question concerns the Nordstrom in Boston. I know you don't have a time for a case study here, but it opened in Burlington in recent past and I think liberty tree opens this week.
What's the new and renewal leasing discussions has been like around these deals and how is that shaping up for south shore?
Rick Sokolov
Well, I'd just say if you go, liberty tree as a Nordstrom rack so that's a different animal, it's not a full (inaudible). I will tell you if you look at Burlington and the lease up, Nordstrom is a wonderful retailer and they add a lot to the mall environment.
And they bring, they allow us in a lot of cases to execute an upgraded dependent mix, which is what we did at Burlington in their wing. And even though the timing is not great it's a great long-term situation for us.
Rick Sokolov
David alluded to this earlier but an interesting study is Ross Park where we added Nordstrom in Lou of a Macy's and with the announcement of Nordstrom we got a LL Bean and a Tiffany Louis Vuitton and Michael Kors and a Juicy Couture, so we have substantially transformed Ross Park Mall into the unambiguous place to shop in a trade area over 1.5 million people and that's what we do here.
Jeff Donnelly - Wachovia
Great. Thanks, guys.
David Simon
And your next question comes from the line of James Ellman of Seacliff. You may proceed.
James Ellman - Seacliff
Yes, thank you. Could you give us a little bit of outlook on how your business would have the ability to show flexibility or what happens to your business?
If some of the prognostications of same-store sales for this holiday season being down 10% to 15% due to loss of consumer credit as well as slowing economy?
David Simon
Again, not a lot of our earnings is tied directly to sales. Most vast majority in the mall portfolio is tied to fixed rent.
And then the overage, the part that's tied to sales, it's a combination of sales throughout the whole year. And what we've noticed is that, if some people go out of overage rent, others go in, it is a pretty static environment.
The outlet business we have more of the anchors are tied is a direct percent of sales, but, we think the outlet business is somewhat countercyclical in that consumer and certainly with gas, there was a lot of questions on gas prices and how that may affect the outlet. We actually think the consumer may look for more value, and so maybe, there is better sales despite the environment.
We don't know. We'll find out.
So the long story short is, it's a couple of cents here and there, out of 640 to 645, so in my view it's somewhat immaterial. I let you judge whether that's material or not, but it's not going to make a break us one way or another.
James Ellman - Seacliff
I understand the percentage rent is a relatively small size in your revenue statement, but if we had a 10% to 15%, a significant drop in holiday sales, I imagine that would put many of your tenants to the wall. How do you deal with that?
How do you react to that?
Steve Sterrett
Well, again, I think as Rick said if you look at the vast majority of tenants that we are doing business with, they are well capitalized. And so it would depend on the tenant and so on in terms of reaction to it.
David Simon
I would also make the point that the tenants have not been operating their business in a vacuum and they've been substantially reducing their inventory, reducing their in-store employees because they're running their businesses for bottom-line EBITDA as well. So while they care, that's another thing going on.
James Ellman - Seacliff
So, last question would be if they have been cutting back significantly, is there a chance that you're going to have significant empty shells this holiday season?
David Simon
No, no.
James Ellman - Seacliff
Very good. Thanks for the time.
David Simon
Thank you.
Operator
Your next question comes from the line of Fred Taylor of MJX Asset Management. You may proceed.
Fred Taylor - MJX Asset Management
At this point the question I had, the rollover of secured debt was probably beaten to death, but let me ask this slightly different angle. Would you refinance maturing unsecured debt with secured debt thus changing the mix?
David Simon
Not at this point.
Fred Taylor - MJX Asset Management
Okay, thank you.
David Simon
Thank you.
Operator
Your next question comes from the line of Michael Bilerman of Citi. You may proceed.
Michael Bilerman - Citi
I just had a follow up on Las Vegas and what you're seeing in Forum Shops and trends and sort of how you're looking at the market overall?
David Simon
Well, look Forum Shops continues to be the leader in Vegas. Clearly, I think we said this in our first quarter call, I believe that we had seen softness in Las Vegas.
It continues to be that way. There is no drop in sales that we saw after the year continues to be that kind of drop, in other words, the drop percentage not increasing, it's kind of at that same level that we saw the 5% to 10% drop, but even with that said, its still the number one in Vegas, but Las Vegas obviously has had its issues.
Michael Bilerman - Citi
I guess in this sort of environment, would you be less willing to put more capital to work in Vegas?
David Simon
Do you have something specific in mind, Michael?
Michael Bilerman - Citi
I'm not a broker. So I'm not hocking anything.
David Simon
I think we can underwrite Las Vegas reasonably well given our knowledge of it. And beyond that obviously we are pleased with the Forum Shops, but I think we have to take into account the fact that Las Vegas economy is not doing so well right now.
Michael Bilerman - Citi
Okay. Thank you.
David Simon
Thank you.
Operator
I am showing that you have no further questions at this time. Gentlemen, I would like to turn the call back over to you for closing remarks.
David Simon
Okay. Thank you for participating.
I'm sure, we will see a number of you at NAREIT, so take care.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.