Oct 30, 2009
Executives
David Simon - Chairman & Chief Executive Officer Rich Sokolov - President & Chief Operating Officer Steve Sterrett - Chief Financial Officer Shelly Doran - Vice President of Investor Relations
Analysts
Kunal - Morgan Stanley Christy McElroy - UBS Mark Biffert - Oppenheimer Michael Bilerman - Citigroup Steve Sakwa - ISI Group Jay Haberman - Goldman Sachs Alex Goldfarb - Sandler O’Neill Craig Schmidt - Banc of America Michael Mueller - JP Morgan David Fick - Stifel Nicolaus Jeff Donnelly - Wells Fargo Rich Moore - RBC Capital Markets Jim Sullivan - Green Street advisors
Operator
Good day and welcome to the third quarter 2009 Simon Property Group earnings conference call. At this time, all participants are in listen-only mode.
We will facilitate a question-and-answer session towards the end of the presentation at which time you may participate for pressing star one (Operator Instructions) I will turn the presentation over to your host for today, Shelly Doran, Vice President of Investor Relations. You may begin.
Shelly Doran
Thank you. Welcome to Simon Property Group’s third quarter 2009 earnings conference call.
Please be aware that statements made during this call that are not historical maybe deemed forward-looking statements. Actual results may differ materially from those indicated from those indicated by forward-looking statements due to variety of risks and uncertainty.
Please refer to our filings at the Securities and Exchange Commission for a detailed discussion of these terms. Acknowledging the fact that this call maybe webcast for some time to come, we believe it’s important to note that the call includes time sensitive information that may be accurate only as of today’s date October 30, 2009.
The company’s supplemental information package was filed earlier today as Form 8-K. This filing is available via mail or email and it is posted on the Simon website in the Investor Section under financial information, quarterly supplemental packages.
Participating in today’s call will be David Simon, Chairman and Chief Executive Officer; Rich Sokolov, President and Chief Operating Officer and Steve Sterrett, Chief Financial Officer. I will now turn the call over to Mr.
Simon.
David Simon
Good morning everybody. We reported diluted FFO per share of $1.38 for the quarter, which was $0.05 higher than the first call, and once again, we’re pleased with our financial and operational performance.
Occupancy in all of our domestic platforms is up sequentially from 6/30/09, Mills was up a 150 basis points and Regional Mall and Premium Outlet Centers increased 50 basis point and Community, Center, Lifestyle platforms increased 40 basis points. We saw a decline in the Regional Mall retail sales in the third quarter as compared to third quarter of ‘08 with comparable sales as of September 30 were $430, the decline in sales for September over September was much lower than any month year-to-date.
Preliminary reports from retailers regarding October have been encouraging. We believe our retailers will have a decent holiday season.
Premium Outlet comparable sales were relatively stable in the third quarter at $492 per square foot, down only $1 from 6/30/09, and we actually were up in September on a comparable sales per square foot, Mall leasing spreads were $4.04 for the first nine months of 2009, average base rent was at 9/30/09 was $40.05, up 2% for the year earlier period. Premium outlet releasing spread continues to be strong at $9.25 per square foot for the first nine months of ‘09.
Average base rent for the outlets at 9/30/09 was $32.95 per square foot up from the year earlier period. Comp property NOI growth for the first nine months of 2009, was up six tenths of a percent for the Malls and NOI growth has been impacted by higher bad debt expense resulting from tenant bankruptcies, as well as overdraft due to lower tenant sales in 2009 as compared to 2008 yet we are still up over the year and our Premium Outlet portfolio comp property NOI was 6.5% for the first nine months.
Let me just turn to capital markets and reflect a touch SPG returned capital markets in August with $500 million principal amount of five year senior unsecured notes they were priced to yield 5.46% the maturity. Our third quarter capital activities also included $400 million mortgage financing for three malls, additionally redeemed 40 million of preferred units the weighted average rate of just under 8%.
Beginning of ‘09 there was an incredible amount of uncertainty over the ability of capital and either the secured and unsecured markets during our call late January when we discussed environment which was unlikely that we would initial in the bond market and we might need to be paid insuring bonds with our credit facility and the secured debt financing would be difficult. Markets have significantly improved from the first quarter and we worked very intelligently in the execution of capital markets activity in 2009.
The volume of completed and in process transactions is considerable put the equity that we have raised aside we have thus for issued three unsecured bond offerings totaling $1.75 billion. We have completed or expect to complete before year end approximately $3.3 billion of secured financing comprised of new loans as well as refinancing.
Our share of those financing and secured financing is approximately $2 billion. First a few details on these new loans.
We have completed 18 loans, totaling $1.5 billion and $1.25 billion of that was from life companies. Our share of the completed new loans was $1.1 billion, weighed average interest rate on the loans was 7.2% and the weighted average life was seven years.
By year end we expect to close an additional seven new refinancing tolling $450 million of which our shares a 150 million. Eight new lenders on these new financings are new secured capital providers to SPG.
In addition, we had the contractual rate or renegotiated loan extensions of 1.3 billion in 2009 our share of that was $750 million. Our spreads of continued to rally, CDS spreads are quoted currently at 150 beds which is rally from 550 basis points from the highs in early March in fact was the highest of which was in December of ‘08 at least 750 basis points.
As of September 30, 2009 we had $4 billion of cash on hand, including our share of joint venture cash, which is approximately $11.50 per share. Availability and our corporate credit facility is $3 billion, generating illiquidity of position of $7 billion.
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Now let me turn the turn to guidance we increased the low end and maintained the high end of our 2009 FFO guidance taking into account the $0.03 diluted impact of our $500 million note issuance, which was not included in our previous guidance that we issued at the end of this second quarter. The current FFO guidance therefore is $5.40, $5.50 and of course you’ll recall that includes 42% impairment from our holdings in Liberty non-cash.
We have a solid in financial and operational performance in the third quarter. I’m proud of that.
Our year-to-date activity has produced good results in a very, very challenging difficult market. We remain focused on operations and we continue to believe that we are well positioned for growth, given our balance sheet and access for capital.
With that said, we’re ready for questions.
Now let me turn the turn to guidance we increased the low end and maintained the high end of our 2009 FFO guidance taking into account the $0.03 diluted impact of our $500 million note issuance, which was not included in our previous guidance that we issued at the end of this second quarter. The current FFO guidance therefore is $5.40, $5.50 and of course you’ll recall that includes 42% impairment from our holdings in Liberty non-cash.
We have a solid in financial and operational performance in the third quarter. I’m proud of that.
Our year-to-date activity has produced good results in a very, very challenging difficult market. We remain focused on operations and we continue to believe that we are well positioned for growth, given our balance sheet and access for capital.
With that said, we’re ready for questions.
Operator
(Operator Instructions) Your first question comes from [Kunal] - Morgan Stanley.
Kunal - Morgan Stanley
Could you provide color on where you are currently with respect to your 2010 lease expirations and on that basis how you feel about an expert next year?
Rich Sokolov
This is Rick. So far through September 30, 2009 to 2010 we’re about 44% through our renewals and either excluded, we’re in progress.
We’re making very good progress there. Compared that to September 30, 2008 we were about 53% through our ‘09 renewals and so we’re a little bit behind, but part of that is the deliberate strategy on our part to delayed renewals that are coming up in the second half of 2010, because we believe we will have a more advantageous environment to negotiate those renewals.
Kunal - Morgan Stanley
Also, although there haven’t been many transactions, it appears as a cap rates for B malls have moved, higher relative to A malls. Have you reconsider the possibility of stepping into the market acquire B quality malls either on your own or possibility in an institutional JV?
David Simon
I guess the answer is, we look at everything that’s available and if we like the property and we like the price and we like the growth characteristics, we’ll take a hard look at it.
Kunal - Morgan Stanley
Also do you have in the outlook for lease termination fees in Q4, whether they will be materially higher or lower, which is the current run rate?
Steve Sterrett
Year-to-date, ‘09 compared to year-to-date ‘08 is generally almost right on top of each other. There maybe a little bit more activity at the fourth quarter, but nothing that’s going to move the needle in any significant way.
Operator
Your next question comes from Christy McElroy - UBS.
Christy McElroy - UBS
Just looking at your mall releasing spreads, which forward from 17% in the first half to about 11% year-to-date, which could imply the spreads were flat to negative in Q3. Somewhat I understand your spreads are calculated based on store openings rather than leases sign.
So what I’m looking at is effectively a lagging spread number that reflect of leases signed three to six months ago, if I understand right. So what I’m wondering is, given that you know where leases are being signed today.
Was that flat to down number sort of an anomaly based on the mix of leases you were signing any time or is this a new run rate, such that you’re no longer signing leases at a positive spread?
Rich Sokolov
I mean it is positive $4 and it’s all performing just about so far every one that I have seen. We’ve always said its $5 to $6.
We were going to be impacted. We’re not immune to the economy, but we are proud of our for dollar spread.
We still think that we have leases that are under market and I mean obviously negotiating REIT in a tough economic environment is more challenging, but the fact is it’s a positive spread. I haven’t seen that anywhere else and we’re proud of that.
Christy McElroy - UBS
Absolutely, but if you’re backing into sort of a Q3 number, should we just not read into anything and just look at the nine month numbers?
David Simon
I think there is always a reaction to quarterly performance and real estate is better viewed over a longer period of time, but that’s your job so I’ll let you do that, but the fundamentals of our business have not changed. We are dealing with tough economic environment.
It’s realistic to assume that when you’re in the process of negotiating leases in the tough economic environment, you’re going to have to be sensitive to that it, but the fact of the matter is over a longer period of time, we think our leases are under market and will continue to prove that.
Christy McElroy - UBS
We saw that you took the management contract at the Galleria in Dallas from general growth are there any of their opportunities there? Can you speak generally about your strategies as it relates to third-party management?
David Simon
I guess, I would not say that we took it. We were asked, if we were interested and given it’s a good market and a very good center, we decided, we also have a relationship with the owner and that was our primary focus.
I do not think our strategy is to change. We will occasionally do it for people that we know and we have a relationship with, but beyond that I don’t think it’s going to change.
We are not out soliciting third-party management contracts. Occasionally, they’ll come to us and given the relationship we have with certain institutional investors we’ll consider it.
Christy McElroy - UBS
Lastly on the recovery ratio, I notice that it was a little bit above average in the quarter. In your efforts to reduce overall CAM on what percentage of your tenants are on fixed CAM?
Is that helping your recovery ratio? So expenses were down, but you’re still getting the recoveries from a portion of your tenants?
Steve Sterrett
We’re about 80% converted to fixed CAM right now, so you are exactly right as we have done a good job in managing the costs, 80% of that benefit fall into our bottom.
Christy McElroy - UBS
Just a follow-up on that, I mean to what extent are you reducing CAM expenditures that you typically capitalize? Could that potentially reduce your recovery ratios?
Is the recoveries that you’re getting from tenants that not that it’s a huge percentage with 20%, but the tenants that are not on fixed CAM that recovery declines.
Steve Sterrett
It’s not meaningful, I’m we’re managing the capital expenditures at the Mall it seem where we’ve always been.
Operator
Your next question comes from Mark Biffert - Oppenheimer.
Mark Biffert - Oppenheimer
I was wondering if you could comment on the credit provisions that you took we saw that they decline substantially. Is there anything behind that or you’re just assuming that you’re not going to see as much increase in bad debt or if you can maybe provide a color on that?
Steve Sterrett
We look at the different categories of receivables and put a reserve them that bidding of what category that they fall in? Interestingly, enough our receivables were actually down third quarter of ‘09 compared to third quarter of ‘08, so you see that in the small bad debt expense…
David Simon
I would say, we collected more cash than we had already expensed probably in the first couple of quarters and that’s because, we’ve been aggressive in collecting rent. That’s the business and I think that’s partly because, there were a handful of tenants that were really uncertain about the world.
They feel a little bit better and they’re starting to pay their bills in a more timely manner, which really excites me.
Mark Biffert - Oppenheimer
So it’s your expectation that line will stay at a fairly low number for the next few quarters at least?
Steve Sterrett
All it takes is one unknown bankruptcy, it’s part of our guidance, we’re still anticipating kind of the difficult environment that exists and it can move up and down a little bit, but it’s really a function of the first couple of quarters, we reserved a lot of expenses because they were slow in paying bills and I made sure, they paid as much as what we were entitled to.
Mark Biffert - Oppenheimer
I was going through your top 10 list and notice that you asked about 23 stores quarter-over-quarter and from your remarks earlier in the call you did obviously mentioned that there was some tenants replacing that I am just wondering what part of your portfolio, is it the bottom third that you are seeing a lot of these top tenants pullout of and just maybe give some color around that?
David Simon
Well, leasing the challenge, but we are up from the second quarter we’re down from last year and it could be a function of the sales performance of a certain retailer and certain part of the market. It could be a function that they’re in eight property and they cannot afford to free.
So, again I think you have got a drill down to the specific retail asset to do that, but it has been a combination of regional issues and/or not been able to afford the rent or the fact is that we would rather have this space back empty then to keep the renters that we could probably kept the tenant for so. There is a handful of reasons why that happens.
We cannot rely on to just one tenant to drive our occupancy. We’re hitting the streets were scaling the country and we’re looking for growth tenants and we’re doing okay given the environment.
Mark Biffert - Oppenheimer
Then lastly, just of trying to get an update on the acquisition front in terms of what opportunities are seeing, is pressing adjusted and the opportunities if you looking at both domestically and internationally and do you think that you could potentially be able to close anything before the year end or is this more likely a 2010 story?
David Simon
Well, where the years, I am thinking about ten right now frankly we are evaluating a number of opportunities, we’ll see what happens but we can be very patient. In addition, I will say that I do not think on our plate on the acquisition side is any international activity at this point.
We’re focused domestically we’re looking at a few opportunities, but I think it’s safe to say that, nine to do anything in nine would is probably not going to occur.
Operator
Your next question comes from Michael Bilerman - Citigroup
Michael Bilerman - Citigroup
Just a question on the average base rent and I think it’s effectively may bring the full circle on the lease spreads. The average base rents sequentially went down by about 60 basis points and I know it’s up 2% year-over-year.
Did that reflect sort of this at least potential negative of these spreads that were lease in the quarter or rent concessions or what else maybe impacting that average base rent number. Which and I know it small, but it went from 4029 sequentially down 4005.
Steve Sterrett
Michael, it is Steve. I mean there are a lot of things that are going to impact that as David talked about in his prepared remarks on our occupancy is up year-over-year in a little bit and the mix of stores that close that’s an example and what those tenants were pain coming out of the mix would be another factor.
So, you cannot look at it only in the context and try to impute what it might lease in square perspectives.
Michael Bilerman - Citigroup
I would just point out, I mean that quarter analysis it can be impacted by mixed more than, a year amount would be. So, I know it’s a year-to-date number, but you just can not overreact in terms of that at this point like I said I think the longer picture is, yet it’s getting tougher and has been tougher, to maintain our historical lease spreads.
There is no denying that and yet we’re still able to Eka deposit of spread and positive NOI growth but is it a challenge. Yes.
Do I see it turning negative? The answer is no, but it’s a volatile market and sales, and the mood of the tenant is important and we’ve been in a very tough retail environment.
The good news on all of that is that, this is no guarantee, but the mood from our clients is better and they’re thinking more about ‘10 and hopefully, they’ll have a positive holiday season and the store count will grow in 2010, but there’s a level of uncertainty out there.
Michael Bilerman - Citigroup
I think you mentioned that your peers have done this quarter and giving with the effective was 4% rent relief off of the total NOI. You do not have that going on?
Steve Sterrett
Michael, at the margin there could be a little bit of impact there. Our 2009 rent relief in total will be under $10 million and into $7 million to $8 million range.
As I think we said on the call last quarter, we haven’t seen much of it year-to-date, so it’s a little bit back and weighted as you look at the impact on the average fees rent. It could have a nominal impact, but it’s a small number in the context of the size of our income statements.
David Simon
Let’s talk about rent relief just philosophically for a second if we could. Our view on rent relief is that, if you’re in national tenant and you have a lease you have to abide by it and occasionally be modified that statement if we think that the tenant is on the verge of a bankruptcy or something along those lines and we think our help, obviously this is not just us.
It takes essentially the landlord community as well as their suppliers. We work together to try and keep the retailer out of bankruptcy.
We have done that with one national tenant of any size this year. Now, look when the lease expires, all bets are off, right.
They’re going to try and get the lowest rent they can and we’re going to try and get the highest rent and in some cases we win, in some cases they win. Most of the time to tried to figure it out, so that it works to both parties advantage.
Now, let’s talk about local retailers. Local retailers, frankly if they’re screaming and we don’t have an immediate use, we may grand rent relief of a little bit more generously on the local tenant, but again that would be driving the number more than in the national regional tenet.
Michael Bilerman - Citigroup
Just in terms of the $4 billion of cash. I know that you obviously looking for opportunities, but if nothing came up that was suitable to you, what’s sort of the Tom timeframe were you would start to pay down debt or maybe buyback debt and the reason I ask, because obviously the FFO impact can be quite significant on what assumption that you will make?
David Simon
We’ve already earmarked in our own mind next year a lot of that capital payback debt, but right now as some going into the market and paining a premium for our debt, which we’re not overly excited about doing. We will do a couple things, obviously we have some unsecured bonds, which will payoff with cash and then we will unencumbered assets next year as either of those mature and/or come out to their window, where we would incur a prepayment penalty.
Now, most of that, if you look at the schedules a little more backend weighted, but we are suffering through read somewhere that someone is getting 50 basis points on their cash. We’re getting less than that.
So I’m going to call that person and find out, why they’re getting 50 versus our 30 to 40. They maybe buying auction very preferred to all, but I hope to got we’re not.
So we will earmark that, but it’s going to be for wholly-owned assets, where we don’t incur prepayment penalty in our unsecured bonds, but unfortunately most of that stuff is coming out made to the end of next year.
Michael Bilerman - Citigroup
Just one last one, I think you maybe comment before with international acquisition of change, it really have anything on the tender at the moment, is that a function of, like US dollar or are there other things going on there? Is it is the lack of opportunities you’re seeing?
David Simon
It’s a function of number of things. I do think the weakness in the dollar makes obviously a much challenging proposition.
It’s a function of we think there are going to be or there are better opportunities in the U.S. Also, we have created a value in our absent unfortunately liberty, but we created value and our international activities.
We’re accepting our competitive advantages there and until we have that assessment done, I think we’re better off focusing here on the domestic opportunities, which are a little more powerful at better values. If you bet wrong on the dollar right now, you could get destroyed and we don’t want to see that and I just think ultimately, there’s going to be more.
I feel more comfortable with the pricing here versus elsewhere that the opportunities are better in the U.S.
Operator
Your next question comes from Steve Sakwa - ISI Group.
Steve Sakwa - ISI Group
Couple of questions, David, could you just go back to your early comments about the sales trend. You mentioned that September was much lower, but I don’t think you quantify that?
Could you give us some monthly progression of these higher sales…?
David Simon
The outlet business was up $1.5 million and the mall business was down $5 million. I think the next question is why we’re down a little bit more than some of our peer groups?
We do have more exposure to Florida and California than probably a lot of people to understand and then I think that’s a great long term position to be in, because those are clearly greet long term economies and great population migration and all sorts of those demographic items. They have been hit the hardest and Florida, has suffered more than people realize and I believe we’ve also obviously had some exposure to Las Vegas, which has been hit recently hard.
So I think when you look at those areas that I probably why we’re just a little bit higher sales decline and then in other top mall companies.
Steve Sakwa - ISI Group
Then you mentioned that October was encouraging. I guess it was your expectation or do you believe that you could be in the positive camp in Q4 here?
David Simon
It’s very interesting and I’ll let Rick comment on this. We’ve had a well known retail analyst.
I don’t know if she wants a plug or not, but we probably should asked here. She came and presented to our Board yesterday.
We also had a major CEO come and see us. Other major retailers come to see us, Monday I guess.
They’re feeling better now. A lot of it depends on how they plan their inventory The fact of the matter is that comps compared to last year still could be down just because they have a lot less inventory, but with that results to be very, very pleased because their margins are going to stay intact and I will tell you just what I know and what we’ve asked.
There are some that are planning up. There are some that are planning down, but they all feel good about the business.
Rich, I don’t know if you want to…?
Rich Sokolov
One of the areas that this is really in every size they’re caring less of the same size and every one feels very well positioned and if in fact there’s a slight up tick in consumer demand. You’re going to see substantially better price performance, margin performance and cash flow performance.
David Simon
I guess, what I would say to you is, it’s a little bit what’s happening in sales year-to-date. I mean it may come in with less comps, but they maybe tickled pink by its and unless costs are down 20% that’s not going to be good, but if they’re down and again it depends on the retailer.
If they’re down 5% to 6% they maybe really happy with that and that’s why we’ve just to be careful on how we look at that number.
Steve Sakwa - ISI Group
I guess to that point, Rick, you said your renewals, I guess kind of 44% done for the business or kind of your ‘10 and that’s a little bit behind kind of where you were last year. I guess what level of sales would get you kind of excited or maybe even disappointed about kind of the continued leasing velocity, is there sort of a breakpoint that you think about?
Rich Sokolov
The retailers that we’re deal with are certainly focused on sales, but they are for more focus today on profitability and cash flow, which leads to capital allocation for new stores or remodeled stores upon renewal. What we face in 2009 was most retailers saying, “We’re preserving our cash, because we’re unsure about our line and we’re unsecured about our ability to finance.”
Now that they have better cash margins than better cash on deposit, we’re now hearing that they are allocating money for new open to buys and I think David gave you a list in his comments of those stores that are looking at that. So I think it is going to be less correlated with sales and more correlated with profitability and cash flow generation.
Operator
Your next question comes from of Jay Haberman - Goldman Sachs.
Jay Haberman - Goldman Sachs
David, you mentioned using cash to pay down unsecured and pay down additional debt. Just two parts of the questions, I guess one is do you have a deleveraging goal and you already at six times I guess net debt to EBITDA, but do you see that trending lower and obviously you mentioned the positive impact that’s had on your cost of capital thus far this year?
The second question, I guess can you speak to the dividend. What you think about reinstating at some point the cash dividend?
David Simon
I think obviously that we have always fell for even with kind of the market correction that we are in good strong financial shape, but you can never be too conservative in today’s fall to world. So the answer to that is that I do think we will continue to deleverage.
Other than, Jay, I think that if we see an opportunity that could add value to our shareholders. We could see a temporary spike up and then obviously towards trying to get down to where we are.
So we feel really very good where we are. I don’t think we would need to go lower, but I think we want to be as stable as we can.
Now, with respect to the dividend, I’ll tell you right clear and unequivocally where we’re headed, obviously I say this subject to Board and discussed with the Board and it’s obviously subject to market conditions, but we plan on paying cash next year and that’s our goal. We do not see anything right now that would dexterous from that goal.
It will be around are taxable income, which is kind of around where we are this year, if you add it all up, maybe it depends on the transactions and if we can accelerate certain tax depreciation and it gives a little complicated, but our goal would be going for next year to clear the dividend $0.60. I think we would look to start paying cash at that level or near that level next year with no common equity.
Jay Haberman - Goldman Sachs
Then just a second question, can you give us some sense of just the dollar volume. What you’re considering for acquisition to this point?
Is it $1 billion dollar range, you’re talking about $5 billion and also can you give us some sense of the returns? I know returns clearly you’re looking at higher returns six months ago, but how you’re thinking is today?
David Simon
We’ve got to have higher returns. There’s no question about that.
We are in a riskier world and we would expect to achieve those if we deploy capital. Jay, I really can’t do that, because if I gave you, it just tough for us to really go.
We just have to see obviously if we do anything, we’ll lead it out, we’ll have a chance to discuss it, but at this point I cannot shed much light on that.
Operator
Your next question comes from Alex Goldfarb - Sandler O’Neill.
Alex Goldfarb - Sandler O’Neill
I just want to take a look at the temporary tenants for this holiday season. Is it pretty much on par with the amount of tenants that you had last year and what percent of NOI comes from the temporary tenants that setup for the holidays?
Steve Sterrett
I will just comment on the velocity of that business and we’ve been able to maintain that business pretty constant with last year. We have been aggressively canvassing all of the properties in our markets as David mentioned, because we think this is about market share and we believe there are many compromised properties operating in the same markets as our malls and we want to bring in the tenants into our properties.
So they can see if they can do business and just increase our market share, which will in turn increase our pricing power.
David Simon
I just would add that the cart business, we’re looking at business in two areas. We have the cart business and we have temporarily income, when we lose inline store and we put a temporary tenant in that inline store.
You walk a thousand miles and you know exactly what I’m talking about. I will say this the cart business, we’re making the deals, but rent is a little under pressure there and we’re having to do a little more volume to makeup for the last rent, because it kind of obviously Christmas last year was disappointing for that tenant and so we’re turning and burning a little bit more than we’ve had to do in the past.
We think we can bring it in and totality kind of where we were last year. This is a business, a lot of it’s a cash business in the sense that you cannot really base a lot of it, and there are a number of national tenants that claim that business as well.
We’ve made of some of it by bringing a new uses like, I’m sure you’ve read about the toys…
Steve Sterrett
We’ve about 25, toys are up seasonal stores that seem to be initially performing very well for them and we hope to be able to grow that into permanent stores and have them comeback into the malls in a long term basis.
David Simon
As long as, Vornado doesn’t negotiate the rent with them will be fine. So that business is challenging.
We’re doing a lot more volume to makeup for the softness in rent, but there is an unknown. Again, this is all on the margin for us, but there’s a little bit of an unknown in terms of how we deliver for year end.
Alex Goldfarb - Sandler O’Neill
In terms of which part is more challenging filling, vacant inline or filling the carts and also just looks kind of NOI, comes from?
David Simon
It’s really per cart rental.
Rich Sokolov
It’s not even so much getting the carts least. It’s getting the pushback on the rents there.
Alex Goldfarb - Sandler O’Neill
What about success in filling the inline, is that pretty much on par with last year?
David Simon
Yes, that’s right.
Alex Goldfarb - Sandler O’Neill
Then just a final question is probably more for Steve. You talked about unsecured, you talked about secured, what are your thoughts on converts and is that an area that you’d look at or you guys with stick with more traditional sort of five, seven, tenure unsecured debt.
Steve Sterrett
We have had and actually still do have converts in the capital structure. We did in a public deal.
They typically have been issued as a bridge security as part of an acquisition. The market is very attractive right now, but as we talked about with a couple earlier calls we’ve got $4 billion in cash that we’re sitting on today.
So it’s not like we have a ready use for the proceeds, but it is a market that’s a very open, very attractive right now and something that we’re clearly paying attention to it.
Alex Goldfarb - Sandler O’Neill
Can you give us a sense of pricing?
Steve Sterrett
Yes, our coupon would be today sub three with a premium of probably 30 percentages.
Operator
Your next question comes from Craig Schmidt - Banc of America.
Craig Schmidt - Banc of America
Looking over the last four quarters, you’re same store NOI has been more resilient than your mall peers. I’m wondering if there was one fact that you might attribute that to?
David Simon
It’s hard to say. I don’t think there’s one factor.
I just think, Craig, we’re focused individuals.
Craig Schmidt - Banc of America
It looks like you picked up about 250,000 in occupancy in the mills. I’m wonder if that’s related to the big box comments and if could name some of boxes that came in?
Steve Sterrett
In fact we have and there have been a lot of activity in mills, in the big boxes. As you know when that platform the box square footage and the small shop was included in their occupancy.
We have brought in the last nine months two Neiman Marcus last calls. The outlet Christmas Tree Shops, Bed, Bath & Beyond, H&M, Best Buy, I mean these properties are very well located in our Forever 21.
I think that the point that David made in his comments about the flight to quality. What we’re seeing is that these big box users now understand that they are going to be advantaged by getting the incremental traffic that they get in a mills environment, while still having their own entering in their own parking field and visibility as opposed to being in a smaller math strips center.
So we’re finding a lot more interest in the boxes that become available. We’re also in the process of making deals with [Swede Lake] 10, 3:15 and Legoland that are part of Maryland and that will also just add market share to the properties.
Craig Schmidt - Banc of America
Also if I take the bed debt fourth quarter same store sales are positive?
Steve Sterrett
Craig, there are a number of retailers that feel that way, but the world is volatile, so we will moves better from them for sure.
Operator
Your next question comes from Michael Mueller - JP Morgan.
Michael Mueller - JP Morgan
Just going back to acquisitions for a second, your comments a couple minutes ago about, if you do something you’ll see leverage stickup a little bit, but you would certainly laid out, it doesn’t necessarily sound like a pipeline of smaller one off deals and it sounds like something bigger in scale. Am I reading a little too much into that or is that to think about…?
David Simon
The answer is, we’ve identified roughly 30-ish recent new lifestyle centers that are in distress. It’s interesting because we thought maybe that would be a great opportunity.
Rick and I have gone over and there’s maybe one or two that we would pursue and I think historically, we have done our staff. Over the last few years it’s been on the bigger scale.
So I guess if there are those opportunities, it’s logical to conclude that it will probably be more of that than the individual ones. There’s not a lot of individual stuff out there and distressed retail, I mean it’s distressed for a reason and in some of it will be good long term.
We’re evaluating that, but we were one very surprised to know, there are at least thirty something in trouble that’s a lot, because lot of these were high land values, high construction costs, but even more surprising is that at the end of the day, that 30 plus is only two or three that would let our whistle.
Michael Mueller - JP Morgan
Going back to the core for a second and I think you answered this in some prior questions, but when you were talking about the leasing spreads and I guess the comments were coming up about Q3. Is it fair if we’re thinking about the 44% or 43% of leases that have been addressed for 2010, that if we look at a year-to-date basis for ‘09, the spreads of that what’s coming upper in the vicinity of that year-to-date number, even if it’s a little bit lower, but some were in the ballpark?
Rich Sokolov
I think it’s hard to generalize. As David said, every lease is its own story.
Every property is its own story and while it’s a significant amount of square footage that we are dealing with, there’s no trend if we have rolled over is coming over in the weaker property that going to impact the spread, when the rollovers are coming over in a better property that’s going to move it up. I think we have a large enough base and a large enough sample that as David said, we’re still going to generate positive spreads and we’re just very focused on running the business, making the best deal we can for each of these renewals.
David Simon
I think again, any moment point in time you’ve got to be careful with it. I guess at any point in time you’ve got to be careful to draw too much from.
Partly, the reason we’re below ‘09 versus ‘08 is that we want to wait. We’re hopeful that a better Christmas season, holiday season will give more confidence to the retailer and we can negotiate a better deal, that’s part of it.
Some of it is, the retailer saying, “Listen, I want to see, how they are?” We wouldn’t be accurate saying that, it’s all part of that strategy.
Part of it is, they want to wait and see how they shakeout and the trend maybe working in our favor. Remember, ‘08 was different than ‘09 in terms of the mood for the retailer even though it certainly was not robust, but the retail world didn’t end until kind of mid September.
So we have those commitments they were pretty much done by the time that we reported the September 30 numbers. So it’s tougher right now.
We’re confident that we still have the spread. The spread will come under pressure because we’re dealing with a tough economic environment.
There will be pressure on occupancy like we have seen in ‘09. Even with that said, because of where we are in the industry, we will continue to outperform our peer group, but we’re not immune to the bigger picture right now and our results indicate it.
I mean we are 60 basis points up, which some would feel good about. We want to be 300 basis points up.
So we’re feeling it, we’re doing the best that we can in that tough environment, but certainly these numbers will feel pressure and you’re seen it.
Michael Mueller - JP Morgan
Lastly, for Steve, if I look out in terms of secured debt coming to over the next couple of years, it seems like the malls that are almost certain to be unencumbered, you have Georgia, Forum Shops, Copley, any others that are on that list as well?
David Simon
That’s the majority was, Michael, there could be another one or two in Nikon there, but for 2010 those are certainly the ones that we focused on.
Operator
Your next question comes from David Fick - Stifel Nicolaus.
David Fick - Stifel Nicolaus
When you look at the GDP same store leasing numbers that are running negative 20%, they have commented that they don’t believe your numbers and I don’t want to beat this force to debt on the leasing spreads this quarter and I understand your hesitancy on a single quarter number, but the third quarter denominator is the biggest quarter in terms of how you report leasing spread? Given that you were up 17% year-to-date at the end of June and now about of 10%, it would appear that you mathematically have to have a negative number in the third quarter, so you’re saying you have a high confidence level in the $4 spread, we’ll see how that works going forward and all we have at this point is a one quarter trend line.
What are we to make GDP overlay against to you, simply that they are not a good counterparty to the tenants anymore or having to give up rent compared to…?
David Simon
David, you can ask them. I have no comment on that other than I think we’ve answered that we asked and answered frankly other than what the spread has come under pressure.
We’re not denying that. We’re still got a spread and we told you that the spread has always been kind of $5 to $6, we’ve outperformed in a better economy.
We’re not quite getting the $5 spread in a tougher economy, it’s still positive. We’re not done with ‘10.
We’ll see how ‘10 shakes out. The good news is that the environment is getting better.
So the pressure may subside to some extent, but I have no comments on somebody accusing us of that. I won’t give that…
David Fick - Stifel Nicolaus
You’re obviously looking at GDP. Can you give us any comment on why you think there rent spreads are so negative?
David Simon
No, absolutely not.
David Fick - Stifel Nicolaus
With respect to mills, are there any remaining significant cleanup items with respect to that acquisition? Can you give us a status for example of the Class Action Suit that was filed a couple years ago?
David Simon
It is in a process of being dealt with according to our plan, but there’s some technicalities associated with it, but it’s pretty much in the rearview mirror for us.
David Fick - Stifel Nicolaus
Lastly, you had a couple of assets that went back to lenders this year appropriately, so as you look forward, how does your watch list look in terms of non-recourse givebacks?
David Simon
I think if it gets to that point it will be extremely, very much on the margin for us. Our preference would be to figure out, how to work with the lender, but it can’t happen in all of the cases.
So if in fact, it happens again, it will very much to be on the margin and there’s no guarantee that will happen again.
Operator
Your next question comes from Jeff Donnelly - Wells Fargo.
Jeff Donnelly - Wells Fargo
Rick, I want to follow-up on your point about strategy did the renewals for late 2010, is that premise on your expectation for a strong holiday and I guess particular economic outlook for 2010? I’m just curious, what your assumptions are?
Do you think that decision one way or the other?
Rich Sokolov
I think that it is lesser a function of the strong holiday with respect to sales, but there’s an assumption that it’s not really the assumption, it’s based on talking to the retailers, which David and I are doing a whole lot of every date that they’re feeling better and we have absolutely seen several instances of retailers that were in here in the second quarter asking for rent relief and modifications and then came back in the third quarter and said, “Looks like, we’re okay.” We don’t need anything.
We’re going to make it. Obviously, we believe that with their inventory policies with the cash flow generation with where we believe they will be on profitability in the fourth quarter.
We will have a more welcoming environment to have those discussions with the retailers for the renewals in the back half of ‘10. I mean we’re very focused on the 1/31/10 renewals.
We’re getting those done that. Tomorrow, we’re putting that in place, but we’re hopeful that these retailers will be in a better position and frankly, as I read all of the retail analysts and all of their ratings and their movements virtually all of the retailers are getting upgrades and more positive outlooks based on the expectation that there’s going to be a more profitable Christmas, which may or may not be related to more sales.
Jeff Donnelly - Wells Fargo
I guess then set our expectations for early 2010, do you think we’ll see fewer store closers this time around post holiday season?
Rich Sokolov
While we certainly had had a significant number of bankruptcies in year-to-date in 2009 and I would certainly hope that we would be below that level in 2010.
Jeff Donnelly - Wells Fargo
Then switch gears, David, there are a handful with outlet property portfolios in the market. Are those in interest you guys and does your experience tell you that Chelsea can be successful improving sales and profitability in outlets and I guess on the secondary markets?
David Simon
We’re trying to negotiate with the team there now. So I don’t want to give them any compliments.
The outlet business has been a good business for us. I mean the outlet team has performed exceptionally well.
So if we grow our business, we’re going to look for quality retail real estate and it could be in outlets. It could be in malls.
As I mentioned to you before, it could be in some of these lifestyle centers and we look at anything and everything. We don’t have anyone desired to do malls ahead of outlets or outlets ahead of mall, it’s really a function of where we think the best return as what we can do to that cash flow if we bought a center.
So we haven’t done a lot of acquisitions in the outlet business. We’ve done in a little bit here and there, but it’s really been mostly organic growth.
Jeff Donnelly - Wells Fargo
I could just ask one last question admittedly, it’s probably a softball for you on the outlet business, but I’ve covered you guys in Chelsea independently for a long time, I really can’t recall a time when sales in that area were weak or even down. What do you think is driving that secular growth?
I guess recall in outlet, because it seems deeper than just consumers signing value in recession right now. It’s a mix to higher price point or do you see it in full traffic or do you think it just taking share from full price retail?
David Simon
The fact is, I think that it all boils down to the consumer and I just find it, they find the value of there. The value is more than just price.
Its how the center looks, how the center field, what tenants to have, what merchandize they have, and I think we’ve also change the paradigm a little bit with the outlet business by bringing it closer in. As an example, I was just in Cincinnati over the weekend and I visited our outlet center that we just opened and it was an old mall site, right.
Now I remember, but I won’t say which developer was trying to build a fashion center there, but anyway and it’s well done, it’s on the highway, it look beautiful. We still got some lease up to do there, but the stores had great merchandise, had great prices and I think the consumers just recognize that.
What’s interesting with what I have seen year-to-date and the Chelsea portfolio, we’ve always had over the last three, four, five years wonderful growth in sales from the tourist centers. In fact, what we’ve seen year-to-date is that tourist centers have taken a hit and if there’s any reason why Chelsea, even though September, we’ve reported down sales was because the tourist centers were taking a little bit more of a hit.
The Florida of the world, Vegas and even something like Woodbury, but what was interested in the sales that kind of the Cincinnati, do you know that’s on in the comp number, but we have Northern Indiana even between Indianapolis, I mean in those kind of that Chicago of the world. We’re actually very, very strong for the outlet business.
So I think it’s long winded by saying, I think the consumer just, they’d likes the plan, they like the value, they like the selection, they like the price.
Rich Sokolov
If I could just, one other thing if you look historically the other thing that I’d like to think that we brought to the outlet industry is building a bigger impact centers in a race track configuration. So the square footage is larger.
The absolute number of outlets in the United States is probably substantially reduced from where it was ten years ago. So you have more concentrated powerful properties, which is driving the results of those properties and frankly when you look at the capital situation today or the construction in the retail sector is that like a 20 year low and we certainly anticipate it will remain there and the lack of new supply can only hopefully help the demand side for the existing product.
Operator
Your next question comes from Rich Moore - RBC Capital Markets.
Rich Moore - RBC Capital Markets
It’s been with the thoughts that you just expressed on the development front, the Tanger guys are out there, saying that they have found one development to do and maybe some other ones and Rick, you were saying that tenants are getting a little bit more excited about the existing assets. I mean David, do you think the tenure moratorium that you sort of put on new development, maybe it’s a bit too much and are you guys looking to break ground on anything?
David Simon
When I said that, I said he didn’t hear me except for outlet. Somebody asked me what I was going to dress up this weekend for Halloween and I said, well I have kind of a ghoulish sense of humor sort of lifestyle developer.
What I do think there’s going to be some outlet development. I mean good example was, the besides predevelopment.
As you know, Rich, we have our land in Merrimack, New Hampshire and we’ll going to have a decision to make in this spring whether to build it. I have start building, I mean we’re going to eventually built it, but whether we want to build this, start the spring of the tenure or wait in another year.
Right now, I think right now the mood is to start next year, which frankly I would not have included anytime up until the last month or two so. The good news is we’ll have time, we don’t have to rush it, but I still think the amount of outlet development and it’s still going to be very few and far between and that’s okay, because I mean it will drive the demand in our existing centers, but there will be some.
I think certainly that will come ahead of full price retail. A lot of people suddenly want to turn center they land the ahead into an outlet center and if the world continues to improve, we’ll have to deal with that oncoming rush or desire to build, but the stuff that we will do will make economic sense.
Rich Moore - RBC Capital Markets
So, really nothing new from you guys maybe Merrimack obviously but nothing beyond that for 2010?
Rich Sokolov
No, the only thing David did allude to, the redevelopment we have built into our new projects with Chelsea, expansion opportunities and they are already laid out, already master plan and in the project self demand comes back and we can get an acceptable return, maybe a couple of those opportunities get move which further consolidates the square foot in our property prevent incremental competition in those market.
Rich Moore - RBC Capital Markets
The same kind of thing on the domain, we’re are you guys with Domain in the future phase that you envisioned are those getting further down or they coming back lifer.
David Simon
Let me just clarify because it can be a little bit confusing. We’ve both in our Domain Phase 1 which is Neiman, Macy’s anchored and it was opened and what thought two years ago right.
We’re our Phase II is opening in the early spring and that is anchored by Dillard’s, Dicks Village Road, Maisanos and the number small shop tenant. Dicks opening in actually earlier but that’s opening in February of ‘10 and then there is another project that uses the Domain name that another developer is looking to develop, but we have no financial interest in that and I am not sure of the status of that.
So we’re going to be pretty much done with Domain and when we opened. I mean, continually lease up and management opportunities, but we’re done in the spring in terms of the new development there.
Rich Moore - RBC Capital Markets
The last thing, Rick, a year end occupancy what do you think that’s going to be?
Rich Sokolov
We are today 91.4 we hope that will tick up a little more into the fourth quarter, but we ends of anything leases but we are hoping that its going to be closer to 91.56. It’s just a function of where we end up with your end getting stores open.
Operator
Your final question comes from Jim Sullivan - Green Street advisors.
Jim Sullivan - Green Street advisors
There’s been a lot of discussion on the call with respect to ‘09 Holiday and ‘10, but I would like to ask you to maybe look at little bit further into ‘11, ‘12, and ‘13 particularly as it relates to tenant sales growth. When we look at the company’s history tenant sales growth following economic downturns is recovered pretty quickly to the solar mid positive single digit range.
It just seems as we have said here today that the consumer this time around is in a different bottom or negative spot it relates to their balance sheet in the level of debt that carrying which would make that kind of recovery much harder to achieve this time around, again out in the ‘11, ‘12, and ‘13. You agree with that or do you have different point of you?
David Simon
I think it the consumers clearly going to be challenge in terms of spending and certainly to the extent that we continue to have such a week picture. I’ll tell you that I think corporate America is on the verge of starting to hire again and to employ capital which will lead to job growth.
I think in the environment that we are in today, I agree with you. I think there is a reasonable chance that we will be in a much better job picture in ‘10.
I think that is going to be corporate led and there are obviously retail lags and so I think you are right that right ‘10 will continue to have a lag impact, but that the CapEx and Corporate America will be significantly up in ‘10 right now other work think about at Tanger announced they are going to build. We might build a New Hampshire.
There are lots of companies in various sectors that I think are thinking about a growth and in order to achieve growth, I think they need to hire people which will give a certain stability in the job growth, which may make ‘11 and ‘12 a little bit better than what we are feeling today. So, I am not as pessimistic on ‘11, ‘12.
I think ‘10 will continue to have a and be a tough environment because we have got the lag impact, but if corporate America seems to be positioning to hire a little bit more, put more capital to work we could have a better ‘11,’12 then what we might feel like today.
Operator
This concludes our Q-and-A session. I’ll now turn the call back to Mr.
Simon for closing remarks.
David Simon
Okay, thank you everyone and I appreciate your interest and your questions and we look forward to talking to you in the future.
Operator
This concludes today’s presentation. You may now disconnect.
Good day.