Exhibit 99.3
SIMON PROPERTY GROUP
TELECONFERENCE TEXT
FEBRUARY 17, 2000
FORWARD LOOKING STATEMENT
Welcome to the Simon Property Group fourth quarter and year-end earnings
conference call. Please be aware that statements made during this call that are
not historical may be deemed forward-looking statements. Although the Company
believes the expectations reflected in any forward-looking statements are based
on reasonable assumptions, it can give no assurance that its expectations will
be attained, and it is possible that our actual results may differ materially
from those indicated by these forward looking statements due to a variety of
risks and uncertainties. We direct you to the Company's various filings with the
Securities and Exchange Commission including Form 10-K and Form 10-Q for a
detailed discussion of risks and uncertainties.
The Company's quarterly supplemental information package will be filed as a Form
8-K next week. This filing will also be available via mail or e-mail. If you
would like to receive the supplemental information via e-mail, please notify me,
Shelly Doran, at SDORAN@SIMON.COM.
Participating in today's call will be David Simon (chief executive officer),
Rick Sokolov (president and chief operating officer) and Steve Sterrett (chief
financial officer). Mike McCarty, our Senior VP of Research and Corporate
Communications will also be available during the Q&A session. David will now
begin the call.
INTRODUCTION
Let me make just a couple of opening comments before we get into the detail.
1. We had a good quarter, meeting the Street's consensus expectation of $1.03
per share of FFO.
2. Despite the economic slowdown and flat holiday season, our portfolio
demonstrated strong performance, with continued growth in rents, sales and
occupancy.
3. Our balance sheet and access to capital are unmatched in our sector, as
evidenced by our $500 million issuance of unsecured debt, completed in
January of 2001.
4. Given the current economic climate, we feel good about our decision to
reduce development spending.
5. And, we are upbeat about the future of our business. The Wards liquidation
and JCPenney store closings represent a long-term value-creation
opportunity for us, and our in-line retailers are in generally good shape.
Steve will now discuss financial and operational results.
FINANCIAL AND OPERATIONAL RESULTS
We increased FFO per share in the fourth quarter by 14%, to $1.03, versus ninety
cents in 1999. There are two items, however, which impact comparability. As
discussed in previous calls, in January of this year we adopted, as required,
the SEC's Staff Accounting Bulletin 101, which addresses certain revenue
recognition policies, including the accounting for overage rent. Without
repeating all of the details, our recognition of percentage rent is now more
back-end weighted in a calendar year. Had we adopted SAB 101 in 1999, our fourth
quarter FFO would have been reduced by five cents per share. The impact on
annual results for 1999 was negligible.
Comparability of results is also complicated as a result of unusual,
non-recurring charges recognized in 1999. In the third quarter we reserved $12
million related to litigation filed by former employees of DeBartolo Realty
Corporation. In the fourth quarter, we recorded a $7.3 million write-down of
land held for disposition. At the time, these types of items did not impact FFO.
Under NAREIT's FFO clarification, which went into effect in January of this
year, these charges are now to be reflected in FFO, thereby reducing 1999 FFO by
three cents per share for the quarter and eight cents for the year.
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To provide you with an "apples-to-apples" look at our results, we have
calculated the impact assuming 1999 adoption of SAB 101 as well as reversing the
impact of the unusual, non-recurring charges. For the twelve months, 1999 FFO
would increase by eight cents per share. Therefore, FFO for the year 2000, on a
comparable, per share basis, increased 7.2%, from $3.06 per share to $3.28 per
share.
Highlights of our fourth quarter operating results are as follows:
- - Occupancy increased 120 basis points from December 31, 1999 to 91.8% at
December 31, 2000. Occupancy has improved due to:
1. The continued demand for mall space--and we have not seen any
significant retrenching in the 01 or 02 expansion plans from our
retailers. In 2000, we leased 8.1 million square feet. Of this number,
5.9 million square feet was new tenant leasing activity and 2.2
million was renewal activity.
2. Increased quality of the assets in our portfolio due to acquisitions
and redevelopment, owning more of the malls where tenants "just have
to be."
3. A more efficient lease execution process, through which we are opening
tenants quicker.
4. A proactive approach with regard to anticipating tenant fallout in our
centers, which minimizes downtime.
- - Comparable sales per square foot, i.e. sales of tenants who have been in
place for at least 24 months, increased 2% to $384. Comp sales per square
foot for the holiday season were essentially flat.
- - Total sales per square foot increased 3% to $377 per square foot.
- - Average base rent increased 4% to $28.31.
- - The average initial base rent for stores opened during the fourth quarter
was $37.57 per square foot, versus average rents of $26.79 for those
tenants who closed or whose leases expired, for a spread of $10.78, or 40%.
The average initial base rent for new mall store leases signed for the year
was $35.13, an increase of $5.89, or 20%, over the tenants who closed or
whose leases expired. This annual number is in line with our historical
spread.
- - Same property NOI growth was 5%, driven by occupancy gains, rent increases
and our SBV initiatives.
We'd like to take a few minutes now to comment on the overall retail climate.
Growth in retail sales began to decelerate in the second quarter of 2000.
According to one study, retail sales growth in the fourth quarter was one-third
the pace of the first quarter. What drove this deceleration? Economists point to
four major factors: slower job growth, lower wage and salary income gains, a
reversal of the "wealth effect," and rising energy costs taking a larger
proportion of discretionary income. With these pressures, consumer confidence
began to wane and along with it, retail sales growth slowed. December was a
particularly challenging month for all retailers as evidenced by the lackluster
results released for the holiday season. SPG's experience was similar to that of
the industry.
What does this mean for SPG? With regard to the in-line tenants from whom SPG
earns most of its revenue, the news is positive. The tenants are generally
financially healthy, and have shown no meaningful pullback in 2001 planned
openings.
We would expect, even in a relatively flat sales environment, to continue to
grow occupancy and rents. History shows us that even in a tough retail
environment, we can produce positive operating results. Witness 1995 and 1996,
when retail store closings nationally were more than double the level of 2000.
SPG still grew occupancy, base rent, and tenants sales in meaningful ways.
Throughout its 40+ year history, the Simon portfolio has demonstrated resilience
to fluctuations in the business cycle, as evidenced by the:
- - Asset quality which translates into superior sales productivity and
consistent operational growth;
- - Scope and depth of the Simon organization's tenant relationships and the
magnitude of high quality, national tenants throughout the portfolio; and
- - Simon organization's demonstrated ability to successfully retenant anchor
and in-line stores.
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These attributes all combine to make Simon the leader in the retail real estate
industry. Rick will address the department store situation specifically in a few
minutes.
LIQUIDITY AND CAPITAL ACTIVITIES
In January, we closed on the issuance of $500 million in unsecured debt. This
transaction was increased from its original size of $300 million due to strong
investor demand. Proceeds were used to pay off the $450 million tranche and to
partially pay down (by $40 million) the $475 million tranche of the facility
obtained by SPG to complete the acquisition of Corporate Property Investors. The
January issue included two tranches of senior unsecured notes: $300 million of 7
3/8% due 2006; and $200 million of 7 3/4% due 2011. All securities in this
offering are rated Baa1 by Moody's and BBB by Standard & Poor's. We are the only
company in our sector that could complete an offering of this size at this time.
In 2001, we have approximately $800 million of remaining debt maturing. Of this
$800 million, $435 million due in September is the third and final tranche of
unsecured debt related to the CPI acquisition. The remaining amounts are
mortgages on 10 assets that have aggregate coverage levels of approximately 2.5
times. We already have lender commitments to refinance a portion of this debt.
We continue to maintain our financial flexibility and strong liquidity with over
$600 million available on our corporate credit facility and over $800 million of
EBITDA expected to be generated in the year 2001 from properties that are
unencumbered. Our interest coverage ratio remains steady at 2.3 times.
DISPOSITIONS
In 1999, we accelerated our efforts to dispose of non-core assets and made
organizational changes to improve performance in this area. We continued our
efforts to dispose of non-core assets in 2000, even though market conditions for
the sale of non-dominant regional malls were challenging. The only regional mall
sale in 2000 was Lakeland Square, where our partner triggered a buy-sell
provision and we sold.
More progress was made in selling non-regional mall assets in 2000. We sold the
Lenox office building in Atlanta, one specialty center, 4 community centers, and
our investment in Chelsea Property Group. In total, $216.7 million of assets
were sold in 2000. If we are successful in completing the sale of our office
assets in 2001, asset sales could exceed the 2000 levels. Potential sales of
non-dominant regional malls should be aided by lowering interest rates.
Proceeds to date from Simon's disposition of non-core assets in 1999 and 2000
total $283 million - $218 million was used to pay down debt with the remaining
balance of $65 million utilized to repurchase SPG common stock and units. Rick
will now discuss the department store activity.
DEPARTMENT STORES
I just wanted to spend a couple of minutes on our approach to the department
store activity that is currently taking place in our portfolio.
As we have said before, department store vacancies at good malls provide a
significant opportunity. Happily, the vast majority of the activity we are
dealing with now impacts malls that are very solid and productive.
With respect to Montgomery Ward, we have been working proactively, anticipating
this liquidation for several years. We have 28 remaining Montgomery Ward stores.
Montgomery Ward owns 17 and 11 are leased. The lease rates are, for the most
part, low, and thus the FFO impact minimal.
We are far down the road in working with replacements for Montgomery Ward.
Tenant interest has been strong. The Ward stores were not significantly
contributing to any of the centers' market share, and for the most part, the
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stores are very well-located in the context of our center plans. History is a
good teacher with respect to Wards. Over the last 5 years, Montgomery Ward has
closed 11 stores in our portfolio. Of the ten locations that we control, nine
have since been retenanted with more productive tenants including Sears,
Nordstrom, Saks, Dillard's, Burlington Coat, Target and Von Maur. Replacing Ward
with these more productive tenants has benefited these properties. This
portfolio has reported average sales growth of over 6% for the last three years
and average occupancy increases of 500 basis points during the same period.
In January of 2001, JCPenney announced their store-closing program for this
year. Five of the department stores on that list are in our portfolio. We own 3
and Penney's owns 2 locations. The situation with Penney is substantially the
same as that of Ward. The closings are, for the most part, in productive
centers. The FFO impact is minimal for 2001. We expect to replace these Penney
stores with more productive retailers, just like our experience with Ward's.
Today, Federated announced that it was doing away with its Stern's division. We
have four Stern's in our portfolio. Two of those Stern's locations, Bergen Mall
and Ocean County, are being converted to Macy's. This will undoubtedly increase
their productivity. Federated has operating covenants at both centers and will
continue to operate them.
The other two Stern's locations in our portfolio are at Roosevelt Field and
Smith Haven Mall. Both of these centers are among the most productive centers in
our portfolio and this represents a significant opportunity to substantially
increase the market share of these already dominant properties by bringing in
users that will have substantially larger volumes than Stern's was experiencing.
We are in active discussions with Federated to redeploy these spaces.
Another area of focus is our theater exposure. We have met individually with
each of our major chain operators and we are actively monitoring the performance
of our theaters on a weekly basis on how they compare with all theaters
nationally and among theaters within the particular chain and local market.
I do want to point out that we have been very successful in converting
non-stadium-seating theaters to other uses. It costs approximately $15.00 per
foot to bring theater space up to grade. Most of these locations have exterior
entrances and dedicated parking fields so that they are very appropriate for big
box users, and we have been able to historically generate acceptable returns on
our incremental capital in converting these locations.
DEVELOPMENT ACTIVITIES
As we have been communicating to you, we have adopted a more disciplined
approached with regards to development activity and believe we made the right
call in reducing our development and redevelopment spending. In the latter part
of 2000, we opened Arundel Mills and the second phase of Waterford Lakes Town
Center. We also completed major redevelopments at LaPlaza Mall, North East Mall,
Palm Beach Mall, The Shops at Mission Viejo and Town Center at Boca Raton.
In light of the weakening economy and current retail environment, we are pleased
to have only one new development project opening in 2001--Bowie Towne Center in
Annapolis, Maryland.
Bowie Towne Center is a 667,000 square foot open-air regional mall with a main
street architectural design. The mall space comprises 560,000 square foot and
will be anchored by Hecht's and Sears and will also feature Old Navy, Barnes &
Noble and Bed Bath & Beyond. An adjacent 107,000 square foot neighborhood
component consisting of grocery retail will be anchored by Safeway. The project
is currently 87% leased and committed.
With the majority of our significant redevelopment activity behind us, we are
beginning to reap the benefits of this invested capital. In addition, our
discretionary cash flow (cash flow after dividends and cap ex) will
significantly
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increase in 2001 due to this reduction in our redevelopment spending. Our share
of development spending in 2001 is anticipated to approximate $200 million for
both new and redevelopment projects.
In 2001, we look forward to renovating five properties, completing the last
phase of Waterford Lakes Town Center in Orlando, and opening both Nordstrom and
Foley's at our renovated and expanded North East Mall in Hurst, Texas.
Our typical, detailed disclosure for new development and redevelopment
activities is provided in our 8-K, which will be filed next week. David will now
discuss our SBV and SBN initiatives.
SBV AND SBN INITIATIVES
We have now been working on our B2B and B2C initiatives for 3 or 4 years. In
2000, we made $62 million. This represents growth of 37.8% over our 1999 results
of $45 million.
On the business-to-consumer side, SBV re-signed Pepsi as a key sponsor for an
additional two years. Pepsi was one of SBV's original sponsors back in January
1998. We believe Pepsi's renewal is a testament to the strength of the SPG
portfolio as a marketing medium.
As of December 31st, JCDecaux fixtures were installed in 39 SPG malls. This
number should grow to over 50 malls by the end of 2001. We saw positive
contribution from this program in 2000, but look forward to a full year of the
program activity and cash flow in 2001. We are excited about this program and
the revenue it will add to the bottom line.
During 2000, we sold over $200 million in Simon gift certificates, redeemable at
any tenant in any Simon mall across the country. $500,000 of these certificates
were sold on-line at shopsimon.com. As a reminder to all of you, Valentine's Day
is next week!
On an ongoing basis, we review what's working and what's not. In November 2000,
after the completion of several months of consumer and retail research conducted
by McKinsey & Co.,we decided to discontinue MALLPeRKs, our shopper loyalty
program. This decision was based on several factors. We had taken this program
as far as we could, and due to its technological limitations, we could not
increase memberships at the rate we wanted. It was also cumbersome for our
shoppers, as we did not have point of sale capability. We do not view this as a
setback. We are looking to create a successful new shopping affinity program
that will add even greater value to our customer's shopping experience.
McKinsey's research supports this view.
In order to focus on marketplace efficiencies, we formed Simon Business Network,
SPG's business-to-business side. SBN is in the process of developing a broader
real estate e-commerce marketplace. The primary areas of focus are MRO
Procurement, Facility Services, Energy Management, Maintenance Services, and
Security Services, just to name a few.
In May, we announced our strategic collaboration with leading real estate
companies from a broad range of property sectors to form a real estate
technology company, Constellation Real Technologies. Constellation has invested
$25 million in FacilityPro.com, with SPG's share of this investment at $2.5
million.
One other point regarding our B2B programs. As you recall, in 1999 we completed
a major agreement with Enron, where we created a joint venture with Enron to
manage our portfolio's ongoing energy business and to lock-in our energy costs
at attractive rates. Given the volatility in the energy markets lately, and the
energy situation in California, we're very pleased to be partnered with one of
the largest procurers of energy in the world, as well as one of the country's
most innovative and respected organizations.
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TECHNOLOGY INITIATIVES
We are very pleased with the progress of MerchantWired. Response from the retail
community continues to be positive:
- - MerchantWired has 12 retailers running production environment on the
network.
- - Retailers representing over 7,000 stores have selected MerchantWired for
networking and managed network services. These retailers have either signed
contracts or are in the final T&C's on contracts.
- - American Eagle deployed in 2000 and Finishline began deployment in 2000.
- - Other retailers with signed contracts include: The Buckle, Trans World
Entertainment and Gadzooks.
- - Retailers have successfully used voice/ip high speed credit authorization
and store polling.
- - MerchantWired is continuing active discussions with approximately 20 other
retailers.
Retailers and technology companies recognize the benefit of MerchantWired.
Retailers are currently testing:
- - Enhanced POS systems
- - Inventory Management Systems
- - Real time data
- - Multimedia web cams
- - Security/Shrinkage applications
- - Enhanced credit card authorization
- - Wireless integration
Over 300 malls have been wired to date and are fully operational with an
additional 50 properties contracted. Active negotiations continue with a variety
of other property owners.
MerchantWired is also evolving to provide integrated technology solutions.
Examples include: credit card authorization; infrastructure hosting;
professional services; wireless; and other applications.
With respect to clix, we are finishing the next evolution of our product in
conjunction with Found, Inc. Found is an innovative e-infrastructure technology
provider that utilizes the Internet to create significant efficiencies for
offline retailers and manufacturers throughout the supply chain. Found and clix
are developing a single wireless wishlist product, which will combine the best
of our FastFrog and YourSherpa initiatives with Found's ability to provide
real-time access to retailers' store inventory levels. The technology that we're
working on has the potential to integrate online and physical shopping into a
seamless experience for the consumer. We're excited about the prospects.
In other technology matters, included in fourth quarter results is a $3 million
write-off of our investment in PIIQ.com. PIIQ was one of our earliest technology
investments and was an online shopping site that has ceased operations. The
write-off is reflected in other expense on the combined consolidated income
statement and adversely impacted our FFO per share by a penny.
We remain enthusiastic about our technology initiatives and believe that upon
final implementation, they will add value to our company.
2001 OUTLOOK
I'd like to take a minute and discuss our 2001 outlook.
We always challenge ourselves with aggressive business plans. And 2001 is no
exception. Having said that, we do believe that we have a realistic view of 2001
in the current environment. We expect a modest increase in occupancy, but at a
slower growth rate than 2000. We expect tenant sales to be relatively flat. Our
plan also reflects our lower capital spending levels for development, and also
anticipates a lower overall interest rate
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environment than we experienced in 2000. Even in a weak sales environment, we
are in good shape because of our below-market rents. Year-end occupancy cost was
12.1%, so there is room for growth there. In fact, our major business focus in
2001 is to increase our revenues through increasing releasing spreads.
We have consistently worked to increase the quality of our portfolio over the
past few years and our properties should serve us well through any economic
cycle.
CONCLUSION
Before I open it up to Q&A, let me offer a few concluding comments:
- - Don't be overly concerned about the health of the mall business. Remember,
it was only about 18 months ago when conventional wisdom said that
e-commerce was going to make the mall obsolete.
- - The mall is healthy. Don't be concerned about recent store closings. It
happens every year at this time. With respect to the Wards' locations,
there is real upside in retenanting those spaces.
- - We are very well positioned to withstand an economic downturn. With a
strong balance sheet, quality portfolio and below market occupancy costs,
our company is stronger than it has ever been.
- - I was pleased to read yesterday that President Bush has agreed to support
the tougher bankruptcy laws that Congress has passed the last two years,
but that Clinton vetoed. Long-term, this will strengthen our dealings with
retailers.
- - Finally, we were very pleased to be recognized in Fortune's recent ranking
of America's most admired companies. It's a great testament to the progress
that our industry has made to even have real estate included as a category.
And we're honored to be mentioned with great companies like EOP and EQR,
also leaders in their sectors.
And now, Operator, we are ready to open the call to questions.
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