Good day, ladies and gentlemen, welcome to the Simon Property Group, Inc. conference call to discuss plan to spin off its strip center business and smaller enclosed malls conference call. My name is Glenn, I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. If at any time during the call you require audio assistance, please press star followed by zero, a coordinator will be happy to assist you. I would now like to turn the conference over to your host for today, Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.
Thank you, Glenn. Good morning, everyone, welcome to Simon Property Group's conference call to discuss our planned spin-off transaction. Presenting on today's call is David Simon, Chairman and Chief Executive Officer, Rick Sokolov, President and Chief Operating Officer, Steve Sterrett, Chief Financial Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, actual results may differ materially due to a variety of risks, uncertainties, other factors. We refer you to today's press release our SEC filings for a detailed discussion of forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
During this call, our remarks will highlight key elements of the investor presentation that has been posted to our website, investors.simon.com, you may follow along. I will now turn the call over to David Simon.
Okay. Good morning. Thank you. Earlier today, which happens to be the 20th anniversary of the Simon Property Group IPO, we announced our plan to spin off all of our strip center business and smaller enclosed malls, which we identified as those malls with less than $10 million of net operating income, into an independent, publicly traded REIT, which for the moment we're referring to as SpinCo. We're excited about this transaction, which we believe is a positive for our shareholders. Over the years, we have seen a number of very attractive investment opportunities in these asset classes that we have not pursued, given our primary focus on our global portfolio of larger retail assets.
We've been thinking about an appropriate strategy given our evolution as a public company, having considered the full range of strategic alternatives for quite some time, we have concluded that a spin-off is in the best interest of our shareholders. Putting these assets in the hands of a dedicated management team with a strong balance sheet creates a company that will be able to execute on a growth-oriented strategy. By spinning the business off rather than, say, selling it, we're ensuring that Simon shareholders will be the ones to benefit in a tax-efficient way from SpinCo's profit potential and the value inherent in its platform of quality, stable retail assets. Rick and I are going to go through the presentation, so you may want to follow along. We'll give some highlights. On page four, we believe SpinCo will be a retail real estate company poised for growth.
SpinCo will have an independent management team and board but will benefit from continued relationships with Simon, both at the board and property levels. Simon will be able to focus on its global portfolio of larger malls, mills, and premium outlets. The total dividend to Simon shareholders is expected to increase following this spin. We at Simon Property Group have an annualized level at $4.80 per share, which we continue to expect to grow given our growing FFO and taxable income. SpinCo is expected to be at least $0.50 per share going forward after the spin. Each SPG shareholder and unitholder will receive a pro-rata distribution resulting in identical ownership of SpinCo.
As shown on page five and alluded to already, we're establishing SpinCo as a separate company with the ability to focus and grow its business while allowing SPG to continue to do what it does best. SpinCo will have a strong balance sheet, equity currency, and access to capital. SpinCo will have the ability to pursue development, redevelopment, and acquisitions of strips and malls. We're enhancing transparency for investors. The two companies post-spin will produce a greater level of disclosure on a combined basis, and through this disclosure, we'll be able to better highlight the key attributes of each company. The transaction just doesn't create a new real estate company, it creates an even stronger Simon. On page six, following the spin, our operating metrics will increase. Sales per square foot increases from $579-$616 when comparing Simon today versus Simon post-spin.
Sales in the mall portfolio go from $560-$625 per square foot, while outlet sales remain at $606. Occupancy increases over 100 basis points. At the same time, we expect no change to Simon's credit rating or related outlook. I'll now turn the call over to Rick to give you more details on SpinCo.
Thanks, David. I'd like to introduce you to SpinCo. The portfolio consists of 44 malls and 54 strip centers, totaling 53 million sq ft.
SpinCo will have one of the largest, most diversified portfolios of smaller enclosed malls and strip centers in the U.S. As shown on page eight, the portfolio spans 23 states. Page nine highlights SpinCo's strong financial metrics. SpinCo's initial year net operating income is estimated to be in excess of $400 million at share, and comparable NOI growth for the portfolio is 2.2% year-to-date. SpinCo's initial annual FFO is expected to be $300 million, or $0.80 a share. SpinCo will have a flexible, conservatively managed balance sheet and, as previously mentioned, is expected to pursue an investment-grade credit rating. At the time of the spin, we expect SpinCo to have about $2 billion of debt, including at least $1 billion in new debt to be added to SpinCo between now and closing. The cash proceeds of this new debt will remain in Simon.
SpinCo will pay out an estimated annual dividend of at least $0.50 per share, which will result in an increased total dividend for Simon shareholders. We believe SpinCo represents an attractive investment for shareholders. Its strengths are highlighted on page 10. It is starting with an asset base of considerable scale, has a demonstrated track record of stable operating performance, and we expect cash flow to grow. Its dual asset class strategy, malls and strip centers, enables efficient allocation of capital between two complementary retail real estate categories and a number of common retailers. Its strong balance sheet positions the company for growth and, combined with its significant scale, will enable SpinCo to be a leading acquirer in both asset classes. Finally, SpinCo will be an independent company, a majority of its board will be independent directors, and it will continue to have ongoing relationships with Simon.
David will be a director, I will be chairman of SpinCo's board, and we will both be significant shareholders. David, a little more than me. Simon will provide property management and support services to SpinCo. SpinCo's primary objective is to deliver attractive total returns to shareholders by executing on a growth-oriented business strategy. This strategy is outlined on page 11 and includes driving internal growth through rigorous asset management and capital allocation, executing on targeted value-added redevelopment projects to enhance portfolio performance. We have identified a pipeline of approximately $300 million of potential projects, pursuing acquisition opportunities in both asset classes, selectively developing new high-quality strip centers, and several opportunities are already embedded in SpinCo. Taking advantage of the value inherent in SpinCo's platform and, of course, maintaining a strong balance sheet. Some components of SpinCo's strategy are already being executed.
If you look on page 12, you can see the substantial investment that has already been made in SpinCo's assets to attract and retain key anchor tenants. This year alone, SpinCo's redevelopment activity will be approximately $80 million, and recent activity has resulted in the addition or expansion of tenants such as Walmart, Bed Bath & Beyond, and Dick's Sporting Goods. As discussed on page 13, SpinCo will have a dedicated executive management team in place to execute on its growth strategy. Key executive positions are currently being sourced from both internal and external candidates. The entire Simon Strip Center team will move over to SpinCo, and SpinCo's malls will continue to receive management services from Simon, so there will be significant continuity. A few words on process, which is summarized on page 15. We're aiming to complete the transaction in the second quarter of 2014.
The immediate next step is the following, the initial Form 10 with the SEC, which we expect to do before year-end. We have also listed for you all of the SpinCo assets and the related property information on pages 17 to 23 of the presentation. Let me now give it back to David for some closing thoughts.
Okay. Thanks, Rick. In conclusion, let me say again that we're pleased to announce this transaction on Simon's 20th anniversary as a public company. The spin will unlock the potential of our strip centers and these malls and will allow Simon to focus on our larger assets. We believe we are creating a new company that has both a strong Simon heritage and all the requisite tools to grow its business to succeed. From a shareholder's point of view, we're increasing our overall dividend from these two in a combined basis to $5.30 with growth prospects in the future. From a shareholder valuation perspective, taking into account the trading valuation of comparable peers for SpinCo and the anticipated capitalization rate compression for SPG, we expect a higher overall valuation. We're now ready for your questions. Thank you.
Ladies and gentlemen, if you would like to ask a question, you may do so by pressing star one on your phone. If your question has been answered or you would like to withdraw your question, please press star two. Questions will be taken in the order received. Please press star one to begin. Your first question comes from the line of Michael Bilerman with Citigroup. Please proceed.
Yes, good morning. Christy McElroy's on the phone with me as well. David, you talked about the $10 million of NOI being the threshold to decide which assets went into each bucket, spin versus staying at Simon. Was there anything else as you sort of went through looking at the 160 assets or so that only 44 went over? I guess, at what point did you say you had to draw the line, and what other factors sort of drove that?
Well, we're focused more on the smaller malls. As we did a thorough analysis of the portfolio, the $10 million of NOI kind of led us to that conclusion. We certainly have some that are still in SPG that are smaller in nature because of joint venture relationships. The focus has been on the strip business and the smaller malls because of the continuity and the retail relationships and the commonality of how you run both of those. It was a natural kind of demarcation at that $10 million NOI level.
Just from a financial standpoint, by increasing the dividend effectively $0.50, you are reducing the company's free cash flow by about $200 million. You're getting $1 billion, obviously, out of the entity once you spin it off. I'm just saying, how do you sort of think about that perspective and being able to fund growth going forward?
Well, Michael, there's nobody in the industry that has our balance sheet pre and/or post-spin. If you look at our credit statistics, you will notice that for post-spin SPG, there's really no change in any of the credit metrics. We certainly have all the firepower available to continue to fund our development. Obviously, some of the development pipeline that we have goes to SpinCo, so that amount of capital will be reduced that we want to put back into these assets. There's no question in my mind that we'll be able to continue to do what we've been doing, which is significantly invest in the portfolio for the benefit of our retailers and consumers. There will be absolutely no change to plan. As I said, some of the capital that is earmarked will go to spin.
Christy had a question.
Hi, good morning. What will be the nature of the new $1 billion of debt, and in terms of your plan to pursue an investment-grade rating for SpinCo, have you already engaged the rating agencies in discussions?
Yeah. Steve's here. Steve, why don't you answer that?
Yeah, Christy, we have had conversations with the rating agencies about the transaction, both from the perspective of the minimal impact on Simon's credit metrics, as David mentioned, but also about laying out what SpinCo looks like post-spin and setting the desire and the expectation that we want to get SpinCo investment-grade rated at the time of spin.
I think part of the new debt that SpinCo will assume will be a combination of secured and unsecured debt.
Thank you.
Your next question comes from the line of Alexander Goldfarb with Sandler O'Neill. Please proceed.
Good morning. Certainly makes for an exciting Friday the 13th.
Yeah, we never let dates worry us.
Okay. Well, Saturday the 14th was a good sort of spook movie. Just a few questions here. First of all, David, regarding the family's ownership stake, presumably a lot of that's OP units. Is there any commitment on part of the family to retain an ownership stake in SpinCo?
Well, we're going to own the same amount of units in SpinCo that we are in SPG. Absolutely, we're going to continue to be unit holders on the same percentage. This is an absolute spin. Every shareholder will get a unit. If they're a unit holder, they'll get the same units that they own in spin. Every common shareholder will get the same amount of common. Let me just broaden your question and say to you that both Rick and myself are absolutely, unequivocally focused on making SpinCo an extremely successful company. Otherwise, we would not be on the board. We would not put our personal reputations at risk.
Our family will continue to own what it owns. We feel very good that SpinCo, as we look at the landscape of similar situated retail real estates. The experience that I've had and that Rick's had over 20 years in building SPG, we expect to be able to do some nice and interesting things at SpinCo, obviously, without taking our eye off on SPG. We have a real commitment to make SpinCo a successful company.
Okay. As far as the legacy strips management team goes over to the new entity, but you had mentioned that Simon will sort of be the third-party manager of the malls. Is that a permanent endeavor, or will you ultimately seek to either move Simon people over or hire other mall people to run the malls?
I think there will be a term of agreement. This will be outlined in the Form 10, but we're going to give flexibility to SpinCo. Ultimately, they're going to provide the asset management role for the malls. In terms of the property management, it will be done by SPG, ultimately, we're going to give SpinCo the flexibility, to decide in about a two-year period of time or thereabouts, what it wants to do going forward. I think that's a little bit flexible, other than for the first two years, SPG will provide property management services to the malls only from the get go, there'll be flexibility at SpinCo's level to decide, as well as SPG's side to decide what it wants to do after about a two-year period.
Okay.
I would say that what that provides is continuity. We have a lot of activity going on in this portfolio in terms of leasing and redevelopment, and we don't want to take our eyes off that ball so we can continue to deliver those results and that growth that we've delivered historically, and that's the best way to do it in the intermediate term.
Okay. Just finally, with the focus of Simon now being more global and on the larger malls, previously, with regards to the balance of Klépierre, you guys had indicated that you're fine with your ownership stake. Does this transaction mean that now mentally you've changed, and now you would consider 100% of Klépierre if that became an option, an opportunity? Or is the thinking that still we're fine with the ownership stake as it is, if something happens, we'll let someone else take a look at buying the balance of the BNP?
Well, I'm glad you brought this question up. This really has no change whatsoever in how we think about our international business. We've made it clear we're very pleased with our ownership interest at Klépierre. We don't foresee that changing. This change for SPG will not change our attitude on the international business. We've been very cautious, very successful. We are not going to change that model. We, Steve, and I know Rick, have made that clear to our shareholders. Our shareholders need to begin to believe us in how we're approaching that. It's not going to change our attitude toward international. We think there's opportunity, but you've got to be very cautious, very deliberate. Our number one goal in anything we do is to make money. Thus far, we've been successful. No change in summary on that.
I appreciate you asking that because I think that would be a natural conclusion to this. In fact, it really has had nothing to do with how we're thinking about the SpinCo.
Okay. Appreciate it, David. Thanks.
Sure.
Your next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed.
Thanks. David, I guess I wanted to focus a little bit on kind of the SpinCo, the kind of the redevelopment and the money that you're talking about putting into the assets and trying to hire kind of a new management team. I guess I'm just really trying to figure out, in effect, how much neglect or just lack of focus have the assets had relative to your larger assets in the portfolio. Just trying to really understand how that $80 million investment, which looks like it's been ramping, how much of that in the $300 million was really kind of a result of this process that you went through, or how much of that was already in place? What kind of can a new management team do to the assets that maybe the previous management team wasn't focused on?
Well, look, it's safe to say, first of all, the strip business has been extremely well run, and the way they operate is not necessarily going to change. The fact of the matter is, they've had a number of opportunities that that team has wanted to pursue that we put at the bottom of the list because we were focused on outlet growth or major redevelopment. I do think there's a couple of new phases and new development, ground up development in the strip center business that that team will be executing that we had at the bottom of the list, frankly, just because we had been more focused at the executive level with the larger assets. Now, with respect to the malls, I think it's human nature to always focus on the bigger malls.
I do think, though we run these well, I do think that an executive team that is absolutely charged to grow this business will execute it. Even though we've been pretty good, I think they'll execute it better, and we're going to help them. Rick's going to be the chairman. I'm going to be a director. We're going to help them grow. The fact is, Steve, we've got a team that we're going to move there. It's not as if we're creating this out of whole cloth. We've got the team. We're going to add to it. We've got internal candidates consider what we call the executive spots. At the end of the day, we think there is opportunity to continue to move the business, because naturally, there's only so many hours in the day for our personnel.
Okay, thanks.
Sure.
Our next question comes from the line of Dan Oppenheim with Credit Suisse. Please proceed.
Thanks very much. I was wondering if you can talk in terms of you mentioned how this will be an acquirer asset and such. If we look at, there's some real regional concentration right now. How do you think about that in terms of what you'd like in terms of SpinCo over time? Would you like to be concentrated or selling off some of the assets that were fairly dispersed from the others? Will you plan to grow in some of the other areas across the country?
Well, you broke up there in the thing, but I did hear. I think SpinCo's view, it will continue to cull some of the assets. Not many, but there might be one or two or three that they might look to sell. In fact, before it's all effective, there might be one or two that are sold prior to that. There may be slight changes in the portfolio between now and the effective date. I think the focus will be on the open-air element, given the historical benefits that the strip team has done for SPG. If you look at Waterford Lakes in Orlando as one of the assets here, you can see that that team actually found the site, developed it, and grew it into one of the best open-air power center developments in the country.
At the same time, we do think the ability to manage the smaller malls with a lot of the common retailers will again, be something that that team can add value to. Again, I'm not sure I am hitting your questions because you did break up there, so let me know if I didn't.
Sure. I guess it is mostly about regional concentration we have had. For the other question, wondering about, you mentioned 90.4% occupancy. Wondering how substantial any temporary occupancy would be within that, if you would break out permanent versus temporary.
As you know, we do not include leases in there unless they are a year older. Frictionally, if you were to walk a mall that is 90% occupied, it would look 100% generally. That includes the way we define it. We do not really have what I would call temporary occupancy in that number. It has got to be a lease over a year.
Okay, thanks.
Your next question comes from the line of Jim Sullivan with TD Cowen. Please proceed.
Sure. Thank you. David and Rick, I am curious, the initial composition of SpinCo is 30% strip, 70% malls in terms of NOI. Based on your comments, David, is it safe to assume that we are going to see those percentages become more like 50-50 in the near term?
I do not know if it will get there, but I do think that it would not surprise me over time. It is going to be up to the team, obviously, but would not surprise me over time that the open-air element of the portfolio would increase, so those percentages would balance more than they are today. It would not surprise me. Plus, there may be a couple of the smaller malls that might be sold. I think that is a reasonable expectation, Jim, over time.
Also, further on in that question, to what extent is it possible that some of those regional malls, given what is happening in the big box world, might be converted to a tenant mix which is more comparable to a strip center tenant mix?
Well, Jim, it is Rick. There are two examples in SpinCo that highlight that precise point. We literally opened this year an asset called University Town Plaza that was a mall that this strip center team converted into a power center anchored by Sears and JCPenney and added Burlington, Academy Sports + Outdoors, Toys 'R' Us , and small shops. Did the same thing at Richardson Town Square, where we added a Lowe's. The expertise and the relationships that this team has with those tenants will certainly be brought to bear in a more emphasized way inside of this portfolio. We would certainly anticipate that they will bring forth additional opportunities to add
retailers that they've got relationships with into this portfolio.
Also further on that, Rick, to what extent, if at all, have you been having discussions with Sears and JCPenney about buying some of those boxes?
The bottom line is that we're obviously always planning alternative scenarios should boxes become available. To date, we've not had any opportunity that we felt was mutually beneficial to pursue. Should an opportunity present itself, we've already have lists of tenants that would be interested. We've got plans, and in some instances, we're actually pursuing approvals in anticipation of an opportunity. Until one presents itself, we're just going to continue running the business the way we have been.
Then finally from me, you indicate comparable NOI growth for SpinCo of 2.2% year-to-date. Is it possible to break that out by the 2 component parts, what the growth rate is for strip centers versus malls?
Sure. We don't have that. It's something we can put in the Form 10.
Okay, great. That'll be very helpful. Thank you.
I should say we have it. We don't have it right in front of us.
Okay.
The Form 10 does require audited financials. They're basically almost essentially done. We're just wordsmithing the document. That kind of information will be in there, Jim.
Okay, thank you.
Sure.
Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.
Hi, good morning, guys. Congratulations on the transaction. From a competitive standpoint, I'm curious, the same people are basically running both companies, and I wouldn't want to compete with Simon. I'm wondering if SpinCo's going to be able to compete with Simon, or if that's going to come up.
Again, for some reason, we're having some technical difficulties. Look, we think, it's not necessarily going to compete. Simon will not be in the strip center business, and Simon is not going to be in the smaller enclosed mall business. We're going to act as fiduciaries as directors, and which will be helping the executive management team put the plan together. We couldn't think of a better way to get a company of this scale and nature up and running than to have someone like Rick to be chairman and me to help as well. We think it's the right thing to do, and we're going to be a shareholder in this, so we want this thing to do very well.
I don't anticipate, given where SPG is headed and given the opportunities where the SpinCo opportunities lie, I just don't see the realistic scenario where the two are competing. If, in fact, there is some odd scenario where that does happen, we'll act like fiduciaries and recuse ourselves. There'll be an independent board, Rich, and we'll handle ourselves appropriately. Again, we want to make a commitment, both personally, professionally, that this SpinCo's going to be a very good scalable company. That's why the balance sheet is the way it is, with good stable assets, with very good management team, to grow its business. As we look at the competitive landscape with what Rick and I know, we think this company will be successful. We got a 20-year track record to give us confidence that comes with that conclusion.
Again, if there's some odd scenario, I don't foresee it, we'll recuse ourselves and the company, SpinCo that is, will be able to act in accordance with all the highest fiduciary duties that are expected.
Okay. I don't know if you can hear me better, David. Also I wanted to ask you on the market strategy. I noticed, just looking through the list, like for example, in my hometown of Albuquerque, you're keeping one and getting rid of one, and I'm curious if there's any kind of broader market strategy to how you split these things out.
Well, they really don't overlap in trade area. Again, it was done with the idea with the whole demarcation from an NOI point of view. That's really how we concluded that there is the chance that, as I said to you, we're still going to need some partner approvals on some of these assets. The portfolio may adjust between now and when the spin-off is effective. Effectively, it was along the lines that we've discussed going forward.
Okay. Exiting a particular market is not really part of the strategy.
Not at all. There's many scenarios where there's a strip in a market, and Indianapolis a good example. The strips are going with the strip guys, and Austin, they built a bunch of strip centers. We still have the malls, and the strip centers are going with SpinCo. It really wasn't a market issue, it was more of a product type issue.
Okay, great. Thanks, guys.
Sure.
Your next question comes from the line of David Harris with Imperial Capital. Please proceed.
Hey, good morning. Happy 20th birthday, guys.
Thank you.
Thanks.
No worse than wear.
It's one of these early starts again, David. Rick, in a year's time, when you've got management in place, the company's established, how much of your time are you going to be giving over to your duties for SpinCo?
Well, I must tell you that we've been doing it all historically. It's not going to be an incremental focus in that we're already involved with the capital allocation decisions. We're already involved with the leasing decisions. We literally had a capital plan yesterday where they're renovating three additional power centers and adding some additional boxes. I'm sure there'll be an incremental allocation of time, because I fully anticipate, as David alluded to, with a dedicated balance sheet and a dedicated strategy and a dedicated management team, they're going to come up with many more external opportunities to grow than we entertained previously. I fully anticipate that the incremental time that will be spent will be on external opportunities.
The internal opportunities we've been doing, I expect that these things will continue, and we will continue to produce our NOI growth through running these assets the way we have on a heritage basis. I expect there'll be much more activity externally.
I would just say, I think you should look at Rick and my role as mentoring the SpinCo executive team. Remember, we've got already the strip center management team that's going to go into SpinCo, and then we're going to complement that with other traditional executives like CFOs and general counsel, chief investment officer, those roles, CEO, and we're reviewing internal and external candidates for those spots. Our job really is to mentor. Obviously, the first year or so we'll be more involved. We'll then act as directors, which is outlining the strategy, making sure they're hitting their financial and operational objectives, and mentoring the executive team. We won't be running it day-to-day.
Again, there'll be some added focus in the next year or so, I think you should think of us, Rick will have a higher responsibility because he's chairman, I think you should look at us as directors of a public company whose job is it to mentor, review strategy, and all of that sort of stuff that directors do.
How close are we to concluding on the directors? I've got terrible echo here, but hopefully you can hear me. On the executives, you're hoping to spin this out second quarter. Can we assume that you're going to have the senior appointees in place by the end of the first quarter?
I think that's a reasonable objective because I think we expect this to happen in the early second quarter.
Okay. This goes back to an old chestnut I raised with you, David, about three years ago. If the objective here is to create shareholder value, did you seriously look at spinning out the outlet as a possible way to enhance shareholder returns? Is that just too tied synergistically with your upper class, upper end quality malls?
It is too tied, David, the fact of the matter is, the amount of time that the executive team spends in the outlet business is what's created the success. Let me give you an example. When we bought the outlet business, roughly, the NOI of the business was $400 some odd million. Today, it's $1.3 billion. That wouldn't have happened had it not been the executive team. I think from a shareholder point of view, it would be a horrible mistake to separate that business from the executive team that's led to that kind of growth. In the history of real estate transactions, there's been few that have been as successful as what we've done in the outlet business. It's not by osmosis. It's by day-to-day focus, effort, and dedication.
Right.
That we really transformed that business. I'm not sure that would make any sense at all.
Right. You actually give us a split of the NOI between your shared malls and the Premium Outlets. The first time we've seen this for what, three or four years now. Is that going to be a go-forward disclosure for us?
I think at this point, we'll consider that. You now have the sales per square foot in our malls at 625 after the spin. You've got the Premium Outlets at 606.
You've got the composition of NOI.
We've got the composition of NOI. There's more data there for you if you want.
Small steps, David. Small steps.
Oh, good. Great. Thanks, guys. Bye. Happy birthday again.
Your next question comes from the line of Michael Bilerman with Citigroup. Please proceed.
Yeah. Just quick follow-ups. In terms of the financial impact, over $400 million of NOI goes forward. What's the rate on the $1 billion of debt that's being transferred over? Is there any G&A efficiency savings at Simon as we think about sort of when we split the baby a little bit, what amount of FFO is effectively being lost at Simon?
Well, Michael, this is Steve. The rate on the $1 billion of debt's about five and three quarters. We give you a roadmap to tell you that the FFO SpinCo is about $300 million or about $0.80 a Simon equivalent share. Obviously, for a model, you'd have to make a determination about what you're going to do with that $1 billion of capital that's going to go back into Simon. I think for purposes right now, I think thinking about $0.80 a share of FFO on an annual basis, coming out of Simon and going to SpinCo is a fair run rate. The G&A impact, Michael, is minimal.
Yeah. Look, this is an important point because, as you know, we have essentially the lowest G&A load for the portfolio that we run. The scale that exists in SpinCo, we believe, will again have one of the best G&A loads compared to its peer group. We expect that efficiency to translate to SpinCo because we, in fact, know how to do it. The SPG will be losing the overhead dedicated to the strip center business. As we look at the economies of scale, we're convinced that SpinCo and ultimately SPG will continue to have the most effective G&A load in the industry.
Well, that's what I was trying to think about. If the company call it a $5.5 billion entity, how much G&A will SpinCo need to support its operations? I assume there's some leakage between the two, just because you're going to have multiple, two CFOs, two CEOs, and things like that.
It'll be de minimis in the scheme of things. You'll see some of this in the Form 10 that will lay it out, but it will be de minimis. Again, even with that added cost, because you're right, there will be an executive team, you'll have a board of directors and that sort of stuff. At the end of the day, the load at SpinCo will be better than its comparable peer group. That was very important to us to achieve. That's why the scale of SpinCo, as we thought about it and put it together, we thought it was kind of the right scale. Not only that, but to also have to be an important company with important retailer relationships. We're balancing that, and we think we found it.
I appreciate your opening comments in terms about looking at the range of alternatives that you had to pursue, whether it be merger, sales, and that this effectively is the most tax efficient to allow shareholders to benefit from the combined growth of both entities with still some level of Simon involvement. I'm just curious from a strategic standpoint how wide that process was and whether the fact that you've come out with this now could potentially change how this entity goes into the public markets if you get approached by existing public companies. How wedded are you to the spinoff idea?
Well, we like it, obviously, a lot. Otherwise, we wouldn't do it, Michael. We're fiduciaries, we would look at any and all transactions. We like this. We like what we've done. We clearly think it was better than the other alternatives out there. Otherwise, we wouldn't go forward. We're focused on creating value, whether it's through sale, spin, acquisition, development, what have you. I just think that's one of the things. I will tell you that having spent a lot of time on this over the last year plus, we feel good that this is going to be a very good company in this industry.
Just last question, just about sort of Simon going forward. 114 or so malls doing 625 a foot. Your 66 outlets in the U.S. doing north of 600. You've sold a lot. The market doesn't give you any credit for selling $3 billion of assets over the last few years, but you have been selling assets. How should we think about these 114? Is there further things that you can do that asset sets didn't fit into SpinCo, but basically even getting the sales productivity and the effective new Simon up even further. You think about your top 100 assets doing 750 a foot.
Clearly, there's still a number that maybe don't fit within. I'm just curious how you're sort of thinking about continued sale activity.
I think that's a good question. I think we will continue to upgrade the portfolio, whether we think it's appropriate to sell it or through redevelopment and the like. There are some properties that might have fit in here, but because of the joint ventures, it was a little tricky. That's why I will tell you that the portfolio may modestly change between now and the effective date. We'll see how that plays out. I would say in terms of that, Michael, you're right, we have sold stuff. None of that will change. We'll continue to be aggressive portfolio managers of our business. So I think that will continue to be a focus. Just like we sold a few outlets here and there, we'll continue to prune that portfolio as well.
Okay. Well, congratulations.
Thank you.
Your next question comes from the line of Jeff Donnelly with Wells Fargo. Please proceed.
Good morning. Steve, what sort of one-time costs are associated with this transaction?
Jeff, it's a fair question. I'd say it's a little early yet. Obviously, we've engaged lawyers. We're going through the process of auditing the financial statements of SpinCo. Most of the costs will be costs related to preparing and then declaring effective the Form 10. I'd say it's a little early for me to tell you what the number's going to be.
Okay. Is SpinCo assuming a portion of Simon's unsecured debt? I guess if so, what's necessary to make that transfer happen?
They are not. All of the unsecured debt will stay with Simon. Now, SpinCo, as part of that additional $1 billion, at least $1 billion of debt that we're going to place on SpinCo, part of that may very well be, and will likely be unsecured. All of the bonds that Simon has outstanding will stay with Simon.
I have to ask, is Steve Sterrett staying with Simon's unsecured debt?
Steve Sterrett plans to stay with Simon's unsecured debt. Yeah. I guess that I should be flattered by the question.
Thanks. One last question, I guess, for David. If your spinoff ultimately leaves Simon with a more attractively valued currency for the core SPG business, does that shift your thoughts maybe about consolidating your U.S. peers that cause you to maybe reinvigorate that thinking?
I don't know. Put it this way, people know my phone number. No one's called recently. Okay. I don't worry too much about that. We have a great opportunity. As we said for the last couple of years, our biggest opportunity is redeveloping our existing portfolio. We're in the midst of that, heavy and hard. We're building great new outlets. We've certainly got plenty to do. If you have a good idea or somebody wants to give me a phone call, you know my number. I'm not out calling on people because I figure they know my number.
Well, thanks. I appreciate it.
Sure.
Your next question comes from the line of Mike Mueller with JPMorgan. Please proceed.
Yeah. Hi. I guess a lot of questions have been answered already, was the decision to do this more driven by trying to get the right valuation for the mothership, the bigger assets that you're going to own going forward, or just kind of trying to ramp up the SpinCo business and see it grow faster?
I think we see the benefit of both. Obviously, a large portfolio, if you think about it, essentially 98 assets. That's a lot for the executive team to say grace over. By unleashing those 98 assets into SpinCo with what we'll think will be a very good executive team, certainly going to allow for opportunities for that company to grow. At the same time, obviously, for mostly not Simon-specific stuff, I wouldn't think, but given our growth and our earnings results and et cetera, that we think Simon Property Group is a great value alternative. This certainly highlights the quality of the portfolio that SPG will have going forward.
I will say, almost like Michael said, I think part of the dilemma that we have is that it gets lost in the sauce, the amount of stuff that we do day in and day out because of the size of the company. We're always marveled about, well, we do that every day, but when a peer does it, Something very interesting. If that can help shine a little bit brighter light on the quality of the organization and the portfolio and a little bit more of the attributes that we bring to the table, I think that's good for our shareholders at the end of the day.
Yeah. For SpinCo, do you think the opportunity is greater, I guess, either looking at the existing portfolio, leasing it up, redeveloping it, or playing a role as a consolidator?
I think they're going to have both. That's as directors, we're going to put the right team together that's going to be able to balance those two.
Okay. Thanks.
Sure.
Your final question comes from the line of Tim Keeling with Ventas. Please proceed.
Thanks. Just a couple quick follow-ups here. When you guys go to a table with national retailers, would this be more on a coordinated basis with Simon and SpinCo, or would it be much more separate?
No, it'll be done by the SpinCo team, ultimately. There'll be a period of time where certain leasing folks are leasing some of the malls during a period of time, but ultimately, SpinCo will be driving the retail relationships.
Okay. When I go through your mall list, not surprisingly, a lot of the malls are anchored by JCPenney and Sears. How much of this is your internal view or opinion about the future of those retailers and your choice to perhaps eliminate some of that risk?
This did not factor in at all.
Okay. Just last quick question here. It was interesting on your comments about evaluating different avenues for selling these assets. Just curious about, what was the market telling you, or advisors, or what have you not, about the valuation of the portfolio? What was the market willing to pay you from a capitalization rate standpoint for these assets that ultimately made you decide to spin off instead?
The fact is that the interest in assets like these is great. When we factored in the growth potential and where we think SpinCo will trade, we just thought it's in our best interest, given the tax ramifications of selling, without question, we think this is a better from a financial point of view for our shareholders. There's a lot of activity out there. There's no question in my mind that there's the institutional investor that would covet a portfolio of stability, quality, and scale like this. We concluded that let's give that opportunity to our shareholders as opposed to the guys that like to skim off the top. We're delivering this value to the shareholders, and that's what makes us excited.
Okay, thank you, and congrats.
Sure.
At this time, we have no further questions. I will now turn the call over to Mr. David Simon for closing remarks.
Okay, thank you. Again, I'm sorry it's early, and I'm sorry it's Friday the 13th, and I'm sorry it's near December. Obviously, you'll see more of this, and we're happy to talk to you over the next quarter as you see this move forward. Happy holidays, and, again, thanks for your interest.