西蒙地產 (SPG) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Simon Property Group, Inc., earnings conference call. My name is Nika, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. At that time, if you wish to ask a question, please press star followed by 1 on your touch-tone telephone. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Welcome to the Simon Property Group fourth quarter 2005 earnings conference call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our various filings with the Securities and Exchange Commission for a detailed discussion of such risks and uncertainties. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, February 6th, 2006.

The Company's quarterly supplemental information package was filed this morning as Form 8-K. This filing is available via mail or email, and it is posted on the Simon website in the Investor Relations section under "Financial Information, Quarterly Supplemental Packages." If you would like to be added to the list for email distribution of this information, 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. And now, I will turn the call over to Mr. Simon.

Good afternoon, and thank you for joining us today. We are pleased to report another quarter of strong financial and operational results. Our growth in FFO per share was 8.1% for the quarter and 13% for the year. We exceeded the Wall Street consensus estimate for the quarter by $0.03 per share. Our core operating fundamentals continue to demonstrate strength. We opened one new development project and entered into an exciting land development joint venture with two quality partners. We have six new U.S. projects and five new European projects under construction. We acquired a joint venture interest in two regional malls, Coddington Mall, located a mile and a half from our Santa Rosa plaza in Santa Rosa, California, and Springfield Mall in the Philadelphia metropolitan area near four other SPG malls.

We disposed of 13 noncore assets in the quarter and 18 in the year. We issued $1.1 billion of unsecured notes at very competitive rates; and we extended and expanded our corporate credit facility, increasing it from $2 billion to $3 billion and reducing the interest rate by 12.5 basis points. We also increased our dividend by 8.6% to $3.04 annually. 2005 was a strong year. We look forward to the opportunities that lie ahead in 2006. Steve?

Thanks, David. Fourth quarter details are included in our press release and our 8-K supplemental filing, so I will just highlight a few key points. As David mentioned, diluted FFO per share grew 8.1% to $1.47 in the quarter. For the year, diluted FFO per share increased 13% to $4.96 per share. The primary factors contributing to these results continue to be strong portfolio operating metrics in the Company's regional mall business, outstanding 2005 results from the Chelsea premium outlets, and the continued financial health of our tenants. As a reminder, at the time beginning of 2005 the consensus estimate for SPG's 2005 FFO was $4.75.

Comparability for the fourth quarter was impacted by an $18 million charge in 2004 for the impairment of an asset that was sold in 2005. I would also point out that as a result of the ongoing disposition of noncore real estate, the sale of our two Chicago office building complexes, the sale of Metrocenter in Phoenix, and 15 other assets in 2005, the fourth quarter 2004 FFO included $0.02 per share from these assets versus no contribution in the fourth quarter of 2005. Please also keep in mind that LIBOR rates were approximately 200 basis points higher in the fourth quarter of 2005 as compared to 2004, increasing quarter over quarter interest expense by approximately $0.04 per share. Occupancy in our U.S. mall portfolio was 93.1% at year end; that's an increase of 40 basis points over the December 31st, 2004, level. Occupancy for the premium outlet portfolio was 99.6%, a 30-basis point increase.

Sales in all three of our domestic platforms were up; comparable sales increased 5.4% to $450 a foot in our mall portfolio. They were up 7.8% to $444 a foot in our premium outlet portfolio, and up 2.3% in our community and lifestyle center portfolio. Re-leasing spreads for the regional mall portfolio continued to be very strong at $7.40 per square foot, representing a 20.7% increase. Re-leasing spreads for the premium outlet portfolio are accelerating, which is consistent with our expectations, and they were $4.57 per square foot, representing a 20.9% increase. And spreads for our community and lifestyle center portfolio were $4.45 a foot, or 38.9% increase. Our comparable regional mall NOI growth was 5.3% for the quarter and 4% for the year. As is our standard practice, this calculation excludes all land sale activity. Approximately 93% of our regional mall NOI is considered comparable.

This strong growth can be attributed to our continuing conversion of tenants to fixed CAM, strong re-leasing spread, the continuing increase in portfolio occupancy, lower than normal bad debt expense, and our temporary tenant and cart program. Also positively impacting results for the year was the reduced amount of tenant workout and tenant bankruptcy activity in 2005. Through year end, only 294,000 square feet of occupancy was lost to bankruptcy versus approximately 500,000 square feet lost in 2004. As is normally the case post-Christmas, we are now in the season for bankruptcies; and we've had a few announcements, the most significant of which were Musicland and G&G Retail Center. The overall financial health of our retailers remains strong. Occupancy costs for our mall portfolio at December 31st, 2005, was 12.9% as compared to 12.8% in 2004.

Strong growth in tenant sales continues to offset some of our progress in capturing a higher percentage of tenant sales in rent. Comparable NOI growth for our premium outlet portfolio was 6.9% for the quarter and 9.3% for the year. Approximately 94% of our premium outlet NOI is comparable. This very strong growth can be attributed primarily to two factors. One, a number of premium outlet tenants especially some of our anchor tenants, pay a portion or all of their rent based upon sales. Accordingly, when sales are growing as robustly as they did in 2005, up 7.8%, this impact falls directly to the bottom line. Secondly, leasing spreads are significantly accelerating -- as I mentioned earlier, 20.9% in 2005 as compared to 13.8% in 2004 and 12.3% in 2003, as the Chelsea leasing team is laser focused on capturing increases in tenant sales as rent while maintaining essentially full occupancy.

Despite the higher re-leasing spreads, occupancy costs were still 8% at year end, unchanged from 2004 due to the strong growth in tenant sales. On the balance sheet side, our total debt to market cap is now a low 42.8%. We're proud to point out that we have the strongest balance sheet in our sector. We believe that we should have access to all forms of capital, allowing to us tap the lowest cost options as capital is needed. During 2005, we reduced our floating rate debt from 22% at the beginning of the year to 15%.

During 2005, we also repaid two-thirds of the Chelsea acquisition facility prior to the due dates. We received rating upgrades from Moody's and Fitch. We completed two very successful bond offerings totaling $2.1 billion, and adopted new, easier to interpret and report upon debt covenants. Other balance sheet highlights include at year end borrowings on our $3.0 billion revolving corporate credit facility, or 809 million. Our interest coverage was 2.6 times for the year. The weighted average maturity of our debt at December 31st was 5.1 years, and our weighted average cost of debt was 5.94%. And our expected FFO payout ratio for 2006 should remain below 60%, with over $500 million of free cash flow expected to fund growth. During the year, we repurchased a total of -- repurchased a total of 2.8 million shares at a total cost of $182.4 million. During the fourth quarter, we did not purchase any shares.

We also continued to improve the quality of our portfolio through the disposition of noncore assets. As was disclosed in the earnings release, during the fourth quarter, we disposed of 13 properties, four regional malls, eight small nonpremium outlet centers and our investment in the center in Montreal. During the calendar year 2005, we sold eighteen assets -- six regional malls, one community lifestyle center, two office building complexes and nine outlet centers. Total gross proceeds from 2005 dispositions were approximately $550 million, and the net gain recognized was $146 million. During the last three years, we have now sold a total of 38 properties -- seventeen regional malls, eight community centers, two office building complexes and eleven nonpremium outlet centers. Total gross proceeds for that three-year period have been in excess of $900 million.

And while dilutive to short-term earnings, we firmly believe that this continual pruning of our portfolio is the correct thing to do. I'll now turn the call over to Rick so that he may provide our development update.

Thanks, Steve. On October 7th, 2005, we opened Firewheel Town Center, a 785,000 square foot open air regional shopping center located 15 miles northeast of downtown Dallas in Garland, Texas. Firewheel is anchored by Foley's, to be converted to Macy's, Dillard's and an 18-screen AMC Theater; Barnes & Noble, Circuit City, Linens-N-Things, Old Navy, DSW and Pier 1 Imports. Foley's store Firewheel will convert in 2006. The in line retail space of Firewheel is 99% leased. The center has been well received by retailers and consumers alike; and due to strong demand for space, we have already begun development of Phase II of the project. This will be anchored by Cost Plus World Market and Ethan Allen, and will feature an additional 20,000 square feet of small shop space.

As was discussed in the press release, we currently have six new projects under construction: Coconut Point in Estero/Bonita Springs, Florida; Round Rock Premium Outlets in Round Rock, which is a northern suburb of Austin, Texas; Rio Grande Valley Premium Outlets in Mercedes, Texas on the border; the Village at South Park in Charlotte, North Carolina, which is adjacent to our South Park Mall; the Domain in Austin, Texas; and the Shops at Arbor Walk in Austin, Texas. Leasing is proceeding very well for all of these projects with at or above projected rental rates. Additional details for these projects, as well as all significant expansions and anchor or big box additions are provided in our 8-K. On January 11th, 2006, we announced a joint venture consisting of Toll Brothers, Inc., Meritage homes, and SPG, which was the purchase of a 5,485-acre land parcel in northwest Phoenix, a metropolitan area, from DaimlerChrysler Corporation for $312 million. According to research published by the Arizona Republic, this represents the largest dollar value land transaction recorded in the Arizona history. DaimlerChrysler will continue to lease the property for the next two years while the partnership with [INAUDIBLE] entitlement. The joint venture is owned 40/40/20 by SPG, Toll Brothers, and Meritage homes, respectively.

Our equity investment is $50 million, and the mortgage debt is nonrecourse. Toll Brothers and Meritage Homes each plan to build a significant number of homes on the site. Simon has the option of developing a substantial portion of the commercial property. Other parcels will be sold to third parties. Initial plans call for a mixed use master plan community, which will include approximately 4,840 acres of single-family and attached homes. Approximately 645 acres of commercial and retail development will incorporate the schools, community amenities and open space. Property sales are tentatively scheduled to begin in 2009. This investment is a natural progression in our business approach.

As a result of our recent asset intensification efforts, we have been building relationships around the country with residential developers. It was through one of these relationships that this opportunity came to our attention. Because of our experience in the develop process, we believe that we can add value to this joint venture; and most importantly, that we can make excellent returns for our shareholders with the option to acquire land for major commercial development in the future in an outstanding growth market. On August 30th, 2005, Federated Department Stores completed its merger with the May Department Stores Company. Most of May's regional department stores will be converted to Macy's during 2006. As we have discussed with you in the past, there are 23 centers in the SPG portfolio with overlapping Federated and May Stores. Two of these stores, Robinson May at Fashion Valley in San Diego, and Filene's, at the Mall at Chestnut Hill in Boston, will convert to Bloomingdale stores and reopen in the fourth quarter of this year.

An additional overlap store at Cape Cod Mall in Hyannis, Massachusetts will be converted and operated as an additional Macy's in that project. Of the remaining 20 stores in our portfolio, it is our expectation that six locations will be sold directly by Federated to other retail users. In fact, it was announced today that [Boss Cobb] has acquired the Strawbridge stores in four of our properties -- Lehigh Valley Mall, Oxford Valley Mall, South Hills Village, and Montgomery Mall. We continue to negotiate with Federated towards an agreement to acquire a number of the other overlap stores. We anticipate announcements over the next few weeks regarding the status of our discussions with Federated, and our plans for these locations. These Federated stores are all located in high-quality assets, with average sales per square foot approaching 500 a foot. We are very excited about the redevelopment opportunities that will become available as a result of these negotiations. I just wanted to spend a couple of seconds to focus on the quality of our SPG assets.

Because of all that we have going on and the size of our portfolio, it is easy to overlook the number of our assets in this portfolio that would be very difficult, if not impossible, to replicate. As of year-end 2005, twelve of our mall properties generated sales in excess of $700 per square foot. A total of twenty centers produced sales in excess of $600 per square fat; and that number increases to 36 when you look at sales in excess of $500 per square foot. Within our premium outlet portfolio, we have fourteen centers with sales in excess of $500 per foot. I would now like the turn the call back to David for a few comments on Chelsea and our international initiatives, as well as -- including [INAUDIBLE]

Well, thanks, Rick. We'd now like to update you on some recent management changes at Chelsea. [Les Chow] has been promoted to CEO, and Mike Clark and John Kline have been promoted as well and named Co-Presidents. Les will continue to report to David Bloom, who will continue to serve as Chairman of Chelsea, and as an advisory director to the SPG board. We will continue to take advantage of his expertise and vision in a number of corporate matters. Tom Davis, Co-President, has decided to retire at the end of 2006. Tom made us aware of his intentions at the time of the transaction in 2004, so this was long anticipated. We are grateful that he has continued to serve in his role for this long and assisted in the merger. Chelsea Japan, is expected to open the 91,000-square-fat third phase of the [Sand Hill] Premium outlets on March 4th, 2006 after they open, [Sand Hill], located 40 miles north of Tokyo, will contain 320,000 square feet. Earlier this week, Chelsea Japan began construction on the 53,000 square second phase of Tokai Premium Outlets, which is projected to open the fall of 2006. Tokai is located 25 miles northeast of [INAUDIBLE] and will contain 231,000 square feet after Phase II opens. During January of 2006, Chelsea Japan announced its sixth site, to be named [Kobe] [INAUDIBLE] Premium Outlets. The project is located in the Kobe/Osaka market, 22 miles north of downtown Kobe. Construction on the 185,000 square feet phase is expected to commence in the fall of 2006, for a projected summer 2007 grand opening.

During the fourth quarter, Ivanhoe Cambridge acquired the 39.5% ownership interest in our ERE operation. You'll recall that ERE owns Groupe BEG, a paraspace developer, owner and manager of retail properties in Europe. SPG currently own a 34.7%, with the remaining interest owned by the founders of Groupe BEG. But for the next couple of weeks, SPG and Ivanhoe Cambridge will equalize their ownership positions in ERE through the purchase of additional interest from BEG's founders. We are very excited with the entry of Ivanhoe Cambridge to our ERE European joint venture, and we believe that is a significant platform for future growth. In the development arena, our ERE joint venture has obtained zoning approval for the development of a shopping center project in [INAUDIBLE]. The CVEC approval is still subject the a comment period, which typically lasts four months. However, management is optimistic that the project will obtain final approval and could open as early as late 2008 and early 2009. 2005 was a very busy and gratifying year. We delivered a strong 23% return to our shareholders once again significantly outpacing the broader market indices, as well as the Morgan Stanley REIT index.

Behind this stock performance, and most importantly, was the solid execution of a straightforward solid business plan on all fronts. We're proud of the fact that we created a company with over $24 billion of equity value and a $42 billion total market capitalization, and we look forward to the future. This concludes the prepared comments, and Operator, we are available for questions.

[OPERATOR INSTRUCTIONS]. And our first question comes from the line of Paul Morgan of FBR. Please proceed.

Hi. Good afternoon.

Hello. How are you doing?

Good, thanks. When you were mentioning the Federated closings and the 23 in your portfolio that you have, you said only six might be sold to retailers. Is that six that you think you know of, or you actually think that --

No, let me make it clear. Six that Federated will sell directly to retailers; and then as we said, as we finalize our discussions with Federated, we will be adding retailers but we will be doing it directly as opposed to Federated doing it it.

Does that mean you would be able to add a department store along with other uses?

Yes, yes.

And those announcements would be in -- and the deadline is the end of February?

There's no deadline. It's -- you know, we're very close to Federated, and, you know, would hope to finalize a transaction here shortly. And once we do, I think we'll make it clear to the marketplace what we plan on doing. And we're very excited about those redevelopments that that will actually foster.

So you -- you mentioned, like, a couple calls ago as part of your strategy [INAUDIBLE] indication, and related to the Phoenix acquisition, are there other announcements forthcoming? You talked about things like storage, joint ventures, or other --

Yes, we're -- you know, the storage ones, we have probably six or seven that are in the various, you know, permitting process. You know, they're not of a significant nature that we're going to announce them but we're moving very, very fast and furious on that front; and in fact, we would hope by '07 to complete at least five, if not six. On the residential side, just to remind you, we have Firewheel that's under construction, we have Coconut Point that's under construction; Domain, we have 390 multi-family units there, and then we have the Village at South Park, which is under construction. We are permitting on another six or thereabouts; and again, the -- you know, we're going through the permitting process on some of these, so I don't think you'll see announcements from us until those get permitted. But needless to say, these are in some high profile areas, and we're working very diligently to get the approvals to do that. So we're -- I'd say we're more bullish, frankly, on that than we have been, you know, even before we started the process.

Are you doing those with partners in all cases?

We are except for a couple of the larger ones, where we're doing it at this point by ourselves.

Okay. Last question. Could you comment a little bit on the gift card program over the holidays, you know, whether volumes met your expectations and whether you sort of -- where do you see flow through from that into January sales?

Well, the gift card did meet our expectations; and it was interesting, [INAUDIBLE] come late, kind of consistent with what the retailers saw the last kind of weekend in Christmas, and the week after Christmas. And you know, the cards are I'm sure being redeemed. January sales look pretty good. So pretty much on target with what we thought -- a little more positive. You know, in total sales I think it was -- Steve, we were up to 465?

465. It was up about 14% year-over-year.

Okay. Thank you.

Thank you.

Your next question comes from the line of Craig Schmidt of Merrill Lynch. Please proceed.

Good afternoon.

How are you doing, Craig?

Good, I just -- I'm curious on the two outlets in Texas. The one in north of Austin is about twice as expensive as the one in Mercedes. Is that primarily land cost, or are there other things that make that cost to bristle?

It's really land costs. And you know, there are some building costs, a little more expensive to build in Austin than on the border. So that's really it.

Okay. And --

Size is also a little bigger in Austin.

Yes, there's more -- there's some outlet -- yes, the parcel at Austin is quite a bit bigger, Craig, because it was originally a regional mall site.

Okay. And then, any update on the in-line at leasing at Domain, you know, in terms of -- ?

Fantastic. I mean, it's really -- it's really just a function of us producing the right mix as opposed to the right demand.

Now, would this be more lux names than -- ?

Yes, yes, there will be a lux wing to it, so to speak, and it's open air, so [INAUDIBLE], probably not the right word to use, but there will be a luxury anchored down by Neiman, kind of that area will be, you know, luxury-type tenants.

And it will also have a very strong restaurant component. We're going to have six sit-down white tablecloth and the like restaurants. So it's going to be a major destination for the entire Austin market.

Great, thanks.

Thank you.

Your next question comes from the line of Michael Bilerman of Citigroup. Please proceed.

Hi, it's John Litt here with Michael Bilerman.

How you doing?

Very good. You guys on your acquisitions front have been on the quieter side the past several years. And I think that's largely been due to pricing. You've made it pretty clear that many of the traditional Mills assets aren't necessarily assests that would have an appeal to you [INAUDIBLE] your interest in them. But the rest of the portfolio in the development development pipeline at this point is probably trading at some discount to maybe market value. Can you describe to the extent possible your views on that?

On the Mills development pipeline?

Well, mills overall.

You know -- listen -- I -- Mills, just historically, we've had a good relationship with them, they -- we had I think five developments that worked out very well for both of us. You know, we each had a beneficial relationship. We decided at that point to mutually, you know, profit from the relationship. We have not been -- you know, I mean, beyond that they have -- you know, we like Mills, we like the company, we like the development. But beyond that, you know, it's not -- we don't really have much to say. And we really -- I really haven't paid that much attention to their -- you know, their development pipeline, I guess. I guess to the extent you thought was trading at a discount to whatever the market value would be, it would seem to me that it would be something that would be interesting to a company like yours. Well, we're -- you know, I don't know, you know, that we know whether it traded at a discount or not. I really -- we're really not in a position to say that. That's up to the market to decide. You know, we're -- I just will say this, John, that we're always lacking for opportunities, but you know, the market decides whether it's trading or not. I mean, we were good at identifying one company we thought was trading under market; but given the experience there, we're probably -- we'll probably just stick to what we do best, which is operating, and stay out of trying to understand whether the market is undervalued or not.

Okay. I think Michael has a question as well.

Can you talk a little about asset recycling coming up this year, how much more you plan on disposing?

Well, Michael, we continue to look, you know, at pruning the noncore stuff. '05 was an exceptionally large year because we did dispose of the Chicago office complexes. So I don't think you can see -- you won't see that kind of level activity again, you know, absent some unusual circumstance; but we'll continue to look at a handful of the noncore stuff and, you know, continue to take advantage of the market conditions to dispose of them. What that ends up being in a dollar amount, it's really hard to say.

And maybe you can expand a little bit about the land development acquisition in Arizona. You have 50 million up-front. I assume that will increase as you have to build out and remediate land and do things. How do you look at this sort of venture, and how much capital -- I mean, obviously you'll get back when houses are sold, but how do you think about the profile of the capital that you need to commit for this [INAUDIBLE]?

Well, the 50 million of equity is the total amount of equity we expect to be required to get us through the right to actually parcel it into lots and to begin to sell entitled land. That's essentially the equity that's required for the first three to three-and-a-half years of the venture. The remainder of the financing is, as David mentioned, non-recourse morning financing which is already in place and committed. I mean, in terms of how we look at it, you know, we bought land that is right in the middle of the growth corridor in the Phoenix metropolitan area, and we bought it at $55,000 an acre. So we feel like we bought it wholesale, if you will, you know. Entitled land on a bulk basis out there right now is selling anywhere from 150,000 to $200,000 plus an acre.

The joint venture allows us the flexibility, once the entitlements are obtained, to make a decision whether we want to stay in the partnership and ride it all the way through the actual selling of individual lots, or whether we want to exit and capture value along the way. And so that's, you know -- this is our first venture. It's new for us. We think we made a really good deal. We like our partners a lot. We're in at a great price. You know, we'll go through the entitlement process and then we'll see where we are and decide whether to ride it out or to capture value at that point.

How many other deals like this are you working on around the country?

On the land basis?

Yes.

I'd say this really is the only one of this nature, of this magnitude.

Yes.

We have purchased land for retail development over the last -- you know, we'll have some announcements, but that's kind of normal course of business. Just to reemphasize what Steve said, the $50 million of equity gets us to the point of essentially the value creation exercise. So we really don't expect to have to come up with any additional equity to the point where we've created the value and the value is through the permitting process. And then we'll -- and then, Steve said it right. We'll have another chance to decide whether we want to keep going or go ahead and take advantage of the value that we've created. It's not a big investment for us.

But it's a business that we thought we would -- we want to learn about; and given the attractive nature of the -- of that market -- of that corridor in Phoenix and that growth, as well as who our partners are, and kind of the low going in price, we felt like, you know, this was a great opportunity at a very small amount of equity capital to really learn this business going forward.

And just the final question, just on the professional fees and the other expenses, we saw a big jump, almost three times what you have been --

Right.

Can you just talk about what's in there, what the outlook is and what drove it?

Sure. Michael, the professional fees are higher. I mean, we're in an environment where, you know, Sarbanes-Oxley and things like that drive up costs. As we've mentioned on prior calls, we are involved in a couple of ongoing disputes that have also driven those fees up. In terms of our run rate, it will really be a function of where we end up with the couple of things that are going on; but I think it's probably fair to say that what we saw in '05 as a year, you know, is a reasonable expectation for what we would see in '06.

So this is not outside consultants or advisors? It's primarily litigation costs?

It's primarily legal and accounting, yes.

Is there going to be some payoff, you know, if some of these are resolved, where you may have an accrual the other way? Or it's just fighting defendants?

That's really hard to say. It's very much hard to say. One of them, as you know, is Mall of America, and we are are not recording any income from Mall of America right now, so subject to the resolution of that, you could see some pickup there down the road.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Scott Crow of UBS. Please proceed.

Good afternoon, everybody.

How are you doing?

Quite well, thanks. I'm just trying to reconcile the significant slowdown between what is the comp NOI in '05 and what you do to [INAUDIBLE], you did 4% for the malls and 9 for the outlets in '05, and you've got it at two and a half to three and a half, proceeds for the mall and then four to five for the outlet.

Well, on the mall site, Scott, I think you have a couple of things going on. Number one, there was a very low level -- abnormally low level of bad debt expense in '05. As I mentioned in the call, we had very little bankruptcy. We have -- we have anticipated a more normalized year of experience in '06 there. We also, you know, in both the mall side and the premium outlet portfolio, had very strong sales growth, and I think the expectation for '06 is that the sales growth may not be as robust as it was in '05. So you could see less of a contribution from percentage based runs.

Okay. Just further to that, what portion of your portfolio of the outlet business is coming from percentage [INAUDIBLE]? I know you mentioned it.

I think it was 94%. Is that what you -- I'm sorry, can you repeat it?

No problem. What portion of your outlet business is actually, the rent directly linked to sales?

Oh, in the mall business, we get about 2 to 3% of our EBITDA from sales-based rents, and in the outlet business, it's going to be in the high single digits, probably 6 to 8%.

You mentioned that you were looking to grow that; is there a number that you sort of feel comfortable with with respect to the outlet business?

When you say looking to grow --

Looking to increase the amount of rent that's directly linked to --

Well, our occupancy costs as a percent of sales right now in the outlet business are 8%. Compare that to almost 13 in the mall business at very similar levels of productivity. I mean, both portfolios are doing close to $450 a foot. We'd clearly like to move that 8 up closer to where we see the mall business. We'd at least like to get it to 10% or so.

Okay, and just to make sure, clarify, the reason their percentage rents is higher is because a number of their anchor deals tend to be -- and their anchors are the Neiman's of the world and the Nike's of the world -- they tend to be purely -- historically, in any event -- purely percentage rent deals.

All right, thanks. Just quickly, looking overseas, can you quickly comment on the development yield you're seeing for those projects and whether you've experienced any cost pressures like we've seen here in the states which are, you know, shrinking those margins?

Yields are pretty consistent double digit, except for Italy, which is a little bit lower, but they have always been kind of in that range; and we have yet to see any real cost pressures, you know, from raw materials like you have here, certainly in pockets of the states. And the pockets of the states that -- where we are seeing obviously sensitivity is down in Florida being the biggest; and, you know, we're not doing a lot in the northeast. Mostly redevelopment. But we're also seeing some pressure there.

Okay, great. Thank you. And lastly, I think you mentioned you didn't bay back any stock in the fourth quarter. Was there any comment on pricing of the market?

No, it really was, frankly, when we were -- when the stock was weak, we were locked out, and, you know, just really a function of more administerial thing than any view of the stock.

Okay, thanks, guys.

Thank you.

Your next question comes from the line of Ross Nussbaum of Banc of America Securities. Please proceed.

Hi, good afternoon, guys.

How are you doing?

Good. David, if my math is right, the 14 boxes that you'd buy from Federated, can you give us a rough sense of how much capital could go out? Were we talking a couple hundred million here?

Well, when you add in the redevelopment potential, the answer is yes. You know, not just absent -- I think we'll have some very exciting news in the Boston market, but -- and when you add what we're doing there, and the redevelopment, the answer is yes. Not, obviously, just from the Federated transaction by itself.

Why, if -- obviously you're planning on making some pretty significant returns on those boxes, and I'm sure Federated knows that -- why wouldn't they look to do more of this themselves?

They don't have the right to.

And on the six stores they're selling to others they do?

In some cases, yes. In other cases we've set's said it's fine for them to go ahead and sell to that retailer.

Okay. Steve, couple of housekeeping items. The FAS 141 fair market value of the lease adjustment was up 8 million sequentially, but you didn't really buy a lot. Why did that go up?

That was just, Ross, as you know, under purchase accounting rules, you get one year to finalize your purchase accounting. So the fourth quarter was when we put it all to bed for Chelsea. What you should lack at when you think about modeling purposes is where the year ended up in '05 as opposed to looking at the quarter.

Okay. So you're saying average out that adjustment over the space of a year?

Exactly.

Okay, and then the other housekeeping item, your property operating expense line item was actually flat year-over-year, which is somewhat surprising to me. Why was it flat? I mean, I guess it caused your reimbursement ratio to tick up to 98% overall.

Well, you had a couple of things. One, there were actually, because of the dispositions on a consolidated basis, there's actually a couple of fewer properties in the consolidated number in the fourth quarter of '05 versus '04. So you're dealing with -- I was going to use the word stagnant, but that's a bad word to use here. You're looking at a relatively comparable, or even a little bit smaller portfolio.

The other thing is, last year we had some huge -- we had a lot of -- I mean, I guess I don't know the number off the top of my head, but we had a lot of snow removal last year.

In the fourth quarter, and that's almost done this year.

Which we didn't have this year.

Right.

And just related to that, what percentage of your leases now are on fixed CAM at this point?

At the end of the year, we were right at a third.

Thank you.

Sure.

Your next question comes from the line of Dennis Maloney of Goldman Sachs. Please proceed.

Hi, good afternoon.

How are you doing?

Great, thanks. Just curious if you guys could remind us of your occupancy definition. Are temporary tenants included there? And at 93.1%, I mean, is this as good as it gets on the occupancy front, or can you still go higher in '06?

No, Dennis, temporary tenants are not included. Our definition of occupancy is a lease longer than 12 months in length. So -- and I'll defer to Rick or David about the --

Well, I mean, I'm worried some of my leasing guys are listening to the phone call, so I would tell you that absolutely we can increase occupancy. No question about it.

Okay. Great to hear. And then just with this $0.24 dividend hike, I'm just wondering where you stand versus your minimum payout ratio, and are we likely to see the dividend grow with the earnings going forward?

We still have a little bit of room left vis-a-vis our taxable income. And based upon, you know, kind of what we see as an external environment -- meaning a lot of our growth is going to be, you know, the redevelopments, the intensification, better performance at the operating, the property level through increased efficiency and effectiveness, and not -- you know, we are not planning a lot of external activities. So the answer to that is, given what we see in front of us, we would expect that to be the case. Now, you know, there's always the unusual larger transaction out there; but we frankly don't see it, and we don't anticipate it.

Okay, thank you very much.

Thank you, sir.

Your next question comes from the line of David [Toddie] of Lehman Brothers. Please proceed

Hi, everybody.

How are you doing?

Good. Couple of quick questions around your European investments. In some of the markets overseas where you have joint venture investments, are you now growing comfortable in any of those markets to go it alone in some of these locations?

Well, I think in Italy, you know, our partner is -- in GCI is [O'Shawn], which is also anchoring the centers. And so there's -- it's -- it makes sense for to us continue to have obviously a partnership relationship with the -- you know, with the lead anchor, and it's not uncommon, what happened here historically in the U.S., when Penney -- J.C. Penney Realty, as many of you remember, anchored a lot of the initial centers that were built, and we were partners with them, I think General Growth was, Hallmark was created out of Sears. May Centers was created on May Company, et cetera. So that makes sense. And you know, we -- in ERE, which we're actually working on renaming the company, because it's confusing, ERE, BEG -- you know, we're going to rename it here shortly so that it's clear. You know, we are very excited about bringing in Ivanhoe and using that company as a base to grow not just its existing European business, which is primarily Poland and France, with a pretty large development pipeline in France, but also looking outside of those two countries.

So, you know, we do -- you know, we don't think we -- you know, we do think partners like that can bring a lot of value, and so we would expect to continue the -- you know, that model going forward.

Okay. And just one last quick question. How are you feeling about China, and just specifically also about Turkey, in terms of investment location?

China, we are continuing to proceed with the partnership that we announced last year with Morgan Stanley's Real Estate Fund, as well as [Sidek], which is a major property company in China. And we are -- have circled about five developments. There are certain conditions precedent that must be met for to us move forward on those. We're in the process of trying to see if those conditions precedent are met. If so, then we would expect to be, frankly, under construction, and with about five of those by year end, you know. You know, it's -- timing there is always a little more uncertain than we can describe here.

Turkey, the only exposure that we've had to Turkey is, BEG-ERE is actually a manager for a number of [INAUDIBLE] centers -- [INAUDIBLE] anchorage centers here. It's an interesting country. You know, it's a little more volatile in terms of the currency. You know, it's a great country, it's a great marketplace. Our reluctance has historically been the currency volatility that you don't see, obviously, with the Euro. Frankly, you don't see in China. And you see Turkey a little more volatile on the currency front and, you know, more comparable to kind of Latin America. So South America. So, you know, it's an interesting marketplace, something we're looking at; but we don't really have any, you know, significant plans at this point.

Great. Thank you very much.

Thank you.

Your next question comes from the line of David Fick of Stifel Nicolaus. Please proceed.

Good afternoon.

How are you doing?

Can you talk a little bit about the run rate on Simon brand ventures? You were up 22% in '05 but 10% in 4Q. Are we sort of leveling out in terms of the growth rate there?

Well, it's -- there's a couple of big initiatives. I don't know that we're leveling out. I don't think we've ever put constraints on how we think about the business. We've got a major digital initiative essentially underway this year. We will have somewhere -- anywhere between 40 and 50 -- in malls, that is, of our digital network; and I think from there it's -- that's going to be a really, you know, good opportunity for us to boost the growth rate. We're also, you know, very aggressive on all the marketing platforms, billboard strategy and the like. So, you know, it is -- it's still a new business, so you're going to have -- you know, it's tough to model. We are anticipating, you know, double-digit growth this year. We would certainly hope to meet those -- that growth criteria, but it's still -- you know, it's still a new business that, you know, not -- not -- you know, where we still have volatility in terms of how we predicted the outcome of it.

So does it make sense to model closer to 10 or 20?

You know, it depends who you're asking.

All right.

It's in that range, I'd say.

One follow-up on the Federated questions. Are there any payments being made to eliminate reciprocal easement objectives from other anchors?

Are you saying payments made from anchors other than Federated?

Well, two anchors other than Federated for their approvals under reciprocal easements.

No.

Okay. This is, I'm sure, sensitive -- my last question. David, can you comment on the status of both the forum shops and Mall of America? You alluded to them, but what should we expect?

Well, I'm not sensitive to it, so I appreciate -- appreciate you, you know, saying that, though. They're ongoing. There's nothing really new to report with respect to the forum shops. You know, the legal process there is ongoing. We still have a motion to dismiss that's in various review process, and nothing really new to report in Mall of America at this point.

When do you expect significant new news?

I don't anticipate on the forum shops anything in the near future. I think that's going to be a -- you know, unfortunately, a long, protracted, you know, litigation. And then Mall of America, you know, eventually there will be some clarity there, and perhaps even this year.

Thank you.

Thank you.

Your next question comes from the line of Jeff Donnelly of Wachovia Securities. Please proceed.

Hi, guys. Just a few follow-up questions. Steve, just wanted to understand how you're thinking about leverage going forward. You're producing a lot of cash flow, obviously, and leverage is kind of low. To the extent you guys do find a large acquisition or development projects, look to buy back more stock, is it reasonable to assume you might be willing -- or more willing than usual to leverage up beyond your cash balances to fund it?

Well, I mean, I think it's fair to say, Jeff, that we have an awful lot of embedded firepower in the balance sheet, if you will. You know, our leverage is certainly at the very low end of our pier group, and given the stability in -- certainly the mall and the outlet business, which, you know, generates the vast majority of our cash flow, I think it's fair to say that, you know, if the right opportunity came along, the opportunity -- you know, the ability to acquire it on a more levered basis would certainly be there.

Is it fair to say, though, that the leverage maybe of some of your peers, the leverage levels they have out there, isn't necessarily a deterrent for you guys?

I think it the's fair to say that the path that we have chosen with respect to our capital structure is one that we're comfortable with, you know, and, I mean, listen; there's -- it's a philosophical discussion that we ask ourselves on a regular basis. And, you know, we're comfortable with our rating, we're comfortable with the borrowing cost and the access to capital that it provides for us, but we also are cognizant of the fact that, you know, we're in a business where we talk about EBITDA growing, you know, 4 versus 3%, and so leverage is important.

Look, I think our view here is also -- to add to that is -- you know, we're -- we try and take a very long-term view of what we're trying to accomplish, and to the extent that, you know, we don't feel that we need that firepower, you know, we're going to use that firepower in one way or another, and if that ultimately -- and that firepower is there to increase our returns on equity; and, you know, we'll either do that externally or internally; but we're not in a rush to do it because it is a long-term -- you know, this Company has been around for I think -- well, 45 years. So 45 years, so you know, we are patient with respect to the firepower. That sounds negative when, in fact, it's really a good thing, right? It's really positive to have, you know, that kind of balance sheet. But, you know, we understand, you know, that our goal is to increase the returns on our equity. We are just being very patient as to how we analyze it.

And just generally speaking, I mean, are you seeing better total returns on this side of the pond than on others, or?

It's all tough. You know, I mean, the best stuff that we have is, you know, is -- you know, is here in redevelopment, in new development. You know, the Chelsea, you know, was a great example of an opportunity where we used our balance sheet and financed it conservatively. In retrospect, we -- you know, the founders always obviously would have wanted to have units and the like issued to them; but we financed it probably way too conservatively, but those are the kind of opportunities that we like. It's been a great fit. It's been a great addition to the business; not just because of what they produce, but ultimately, you know, what we can do together. So, you know, the acquisition environment is very expensive. I don't anticipate it changing. You know, I think in Asia and other parts, it's almost frightening where some of these things are trading, and, you know, we're not going to chase it.

Actually speaking, can you give us an update on which markets if any you are looking at beyond Japan and South Korea, whether it's with Chelsea or even projects for Simon, like in Singapore, et cetera?

Well, in the development phase right now, Chelsea is focused on Japan and South Korea. We're -- as I mentioned to you, we're focused on pursuing the -- the [Sidek] Morgan Stanley relationship to its ultimate conclusion, which is, you know, either we start building or we don't; and, you know, there's other opportunities that we've looked at, none of which have met our return criteria, and, you know, we'll continue. We do have an office in Hong Kong. We'll continue to pursue those, but it's, you know, from a return on cost point of view, very expensive. A lot of uncertainty. So we've just been relatively conservative there. Europe, you know, we're very bullish on what we can build in Europe. It's just a question of being able to -- you know, to get those opportunities through the permitting and zoning process.

U.S., very bullish on, you know, developing the outlet business. Have a number of opportunities, some great expansions that we're working on, like in Las Vegas and Orlando. And then with Federated [INAUDIBLE], as well as our new development -- you know, traditional new development pipeline. So needless to say there's a lot going on, and our balance sheet comes in handy to pursue those opportunities.

Two last questions. David, Rick said earlier bankruptcy season is upon us. I know you have good relationships with your retailers. Can you share, I guess, your gut sense of what your expectation is for the early '06 closings you expect to see versus the last few years?

I think it will be higher than clearly '05. And, you know, it'll get back -- I view '05 as an anomaly, really. I think it will get back to kind of the '04 was -- and '03 were relatively consistent at certain levels, so I think that -- Musicland is going to be a challenge for our industry to replace quickly, because they weren't in great location, paying decent enough rent. So that's going to be a challenge not just for us, but for the whole industry. I think G&G, as Steve said, looks like there's a deal with [INAUDIBLE], so if that's the case -- I'm not completely up to speed what it might be, Rick might be -- but if that's the case that shouldn't be much of an issue. But Musicland, I think will challenge the industry to replace that income in a relatively short period of time.

And just lastly, I was curious what sort of buyers are acquiring the malls that you're selling, as well as the nonpremium outlet properties?

Entrepreneurs with a lot of leverage.

So you don't see a lot of institutional capital, people making contrarian plays?

In fact, it could be institutional capital, but it's institutional capital that's been allocated to a more entrepreneurial fund looking for higher returns with higher leverage and potential redevelopment scenarios.

Okay. Thanks.

And again, some of those, you know -- you know, like we sold the thing in Yuma to kind of a fund that's focused on the Hispanic -- I mean, they may do okay with it. I hope they do, actually. But for to us do it, we just didn't -- you know, we -- our resources are better spent on bigger, better things.

Okay. Thanks, guys.

Thank you.

We have a question from the line of Jamie Feldman of Prudential Equity Group. Please proceed.

Thank you and good afternoon.

How are you doing?

Good. What does the '06 guidance assume for land sale gains?

It assumes a little more return to a normal level, Jamie. '05 was light compared to '04. And that's just a function sometimes of the lumpiness of that business. '06 would return us kind of to more historical levels like we saw in'04.

So use the '04 run rate?

Yes, that's going to be fine.

Okay. And then, Steve, I think you mentioned that you think -- I guess contrary to what David said, your outlook for bankruptcies in the portfolio is actually weaker in '06 than '05.

It's definitely weaker. We said basically the same thing. We only lost 300,000 square feet to bankruptcy in '05. Our '04-'03 level was more in the half a million square feet, and both of us would expect '06 to go back to more of that normal half a million square feet.

Okay. And then in terms of the change in accrual accounting, based on bankruptcies, or based on accrual reserves, would that impact your guidance for the same store NOI growth?

We haven't changed any --

I'm not sure I understand your --

What I'm getting at, you know, if you look at the two and a half to three and a half for regional malls, how much of that is a change in accrual?

All right. I mean, if your question is -- our bad debt expense historically has run about 50 to 60 basis points of revenue. So about a half of 1%. This year it was only about 30 basis points of revenue. The '06 guidance would assume that -- would assume that it goes back to that 50 to 60 basis points of revenue.

So there's no change in accrual.

Yes, so there's no change in accounting.

Right. I think I meant bad debt. Okay. And then finally, cap rate on acquisitions and dispositions in the quarter?

The cap rate on our two acquisitions, we would have blended to about a 7. And on dispositions, it would have been about an 8 probably.

Okay. Thank you.

Thank you.

Our next question comes from Matt Ostrower of Morgan Stanley. Please proceed.

Thanks. My questions have been asked and answered.

Not one, Matt?

No.

Okay.

And your next question comes from Lou Taylor of Deutsche Bank. Please proceed.

Yes, thanks. You guys have alluded to a lot of different development projects you're working on. How many do you expect to really start in '06 in terms of new projects?

In terms of brand-new, ground-up?

Yes.

Hopefully, there will be two or three additional starts in '06 across our three different pipelines. But we're also looking to expand several projects; and as David said, we have a very potentially large '06 redevelopment pipeline that would be starting this year as well.

Okay.

I want you to -- I think it's important for the market to know, we are -- we're very actively developing and looking for development. We still are very conservative developers, and that -- you know, in terms of making sure we have the right location with the right tenant mix and the right anchor commitments and the like, so --

And the right returns.

And the right returns. So our standards really have not been lowered at all over the -- even though we're more active in it, we're still -- you know, it's still very important for us to mon ton our standards here.

Okay. Also, in looking at your sales per square foot in Europe, even adjusted for changing currency, looks like sales were down year-over-year. Any factor particularly contributing to that?

The biggest one was we opened Arcadia, the big center in Poland, which is doing fantastic, but it's so large that it is -- I think it's skewed the -- it's skewed --

We opened it in the fourth quarter of '04, so we got a little grand opening pop in '04, so, you know, this year, as David mentioned, the sales were strong, but they weren't up to what we saw at grand opening. I think the Italian economy is a little weaker as well, and so we've seen some flatness in our sales in Italy.

Okay.

But I think the biggest issue is Arcadia.

Right. And the last question is, your -- I think your debt on the assets with May's [INAUDIBLE], which is [INAUDIBLE], can you just update us on your thinking with regards to those assets and that debt and that venture?

It's still evolving. The likely outcome is we will refinance -- obviously, we'll refinance the debt, because it's above market, so there will be opportunity for both of us there. We'll probably continue on as partners, and we'll probably sell or think about selling a few assets. So that's the likely outcome, but I will suggest that the thinking is still evolving.

And I would tell you one thing, Lou that we will do -- you know, those assets are in accrual; they're all crossed right now. When we refinance them, we will refinance them more, I think, as single assets financings to give ourselves more flexibility.

Great. Thank you.

Thank you.

And our final question is a line from -- a question from the line of Michael Bilerman. Please proceed.

I had a follow-up on BEG.

Sure.

You talked about that you may use it outside of Poland and France. Is there specific opportunities that you're looking at and, you know --

Well, there's some development opportunities outside of those countries that we're studying seriously. Sapin as an example, you know, and some other countries that -- not necessarily acquisitions, but mostly development.

Okay. Thank you.

Thank you.

And at this time, gentlemen, I'm showing no further questions. I'd like to hand the call over to Mr. Simon for closing remarks.

Okay. Thank you, everyone, and appreciate your interest, and we will talk to you very soon. Call with any questions. Take care.

And once again, ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.