西蒙地產 (SPG) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 Simon Property Group Incorporated Earnings Conference Call. My name is Sheneek, and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Welcome to the Simon Property Group second quarter 2006 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 filings with the Securities & Exchange Commission for a detailed discussion of these 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 the call includes time sensitive information that may be accurate only as of today's date, August 1, 2006. The Company's quarterly supplemental information package was filed yesterday as a Form 8-K. This filing is available via mail or e-mail, and it is posted on the Simon website in the Investor Relations section, under financial information quarterly supplemental packages. If you would like to be added to the list for e-mail distribution of this information, please notify me at SDORAN@simon.com. Participating in today's call will be David Simon, Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Steven Sterrett, Chief Financial Officer.

And now I will turn the call over to Mr. Simon.

Thanks, Shelly. Good morning, and thank you for joining us today everyone. We're pleased to report that second quarter diluted FFO per share increased 6.8% to $1.26, a penny above consensus. Operational metrics for our portfolio remained strong. Tenant sales growth in our regional mall and premium outlet portfolios was robust. Releasing spreads were significantly positive in all platforms and our demand for our retail space continues to be strong.

Our quarterly regional mall occupancy decline was a result of certain retailer bankruptcies, and as mentioned in our last quarter, not unexpected. And we believe that regional mall occupancy should return to 2005 levels by year-end 2006. We are substantially complete with our 2006 leasing activity, and are working on 2007. We saw a record attendance at the May ICSC, received lots of positive feedback on deal-making and retailers continue to grow their store accounts.

Additionally, many national retailers are coming out with new concepts, which bodes well for our business. We are busier than ever with an expanding development, redevelopment pipeline both in the US and abroad. Based upon the results for the first six months of the year, and our outlook for the remainder of 2006, we have raised both the top and bottom-end of our 2006 guidance.

Now, I will turn the call over to Steve for overview of financial and operational results.

Thanks, David. Second quarter details are included in the press release and the 8-K supplemental filings, so let me just highlight a few points. As David mentioned, the diluted FFO per share grew 6.8% to $1.26 for the quarter. For the six months, diluted FFO per share grew 9.1% to $2.52 a share. Comparable sales were up 5.9% to $468 a foot in our mall portfolio. Remember that that portfolio is 171 properties that comprise 65 million square feet of small shop space.

Sales increased 6.3% to $453 a foot in our US premium outlet portfolio of 34 centers, which comprises 13 million square feet of space. Re-leasing spreads for the regional mall portfolio were $8.16 per square foot. That's a 22.7% increase. Re-leasing spreads within the premium outlet portfolio were $6.28 a foot, that's a 28.2% increase. Occupancy in our US mall portfolio was 91.6% at quarter end, as David mentioned, that's a decrease of 60 basis points over the prior year levels.

During the first six months of '06, we had 380,000 square feet in bankruptcy driven store closures. That compares to 215,000 square feet in the first six months last year. About two-thirds of the bankruptcy space lost in 2006 was from Musicland. You may also recall that during the first quarter of '06, we received a lease settlement from retail brand alliance in connection with the closure of an additional 340,000 square feet of Casual Corner stores in our portfolio. But demand for space is good.

Case in point, we have executed or have committed leases for over 200,000 square feet, or about 60% of the Casual Corner space, and we have released that space to tenants such as Sephora, [Packston], Hollister, American Eagle, and Coach. Comparable regional mall NOI growth was 2.9% for the quarter, 4.5% for the first six months. In the second quarter NOI growth was affected by an abnormally low bad debt expense in the second quarter of '05. If you recall, we actually have $1.6 million of bad debt income in Q2 '05, as a result of some recovery.

Normalizing bad debt expense in the second quarter of '05 would result in a 4% comp property NOI growth for the second quarter of '06, and about 96% of our regional mall NOI is considered comparable. Occupancy in the premium outlet portfolio was 99.4% at quarter end, that's a 20 basis point increase from the prior period. Comparable property NOI growth for the premium outlet portfolio was 3% for the quarter, 3.5% for the first six months. NOI growth was affected by a lease settlement in 2005 that did not repeat in '06. If you excluded the impact of that last year's lease settlement, the NOI growth would be in the premium outlet portfolio 4.1% for the second quarter, and about 96% of our premium outlet NOI is considered comparable.

Let me talk about the balance sheet for just a couple of seconds. Highlights would include; at June 30, 2006, our debt to total market capitalization is 41.1%. Outstanding borrowings of our $3 billion corporate credit facility decreased, down to 1.25 billion at June 30, due to a pay down from proceeds of our $800 million offering of senior unsecured notes in May. That offering consisted of $400 million notes at 5.75% that come due in 2012, and $400 million of 6.1% notes that are due in 2016.

We also settled forward starting interest rate swap contract concurrently with the pricing of the notes. If the proceeds of those settlements were applied to the notes and those contracts were about $10 million in the money, the effective interest rate on the 2012 notes and 2016 notes would be reduced to 5.71% and 5.91% respectively, and to 5.81% on a blended basis over the eight year weighted average maturity.

Our interest rate coverage is currently 2.6 times. The weighted average maturity of our debt is five years. The weighted average cost of our debt is 6.04%. Our FFO pay out ratio is expected to remain below 60%. And we expect to generate over $500 million of free cash flow in 2006. As a result of the financing activities over the past two years, we not only maintain the integrity of our balance sheet, we have actually improved it. At the end of 2004, after we acquired Chelsea, our floating rate debt comprise 22% of our total debt and at June 30, our floating rate debt is down to 11% of our total debt, or about 5% of our total market capitalization.

With that, I will turn the call over to Rick to provide our development update.

Thanks, Steve. As outlined in our press release and 8-K, we have numerous projects under construction. Six new retail developments, 10 assets undergoing redevelopment, adding incremental GLA, five centers with mall renovations, 10 centers where we're adding Anchors big boxes or theaters, and three residential components at existing or new developments, as part of our asset intensification program.

I won't go into detail on these projects as the details are included in the 8-K supplemental package, but I would like to take a minute and talk about our expanding potential development pipeline. Operating for multiple platforms, we have the opportunity to grow our business through new development, as well as the enhancement of existing franchise assets through redevelopment. Risk adjusted development and redevelopment returns on cost continue to be attractive.

Current estimated cost of projects already under construction, were identified as likely to proceed and be completed during the period 2007 to 2010, are expected to total $6.9 billion. SPG share of these current estimated project cost is $4.7 billion. These totals exclude projects to be completed in 2006. They are broken down as follows. Within our regional mall platform, current estimated project costs are approximately 350 million for new developments, and 1.6 billion for redevelopment projects.

Within our Premium Outlet center platform, current estimated project costs are approximately 550 million for new developments, and 200 million for outlet expansions. Within our community/lifestyle center platform, current estimated project costs are approximately $700 million for new developments. Within our international properties platform, current estimated project costs are approximately 500 million for shopping centers, and approximately 100 million for Premium Outlet centers.

Current estimated costs for asset intensification projects are approximately 650 million for residential and self-storage components combined. We are in the process of reviewing potential hotel additions, but the costs have yet to be finalized. We can develop this pipeline over the next four years on a leveraged neutral basis, by using our $500 million of annual free cash flow. We are very excited about the breadth and depth of our development pipeline, and the value which we anticipate will be created through it's successful execution.

Let me give you a brief update on the Federated and May merger, and the related store closings. During the second quarter, Federated closed on the sale of four stores to [Boscoffs]. Boscoffs is expected to open in newly renovated stores this year at Lehigh Valley Mall, Oxford Valley Mall, Montgomery Mall and South Hills Village, all in Pennsylvania. Target recently announced they will purchase the Federated stores at Springfield Mall in Philadelphia and Westminster Mall in Westminster, California. We expect Target to open at these centers in 2007.

On July 21st, we closed on the purchase of seven Federated buildings in our mall portfolio. The costs to acquire these buildings and redevelop the seven malls where they are located are included in our development pipeline activity discussed previously. Nordstrom and small shops will be added to Burlington Mall and South Shore Plaza in Boston. Dillard's will open in Eastland Mall in Evansville, Indiana.

Lifestyle additions with large format books stores, restaurants, and specialty retail shops are planned at Greenwood Park Mall in Greenwood, Indiana, Pheasant Lane Mall in Nashua, New Hampshire in the Boston metro market, University Park Mall in Mishawaka, which is South Bend, Indiana, and Castleton Square in Indianapolis, where we are also adding a theater.

We have already started construction on the redevelopment of Burlington Mall, where we will be adding Nordstrom and small shops in the former Filene's space and relocating Crate & Barrel to a full line store on the pad formally occupied by the Macy's-owned auto center. This project is expected to be completed in 2008 with Crate & Barrel opening in the fall of next year. We will also be terminating the Federated leases at Ross Park Mall in Pittsburgh and Northshore Mall in Boston this winter. Nordstrom and additional specialty shops will be added to both of these centers.

Let me now turn the call back to David, for a few comments on our international imitative, as well as some concluding remarks.

Thanks, Rick. Within our Simon Ivanhoe joint venture, operating metrics remain positive. There are two new developments within SI under construction and expected to open in late 2006; one in Gliwice, Poland and one in Wasquehal, France. The Simon Ivanhoe joint venture also has several new projects in the predevelopment phase. Operating metrics are stable within our GCI Italian joint venture. The centers are over 98% leased, and rent spreads are in the mid teens.

In late May of '06, GCI opened a 748,000 square foot shopping center in Naples, Italy. The project opened 99.8% leased and includes a shopping gallery, which is anchored by Auchan and Zara, as well as an adjacent retail park, which is essentially a community center. GCI owns 40% of this project. Construction continues on four additional shopping center projects in Italy, fully or partially owned by GCI, and all are expected to open in 2007.

The Chelsea Japan Premium Outlets continue to generate strong earnings and sales. The 53,000 square foot second phase of Toki Premium Outlets is under construction, on time and on budget. The expansion is expected to open fully leased mid-October of this year. Pre-construction activities for Kobe Sanda Premium Outlets, the sixth center in Japan, continues on schedule for a fall 2006 construction start and a summer 2007 opening. Lastly, efforts are underway to locate the seventh Premium Outlet site, and Chelsea Japan is exploring those opportunities throughout Japan.

Construction also continues on the 250,000 square foot Premium Outlet located 35 miles southeast in Seoul, South Korea. Tenant interest is very strong, particularly among the international luxury brands. The center is expected to open in the spring of 2006. And Chelsea South Korea continues to explore potential new sites and we own 50% of this. Let me just make one other comment. As you know, the press focuses on net income. And we do not believe here in adjusting net income, or FFO, other than what is reported.

But I do want to point out that, our net income decreased as a result of $0.40 of a gain that we achieved last year when we sold our suburban office buildings in Chicago. And that resulted in 37 -- we had $0.37 of net income per share compared to 70, yet we had a $0.40 gain. But I just wanted to outline that, because we do not believe in adjusting our net income and our FFO, other than what is required by the White Paper in NAREIT. With that, our business continues to be strong. We look forward to a solid performance going out throughout the remainder of '06.

And Operator, we are now ready for any questions.

[OPERATOR INSTRUCTIONS]

Our first question comes from Matt Ostrower with Morgan Stanley. Please proceed.

Hello?

Mr. Ostrower, your line is open.

Hello, can you hear me?

Yes.

Okay. Just two questions for you. One I guess, on the operating metrics side, I just want to be clear that you are not -- even though some of the metrics might have been a little bit less robust than they were last quarter, the clear message that you're sending is that operating fundamentals for you are exactly the same as it were before, they're just as robust?

I will answer that Matt. Yes, I would -- we said last quarter that we had not cycled through all of the store closures that were a result of the essentially Musicland and a few others. So, we expected this quarterly debt. I mean obviously quarters are quarters, we tend to focus on the longer term, and we feel confident about where we will end up the year and where essentially our metrics should be. So the answer to that is, yes. And nothing in this quarter that we presented to the market is unexpected at all.

Okay. And then you referred to some progress releasing some of that space you loss in the first quarter. Can you talk about the economics there? Were the spreads there in line with what you reported for the portfolio as whole?

I would say clearly the Casual Corner space. We will expect to have significant rental growth from -- and Musicland, there will be some pluses or minuses, but overall it should come into our average.

Okay. And then last question, you guys recently spoke about potentially looking at a fund for the quality malls or other asset types. Can you sort of refresh your thinking on that please?

Sure. We continue to think about it. Nothing is imminent. And at this point, we're still studying the opportunity. But there will be nothing imminent coming from us. And now the focus for us for the time being obviously, as Rick mentioned, we have the potential for about $7 billion -- not all our share, but obviously we -- it still a significant pipeline, $7 billion. That's' the focus. And at this point, we don't want to detract from that, but we'll continue to study it. If we think the time is right, and it's a appropriate for the company, we'll move forward. But at this point, there is nothing imminent.

And just to sort of to be a little bit clearer about what your thoughts were originally about, thinking about that, was it about pricing for the malls looking better or was it about capital from private sources looking very attractive or both?

Well, I would say the primary justification for us to review it is, obviously it is lucrative. There have been other preeminent REITs that have had significant success in that area. We do have obviously a lot of expertise, that people are willing to pay us for. So we study the economics, and we are studying the economics. But that was really the primary reason is because it is obviously a way to use your capital on a more attractive basis and get paid for it.

So that was the primary reason. It wasn't so much the pricing X versus Y. Because that can come and go, but it was -- it is a way to get paid for your expertise, and it is a lucrative --. At the same time we've always, we like to buy from our own account; we like to improve an assets for our own account. And that's something that if we believe in the asset, there is upside in the asset, we can also argue why give up the upside. So that's been a dilemma. That's why we haven't done anything yet. And that's why we continue to study it.

Thank you.

Thank you.

Our next question comes from the line of Jonathan Litt with Citigroup. Please proceed.

Hi this is Ambika Goel for John Litt. I have a quick question about the Casual Corner and Musicland, bankruptcies and vacancies. How much of the drop of occupancy, which you related those two tenants vacating the property?

Ambika, this is Steve. If you look at the two together, about two-thirds of our bankruptcy was Musicland. So that's almost 275,000 square feet. So, if you coupled that with 340,000 square feet of space we lost from Casual Corner, that's over 600,000 square feet of space, which is 100 basis points of our small shop space. Now we have re-leased some of that. I think generally speaking, we're probably about half released in terms of tenants that have executed and are open. So I would say good five to six-tenths, almost all of the decline in bankruptcy would be related specifically to those two tenants.

Okay. And then for the new assets intensification disclosure that you have, if you could just walk through who your joint venture partners are for these residential developments? And then also, how does the 130 cost relate to your cost? Is that a cost you are attributing to the value of the land, or is it based on incremental costs?

Rick, do you want to handle that?

Sure. Of the ones we have going right now, they are in Domain in Austin and Firewheel in Garland. And both of those are partnerships with Columbus Realty and GE Pension Fund, not capital. In both of those, we are a 50% partner. The way we have structured these is that the partnership buys for fair market value, the land in the case of Firewheel, or air rights in the case of Domain. And then we proceed as a partner to obtain a construction loan and develop the project.

The third residential component that is under construction right now is, a condominium project that is being incorporated into our Coconut Point in Bonita Springs. There, we just sold the land, and air rights for the condominium project, and we are not participating as a partner.

And we also have the Charlotte deal, Rick as well.

Right. And Charlotte is a partnership with Hanover and MetLife. And that is 50% partnership -- 40% excuse me. And there also, we sold a land at fair market value to the partnership. And there is a retail component under that residential, which will have Crate & Barrel, and a lot more retail that will be opening this fall. The residential there opens next spring.

We will own 100% of the retail?

Yes.

I think that's important to say. So, the numbers there are gross cost. And then obviously, you just get to our share, but depending on how much we own of [the project].

Okay. Great. Thank you.

Thank you.

Our next question comes from the line of Paul Morgan with FBR. Please proceed.

Good morning.

How are you doing?

Good. Thanks. How are you?

Good.

That land sale that you mentioned related to the intensification, is that part of the kind of the jump in land sales in the second quarter?

No, it isn't. Those transactions that all occurred prior to the second quarter. There was really only one unusual transaction in the second quarter. And generally speaking, our land sale activity is up a little bit because of the size of the development pipeline. And we are creating peripheral development opportunities in our new project. But we did have one transaction in the second quarter, about a $4 million gain where we sold some land to a city for road improvements. So they took the outside corner of our land, because they are expanding the road that goes in front of the mall. And that had been contemplated. we just weren't sure as to when the timing was going to occur, and it finally did in the second quarter.

So if I take that out, and annualize your first half number, is that about an expectation for land sales for the full year?

If you took out an annualized it, you would be closed. I mean give us a little wiggle room, because these things tend to come in chunks of $1 million, $2 million, $3 million, and you can't always control the timing. But that's probably a decent run rate, Paul.

Okay. That -- so going back to the asset intensification, 130 million at a 9% yield, so that excludes -- is your land sale subtracted from the base of investment there to get to that 9%?

That 9% treats the land at whatever cost the joint venture acquired the land at. So, it is full fair market value for the land.

Okay. So then what -- I mean that seems like a high number for residential development these days. Is there any reason the expectation is so strong? I mean people are talking about ground-up projects in the 7% range and you were saying 9 there.

Well, I will add to that. I mean I am -- I think that is why we love our retail business because the yields, as we have explored this, I think have gotten a lot more sophisticated and knowledgeable over the last year. What surprised me most as we analyzed and talked to partners, and very confident partners and people, is that the yields that multifamily do develop are very low compared to obviously retail.

So I think part of why the yields are higher here is, because we think we can get premium pricing, given the environment we are creating with the retail. But I think the overall point is that, we are very glad we are in the retail real estate business.

Right. Okay. Thanks. Last question on the redevelopment pipeline. Mall redevelopments, 1.6 billion, Rick, you mentioned, did -- how much of that is related to the Federated May closings and recaptures?

A significant portion of that is included in the May Federated allocations. But we have a number of other projects that we have announced. For example, the relocation of Nordstrom at Tacoma Mall and the lifestyle addition. So there are -- we have announced the Neiman Marcus expansion, the addition to small shop at Lenox Square, which is ongoing. We have announced the addition of Neiman Marcus and Nordstrom and a major expansion at Quaker Bridge.

So there are significant projects that are not included. And it's probably good [windage] to say about half is attributable to the Federated program, and half to other opportunities that we're creating in the portfolio.

Is there any allocation to the ones that has been announced at Galleria and at King of Prussia, Mission Viejo?

Those are not yet included, because we are still defining the scope. I will say this that, the 1.6 billion for redevelopments within the mall portfolio is an obviously ongoing, living, breathing number. And we would expect as we aggressively pursue the enhancement of our existing assets, that that number should and will grow.

Great. Thanks.

Our next question comes from the line of Ross Nussbaum with Banc of America. Please proceed.

Hi, it's Christine McElroy here with Ross. How much leasing do you have left to do to get to that kind of year-end level, versus where you were last year? And I guess, if you look at the portfolio on a percentage leased basis versus percentage occupancy, are you basically there? It's just a matter of timing of move-in?

Well, there are still forecasts. There are still deals that we can get signed up and executed this year. We anticipate being, at 2005 year-end levels. So we still have work to do, even though it's obviously very late in the year. But we have got a pretty good handle on it, otherwise we wouldn't be suggesting that we think we can get to that number. But there is risk. There is risk, until lease is signed and sometimes it does take time just to sign the lease, because of the ongoing lease negotiation. There is still some work to do, but we feel like we can get to that number.

Okay. And on the re-leasing that you have done in the Retail Brand Alliance space, you talked about it being half re-leased. I mean should we see those move-ins by year-end?

A vast majority of those, yes.

Okay. And then we've been hearing reports that sales growth for some of the luxury retailers have been falling. Have you seen that in any of your malls and on the margin, given the size of your development pipeline? Have you seen a reluctance or a pullback in the expansion plans for any of the luxury retailers when you are having pre-leasing discussions?

Not at all, frankly. Rick can add to this, but I think what we have seen over the years with luxury is that they are now finding extreme success in markets that they otherwise would not contemplate a few years ago. So they believe, and we certainly concur that their brands are exportable and -- outside of the major metropolitan marketplaces.

And I think we are seeing a lot of success with it. So -- the consumer environment out there is not about uncertainty, but our retailers generally are still very excited about their growth plans and their balance sheets are strong, and monthly dips come and they go. But at this point, we haven't seen any wavering from their growth or expansion plans, and that includes the luxury market. Rick, I don't know if you want to add anything.

The only thing I would say is in many cases, it's accelerating. If you listen to the pronouncements of the vendors, Jones is aggressively trying to roll out Barney's Co-op. Polo is now looking to aggressively grow Rugby. Claiborne is rolling out Juicy Couture. Yurman is building their own stores. So, all of these luxury vendors are looking for alternate channels of retail distribution.

And the most interesting is Neiman Marcus that just announced Cusp, which is going to be another better sportswear, junior project, and they are opening four stores, and hope to make that a significant change. So, we are seeing no back up all in those concepts and their appetite to expand.

Are there any retailers, or types of retailers that you are worried about at this point?

Not really from a financial point of view. No. Look, we have always expected the music business to have the hiccup that it did. And we've gone through the book side of the equation, so I don't think there is anything unexpected that is out there.

Okay. And then lastly, Steve, I am not sure if you cover this, but your other expense line, its [picked up] a bit in the quarter, I'm wondering what drove that.

Yes. It's -- there is really not one thing, it's just a lot of little things. There is a little bit of tax in there, a little bit of third- party fees, but nothing of any consequence just [inaudible]

Okay. Is that a good run rate?

The tax was an annual payment, so that is a little lumpy. And in my recollection that was about $2.5 million, $3 million. So annualize that, but the rest of it's probably a pretty decent run rate.

Okay. Great. Thanks.

Our next question comes from Lou Taylor with Deutsche Bank. Please proceed.

Thanks. Rick, can you expand a little bit on the development/redevelopment pipeline of 4.6 million? Over the next five years, how do you see the expenditures falling? Are these projects going to start next 12 months, or how do they fall in terms of starts over the next three-four years?

If you look in the 8-K, we have a little bit of clarity on that because we've shown you what are Nordstrom commitments are. But it's going to be pretty evenly paced over the next four years. And that's one of the reasons we anticipate being able to do it on a leverage neutral basis. Nordstroms wants to have a particular schedule for how they open the stores.

In markets they will only open one store a year in the same markets, so the Boston openings staged. And I think you can assume that it's going to come out pretty evenly over the next four. But as David pointed out, we're hoping that this is the baseline. I mean, we're -- got working on a lot of other things and we were not yet to the point where we can estimate costs, not the least of which is we're looking at adding a hotel intensification component to our asset intensification. And we're just developing those opportunities now. So, I think that it's going to even accelerate from these numbers.

Great. Now -- and how about terms of yield? I mean you think you'll still hold up around 10ish?

Well, so far, we believe the yields are holding up. And again, if you look in the 8-K, you can see that we're maintaining our yields. There are in some markets some pressures on costs. But happily for the most part, we've been able to pass through those costs either in increase in rent, or increasing land values in our peripheral land sales program. And so we've been able to keep our returns relatively constant, in spite of those increasing costs.

Okay. Now, just to jump to the outlet centers for a second when you had -- rent growth there is really accelerating. I mean, is that just the mix in the calculation? Or you know is this just more of a tactical decision on your part, to get more out of the outlook for outlet center tenants?

Well, obviously the probability that retailers generate and the low occupancy costs allow us to do that. And, this is again something that we think will enhance our growth going forward. So we still think there's a lot of room there. And the demand for the space is really unprecedented. And the profitability generated by the tenant is very large. So that allows us to make a fair deal for us and for the tenant, and allow us to get those kind of spreads. We expect that to continue.

And Lou, it's really a manifestation of the strategy that we articulate it to you when we acquired Chelsea. And one of the things that happily has occurred, now that we have six or seven quarters under our belt, is that the leasing spreads have been accelerating, and quarter-over-quarter they have been growing. So, and as David said, we do think there is a fair bit of room to run. Occupancy costs are still only about 8% of sales.

Okay. And Steve, just staying with you for a second and looking at your joint venture performance this quarter versus last year, it looks like you were able to grow tenant reimbursements, but yet your operating expenses were actually lower or flattish year-over-year. Anything different going on there?

Well, you got a couple of things, one, don't lose sight of the fact that we did increase our ownership percentage in the Simon Ivanhoe that venture. So where we had previously been recording, kind of, in the mid 30% ownership, we're now at 50%. And we also are including the ownership at the contribution of the beneficial interest in Mall of America, where that wouldn't have been in your '05 numbers.

Okay.

So, it's a little bit of apples and oranges.

Okay. All right. And then -- I think, I am good. Thank you, very much.

Thank you.

Okay.

Our next question comes from the line of Scott Crowe with UBS. Please proceed.

Good morning.

How are you doing?

Well, thank you. When hearing tenant demand remains strong for yourself and also a number of retail rate fees, but is there a chance that the tenant demand is strong, but the tenants are going to over expand at some stage?

Absolutely. I mean that's just the nature of our business. And, we have seen it. History repeats itself. There are certain tenants that will do that. There are some that are very disciplined and won't. And obviously, it's our job to anticipate and understand, which ones may over expand and run into some issues. But all of that, I don't think there is anything out there that's unmanageable. Given that retailing does -- is very cyclical, as well as retailers themselves are very up and down, despite the cyclicality, if they miss a fashion season or something like that.

So that's just par for the course here. It's -- we have extensive credit group, probably the best in the industry. A lot of very focused people on balance sheet review and analysis. Something we're very proud of in that group. We anticipate it. Sometimes we know going in that it's a little bit of [flyer], but if we like the mix, we will do it. But we're certainly staying away from shaky credits.

All right. Thanks, David. So am I hearing you correctly, in terms of where we sit in that risk spectrum right now in terms of over expansion that you're comfortable with the outlook?

I am. I don't -- Rick, if you want to add to it. I mean there will always be a handful people that may overdo it and have to slowdown. But there is not a specific tenant that I would tell you today that we're paranoid about.

And the only thing I would add is, we track as David said the profitability of our retailers. And if you look, the profitability of the vast majority of our publicly traded retailers is actually accelerating quarter-to-quarter. So we are in a position where our retailers have substantially better results, balance sheets and cash flow than they've had in perhaps previous cycles.

Now as David said, that can go away very rapidly with one or two bad quarters. But I would submit to you, that if you look at several of our retailers, like Gap, that's had very modest sales performance over a significant period of time, they've never missed a penny of rent on any of our leases, because they have a good credit.

And I do think, Scott - this is Steve, you never want to say it is different this time. But one of the things that has changed in the retailing climate is that a higher percentage of our new store openings are coming from public companies, probably more so than ever before. And those companies have better track records, stronger balance sheets.

So I think one of the things that we're seeing is that they are able to tolerate the ebb and flows or the ups and downs of the retail business a little bit better, and Rick's example of Gap which is a perfect example of that where while sales have been relatively modest, the financial results of Gap have been pretty good and their ability obviously to pay their rent is very good.

Got it. Thank you. Just quickly moving to the International platform, could you comment on what is going on in China? Just give us an update please?

We continue to review the market. Obviously it is a very complicated market. We are continuing to work on our joint venture effort there. There are new rules, regulations that seem to surface out of the blue. And we're going to be very thoughtful and very deliberate about our entry into China. We still think there is value that we can add. And we've been working at it, but we're just going to do it on the basis where we feel comfortable with. And at this point, we are not yet there, but we continue to pursue it. Steve, if you want to add anything to that.

No, I think that is fair. And Scott, as you know, we have people on the ground. I literally hung up the phone with them at the end of the day, not 15 minutes before we got on this call. And we're making progress, but it is a little bit of two steps forward, one step back.

Got it. And just very lastly, I know that Wal-Mart is talking about going to India, perhaps looking out with DLF Universal, one of the big property companies there. Have you talked to them about India?

We have talked to a number of retailers about India. We're actually very close to starting a potential joint venture there with a real estate industrial company in India where we would then begin to look for opportunities. So that is a market that we will begin to do due diligence and explore in earnest shortly. I would not expect any immediate projects to surface from that, but it is a market that we're going to begin to dedicate some human capital to, to begin to analyze.

Thank you, very much.

Thank you.

Our next question comes from the line of David Harris with Lehman Brothers. Please proceed.

Good morning. Most of my questions have been answered. I have a couple of follow-ups. Forgive me, if it's been mentioned but could you just recap the sort of primary drivers of the increase in guidance for the full year?

David, this is Steve. It's really a couple of things. One, I think as David mentioned earlier in response to a question, we are substantially done with our '06 leasing activity, so we do have good visibility in terms of our leasing activity through the rest of the year, and what the minimum rent line looks like.

And then two, with the bond offering that we did in May, we substantially reduced the outstandings on our corporate credit facility, and given our minimal exposure to floating rate debt, we're not subject to the vagaries of the interest-rate market for the remainder of the year. I think if you put those two things together, that is kind of where we ended.

Okay. Relative to the fourth quarter, do you have a sense that any kind of consumer weakness could impact your expectations?

Well there's certainly -- we are to some extent -- our earnings will have some impact or some variability due to sales. It's actually a little bit more sensitive with the Chelsea portfolio than it is with the mall portfolio. But again, we're talking in the range of a couple of cents here and there at the end of the day. There's nothing that would be -- and now look at a cent here and there, to some is material. To us it's -- We can't fine-tune it, that is why we give a range. But an absent [an draconian] fourth quarter we certainly can handle that kind of variability.

Okay. And then just moving over to your development pipeline, the asset intensification features, would you say that a lot of the new developments going forward are going to have those features built-in? And do you see some of the projects in the future moving towards more of a mixed use format?

I -- Rick, I would say yes. But mixed use not in a -- the old mixed use in the late '80s was a lot of verticality. And we have always been nervous about a lot of retail going beyond a couple levels. We were not -- this is more of a lifestyle format with additional components. So it is not going to be the mixed use of the late 80s, which had a lot of verticality, and which I think you can run into problems with. This is kind of more designed [in], and we would anticipate a lot of the new stuff that we will -- will have those kind of components.

All right. Thank you, very much.

Our next question comes from the line of Jeff Donnelly with Wachovia. Please proceed.

Good morning, guys. I actually had a couple of follow-ups. David, yes landlords have come out of ICSC fairly positive, given their -- whether it's store unit profitability or store growth plans. But as I think someone earlier pointed out, since that time, it seems like modern price point apparel and restaurants have been seeing slowing sales. So to the extent you guys have revisited conversations with retailers, have you found them to be less optimistic, if you will, given the current environment?

You know retailers tend to wear their heart on their sleeves to some extent. But, I don't sense at this point that that is changing their longer-term outlook; and most importantly, their demand for new store counts. And I'll give you a great example. I mean, the Gap is obviously, we've talked about it's -- the sales performance over the last couple of years.

They continue to be very bullish on where their business is headed and across the brand. So, most of the tenants that we deal with have good financial wherewithal, and don't let a few weeks or months detract them from their long-term goals. Now again, that's not to say that if we have a prolonged recession that it may not have an impact. But at this point, they feel pretty good about where they are headed, and they're moving forward on all systems go. Rick, you can add to that, as well.

Yes. The one comment I would make is on the restaurants, we have found as we are opening restaurants on our properties, they are performing substantially above their chain average. Again, the same issue of asset intensification, we have unique platforms and we already are bringing millions of people to a given location.

When we can accommodate these restaurants with their [frontage] and their logistical positioning, they are highly successful. And you can witness that, we're doing a number of them throughout the portfolio right now in the 8-K. And you're going to see a lot more of them being added, because they like being with us, and we like having them.

And actually, one question there is that, anecdotally I've been hearing that tenants have also been sort of bristling, if you will, at the rising construction costs. There have been some examples have been provided to me of situations where spaces have been leased, not necessarily in your portfolio, but tenants are refusing to open or operate, because they just can economically build out their stores as they originally intended. Is that something you guys are seeing on increasing -- frequency?

Not all. I mean a great example of that is where we have -- I mean the most aggressive problem we've had in cost is down in our Bonita Springs down -- in the Naples area project and where the market essentially has run away from us, because of the hurricanes, demand, and the like.

Yet -- obviously that's having some impact on the retailers in terms of their cost rising. But at this point, no tenant -- we're under the gun to get some of the stores open just because the time period was very condensed there. But no tenant has backed out of a deal down there, because of -- I mean, the development is obviously going to be unbelievably -- I mean, it's going to be a great project for us. And I think the retailer understands that. But no tenant -- and that's probably the worst scenario that we've ever faced, frankly. No tenant has backed away because of rising costs down there at all. Rick you can add to that as well.

That's exactly right. And that's really, again one of the benefits of dealing with a very strong internal credit evaluation before we lease to tenants. They understand their obligations. These stores that are opening are one of 40 or 50 or 60 stores opening in the year, and they understand their obligations, and because of that they perform.

Okay. And David, I recognize the mall fund is still in conceptual stage. But have you had any preliminary conversations with respect to investment partners? I'm trying to figure out how deep is the interest there and what sort of levered, or un-levered returns is people might be seeking.

I think the interest to from institutional investors to partner with us whether in a fund or side by side, or a club deal is very high. And again, in other -- the return expectations really depend upon what -- where that effort would focus. But I would tell you, if we decided to do it, I don't think there would be issue at all with us raising the capital. The real issue for us is whether we want to get into that business, whether it's a good opportunity for us beyond just the initial accretion that can come from running and managing a fund of that nature.

And just two last questions actually, Steve, I won't leave you out. The first is just on the home office -- regional office costs and G&A. Just with the completion of the new headquarters, where do you see that as a run-rate if you were going forward?

The headquarters really has no impact, Jeff. The cost of carrying that building and operating itself or operating at ourselves, is about equal to the rent that we were paying on our current space.

Okay. Great. And then last question is, your attitude toward the use of convertible debt. A few companies out there when using that to drop their near term cost of borrowing, is that something that's attractive to you guys, you might consider?

It's something that we have looked at off and on, just as part of the overall capital structure of the company. I mean, when you are our size, $40 billion, you can sprinkle a fair bit of different instruments into the capital structure. It is something that we evaluate from time-to-time. And it's not something we pulled the trigger on yet. But it is something we continue to look at.

Okay. Thanks.

And I'll just to go back to the home regional office costs, I think part of the reason for that increase really is a result of we -- the employee's earned our restricted stock of '05, based on our performance for '05. And given that was granted at a higher stock price, or was ended at year-end and our stock price happen to be higher than what it had been in '05, we've got to expense that amount over the vesting period, but at the higher stock price. So you're -- some of that I think you're seeing run through the P&L in that front.

Thanks, guys

Thank you.

Our next question comes from the line of David Fick with Stifel. Please proceed.

Good morning. Have occupancy costs moved since you took over Chelsea two years ago?

Not really given that the sales growth. They are up about a tenth, David. But the truth of the matter is, they have been growing sales at 7%, 8% a year. And even though our leasing spread have accumulated -- accelerated almost 30% now, given a five, six year average lease that's -- I mean it's a high class problem for us to have. But that's one of the reasons we think there is room to run there.

Okay. Back to the retail Nirvana scenario you guys keep painting for yourselves. Your same store numbers for specialty or inline tenants are clearly better than those tenets are reporting on average. Is that simply a function of asset quality?

Yes.

Okay. Simon Brand Ventures negative year-over-year. Any comment?

Just a quarterly -- we still have growth there. Just a quarterly number. I don't think anything to get excited about.

Okay. And then lastly, and probably most importantly, is there anything you can say about the market's commentary on Mills at this point, and your participation in that process?

No.

Thank you.

Thank you.

Our next question comes from Michael Mueller with JP Morgan. Please proceed.

Hi. Couple of questions. First, going back to the mall fund again, is this something that -- and you may have address this and I missed it, but is this something that you -- that could be [ceded], or should we think of it as this for marginal acquisitions? And do you think we can possibly hear something infinitive this year?

At this point, I would not count -- I guess, to make it a little more clear, I would not count on us doing it. And as I said, it's not imminent. It's something we will continue to look at, and study, but I think there's nothing imminent. So given that, I don't think you'll see anything this year.

Okay. And in terms of ceding it, with your existing assets versus--?

Either way.

Either way, okay. And then question for Steve, I know, you guys talked about leasing picking up in the second half of the year, can you give us a little more color on where you expect [TIs] to head for the balance of the year, also capitalize leasing commissions etcetera?

We have really not seen any movement in TIs one way or the other. So, I wouldn't expect any change from what you seen us report historically. We don't have leasing commissions per se, we capitalize our internal leasing cost. And again, what you're seeing in terms of what's in the financial statements right now, is a good run-rate for what we'd expect going forward.

Okay. Great. Thanks.

Thank you.

And our final question comes from the line of Jonathan Litt with Citigroup. Please proceed.

Hi, this is Ambika Goel. Just one last question. Have you signed a confidentiality agreement on Mills?

We have no comment on that, other than what we said last quarter. Nothing really new to report.

Thank you.

Thank you.

There are no additional questions at this time.

Okay. Thank you, everyone. And have a good rest of your summer, and we'll talk in the future. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.