西蒙地產 (SPG) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2006 Simon Property Group earnings conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like the turn the presentation over to your host for today's call, Shelly Doran, Vice President of Investor Relations. Please proceed.

Welcome to the Simon Property Group fourth 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 risk 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 2, 2007. The Company's quarterly supplemental information package was filed earlier this morning 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, 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.

Thanks, Shelly. Good morning and thank you for joining us. I will provide highlights for the quarter and the year and then open the call up to your questions. We are pleased to report again solid results, with fourth quarter diluted FFO up 6.8% over the prior year to $1.57 per share, $0.02 higher than the First Call consensus estimate. And included in that $1.57 was essentially a $0.02 charge in terms of redeeming our preferred. For the year, diluted FFO per share grew 8.7% to $5.39, which was $0.13 higher than the mid-point of our initial guidance range provided in January of 2006. Comparable sales were up 5.8% to $476 per square foot in our mall portfolio of 64 million square feet of small shop space. Sales increased 6.1% to $471 per foot in our Premium Outlet portfolio of 36-centers. And at December 31, 2006, there were 51 retail properties in the Simon portfolio with sales in excess of $600 per square foot. 32 in the U.S. and 19 abroad.

Our comparable NOI, mall NOI growth was 6.9% for the quarter and 5% for the year. And 97% of our regional mall NOI is considered comparable. Comparable NOI growth for our Premium Outlet portfolio was 5.8% for the quarter and 5.1% for the year. And approximately 94% of our Premium Outlet NOI is comparable. We maintained occupancy stability in our regional mall portfolio in '06 in spite an of increase in square footage lost to bankruptcies and store closures.

During the year, we lost 518,000 square feet of occupancy, as compared to 294,000 square feet in '05. Yet occupancy in our mall portfolio increased 10 basis points to 93.2% at year end. And our Premium Outlet portfolio remains effectively fully occupied at 99.4%. Releasing spreads for 2006 for our mall portfolio was $6.48 per square foot, representing a 17.6% increase, which is in line with historical spreads. Releasing spreads for our Premium Outlet portfolio continued to accelerate at $7.08 per square foot in '06, representing a remarkable 31%.

In December of '06, we completed an opportunistic $1.25 billion senior unsecured note offering, taking advantage of a rally in treasuries. The all-in effective yield for the notes was [5.2.3%,] below the rate on our corporate credit facility. Since the bond offering, treasury rates have risen approximately 40 basis points. As a result of the bond offering and credit facility paydown, floating rate debt at year end comprised only 6% of our total debt and 2.3% of our total market capitalization. We had approximately $2.7 billion available on our credit facility, and we also have $900 million of cash on hand at year end.

On November 1, 2006 Moody's upgraded its ratings on our senior unsecured debt to Aaa from Baa1. Our unsecured debt is now A rated by all three major rating agencies. During the fourth quarter of '06, we opened four new retail projects that are meeting or exceeding expectations. They include Rio Grande Valley Premium Outlets and McAllen in Mercedes, Texas, Coconut Point in Bonita Springs, Florida, the shops at Arbor Walk in Austin, Texas and a shopping center in Wasquehal, France. Several new projects are under construction with openings scheduled in '07 and '08. Six in the U.S., four in Italy, one in South Korea and Japan and four in China.

In '06 we increased some in gift card sales by 11% to $518 million. Our SBV and SBN business was on budget and grew 10% even against '05 numbers, which had $5 million of extraordinary income items. In 2006 we lost launched an initiative to enrich and enhance the environment of our malls, which will result in acceleration of our touch point programs. Based upon our results for 2006 and our outlook for '07, our Board of Directors increased the common stock dividend by 10.5% from $0.76 quarterly to $0.84.

2006 was a wonderful, successful year for the Company. We generated solid FFO growth, continued to strengthen our balance sheet, delivered a 37% return to our shareholders, outperforming the S&P 500 for the seventh consecutive year and the Morgan Stanley REIT Index for the sixth consecutive year. We remain focused on our core operations and expect to make excellent progress on our robust development and redevelopment pipeline in the coming months.

It is a testament to our unique platforms that in the U.S. this year we will open a 700,000 square foot open-air luxury center anchored by Neiman Marcus and Macy's; a 430,000 square foot upscale outlet center in Philadelphia; and a 385,000 square-foot community center. In addition to upscale outlet centers in south Korea and Japan and three shopping centers in Italy.

We expect another productive year in '07 as evidenced by our FFO guidance in the range of $5.70 to $5.80 per year. This concludes our prepared comments, and we're now ready for any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] And your first question is from the line of Jonathan Litt with Citigroup. Please proceed.

This is [Angie Bigorel] with John. Just looking at the recovery rate this quarter, it looks very high. Can you give some color on that? Is it attributable to the movement to fix CAM or is it just driving expenses down?

This is Steve. And it is really a combination of three things. You touched upon two of them. One of them is that we did have a relatively mild winter in 2005, 2006, so the beginning of calendar year '06 things like energy costs and snow removal costs were below average. That continued into the fourth quarter of this year because the beginning of this winter was relatively mild.

So, you have energy costs and snow removal costs and the like lower than we would have expected. When you're on a fixed CAM lease, and we're about 50% converted to fixed CAM, that benefit obviously inures to ops and so we're seeing a pick up in that regard. The second thing is, when you're on a pro rata CAM and your expenses are below normal, it did allow us the opportunity to accelerate some CAM capital spending, which goes into the recovery line, and that benefited us in our recovery ratio as well. The combination of those two -- and obviously that helped drive the comparable NOI performance in the mall portfolio in the fourth quarter as well.

Right. So looking into '07, do you expect -- if you compare '05 to '06, you can really see the expense recovery rate growing. Do you expect to see the same trajectory in 2007?

Well, there is obviously a lot of variability that goes into CAM expenses, so tell me what the weather is going to be like. Tell me how much it is going to snow. Tell me what energy prices are going to be like. I think it is fair to say that in our '07 guidance we do expect to continue to get the benefit of fixed CAM, and we expect to be about 2/3 converted to fixed CAM by the end of '07. But at the same time, I think we would tell you that we would plan on a little more typical winter so you would see some higher energy costs.

And just as you convert to 50% the 2/3 fixed CAM, what kind of impact do you think that has on the same store NOI growth number? 20 to 30 basis points or not that large?

I think it is hard to say on a general basis because it is obviously lease by lease that you're making these conversions. But I do think it is fair to say that we believe the conversion to fixed CAM is a profitable strategy for us in many ways, not just from the standpoint that we get the benefit of expense control, but also that it makes collections and billings to tenants much more efficient, much easier. We've seen a decrease in our receivables as a result of the conversion to fixed CAM. So I don't think -- it is a stretch to say that it is certainly a positive.

Let me just add, I think as we decided to go ahead and do this, we always felt it would be beneficial to our business. One, it would accelerate our growth in NOI, it gives us a lever to run the business, so if we do run into tough times, it is conceivable that we could reduce our expenses which would maintain our cash flow growth. And importantly, as Steve mentioned briefly, is that it does allow us stronger more fruitful tenant relationships because the billing and the collecting of cash is a lot easier to achieve because if you've ever read a pro forma description in terms of what is reimbursable by the tenant, it is longer than it should be. So it is great for the business, and we expect to benefit from that in the future as we are currently.

Thank you.

Your next question is from the line of Paul Morgan with Friedman Billings Ramsey. Please proceed.

In terms of your same store NOI guidance of 3% to 4% and where you ended the year, both for the full year and in the fourth quarter, I am just trying to reconcile the number. You look at your spread and your occupancy, they seem consistent. Is there anything -- is it related to maybe lease termination fees being big last year or is this just a low number?

The 4%?

3% to 4%, right.

Look, we have leasing to do. We've got properties to run. It is not like we go to sleep and then it shows up, so it is a number we're comfortable with. We feel like we know where we want to take the business. We feel like we're taking the business there. And we always hope to outperform our expectations but there is no guarantee. And the results over the last three or four years have been productive. We would hope to continue on that trajectory. But as Steve said, there's a lot of uncertainties. There is interest rate. There is operational expenses. There is tenant issues. But we know what we want to do and we're doing it. And so we'll just keep focusing on what we've done in the past.

Okay. My other question on the Chelsea leasing, when you bought Chelsea you were talking about how occupancy costs were very low there, and you felt like you could drive them. And that initially some of the pick up in NOI growth and rent spreads was related to you just kind of chasing the sales growth. Have you pushed beyond chasing the sales growth now and actually pushed occupancy costs in the portfolio to get to the 31%?

Well, I think you will be disappointed in us in that we have not yet been able to achieve that. The portfolio there continues to wildly beat our expectations, and the way they're running the business is terrific. The new development is going great. It is just that they're growing their sales at 7%, so we don't have enough rolling over to really drive that u. But you can see the results in the comp NOI growth of the property, so we're making headway but I think it ended up in fact lower. Is that not right? A little lower overall in terms of I think we broke eight, if I am correct, 7, 8, or something like that. The long-winded answer is no, but it is a high-class problem to have.

Yes. And you can't do anything about the lease term, is it pretty much consistent with the mall business or shorter?

Well, we changed our strategy there. Historically, they gave a little bit more options than we have in the mall business, so we're working that out. So it should over time allow us to accelerate where market rents ought to be by eliminating some of the options. We're still working out -- working off some leases that have options.

The one thing that I would add as well is that if you look at their spreads over the last three years, they were 14% in '04, going to 21% in '05, going to 31% in '06. So I do think we are chasing our tail a little bit because sales growth has been so robust, and as David said that's a high-class problem to have. But I think fundamentally, we are asking for and we are getting, much higher rents. I think that speaks very well to the long-term potential and the embedded growth in that business.

Great. Thanks.

Your next question is from the line of David Toti with Lehman Brothers.

Two questions for you guys. The first has to do with potentially providing us with an update on your asset intensification program and your outlook for '07? And the second, if you could just provide us with some sense of retail supply conditions, not only with malls but also with hybrid power centers, lifestyle centers, that sort of asset?

This is Rick. Basically, on the asset intensification we have a number of projects going right now, and we will have our first deliveries in 2007. We have the residential component at South Park, the residential component at Domain, and the residential component at Coconut Point will all be coming online in 2007. We have additional residential projects under construction at Firewheel in Dallas, and we also have office components opening at Domain and at Coconut Point. We are optimistic that we'll be able to announce several hotel components as well that are going to be joining our projects. So, that's continuing very aggressively, and we are finding that it is fulfilling our expectations in getting acceptable returns and enhancing our environments.

With respect to the retail supply, interestingly there is not that much major project activity. There are continuing announcements of a number of smaller projects, but on a macro base the percentage increase being discussed is minimal. Obviously, micromarket perspective, if there is one going on in a market it is something that you need to be attentive to. But on a macro basis the supply/demand dynamics in our sector are very good.

On the demand side, David, I think it is still very, very healthy and strong, so we have, both in the outlet side -- and the outlet side is very, very robust. I know I hope we didn't disappoint anybody by dropping from 99.6% to 99.4%. But that side is very strong. And I know as an example in Philadelphia where we're opening November of '07 we are 100% leased. And whereas normally, we would do our phase two there in a year or two, we're basically going to start doing that now. It gives you just an example of kind of that kind of product.

Same thing on the mall side as well. The demand for space is very strong, certainly in the performing properties. As you get to certain ones, it is a little more challenging but that's why we've got the organization we do. We still expect to increase our occupancy there and move things forward in a positive manner.

Great. If I can just ask one more quickly. Is our outlook for bankruptcies and closures in '07 about the same as '06 or less?

I would say it is pretty consistent but that's very hard to plan for. We're ready. We got the flex defense. I was not going to use a football metaphor but look, we have a great credit department that's kept us focused on making sure we do business with the financially wherewithal companies. But, look, those things are out of our control in a lot of respects. I think it is probably consistent. '06 as you know was a little higher than '05. Some of that was a combination of store closures and bankruptcies but we'll see.

Thank you very much.

Your next question is from the line of Christine McElroy with Bank of America Securities.

I'm here with Ross Nussbaum as well. What was the cap rate on the Mall of Georgia acquisition?

We're not going to disclose that but it was pretty much consistent with market, what's been going on in the market.

Can you comment on market?

Well, the market is -- on the office sector?

Class A mall cap rates.

Well, Class A mall cap rates are -- my guess is they would -- if there was -- this was a little unique because it was a partnership interest. But I would say that a Class A cap rate is probably 5% if not below that. Yes, I would -- any Class A mall that would come to market I think would probably break 5% today. Rick, what would you say?

I would agree with that.

It is hard to say because there hasn't been that many out there. So the Mall of Georgia is a little different. We paid not that, we paid a higher cap rate than that, but it is a little bit different because it was a partnership interest.

Was it a predetermined exit cap rate?

It was a negotiated one.

Okay. And then how long do you expect it will take to burn through the excess cash in your balance sheet and what's the expected use?

Right now I would tell you that it is going to take somewhere in between three and six months. And the uses are a combination of two or three things. Number one, we do have as Rick has talked about in the past, a very robust development pipeline. We're in essence, funding all of that out of cash flow and so we'll use about half of that $600 million of excess on that. There are three assets whose mortgages come due in the first half of '07 that we plan to unencumber. And that's a couple hundred million dollars. And we have a small tranche of bonds that come due, I think in March, it's about $125, $150 million, and we'll just retire that using the excess cash as well.

I think the important point is that over half of that will be to delever or essentially pay down debt.

Great. I believe --?

Cash for debt.

Yes. The other thing that I would tell you is that's very interesting, the borrowing rate on the bond offering in December below the rate that we're paying on our line. So it was actually accretive to pay off the line. But the investment rate on an overnight basis for the excess cash is actually at or 5 or 10 basis points above our borrowing rate as well. So it is not dilutive to us to sit and hold that excess cash.

So, it is essentially earnings neutral.

It is earnings neutral.

I believe Ross has a couple follow-ups.

Guys, I've got one quick question. I am looking at the average base rents for the year on the new leases, and it was $43.21. Basically flat with where that number was in 2005. And the question is what are market rents in the malls doing? Why didn't it move up last year given that sales moved higher, occupancy is strong?

A couple of things, Ross. This is Steve. I think, one, you do need to be a little bit careful because mix can affect that. If you've got a center that's anniversarying, and you've got a large pocket of leases, the mix year-over-year could have some effect. But I think one of the other things that we're seeing is in the conversion to fixed CAM, and like I said before, we're about half converted now, we are asking for a higher fixed CAM number than the tenants were necessarily paying on the pro rata CAM. It gives us a little cushion on the CAM side that it is not unexpected that you might see the rent spread kick down a little bit because we're getting it in the CAM.

Is there any way for you guys to disclose what the new base rent plus the CAM is and compare that to the old rent and the CAM? Because that to me would be the more applicable disclosure.

Well, I think at some point what -- and I think one of our peers mentioned this, I think at some point this business will grow just to gross like the office sector. It will grow to gross rent x-real estate taxes. So I think once we get there, I think we can group it altogether and point that out.

Sure.

And I think the way you do see it, Ross is in our occupancy cost number.

And what was that for the year?

13 and it was really stable year-over-year.

I do think though, mix does have an impact on it a little bit. And the spread is really -- because of that the spread is what we focus on primarily. And a $6.50 spread is a pretty healthy spread when you couple that with what Steve said, which is that we are creating a cushion as we do fixed CAM. So you're not seeing that spread in addition to that if you know what I am saying.

I do. I think it would be easier for all of to us see it if --.

I agree, and I think when we get to fixed CAM and we're there all the way, then we'll have essentially a clean portfolio that we can show you the gross rents.

Thank you.

Your next question is from the line of Matt Ostrower with Morgan Stanley.

On the -- David, you sort of talked about how some malls are easier to lease than others, which goes without saying. But was curious, have you sort of divided your portfolio into a group that was malls that were above your average quality and malls that were below your average quality? Have you noticed any trend or change in the ability to lease the stuff that's below the line?

Well, I think one of the priorities that we have this year is really to reexamine how effective we are in our mid-market malls. And I am actually very bullish on them because I think over the years we've gravitated towards doing a really good job on leasing and running the higher productivity malls or the major Metro malls. So I think there is a huge opportunity for us to increase our cash flow through a little more management focus on those assets. With that said, some of those are simply just a little too big. This sounds kind of corny but I happen to be in Topeka, Kansas and Wichita this last week, examining those assets. And when we built Topeka 20 years ago, we just built the center a little too big but it is a very productive mall. And the cash flow growth is there, we just have to go get it. And it takes a little bit more elbow grease but there is no reason why we can't do it. Yes, is it easier to lease Roosevelt field than Topeka, sure but --.

My question more is -- obviously, I think that's clear to most people. But my question is has is gotten incrementally harder at all just in terms of us trying to understand operating trends in the mall business? Have the lower sales productivity malls, the ones that are a little too big or however you want to find them, has it gotten incrementally -- and obviously you can do better if you focus on them more. But just in terms of the market out there and demand for that space have you noticed in change in the character of that demand or the overall level of that demand, especially given what's been going on with the lower-end consumer?

Not necessarily, no. I think it has been pretty consistent. Rick, would you add anything to that?

The one thing I would point out is there are a couple of very encouraging trends because when you look at the retail concept that is are being rolled out, there are now more retail concepts like Hollister that aspires to be an 800 store chain. To get to 800 stores, they're going to have a broader perspective of the properties they can operate in. And you add to that Forever 21 and a number of other rapidly expanding chains. There is actually new sources of demand for those properties that we're taking advantage of.

And as you go back and refocus on some of these assets, is there a possibility that you will reach the conclusion that there is more of them that you actually want to sell than you've already got on your list?

I think we know what we want to sell. We know what we -- that's going to be very difficult to grow.

Okay. And then last question. Your comments on A-quality malls and 5%-ish cap rates suggest that cap rates may not have changed that much for the higher quality stuff in the last couple of years when cap rates for other real estate types have clearly been coming down. Could you comment on that statement? And more importantly, are we -- should we -- I know that Mills is a very unusual situation but if this thing closes the way that it appears right now, there is always uncertainty, but if it were to close the way that it looks like it's being priced, do you think investors should read anything into that? Do you think it represents an escalation in values in any particular way?

Well, I am not sure I understand the Mills question.

It the pricing, is it robust enough that you could say that that transaction by itself suggests that mall pricing has actually gone up?

I think that's a whole different -- I don't think anybody -- like you, I don't know how you could evaluate Mills because you don't have the data. So I wouldn't draw any conclusions on that just because you lack the data to make an informed decision. And I know that if you had the data you could come up with the decision.

Given that you probably have the data, I am asking you more whether you have a view on that?

Okay. Well, that's a different question. It is an interesting -- the only thing I will say about Mills, it is an interesting situation. And I don't think you can conclude anything on asset value at all. I just think it is a unique situation. I would tell you this, though, I think malls are under-valued, and don't hold me to the 5% cap rate. The fact of the matter is there has not been A malls that are traded. And I am sure some of my peer group that we respect very much would tell you it is 4% or 3% and there is no reason why -- the retail product, a super regional mall that's an A-mall I think has less commodity-like pricing than office buildings and apartments or anything else. And should be at a premium. The market has tended to not warrant that. But I would tell you that Roosevelt Field we put out in the market, I wouldn't sell it at a 5% cap rate today, is the way I would respond.

Okay. Great.

I am not being very articulate articulate but the growth in cash is there, the uniqueness, the consumer angles, the marketing opportunities, the replacement cost is -- you really can't replicate that, and it is not a commodity. And the one thing that retail has never done, it doesn't fluctuate, the up's and downs at the office market. Having been in Chicago office market, market rents in downtown Chicago go from 30, to negative 5, to 12, to 20 over a matter of a year. That's never been the case in retail, and because of that I think retail should trade at a much better multiple. But it does, other than strips, which Rick and I can't figure out because we go to these strip centers that are 100,000 square feet, and people value them at 25 times cash flow, and we still scratch our heads.

The only other thing I would add to that, David referenced the replacement costs. In most cases these assets are not replaceable. They could not be duplicated today at any cost because you could not get the approvals to have that kind of concentration in square footage in the locations where they are. So, it is an incredibly unique asset class and the opposite of a commodity.

Great. Thank you.

Your next question is from the line of Jeffrey Spector with UBS.

A question on the department stores. Our UBS retail analysts have been writing about department stores taking back share. Can you please comment?

This is Rick. We have been experiencing that. I think the best examples of that are Penny that is doing a very good job of transforming itself and taking back share from some of the tenants. I think the Federated legacy stores are certainly also experiencing that. It is hard to determine whether that share is coming back from all specialty retailers or whether some of it is being given up by the May stores as they're being transformed into the Federated stores. If you look, we're still experiencing very robust sales growth in our small shops. So it is not any sector movement. I think it is really taking advantage of any weakness in particular tenants that might have the negative trends. But clearly, our department store group as a whole is stronger today than it has been through consolidation. And its financial situation is much stronger from a balance sheet and a cash flow perspective than it has been.

Do you attribute that to their focus on private lines?

Certainly, private labels is a very important initiative for all of the department stores. As you just saw yesterday, Penny announced yet another private label that's being produced by Ralph Lauren exclusive for for Penny. And they're certainly going to have more flexibility in their pricing by doing private label. The key is going to be whether they can build the brand equity in their private label to effectively compete with the other vendors out there. The other interesting thing for our portfolio that has come from that is that the vendors that have been selling to these department stores are recognizing that there is a move to private label. And in order to grow their distribution channels, we're now seeing increased demand from those vendors for specialty store space in our properties. So, for example, Liz Claiborne with the Lucky Jeans and Juicy Couture are aggressively rolling out stores. Seeing the same things with Barneys co-op and the like. So, there's a lot of good trends as a result of that.

Great. And do you have any insight on Gap? Are you concerned? Obviously, there is strong tenant demand. Are you concerned about any large store closings in your portfolio?

No. I think we have an excellent relationship with Gap. We've had ongoing dialog with them about their stores in our real estate, and we think we have an understanding of the outlook with them.

Great. Thank you.

Your next question is from the line of Christeen Kim with Deutsche Bank.

Just looking at what you're expecting in terms of same-store NOI growth in '06, I think you were looking for around 3.5% and you came in well above that. Could you talk about what provided the incremental upside? Was it the higher recovery rates that you spoke about before or was it something else?

Well, I think we -- I think it was that. It was good leasing, good spread leasing. It was SBV, SBN income.

Strong sales.

It was strong sales, so it was really all the levers that drive our business. I would suggest that we weren't great everywhere but we did a very good job in all the facets of our both our mall and our outlet business to drive our comparable property NOI growth.

And just as a follow-up, in terms of G&A I was surprise to see a little bit of a fall-off in the fourth quarter. Could you just talk about what caused that drop?

Christine, this is Steve. And some of it was just kind of a refinement of our look at what goes in G&A versus other places and we actually reclassed a little bit out. It was like $1 million-ish up to the home office in regional costs.

Okay. Great. Thanks. That's it. Good luck on Sunday.

Your next question is from the line of Craig Smith with Merrill Lynch.

Was the partner at Mall of Georgia Ben Carter?

Yes.

And do you know what his reason for sell was?

Well, I don't know. You will have to ask him.

I knew that you also have a St. John's. I thought maybe you had another project in the works.

No, he's got -- look, I don't think it's -- there is nothing to read into it. He's got partners on his side that some of which -- one of his original partners had passed away, so they got a step up in the basis there, and he has historically sold assets, so no big deal.

Okay. And what's the projected leasing for the opening of the Domain?

We'll be in the mid to high 90's. Some of it won't get open just because they're late. We just found out one of our better tenants wants to redesign the store and stuff like that but we're essentially leased.

And then what was the name of the mall you sold in the fourth quarter?

It was a little strip center.

It wasn't a mall?

No. It was a strip center.

Okay. Thank you.

Your next question is from the line of Dennis Maloney with Goldman Sachs.

Good morning. Just a quick follow-up question on the average base rent question from earlier. If you look back to '02, you see that average base rents within your portfolio were growing about 5% per year. That number has come down, it's about 2.5%. Do you attribute that all largely to just the movement away from gross leases to net leases in terms of the fixed CAM coverage?

There is so much that goes into that. And again, I think you should focus on the spread, which is -- some of the leases that roll over could be although higher or lower. And the real question is the focus on the spread. And I don't think there is -- the spread that we produced in '06 has been pretty consistent with the last four or five years.

Okay. And what's your outlook for capital spending in '07?

Pretty consistent. We've got a number of redevelopment and developments going on. But we'll be -- we put together a program to really focus on kind of increasing the consumer touch points and that might marginally increase the CapEx. But given the size of our Company, nothing of a real material nature.

Has there been any movement in terms of work letters, in terms of tenement improvements and whatnot?

Those have been pretty consistent for us.

And then just lastly, how you -- could you talk a little about the process with which you work with struggling tenants, so as to make it a win-win situation for all parties? Do you talk about -- could you talk about making the small -- the store sizes smaller and anticipated store closures, how do you work through that process?

Well, the real -- we have a work out group. Okay? So our guys on a lot of retailer credit committees, and we assess the -- if it is a leverage issue with the retailer, we assess the viability going forward. If we like the use, we'll want to work with the tenant to do it. Some cases it is restructuring the rent, some cases it is taking back expensive stores and we put together a program. We look at it. And we've gone through, I want to say almost hundreds of restructurings with tenants, so we're pretty -- I wish it wasn't the case but the fact is, we went through it with the department stores, Federated, when they went Chapter 11 we went through it.

We've gone through it with all the specialty guys that have gone through it. We evaluate what it means to the mall to have them. We look at their leases. We know their occupancy costs. We know the margin, their product activity. We look at their GNN. We look at the store contribution. We put it in a blender and we come up with something that makes sense for us and them and we're pretty good at it. And we've done it historically with all sorts of uses in the mall and outside the mall.

Thank you.

Your next question is from the line of Mike Mueller with J.P. Morgan.

Hi. I was wondering if you can comment on TA's for a moment. Year-over-year they were down notably despite all the store closings and releasing, just wondering what the outlook is heading into '07 versus '06?

We're frankly, to Steve's point, it is a function of the mix and the deals we negotiate. Obviously, we are very focused on eliminating the amount of dollars we spend in tenant improvement. And we're focused on our overall return on our rents and we're trying to do a very good job. I would suspect that there is nothing that should mean that this level of TA spending in the specialty store sector won't be relatively constant with historical spend.

I would also add that, as a philosophical point, we have never, ever bought up rent with TA dollars. And not saying that's a practice but we have always very focused -- our leasing people have always been very focused on being as judicious with TA dollars as possible. And we've never gotten in the -- that cycle of providing more TA get more rent.

Okay.

That may be different than some others.

Okay. And a Steve question here. On the last call you gave single-point guidance for the year, came in a few cents higher than that. What came in different in November/December versus what you were expecting on the Q3 call?

I would say it is a couple of things. Number one, as we talked about earlier, CAM came in better because of the mild started to the winter. I would say number two, sales might have been a little bit more robust. But generally speaking for a Company of our size to be $0.01 or $0.02 different is -- I can't say there is any major changes.

I would just say better operational results.

Okay. Thanks.

Your next question is from the line of David Fick with Stifel Nicolaus.

Most of my questions have actually been asked. I am wondering if you can review a couple years of full operations now post-Chelsea. You bought that at a 7.2% cap, which looked aggressive at the time. Obviously, you're very happy with the results of operations. Have you done any analysis of where your yield is today on that acquisition?

Well, every time we speak highly of it, we don't get a pop in our stock, but Tanger goes up, so we can't figure that out. Listen, it has been a great deal with that. And I would say CPI, even though we took the swings and arrows of years have been our two best transactions. And we could get that for you, but it is materially over where we thought it would be when we underwrote the transaction, and we've accelerated. The good news is we haven't -- it is not like it's peaked. We've accelerated the development pipeline and we've accelerated the expansions. As you know, we got Vegas expanding, Orlando expanding, we've got Philly opening this year. We did this deal in Amigo -- in Mercedes, Texas, it is like a 20% return on costs. It is just an unbelievable business, and those guys do a great -- it is so good that we don't even have to bother them in turns of running it.

I hear this called. Is it fair to say you're stopped on the Mills activity today or are you still in the monitoring mode?

All I can say is it is an interesting situation. That we look at -- we monitor everything. We monitor the EOP transactions.

Would you be of a mind to buy partial assets from a Brookfield?

I don't think that they are available. It is obviously an interesting testament to -- Brookfield is a very smart Company and very highly regarded. And I think it is a strong testament to, at least the retail real estate industry, that someone that well thought of has decided to go forward with that transaction.

The Chicago-based mall REIT is up 17% year-to-date, and the Indianapolis based mall REIT is up 13% year-to-date. Is there any CEO handicapping going on there?

It must be because of the Super Bowl. Right? But they're a fine Company, and I should call John and see if he wants to bet on the football game. But just to come clean, when I grew up in Indianapolis, we didn't have the Colts, so deep down I am still a Bears fan.

Deep down I am still a Colts fan. Bye.

See you later. Any other -- operator?

Yes. Your next question is from the line of Rich Moore with RBC Capital Markets.

Hi. Good morning, guys. Any thoughts on development yields at this point?

We've disclosed in the 8-K, and a couple of good things are going on. Construction costs have moderated. On the other side, land costs continue to go up but our yields are remaining relatively constant because we're experiencing some very good demand from the tenants.

Okay. So, Rick as you look forward, you think they're going to stay pretty much where they are now?

Yes.

Okay. And then, Steve, are we at the minimum payout ratio, I am guessing, for the dividend at this point?

No, we're not, Rich, we still have a fair bit of room to run. So, the increase in the dividend was reflective of the confidence we have in the business, not of any minimum tax.

Okay. Good. And then the charge, the preferred charge, is that in interest expense?

No, it is in dividends.

It is. Okay. Great. Thanks. And then let me ask Dave's question a little more directly if I could. Do you guys, David, have any interest in bidding on Mills at this point?

Well, Rich, we can't really comment on what's going on on those kind of things.

Okay. All right. Fair enough. And then last just to further that for a second, any other acquisitions out there that -- leaving Mills alone, anything else that you see out there, is there any room to acquire malls, do you think, at this point?

Well, there is clearly a dearth of product in the good to better mall product. And that's -- I think Matt asked the question what the cap rates are, and I [thought] for a little bit. It is primarily because there is just not a lot of product, good to better product out there.

And you don't think any portfolios, any private, even small portfolios, are really looking to come to market?

I am not aware of any.

Okay. That's fair.

If you have some ideas, call me.

Absolutely or the bankers should. Analysts aren't supposed to do that.

Right. You guys can't do that.

We have to behave ourselves. Thank you, guys, very much.

Your next question is a follow-up from the line of David Harris with Lehman Brothers.

Good morning. David, I wonder if you can just elaborate many more on the overseas activities. I don't think you touched upon it either in your prepared remarks or in the Q&A. Are you kind of thinking that you might be looking to expand activities over your last remarks, which were on -- I think you talked pretty extensively on this last quarter? Any particular countries that are more exciting today than they were over the last three, six months ago?

Well, it is a good question. It is pretty much status quo. This year in -- in '06, that, is our contribution from our international activities was just under 5%, and that is what we're projecting in '07. We've got a robust pipeline in Italy, that's going to have some --. Italy is going to change transformationally because we have three and four projects that are really big time projects that we have interest in that we'll be opening in '07 and '08. So, that's going to -- you won't see much of that in '07 because the activity is late but in '08 you're going to have a pretty big pop there.

Our interest in Simon Ivanhoe continues to be very focused on France's development pipeline, which is just taking long to get approvals. But there's a number of activities there that we're bullish on. And in fact, as I mentioned last time, we continue to evaluate Russia. That we may have development there that Simon Ivanhoe will do. The outlet business is going gang busters in Japan. We've got another one that we're going to open. Most importantly, we bought the land in [Gatumba] and we're expanding that, and that's an '08 opening. And that's the Woodbury Commons of Asia, and so that's a major change.

South Korea opens in June/July this year. And that according to Les Chao, who as you know runs Chelsea in our international activities there, is going to be the best new leasing that they've done for an international project. So that should be a home run. And finally China is -- lots of up's and downs in China. We are under construction. We are making progress but it is still the same program we've discussed, no further additional activity in China until we get some more experience under our belt.

Okay. On a related question for you, Steve, as we look out, it seems like the forecasters are suggesting we could be entering a period of more currency volatility. And notably, the Japanese yen has been very weak over the last few months. Does that require any more sort of currency management? Are you sort of factoring more volatility in your earnings forecast? I know it is only 5%, but it looks like it could be a factor that could be more variable on a go-forward basis.

Not really, David. We hedge as best as we can. In Japan, as an example, the leases are denominated in yen. The debt on the property is yen. And our equity contribution, we have a yen facility as part of our corporate credit facility. So, we're about as hedged as we can. And the business model, which I think has worked very well for us is to typically take the cash flow that is being generated in each of the joint ventures and to reinject that into the equity for our new property program. So, we haven't had an issue with needing to repatriate cash back to the U.S. And I think from that perspective we're hedged, it's a natural hedge, but we're hedged about as well as we can be.

And to the extent that the yen or the Euro weakens or strengthens, yes, you do some of that flow through our P&L a little bit, but it is relatively minor.

Thanks. And good luck on Sunday. Just remind we what shape the ball is? [Laughter]

We got your guy over here now.

That's because he's all washed up and a has-been.

There are no further questions at this time. I would now like the turn the call back over to Mr. Simon for closing remarks.

Thank you. I hope you enjoyed our shorter opening remarks even though I have a hard time spitting out a number of words. Probably going to let Steve give that -- recite those going forward. So anyway, we appreciate the dialog on the Q&A. And we'll talk to you soon. Thank you.

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