西蒙地產 (SPG) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for your patience and welcome to the first quarter 2007 Simon Property Group earnings conference call. My name is Fab and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (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, Shelly Doran, Vice President of Investor Relations. Please proceed, ma'am.

Welcome to the Simon Property Group first quarter 2007 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 and Exchange Commission for 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 today's call includes time sensitive information that may be accurate only as of today's date, April 27th, 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.

Thank you. Good morning. Thanks for joining us. We're pleased to again report terrific results for the first quarter with diluted FFO up 8.7% over the prior year to $1.37 per share, $0.07 higher than First Call consensus. Positive factors contributing to the quarter include strong portfolio operating metrics in all of our domestic platforms, interest income as a result of a mezzanine loan made to The Mills Corporation and high levels of corporate cash available to invest as a result of our December, 2006 senior notes offering and the receipt of lease termination settlements related to department store-like locations that we're currently redeveloping. These terminations, this is important for everyone to know, were contemplated in our original 2007 guidance. You should note that the FFO in the first quarter of 2006 also included significant lease termination settlements as well as a beneficial interest income from a mall that is no longer owned by the Company. The aggregate of these 2006 items is essentially equivalent to the lease settlement income in the first quarter of 2007.

Please also note that the interest income from The Mills mezz loan is partially offset by an increase in our interest expense and our consolidated interest expense line, and our financial statements. The net positive impact for the loan from the arbitrage was essentially $0.02 for the quarter. Comparable sales for the mall was up 5.6% to $487 a foot. Sales increased 9.2% to $485 per foot, and our Premium Outlet portfolio comparable mall NOI was up 3.7% for the quarter. Comparable NOI for the Premium Outlet portfolio was up 10.6% for the quarter. Our mall portfolio occupancy increased 20 basis points over the prior year period to 91.8, and our Premium Outlet portfolio remains effectively fully occupied at 99.1.

Good news on the re-leasing spreads of our mall portfolio. They were up nearly $8.00 per square foot, $7.99 to be exact, representing a 21.3% increase. Re-leasing spreads for the Premium Outlet portfolio were up or were 6.6 -- $0.60, representing a 29.2% increase.

General economic strength for our tenants remains strong. We lost only 24,000 square feet to bankruptcies compared to 115,000 square feet same time last year.

On March 9th, we opened a fantastic center, The Domain in Austin, Texas, 700,000 square foot luxury center anchored by Neiman Marcus and Macy's. It's been very well received by the market and importantly, we have several new projects currently under construction, on time and on budget with openings in '07 and '08, and they include six in the U.S., four in Italy, four in China, one each in South Korea and Japan.

The transaction that received most of the attention during the quarter, of course, was the acquisition of The Mills Corporation. As we reported, our tender offer was successful. On April 3rd, we completed the merger of The Mills Corporation into our 50/50 joint venture with the Farallon Capital Management. In just three weeks of ownership, we've made significant progress. As we announced over the last week, all members of The Mills' senior management have left or will be leaving over the next 30 days. The regional malls have been fully integrated to the Simon regional mall platform and infrastructure for management, leasing and development. We believe that our resources, both human and capital, will improve the operations and cash flow of these assets. Several of the malls provide significant redevelopment opportunities that The Mills was unable to execute and we're evaluating these opportunities currently. We expect to make significant progress with those over the next several months.

The 17 Mills' properties will become our fifth retail real estate platform, and will be led by Scott Mumphrey, an SPG Executive Vice President with more than 30 years of experience with Simon. Reporting to Scott will be the senior management team at The Mills which will be Greg Goodman overseeing development, Gary Duncan leading the leasing function, Paul [Pickenger] directing property management. They will be and continue to be managed and leased from a Washington, D.C. area office and all administrative support functions will be based here in Indianapolis.

The two remaining Mills' development projects, Potomac Town Center and 108 North State Street, have been sold. We have a team obviously of financial service and human resource personnel in The Mills' Chevy Chase offices there, meeting with the personnel, winding down the back office operations there. By July, we expect that all accounting, billing, receivable and human resource functions for the assets will be performed by personnel here in Indianapolis, all running on the Simon's information system's infrastructure.

All of the shares of the various series of The Mills' corporate preferred stock remain outstanding with their terms unchanged. It is currently expected that the holders of the preferred shares will receive liquidation payments which will include accrued and unpaid dividends and we're currently in the capital markets refinancing several of the wholly owned assets. We are finalizing the refinancing of The Mills' current corporate facility. We will place an approximate $1 billion senior credit facility with several banks in the next 60 days that will be at a substantial cost savings to The Mills' venture. Additionally, SPG will then make a mezzanine loan of up to approximately $1 billion to the venture.

I'm pleased with the transaction, our progress to date on the portfolio integration and the potential for the long-term value creation that we've done in the past. We have raised our FFO guidance for 2007 to a range of $5.75 to $5.85 per share, representing a $0.05 increase at both the bottom and the top ends of the range. This increase really is a reflection of the strength of our core business. Our regional mall activity for '07 is more than 75% complete so we have good visibility of that business for the rest of the year, and the Premium Outlet platform continues to be very strong. 2007 will be a year of transition for The Mills as we wind down their home office operations and begin to bring our programs and systems to bear to the properties. Because of the timing of the transaction, I would expect that our growth in the remaining quarters of '07 to be higher in the third and fourth quarters and less so in the second quarter because essentially of the transitional nature associated with The Mills in the second quarter. The end result, though, is the guidance provided for the year, which is higher than what we originally anticipated to the market.

We're focussed on our core operations, our robust development, redevelopment pipeline, and The Mills' portfolio assets. We are on track for yet another year of profitability, and obviously we're very busy.

With that said, Operator, we're ready for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) And your first question is from the line of David Fick with Stifel Nicolaus. Please proceed.

Good morning. David, I know it's very early and you're still assessing what the ramifications are with The Mills JV, but can you give us a sense of how much upside you think there is there in terms of redevelopment NOI creation?

Well, I think it's very hard to give you specific numbers on the redevelopment upside. But there are several -- we really look at it in two distinct buckets. On the mall side, there are probably four or five properties that have major, major redevelopment opportunity and they range from [indiscernible] to South Dale to finishing Riverside, Stone Ridge, and the like. And then obviously on The Mills, there are lots of anchors to improve. We think there's a number of outlet tenants in the Chelsea portfolio relationship that we can add to The Mills. There's the continuation of what's happened in Sawgrass with the -- essentially the outlet, the high end outlet center doing that, so and then there's the underperforming ones where we think where we can focus very -- just laser focus on the Cincinnati, the Discover, the Colorados, that we, with our position in the industry, will -- ought to be able to improve the NOI performance. Now, that's all said, that's all great, I know you want numbers, but all I can tell you right now is that we feel it's -- this is going to be a good transaction for us. It's going to be a lot of work. The next -- this quarter here is going to be a big transitional quarter for us as we essentially wind down what's going on in Chevy Chase, bring that all back here. Rick's very focussed. He's lost several pounds of running around the country trying to figure out the redevelopment. I'm going to see -- I'm seeing all the assets. We just had our management conference here. We brought all the former Mills' management team. They're energized, the leasing people are energized, so we're feeling good, but I've got no specific numbers for you.

Okay. One follow-up on that. You own the residual now in the Meadowlands project. Do you see any role for Simon there or any potential value there?

Well, that's a good question. And I -- the -- as you know, the former Mills company ended up having approximately 650. So we're junior, this is a junior piece. I've already had an offer from my dear friend Steve Roth to sell it to him, but I turned him down. Look, we're open to that. I don't think we'll be putting any more capital in it, obviously. But we'd like to see it succeed because you never know, we may get some money back on it. At this point in all our underwriting, we have never put any value associated with that investment but you never know. And I do think we could add value to it, but it's really up for the new owners to let us know how they -- how they would like us to be involved.

Okay. One last question. On your development pipeline, you've got a number of disclosed items, both in the U.S. and overseas. Do you have a shadow pipeline that's also developing behind that?

We do, David, and this is Rick. I think we will be announcing within the next week or so the Phase II of our Domain project. It is going to be another very significant project in its own right. We have the Grand in west Houston that we hope to be breaking ground on the early part of next year that will be anchored by a Dillard and Macy's. We own land in Pittsburgh Cranberry Town Center, which is literally directly across the highway from the announced new world headquarters for Westinghouse, so that's a wonderful site, and Chelsea remains very active with their development portfolio. We just announced Houston starting. We've got Cincinnati, Merrimack, Tampa, Jersey Shore, all in the pipeline, and that's just new development. The redevelopment pipeline is yet another $1.5 billion and that's, I think, got a lot of visibility in our anchor schedule in the 8-K, showing the anchor commitments going out through 2010.

And I'll just add to that, David, that I'm hopeful that with The Mills, over the next few months, and we're not going to really have a set time period but we'll obviously be able to quantify with -- who knows, by year-end, but certainly over the next several months, kind of what we think that opportunity will be for us.

David, this is Steve. I would just add, too, part of the shadow pipeline is international. We're working very hard on two or three major projects in France. There are probably one or two more developments that Chelsea can do in Japan. South Korea could end up being a three or four center market for Chelsea so -- and obviously, we've got boots on the ground now in China as well. So I think international, there's a fair bit of a shadow pipeline as well.

And David, just following up on David's point on The Mills' development, lost in all this I think was the fact that they had a number of projects that are currently going to open. Costco is going to be opening next month at Potomac Mills. Cabela's is opening next month at St. Louis Mills. We've been very encouraged by our ability to use our multiple platform approach to create a lot of cross-synergy opportunities. For example, we've already met with Nordstrom Rack, Neiman Last Call. Now we're talking with them not only about the Chelsea portfolio but The Mills portfolio and that's generating a great deal of incremental opportunities for all of our platforms. And lastly, I would tell you that we've met with a number of full-priced mall shop tenants and anchors that are interested in several of The Mills' projects because they're functioning as regional malls currently for their market area so there's a lot to be done there.

Would you use Chelsea to wrap more colonades around the existing Mills' projects?

Yes and -- I mean, it would be a coordinated effort but Chelsea will be involved in that.

Great. Thank you.

Thank you.

Your next question is from the line of Paul Morgan with FBR.

Good morning.

How you doing?

Good, thanks. Could you just comment on a couple of the JV portfolios, the New England one and the sale of your partners' interest there and whether you would be interested in acquiring the rest of it or are happy just bringing in -- having another partner come in? And then maybe an update on the Mastrich joint venture which you're thinking about doing with some of those assets that you thought about selling before?

Sure. We anticipate -- we are going to remain a partner in the New England development portfolio and so that will continue to be the case. And beyond that, there's really not much to say. On Mastrich, we are still contemplating selling a few assets. We are very comfortable with the real estate so we are price-sensitive in that effort. But I would expect over time that we'll continue to sell two or three or four of those assets.

Okay. On Simon Brand Ventures and you moved the disclosure, it seems this quarter, I just want to get your thought process as to why it didn't warrant a separate disclosure, and then just since we don't see that, maybe just some sense of what's going on in terms of the growth there?

Paul, this is Steve. The SBV is still growing at kind of a double-digit pace. Programs are good. I think everybody's energized about the preliminary feedback from the on-spot rollout. So I -- that business is still on essentially the same growth path that it's been on.

But why did you decide not to disclose it separately anymore?

Well, I think the market, I think Shelly's blaming me, but I think the market last quarter kind of over-reacted about that we had some unusual -- we had a higher income, if I remember, in the fifth -- or the fourth quarter of '05 compared to '06, because we had a one-time sale of our interest in a credit card processor in '05, and we just said there seems to be an over-focus on it so we just took it out and it's in the mall NOI.

The other thing, Paul, is it's confusing because what we do historically is show you the piece that's in other income. But a lot of the revenue from Simon Brand Ventures is in rent and in the JV portfolio. So rather than show you a slice of the pie, I think that the better strategy is to communicate what we just communicated to you, that it's still growing at a double-digit pace.

Would it fair to say that there's a fair amount of upside in The Mills' portfolio leveraging the platform there?

Well, tremendous and a couple things. One is, I mean, as an example, they do very little gift card business so that's the first. Second is I'm a real believer that The Mills has brand equity to the consumer. So I think, it's an interesting thing is that we're going to exploit that Mills' product directly to the consumer and create kind of a more coordinated, thoughtful approach on how to maximize their awareness in the -- vis-a-vis the consumer.

The other thing that I would say, Paul, is that if you look at the portfolio of The Mills, it's very much true for The Mills, but it's substantially true for their mall portfolio as well. They are almost all located in the top 20 to 25 ADI markets and that consumer is more important to the brand marketers and advertisers than the consumer is in a more secondary market. So from that perspective, I think our SBV guys are really excited about the markets that they're adding and the penetration in those markets.

Great. Thanks.

Thank you.

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

Hey, good morning.

How you doing?

Did you look at [Redemco] at all?

In the U.S.? We bought it.

No, the latest Redemco that's been on the block.

Oh, that one in Europe?

Yes, that little thing that [Unibuy] seems to have got a jump on.

Well listen, obviously, it's a very interesting potential transaction, and I think it speaks to what we have created here. If I -- I guess imitation is the serious form of flattery and if you look at what they're doing, they want to get scale, they want to be -- they want to replicate what we have in the retail world with size and high-quality product. They want to replicate kind of their balance sheet strength that someone like us has. So I viewed it as flattery in terms of and supporting kind of what we have done over the last 13 years as a public company. And I -- and obviously entrepreneur-driven management will have a lot of opportunities with that kind of portfolio so very interesting. Like any and all transactions, regardless of where they are, or what sector they are, when it comes to real estate, we study them all, and that goes from gaming to the hotel industry to retail real estate. So we study this to try and understand its implications for us in a number of different ways.

There's nothing else quite like it in terms of scale and scope, is there in Europe? I mean you can probably concentration, say in the U.K., but there's nothing like Redemco that would get you that scale over so many countries?

Without question, I agree with that statement.

Okay. If -- going back to something that I think Steve mentioned, you've got a couple of major projects in France. Are you holding off making -- pulling the trigger on those until you see whether you get [Sarco] or [Seego]? It doesn't seem to be very keen on the Ango-Saxons.

Right. We -- we're behind the scenes because we don't want to be -- we're making slow steady progress. We've got some great development opportunities but it is a mind-numbing, long, arduous process. But, but, and I'll underline but, if we are successful, and the biggest one we hope to hear from is in [Toulouse] by the end of this year. Obviously, you saw what we've done, at least agreed to, it's not closed, but in Poland, we sold five assets that we probably developed, I don't know, at a 13, 14 return on cost, and we sold it in the low 6 cap rate. And we think that if you do do that, I mean, there's such a significant value creation there that it's worth the pain and aggravation of trying to get the right to build. We're very confident in Toulouse, yet it's a process, and I think at the end of this year, we'll have clarity, and we're essentially -- there's one more, I don't know all the technicalities, but there's one more hurdle that we have to overcome and we're very optimistic we'll overcome that.

Now would those be joint ventures or would they be wholly-owned balance sheet?

They will be -- we'll own effectively own 50% of it because it will be a joint venture. It will be through Simon Ivanhoe where we own 50% with Ivanhoe Cambridge.

And that's pretty consistent -- the arrangement you'd expect to put in place with your other European development?

Yes, I mean all of the activity in Simon Ivanhoe is 50/50. We don't have any partners there other than we might, if we do stuff in Russia through Simon Ivanhoe, we might have local partners that might have an interest in those developments. And then all of our -- I should say in Italy, it's a partnership, we own 49, [Oshawn] owns 51. And there, certain developments are either wholly-owned by GCI a or GCI has an interest and that's all laid out for you in the 8-K.

How close are you in Russia?

We are -- we're close on one deal and thinking about another deal.

Good enough. You're a brave man. Okay, thank you.

Well, that's what I -- yes, you're right.

Thank you.

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

Hi, good morning. Going back to the New England development portfolio, can you describe the nature of any buy/sell agreements that might be in place in your partnership agreement?

We don't really comment on those kind of relationships. All I will say is that our partner has the ability to sell their interest and they are currently pursuing that and it's as simple as that.

Okay.

But they -- but we have all the rights in the world to remain with our ownership interest in it, and that's what we intend to do.

So you have the right to buy them out as well?

No, I didn't say, I didn't say that. It's a little more complicated than that, but we'll -- if they end up selling their interest, we will maintain our interest in it. They can't tag or drag us along in the sale to a third party.

Okay. And then regarding Mills, given some of the property level information that's been released in the tender offer agreement, including the debt numbers and the pro rata share of NOI, we're calculating about a 5.5 cap on '06 financials. To the extent that we're just trying to get a basic understanding of the going-in yield, can you give us a sense for how we should be looking at this, if we're on the right track, maybe walk us through how to get there?

Well, I think we'll, eventually we'll lay this all out. I think we'll be in at the real estate level in '07, based upon our underwriting, we will be in at a better cap rate than that. That's the first statement I'd make. The second is based upon our running the business and the amount of equity that we are putting in the deal, we expect our return on investment to be in the double-digit area which is essentially what we told you in the marketplace. I think that hopefully helps you in analyzing how we're looking at the transaction.

Okay. And then can you just discuss the nature of the partnership agreement between you and Farallon -- fee structure, promotes, duration?

It's very -- again, that kind of stuff is really between the partners, but I will say it's a very straightforward 50/50 deal and obviously we get fees associated with running the company.

All right, and then just kind of one follow-up on that. We've heard that Farallon may be potentially syndicating part of their investment to another firm. Can you comment on if that's true?

Well, they have the -- they tend to bring in on certain of these real estate deals, investors, endowments and pension funds and the like, on a side by side investment. So I don't know that I'd use the word "syndicating" but I'd use the word "co-investing," sounds a little bit more appropriate.

And if they did, that wouldn't really impact your agreement with them?

No, not at all. I mean, they -- I don't want to name a university that they might, they might have university Ivy league co-invest with them in this investment.

Great. Thanks so much.

Thank you.

Your next question is from the line of Jonathan Litt with Citigroup.

Hi, this is [Young Bee John] with John. What types -- what amount of fees are included in 2007 guidance from Mills?

Well, we're not going to be specific on that, other than we are, again, a lot of it depends on how fast we can -- ultimately, the accretion that we'll get for Mills will to some extent depend on how fast we can consolidate the operations and get it up and running in Indianapolis. Given that we're in the midst of that right now, we are not outlining specific numbers and I think we're being conservative in how we're looking at it. But we expect, as we stabilize the Company, that we will be very profitable from our standpoint in running the Mills' business going forward.

David, you said that it's a 50/50 joint venture. I guess we were operating on the premise that there was some sort of a promote that would go to your benefit given what you bring to the table. Would that be a fair assumption?

Well, we are going to be running the business for a significant profit and beyond that, I'm at -- I have a sensitivity to my partner relationships and we expect this to be a very profitable investment. We will add profitability to our Company by running the Company. And beyond that, that's really, at this point, that's all I can say.

Do you have an update on dispositions for that portfolio?

No. Other than it's, as we mentioned to you, we've sold all of the development -- all of the development, projects under construction, I should say. There is one mall that might be sold here relatively soon, and it's not a material asset. And beyond that, we're currently evaluating all of the opportunities available to us. Obviously, we think the earning or the NOI associated with the Company, all the assets was depressed so our view is let's see where we can take it. But ultimately, just like we do with SPG, we'll evaluate assets, we'll sell assets that we don't think fit or that are going to take too much time for us to turn around and -- but that's no different than the portfolio that exists today at Simon and even at Chelsea, for that matter, or in our strip business. So we'll continue to prune, unlike some others, we'll continue to prune assets over time here in totality.

Okay. My last question.

Even in Poland.

Can you review your thought process on just operating The Mills' landmark assets separately rather than maybe pushing them in the traditional mall portfolio or the Chelsea assets?

Well, I'll let Rick mention, I think it's a different product. I think there's a -- I'm very excited about the leasing prospects with it as well as what we can do with the marketing side of that business. It's very unique in that it essentially, it's going to run the gambit of outlet tenants, the mall tenants, to value oriented tenants, to boxes, to department stores, and I think where, where Chelsea can add on the outlet side, we'll do that, where we can help on the mall side, we'll help. But there is the ability to keep The Mills true to form, kind of where it was several years ago, that where we had our successful investments. Keep that kind of concept true to form. And we think a dedicated team to do that with big brother help from us on the mall side and the big brother help from Chelsea on the Chelsea side, will essentially add to the NOI of that. Just like, look, I mean I will -- just like we've done with Chelsea, even though Chelsea has operated at -- obviously, the fact that they've been able to increase their rents significantly where they were historically, gives you a good indication of what the big brother can do in terms of driving that business.

And the only thing I would add is that we're already very closely coordinated. We've put in the systems and procedures in place to have the same type of involvement that we've had with Chelsea that David described, and it's already bearing fruit.

Thank you.

Thank you.

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

Hi, good morning. You continue to see really strong sales growth out of your Premium Outlet portfolio and it looks like it's just a matter of time before it will eclipse the core mall portfolio in terms of sales productivity. How many more quarters or years of outside sales growth do you see in the portfolio relative to the core portfolio?

Well, we don't want you to give them a big head so, look, I mean that business is really a really good, neat business and it's smaller in size obviously, so to move the needle just mathematically, it does have the chance to move the sales per square foot number up faster as sales grow, unlike -- that's the most impressive thing about the mall portfolio, though, is you think about it, it is -- we're at 487 over 60 some odd million square feet. That's an impressive number. But number 1, so it doesn't mean any one mall can really drive it. I mean, I remember when we went public, someone asked me what -- like a form shops might do in terms of if you took it out on sales per square foot. And I can tell you, if you took it out, it would have essentially a negligible impact on our sales per square foot. So that, when you look at that 487 over 63 million, 64 million square feet, that's an impressive number. Okay. But look, the Chelsea business is unique in that it's a smaller portfolio and if they're getting great sales growth, you're going to see that rise pretty quick, and I want it to rise as fast as they can, okay, so I got no problem with that. And it's been a wonderful opportunity for us.

And the only thing I would add to that, Dennis, is that we are trying to create even more inventory in their existing core properties. So we have expansions under construction right now in Las Vegas, in Orlando, we're adding Neiman Last Call in Allen, and now with the product that we're building, we are buying bigger pieces of land, we are pre-designing expansions, and you will see over the next year, expansions being added on to properties that have just opened like Round Rock, Rio Grande, Philadelphia, Camario, so we're giving them more and more inventory to continue to grow that EBITDA.

Great. Thank you very much.

Thank you.

Your next question is from the line of Lou Taylor with Deutsche Bank.

Thanks. Just one last question. Can you talk a little bit about the sale of the Polish assets and just why you exited that market now or those assets?

Sure. Essentially, the board and the senior management of -- at Simon Ivanhoe, as you know, we're 50% partner, felt that those assets didn't have the growth characteristics that some of the other assets were. The market obviously is very strong in terms of selling it, and they just felt from a portfolio allocation, it was the right thing to do from a real estate point of view so we were all supportive. Now what's really interesting is we are able to essentially repatriate that money back here and pay very little taxes and ultimately if we use the proceeds to pay down debt, from our standpoint, we will essentially have no accretion or no dilution associated with it. So I mean we'll have a big gain associated with it, obviously, and those details will be provided if and when it closes next quarter, or this quarter, I should say.

Great. Thank you.

Thank you.

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

Good morning. Can you please talk about some of the takeaways you've learned from developing mixed use projects such as The Domain?

Happy to. A couple of things that we found is the addition of office, residential and hotel really served to increase the weekday population and just the total environment of the retail. They generate significant incremental trips, not only to the retailers but to the food elements that are so important in these projects. And it also enables us to create incremental and more intense development on that same hundred acres that would otherwise have just been a single-level or in some cases two levels, now we're going up much more vertically in that. And if you visited Domain, our residential's four stories, Coconut Point is four stories, we're going to be building a major hotel at Domain that's going to be nine stories and it just has all been pluses and as you know, we are partners in most of those elements so it's another incremental value creation opportunity.

Let me just add this. I think from an architectural point of view, if you've seen some of the lifestyle centers built, some of them almost look like Hollywood sets and I think by adding the -- whether it's the office and/or the residential, you really create more of a sense of place and a sense of community as opposed to kind of a almost looks like a Hollywood set that you would see in a cowboy and Indian movie so I think it's kind of unique. If you look at -- if you went through Domain, you would basically say man, this has been here for a long period of time, this looks authentic. And I think obviously when you create that kind of environment, it's bound to attract the consumers and retailers alike. And some of these lifestyle centers that I've seen just don't have the authenticity that I think as a developer you want to create.

Great, and then just touching upon the growth -- the strong growth at sales per square foot at the Premium Outlets, would you be able to comment on if this is being driven by the international tourist versus the U.S. consumer?

Well, I'm sure there's part of that, unquestionably, because some of their bigger, the Orlandos of the world and the Woodburys of the world are driving the growth. And obviously as America continues to be on sale, we're seeing the benefit. But we're seeing that in the mall side, too. So I don't know that Chelsea's is seeing it anymore than what the mall is, but clearly in certain of the markets, Florida, the New York, Las Vegas, I mean, clearly California, I mean, in those markets where you get a lot of tourism, part of that is being driven by the international buying spree that's going on.

Okay, and then last question. David, last quarter you mentioned that you thought one of the important growth drivers of Simon would be increasing NOI at your middle market malls?

Yes.

Have you started to make any progress there? Can you comment? Are tenants still demanding space in these malls?

Well, I think that continues to be a huge emphasis for us. First part of it is that we really want to upgrade the look and the feel of a number of those properties so we've got a huge renovation. And we call it touch point program, where we're changing -- you can get -- you can do a lot there for -- in terms of the consumer perception of some of those centers by just adding furniture, painting the exterior, changing the flowers out, redoing the restrooms, all sorts of that stuff so we're very excited about that. I think by having a better looking product, I am very confident we will have better leasing and better NOI growth. And part of it's a little bit a leap of faith, but part of it is essentially the right thing to do from an operational point of view and I think we've got a lot going on in the development side, what I'd call middle market, that I'll let Rick comment on.

If you look in the 8-K, you'll see that there is a considerable number of new anchors that we're introducing into these properties, and as David said, it's all about having a better product to sell, and once we have that better product, we can bring in the retailers to increase their market share. We remain very focussed on it. We're allocating both the human resources and the capital to make them continue to be significant contributors and we are making progress but it's a never ending process because you're always striving to increase their market share by adding better and better small-shop retailers and better and better anchors.

And, one is -- I'll just add to that. One of the strategical things that we dealt with in The Mills' transaction was making sure that no matter how we organized and set up the ongoing management of that business, both the malls and The Mills, the one thing we didn't want to do, and obviously we're going to monitor this, is we didn't want to take away from the initiative to focus on improving the growth characteristics on a number of our existing centers. So that's a little bit of why -- I mean, the big driver of having The Mills dedicate a team is because it's a different product. I mean that's the number one driver of it. But in addition to that, we felt like a team dedicated to that would be -- would better serve that product and also would complicate the matters that we've got here in terms of wanting to run those properties better and that continues to be a huge focus for us over the next couple years. The results, I mean the fact that we're on it and I think our leasing people understand it, I think we'll start to see it, but this is a kind of a couple-year, two or three-year process.

Great. Thanks, guys.

Thank you.

Okay.

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

Morning. Just on Mills again, did you guys lay out, I guess, what you're expecting for same-store growth in that portfolio this year and how that's sort of feeding into your guidance?

No.

Can you do that?

Well, look, I think we're going to see -- there's a lot of moving pieces from '06 to '07, as you might imagine. So I think we'll have, we're really focussed on just kind of producing reasonable results in '07. We're not so much focussed on how it compares to '06 and then the real job for us is really to figure out from '07 to what we can -- what we'll do in '08. But as I said to you, I'm looking at it in totality. Totality is, I think we're at the real estate level in '07. We'll be at kind of the initial yield that I mentioned earlier, which is obviously higher than '06, so there is some increase in NOI. That's a little bit of added department stores, et cetera. And then the profit that we get from running the business, you put it all together and we're going to have a very attractive return on our investment and our equity investment with lots of long-term growth prospects associated with running the Company better and all of the redevelopment that Rick and his team and the Mills' team will be able to produce.

Okay. And then I know you mentioned, you talked about the fees and you want to protect your partners' privacy, but it's a multibillion dollar transaction and it seems like the economics there for your shareholders are quite, potentially quite significant. And for those of us trying to forecast your results, I guess I would just plead one more time to give us some kind of sense for magnitude there. And can you at least tell us where those are going to flow through on your income statement?

Well, sure, it will be all equity accounted for, other than the profitability that we get from the fees will be consolidated in our -- in our management company, which we, as you know, own 100% of. And the only -- I think, Matt, from -- I appreciate your comments. It's not that we're being -- trying to be devious. It's just that, as you know, this Company is very complicated. We took a lot of time to underwrite it. We're continuing to get our hands on it. There's still the complexity -- six months ago today is dramatically different, it's a much more simplified entity. We're very pleased about a lot of the progress that occurred with nearing the end of the deal and prior to our purchase of it. We've got a lot of transitional stuff we've got to deal with so we're optimistic '07 will add to our business in terms of a contribution, but we're just being a little bit conservative in how we want to communicate that to the market because of a lot of ins and outs. And I think as we put together plans, and where we want to take the assets the balance of this year, I think when we look at '08, we'll be relatively clear to you what we think it will contribute.

And is it safe to say that you're potentially forecasting significantly less fees than you think you might be able to generate just given all the moving parts here?

Well, the fees we kind of know, I think what we have. The real issue is the cost associated with winding down the business and how much it's going to ultimately cost us to ramp up, to run the business. And that's a three or four--month exercise that we're -- we have an idea but we want to really fine-tune it and really get it down before we articulate the profitability associated with that.

Matt, this is Steve. I do think 90 days from now, we'll have much better visibility in a couple things. As David mentioned in his prepared remarks, we do expect to wind down the office there and to transition all the activities back to Indianapolis by July so that that transition will be substantially complete, we'll be able to give you some color on that. We'll also have come back from convention, so we'll have had the properties to show at convention. We'll have gotten our arms around the leasing activity that we think we can do for the remainder of '07 as well as the implementation of things like our Simon Brand Venture program and what costs we can deal with at the property level. So I do think, be patient for a quarter, because I do think we'll have more visibility into '07 at the end of the second quarter.

And just a simple thing, other than it was -- the venture, our venture with Farallon owns an office building -- I'm sorry, leases an office building at a very expensive rent. Now that's a venture expense. We're going to sublease that. But the cost associated with that, I mean, this is a trivial example, but we anticipate, given the market there, we'll get out of that lease but for three or four or five-month period, we're going to have -- the venture's going to have that expense. And it's not immaterial to the venture so it's those kinds of things, if you add -- if you line-list them, that kind of add up to a variability that we just want to be a little bit cautious as we kind of go through that methodically, thoughtfully, to ultimately assess where the deal is. But bottom line is this will be an attractive investment for the Company. We will make good money running the business and we like the real estate, and we expect to add value to real estate over time.

Great. Thank you.

Thank you.

Your next question is from the line of Michael Mueller with JP Morgan Securities.

Hi. David, given the comments you just had about costs, can you touch on at all an outlook for, or Steve, for G&A home and regional, particularly in the second quarter where it sounds like things could ramp up a little bit, just how we should be thinking about that relative to Q1?

Well, Michael, the wind-down of The Mills' home office activities is a venture cost so it will not flow through our G&A.

Okay. Okay. I guess sticking with Mills one more time, can you just talk about the [Can-Am] relationship that you have at this point and where you see that going over time?

I think it's on very solid footing for a couple reasons. One is a lot of the stuff had already been dealt with by The Mills' people, number one. Number two, we've always had a good relationship with Can-Am. We know them. As you recall, we were partners with them prior to our exit of a few centers back in '02, I think it was. And we've had ongoing dialog and we don't -- we anticipate a very good, solid, strong relationship with them. The alignment is a lot more straightforward than it used to be. We'll continue to work with them to make it really aligned and I don't expect to have any real controversy associated with that relationship.

Okay. It sounds like we'll get some more details on the Poland sales but can you ballpark the proceeds for us at this point?

What our share of that is?

Yes.

Yes, it's just a little bit south of $100 million. Our gain will be in the $70 million to $80 million range.

Okay. And last question, I may have missed this when you were talking about the term loan and the financing, but the existing $1.2 billion term loan, does that get repaid with the new credit line or is that continuing to be outstanding? Can you run over that again?

It will get refinanced, Michael. If you kind of look through it all, once we're through the property refinancings and the redo of a senior credit facility, instead of holding $1.2 billion, we'll end up holding $750 million to $1 billion.

Okay. Okay. Great, thanks.

Thank you.

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

Good afternoon. You touched on this, but I decided I wanted to get a little more specific. Is there any culling or outright sale of any of the 17 Mills' assets?

No.

You're going to hang on all 17. And how about something more challenging on the mall side like Columbus City Centre, would you be hanging onto that?

Well, that, if you read between the lines, I mentioned we might sell one that didn't have a significant value. You're very warm.

Okay. Thanks a lot. And then finally, just any thoughts about the Pyramid Properties sale?

Not really. We understand it's going to be marketed, ex-one or two centers. We're-- look, we like what we have on our plate, but obviously, as I mentioned earlier, we will evaluate -- we'll evaluate any and all opportunities to -- for transactions that will add to the value of the Company.

I mean and given your heightened interest in tertiary markets, does that make this more attractive or less so?

I'm not sure I understand --

Our middle market.

Oh, I'm sorry. Well, I call it middle markets, I don't call it tertiary. You've been hanging around too many people lately, Craig. No, I mean, obviously the market -- look, from a Mills' point of view, one of the things we got excited about, among a lot of things, but one of the things we always liked about the Mills is they were in great big markets. Big markets is where, if you looked at the evolution of the Company, is where we kind of redirected a lot of our acquisition activity. So the fact that they're not -- that doesn't mean that the smaller markets or the more middle markets can't grow. I think what we've seen as we've done a lot of great work at the bigger, more major markets from our own internal resources, we were not being as aggressive on the middle markets in terms of driving that business. That's a focus here. That's where we're hopeful to add some value to the Company. With respect to, as we look at deals, we'll always factor that in because that's a real issue. And that's why I like the Mills because it was in Chicago or obviously in Virginia and you go down the list, Cincinnati, St. Louis, California, Atlanta. So those are big markets that have good population growth, good demographics, and that's exciting about the opportunity. Other portfolios that don't quite have those characteristics, don't rule them out but obviously mean a -- mean something in terms of how we would look at it or value it.

Thank you. That's helpful.

Thank you.

You have a follow-up from the line of David Fick with Stifel Nicolaus.

A couple of capital questions for Steve I guess, first. Do you -- have you looked at what [Kimco] did recently with their light covenant bond offering? Is that something you might consider doing?

We have taken a look at it, David. It is interesting. I think it's a continuation of a trend that started three or four years ago with a general loosening of the covenants in real estate bond deals. It is interesting and something that we'll continue to look at. But it's -- until we come back to the market, which we probably won't do until the second half of '07, it will be a little premature to speculate one way or the other.

Okay. And then lastly, how about a stock split?

Well, I think -- we're waiting for Berkshire Hathaway to do it first.

That was a bad response.

I don't really -- I don't get carried away. I mean, when I talk corporate finance, it's really not supposed to add value to the Company so --

It's not, but it does add the ability for smaller shareholders to buy blocks.

Right. Are you -- you don't -- you sound like you're under the weather, I hope you -- are you okay?

Yes, no. Just a little cold. Thanks.

We do have a board meeting coming up and I'm sure we'll discuss it with the board.

Thank you.

Thank you.

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

Hi. Good afternoon, guys. Do you have any update on the shareholder lawsuits that were associated with The Mills Corp.?

No, not at this point.

Okay. Any -- ?

It's still out there.

Okay. And I mean, is this ongoing negotiations, that kind of thing?

There's no negotiating going on at this point.

Okay. I got you.

It's in a legal -- it's in a legal -- the typical legal process.

Okay. I'm with you. Then looking at leasing in general and the tenant environment, I mean Rick, what do you think? How would you characterize things out there as we go into the ICSC convention time?

We are still very optimistic that demand has not been receding. We had -- last week, we had 20 people from The Gap in here for three days going over the whole portfolio looking to write new business. We continue to have a lot of demand. We're seeing a lot of incremental interest from tenants that are just coming into the mall sector, a lot more vendors looking to expand, simply because of the department store consolidation. We've been benefited by having less bankruptcy because our retailer base is in a better financial place. So things are -- we think, going to continue the way they have and we've not seen any weakening of that to date.

Okay, and then as far as leasing for '07 goes, is that mostly done at this point, would you say?

We're about 75% through of '07 and we literally just had our regional meetings last week. And other '07 deals that we have not finished is because we're holding onto them for strategic reasons because we want to split the space, bring in new tenants, downsize certain tenants, so it is really within our control, that last 25%.

Okay. Very good. Thank you, guys.

Thank you.

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

Thank you. Anyway, thanks for your interest and your participation, and we look forward to continuing to update you on all of our activity. Thank you.