西蒙地產 (SPG) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the second quarter Simon Properties Group earnings conference call. My name is Jeremy and I'll be your coordinator for today. At this time all participants are in listen only mode. We will conduct a question and answer session toward the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the call over to your host, Ms. Shelly Doran. You may proceed.

Welcome to the Simon Property Group's second 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 a detailed discussion of these risks and uncertainties. Acknowledging the fact that this call maybe webcast, we believe it is important to note today's call includes time sensitive information that maybe accurate only as of today's date July 30, 2007. The company's quarterly supplemental information package was filed earlier this morning as form 8K. The filing is available via e-mail or mail and it is posted on the Simon website in the investor relations section under financial information, quarterly supplemental packagings. If you would like to be added to the list for e-mail distribution of this information, please notify me at Sduran@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'll turn the call over to Mr. Simon.

Good morning, and thank you for joining us today. At this time I'd like to provide a few comments on results for the quarter, provide a brief update on our Mills-related activities and then open up the call for your questions. We reported second quarter diluted FFO per share of$1.31, an increase of 4% over the second quarter 2006. A few important items impacted comparability of FFO between the second quarter of 2007 and 2006, and I'd like to just run through those for you.

First of all, our share of land sale gains for the quarter were $16 million or $0.05 per share lower in 2007 than 2006. Our share of lease settlements for the quarter was approximately $3 million or $0.01 per share lower in 2007 versus 2006. Profitability of our gift card program was lower in 2007 than 2006 as a result of changes made at a program in late 2005. Overall profitability of the new program is basically the same as the old, but our revenue is now earned when the card is sold. Under the old program, our revenue was back-end weighted. In the second quarter of 2006 we were still benefiting from the run-off from the old card. This negative impact to the second quarter comparability was approximately $5 million or again almost $0.02 per share. Our gift card program continues to grow profitably. We expect to sell over 600 million of gift cards in 2007.

Also, we no longer manage Mall of America in the second quarter of '07 whereas his we did in 2006 resulting in lost management fee. We also added personnel to our staff in the second quarter of 2007 to handle The Mills portfolio resulting in a higher overhead number than we budgeted. Total impact of this FFO comparability in the aforementioned items is approximately $0.09 per share. I would also like to mention that our reported FFO of $1.31 for the second quarter of 2007 exceeded our internal budget and to remind you that we do not provide quarterly guidance.

Our core business remains strong and I'd like to provide an overview of the health of our two largest real estate platforms. First of all the regional mall portfolio. Comparable sales in our regional mall were up 4.5% to 4 -- $489 per square foot. Occupancy increased 40 basis points to 92%. The releasing spread was $9.03 per square foot representing an increase of 23.7%. Comp property NOI growth for the mall portfolio moderated in the second quarter to 1.6% or 2.8% year-to-date, primarily as a result of lower gift card revenue as I discussed previously, and that common area of maintenance reimbursements for 2007 will be more back-end weighted. While we do have some concern about the weakening consumer particularly at the more moderate price points, we believe the health of a regional mall is intact and expect our comp property NOI growth for the year to be consistent with our original guidance of 3% to 4%.

On to the Premium outlook -- Outlet portfolio. Comparable sales in our Outlet portfolio was up 8.6% to 4 -- $492 per square foot. Occupancy was unchanged at 99.4%. The releasing spread was $7.31 per square foot, representing an increase of 30.8%. Comp property NOI growth for the Premium Outlet portfolio was 8.1% for the second quarter and 9.4% year-to-date. Profitability in the Premium Outlet portfolio has been boosted by its significant exposure to tourist markets, especially at those centers frequented by international shoppers taking advantage of the weaker dollar. Strong double-digit sales growth has occurred at locations such as Orlando, Woodbury, Las Vegas, and Hawaii.

Now let me spend a couple of minutes talking about the acquisition of The Mills. We have made significant substantial progress on the integration of the management of The Mills portfolio. The regional malls has been completely integrated into our existing Simon regional mall platform and the infrastructure for management, marketing, leasing and development. Scott Mumphrey, an SPG Executive VP with more than 30 years experience with Simon has established his management, leasing, and development team, and The Mills product is now our fifth retail real estate platform. The 17 Mills properties will continue to be managed and leased from an office in the DC area, while all administrative support functions are based here in Indianapolis. We have successfully transitioned all accounting, billing, and collection activities to SPG systems in Indianapolis and effectively have closed The Mills back office. We have completed the financing of $2.3 billion of mortgage debt at more favorable rates than those assumed in our underwriting, generating almost $1 billion of excess proceeds.

We continue to earn interest income on the SPG provided financing net of interest expense incurred on the related borrowings or outstandings at the end of the quarter. Associated with this financing is down to $532 million because of the successful mortgage refinancings. We have validated our underwriting assumptions for property operations and we expect 2007 performance to meet or beat our original underwriting at the property level. There will be certain Mills-related transaction costs that will continue to exist for a period of time. The major one being the office in the Chevy Chase office building until we are subleased and we make -- are making significant progress on that. The Mills acquisition was accretive to our SPG earnings in the second quarter and profitability from the acquisition is expected to increase as we begin to earn fees from the management of the portfolio.

Very importantly, our joint venture agreement treated the activities prior to June 30 as a transition period as we wound down The Mills back office. All overhead transaction and transition costs as well as management fees during this period were shared by SPG and Farallon. Effectively July 1, SPG assumed full responsibility for the management of the business going forward and which we expect to contribute to our profitability. The Mills Corporation is expected to be liquidated on August 1, including the liquidation of all of the series of Mills Preferred Securities. There is still a great deal of work to do including some major redevelopment opportunities, but we're very excited about the very good start that we've had and the opportunities afforded by this transaction.

There are numerous other activities underway throughout our organization, but for the sake of brevity, I will not go into all of the details, but they include: the sale of certain assets in Poland at very attractive returns, the large gain that we'll see in the third quarter, the solid progress made on our $5 billion development and redevelopment pipeline and our new successful openings, other than to say it's very exciting to have opened the largest enclosed shopping center in Italy, the first Premium Outlet mall in South Korea and our sixth Japanese Premium Outlet center, all within the last two months. So suffice it to say that our core business continues to be strong. We remain very confident in our business model as evidenced by our increase in our 2007 FFO guidance today to a new range of $5.83 to $5.88 per share. Our confidence is also underscored by our Board of Directors recent authorization of $1 billion of Common Stock at our Board meeting last week. Now with that said, we're ready to open the call for your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) Questions will be taken in the order received. (OPERATOR INSTRUCTIONS) And your first question is from the line of Lou Taylor from Deutsche Bank. You may it proceed.

Hi, thanks, good morning. David, can you talk a little bit about the use of proceeds from The Mills financing?

Yes. Essentially, they were used to pay down the [mez] financing that we initially agreed to provide and we also put in place a senior facility as well, and so that's essentially what it was used for.

Okay. And then second question can you talk a little bit about the kind of regional differences among your retailers, sales in Q2? You mentioned maybe they were kind of low-end consumer was struggling a little bit, but how about regionally? Was there any notable differences?

Rick, do you want to answer that?

Sure. The better regions were the mountain region, the southwest and the southeast. The regions that were a little softer were New England and the south and the mid-Atlantic.

Great. Thank you.

Thank you.

And your next question comes from the line of Craig Schmidt with Merrill Lynch. You may proceed.

Thank you.

Hi, Craig.

Are you going to be reporting metrics similar to your four other platforms in your supplemental report for The Mills?

We will be. We decided though -- we've read every lease, Craig, I haven't personally, but I've threatened to. We've basically have put every lease, read every lease, put it in our system, but we still wanted to -- given the history, we wanted to be a little more slow on putting that forward. Our goal is to have that clearly by year-end, it may even be third quarter, but we wanted to cleanse each and every document, but we will be reporting elements of it in our 8K.

Great. And given that you've had The Mills properties for awhile, are there any changes in the way you want to operate or lease these assets than they have been done in the past?

Well, it's interesting. I think put the regional malls aside so when I mention The Mills, it's really the original Mills product.

Right.

What we have found is that the retailer demand for that product is more than just the value oriented or the outlet tenants, and so I think the decision that we have to make on a handful of them is whether or not we want to bring in full price retail and what that might mean to the consumer proposition. And so I think that's something that we're going to study over the next three to six months, and clearly a lot of the entertainment oriented product or space is something that we'll deemphasize. We clearly liked obviously the theatre and the restaurants and that kind of stuff, but we'll be less skating rinks and that kind of stuff.

Thanks.

And Rick I don't know if you want to add anything as well?

The only other thing I would add just in adding to David's perspective is that there is a lot of redevelopment opportunity within The Mills themselves. We are now approaching the boxes that Mills already had extensive relationships with as part of our overall platform. We're generating incremental opportunities from their traditional box users and we also have seen a significant appetite for The Mills specialty store space from some traditional mall tenants that are anxious to grow their space within The Mills platform, so we've been encouraged by the response to date.

Thank you.

Thank you.

Sir, your next question is from the line of Christy McElroy with Banc of America Securities.

Hi, good morning.

How you doing?

David, following up on your comments about the weaker consumer do you see potential uptick in store closing activity as a result or have you seen any impact at all on retailer demand for space at the margin?

Yes, let me clarify what I said. Where we have seen the moderation of the consumers more in the kind of the moderate end, so that's the first point I'd like to make. At this point, any store closings or re -- or tenant demand is really on the margin. We're girded for a potential slowdown there, but it's yet to manifest itself, frankly. Like an example, Footlocker mentioned they may be closing stores, but all of this is on the margin. There continues to be categories that we're making plans for that may not have the -- as aggressive number of stores, like the music business or the small bookstores, but frankly, we have yet to see it though we're anticipating it. We're ready for it, but the fact of the matter is that we have not seen a decrease in tenant store demand or store closes.

So it's really more of a potential concern for your lower productivity malls.

Yes.

Okay, and then regarding the decline in CAM reimbursements in Q2 and the just lower overall recovery rate including the pro rata share of unconsolidated, how much of that was related to timing in the core portfolio you discussed before and was any of that related to the Mills assets?

The Mills assets are just showing in our JV, so there may be some of that in there, but it's really a timing -- it's really a timing impact completely. Steve, you may want to add to it?

Yes, Christy, it's a couple of things. One, as David said, it is wholly timing. We do expect once we get to year-end the recovery ratio to be kind of where it has been historically and the timing is really a couple of elements. One, there was a little bit higher expense in the first half of '07, and it's no one factor, but like for example, some regions have higher snow cost in the -- given the winter, but then the other element is, which you don't see on the face of the income statement, but there are capital expenditures that go into the CAM calculation pool that can affect the overall recovery. Our spending of CAM capital is going to be more back-end weighted in 2007 than it was in 2006, but it is 100% timing and there's nothing -- there's no deterioration in the CAM recovery. In fact, it's actually just the opposite as we continue to migrate to fixed CAM, so we will get all of that back in the last half of '07.

So if you look at the income statement including the pro rata share of unconsolidated so including The Mills assets, the recovery rate in the back half of the year shouldn't change?

It should return to more normal levels, which I would use '06, for example, as a better guide.

Okay, great. Thank you.

Sure.

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

Hi. This is [Ann Bigo] with John.

How you doing?

Are you seeing varying traffic in sales trends between your higher sales productivity malls and your lower sales productivity malls?

Well, I think clearly, the sales, the comp sales speaks to our overall portfolio. I mean, as you might imagine given the size of it, these statistics mean something, because not one or two or three or four, five, malls can really influence it. So, we're generally seeing, as our comp sales numbers indicate, pretty good growth. Now, the luxury and the very high end continues to outperform the moderate to better centers, which is not inconsistent with what we're seeing from retailers, but nothing to the point of different than that trend that has occurred over the last few, three, four, five years frankly.

Alright. Can you just give guidance on what's assumed for management fees from The Mills in the back half of the year?

It will be profitable. We're not going to, given our relationship with Farallon, we're going to keep that there, but I think from the management point of when you look at our management fees you'll see the ramp up of that over the -- certainly over the next six months as we report our earnings. And then I think you'll see a true picture of it in '08 as we get a full year of running the portfolio.

David, you had mentioned in your opening comments that the lower end consumer is a bit weaker and there's been several questions on it. How would we -- how would that impact your portfolio, and how would it show up from our perspective in looking at your Company?

Well, I think, Jonathan, we're still telling you that we think we'll get comp NOI growth of 3% to 4%, so --

But a lot of that is baked in, right? Most of your leasing is already done?

Yes, I think some of that will be baked in, but we still have work to do between now and year-end. It's just not like we can show up in December and see how we did.

But is this something that would impact '08 more than '07?

It has the potential, and again, I think from our standpoint, given the amount of activity that we're doing in our less productive -- less productive malls in terms of the redevelopment aspects, adding the boxes, renovating the centers, we expect them to hold their own. I mean, they may not have the high comp NOI growth that Roosevelt Field or Fashion Valley have or the -- as an example, but there's no reason why they won't have comp NOI growth, even If the economy weakens significantly.

But even in a highly productive mall there's a certain mix in the mall that's targeting the lower price point. Is --

True, but those retailers have to be in those malls, otherwise they don't have a business model that's going to continue.

Right, but I guess the question is, is there a sense of what percentage of NOI is -- from your malls is coming from those lower price point retailers, and if there's some weakness there that it might result in lower rent spreads in '08?

Well, I'm sure we could quantify that, but I don't certainly have that number off the top of my head.

Should we be losing sleep over that at this point?

No.

And I would -- the only thing I would add Jonathan, and this is Rick, is that if the retailer is at the end of the term, and it's a moderate retailer in a better mall and they don't want to hit the rent spread, there's a whole lot of other tenants that are happy to come into proposed to hit our rent spreads, so that's not a source of concern.

No, I would just add, I mean, our year-to-date rent spreads, or leased in the second quarter were 9%. Our business model has always been predicated on the $5 or $6 spread, so that -- and if you look at our lease rollovers, at least for the next three or four years are in the mid [30s] and our market rents are in the low [40s] to mid [40s]. So we've got plenty of cushion to continue to grow our comp NOI growth and then a very important added fact if we do run into an economy that is recession-like, we also have the benefit now of fixed CAM or in terms of drilling down our operating expense. There's no question that that gives us the variability. We don't see that, so I don't want -- we just put in one little point about the consumer moderating, so I certainly wouldn't overreact to it, but we're ready to take on the challenge if in fact the economy weakens here for all of the reasons that the people think it might.

On your stock buyback, what's the blackout periods around earnings?

I think we need a couple more days before all of the information is disseminated and then I think we're good to go.

So you announced that increase Thursday night, so there's no activity from Thursday night --

There's been none until our earnings have been fully disseminated.

And the thought process on the [buyback] what's your sense of at what pricing or what triggered the decision to go as aggressively as you have with the announcement?

Well, look. I think given where we are trading versus where our intrinsic value is, we've always been wanting to be in a position to do the buyback. We've certainly got the balance sheet that can handle that.

Right, but I mean like at $87, is it something that's interesting?

Oh, sure. I meant that's --

$92?

We wouldn't announce it if we didn't have an intention to buy it back.

And Steve, I have a question for you on the debt markets, can you comment on what if anything -- I don't know if you guys are in the market right now, but if you're getting quotes on stuff what's happening with the debt market?

Well, we're always in the market with the size of the portfolio that we have, John. We're always doing just ordinary matter of course property refinancings. I will tell you that I think that we were very opportunistic and to some degree fortunate in that we got $2.3 billion of mortgage financings -- refinancings done related to The Mills and did all of those really before the markets got crazy the last two or three weeks. It is interesting in that the CMBS market is very upside down right now. I -- spreads have clearly widened in the bond market, but not to the extent that we have seen them in the CMBS market. But in terms of impacting our business, I think this is one of the times when the bankers look to really the higher quality names, and I think given the track record of the Company and the stability of the balance sheet, we're still getting a lot of interest from the banks. There's obviously still the opportunity to get financings done. We're in a position where we don't really need to do anything right now. We've still got $2 billion of availability on the credit facility, so it's a very good thing in that we can sit and be patient and watch these markets hopefully stabilize over the course of the next 30 to 60 days.

Yes, and let me just add to that. I think someone asked me the question, if -- which is a little bit different than I think most people could say. If the Mills were to -- occurred today, could we get the deal done and the answer is absolutely. Very few companies could say that, but we could clearly have financed The Mills today, given the environment if we had to. Now we were fortunate, as Steve said, to do $2.3 billion of financing before the spreads widened significantly, but we were doing that as the market was choppy. It wasn't a perfect market in that $2.3 billion mortgage financing.

Yes.

Could you give us a sense of what the incremental interest expense would be on if you did an unsecured bond issuance today, or if you had to do that CMBS issuance today, do you have a sense or not exactly?

Well, the unsecured I think our, we may have widened 15 to 20 basis points, but on the other hand the 10 year is now what, 470-something, so I would think all in, it's not going to be all that much different.

It's still going to be 6% or low 6% and I think on the mortgage market, John, we have seen more substantial widening, but maybe more importantly, we've seen tighter underwriting in terms of proceeds available. Where six months ago, we could have done 80% loan to value interest only for 10 years, now the market is more in the 60% to 65% loan to value with some amortization.

Yes, but -- and -- but the important point there is we have never been focused on loan amount. I mean obviously to some extent, but loan amount is not a big issue for us, whereas loan amount for others could be.

Right, when you're running a balance sheet that's net-net under 50% levered, David is right. That getting that last $1 of proceeds irrespective of what the cost of that marginal dollar is has never been an integral part of our strategy.

The marginal dollar is clearly more expensive than it has been.

Do you see any opportunities on the buy side of properties coming up, maybe at better cap rates because of some of the dislocations?

I don't see, frankly, rising cap rates for quality retail real estate. I wish I could, but I don't see it in the foreseeable future. I think in the M&A side for us, Jonathan, until we -- there are companies out there that would be of interest to us, but until we feel like we're trading at a better multiple, then -- or we have some special angle, I think it will be quiet on that front as well for us.

Great. Thank you.

Thank you.

And your next question is from the line of Steve Sakwa with Merrill Lynch.

Good morning. Just two quick questions. Steve, was there anything in the income statement this quarter that related to The Mills kind of as one-time cost that may drag down the quarterly results?

There was a little bit, Steve. David mentioned in his remarks that we were ramping up hiring people in Indianapolis to assume the functionality that we moved from their office to here, while at the same time, we were winding down the office in Chevy Chase. So you had some duplicative overhead costs probably to the extent of about $0.01.

Okay.

Well, I mean, I would add a little, yes, you haven't least that, plus we also -- we also as I mentioned, Steve, in my opening remarks, just because of the deal, given all of the major transformation in terms of how we're going to run The Mills going forward, we decided early on with Farallon that the management fees associated with the properties, we're just going to throw in the bucket and be a JV revenue share. So that was a big change in what we'll see going forward, because now those management fees will be going to SPG solely.

So you'll be picking up sort of a standard management fee on their 50% of The Mills assets?

Well, no, on The Mills assets all together, whether the Regional Malls or The Mills themselves.

Okay. And then Steve just in terms of the interest income that runs through, basically it's cash and the loan to the affiliate entities, but what's the rate on the loan to the affiliated?

275% over LIBOR.

Okay, thanks.

Sure.

Thanks, Steve.

Your next question comes from the line of Paul Morgan of FBR.

Good morning. Going back to the credit market for a second. Can you talk about that in the context of two things, one, from what you see in pricing on B-malls as traded? And then, second, a lot of the lifestyle center developers have lived off of pretty easy credit standards, it seems for the past couple of years so I'm wondering if you have seen any stress in that side of the industry that you might be able to take advantage of either kind of buying portfolios or going into developments that are sort of in midstream?

Well, on that front, I would certainly would like to see tighter credit standards in terms of construction loans and the like, as Rick will comment. I mean, we have seen a number for sale and they are really frankly put together, not with a lot of substance, and so we would like to see tighter credit standards there, certainly on the construction loan and we may be in that market now. I do think though, Paul, it's a little bit early to tell. I would say on B-malls, on solid B-malls, we have not seen real pricing differential move. I mean, we're getting close to selling what I'll call a B-mall in the low 7% cap rate range now. Some of the, we have been selling some of the let's call them a C-mall, and what's interesting to note is I think from our standpoint, it's not so much that the cap rate is going up, it's just that the deal seems to be a little bit on hold pending ultimately where the win and if the CMBS market gets back to a stabilized environment. So it's not a sense of retrading, but really a sense of, hey, we need to put together our financing a little bit more. The fact of the matter is on all of our -- those kind of malls we've sold, we've always dealt with that even in the most robust credit markets, because most of these buyers are looking to do a redo or something material. And we're just -- we just don't want to do it because we've got priorities elsewhere. So we've always been confronted with, is the guy going to close? I think the guy that's going to close is a little bit more uncertain now and I think on the other hand stable B-mall assets really the pricing has not changed that much.

Okay, thanks and then you mentioned the $0.02 per share hit from the way you're recognizing gift card income this year.

Yes.

Is that -- when does that change in treatment, annualized? Are we going to see a big bump in the fourth quarter?

I don't think what you want -- I think, Steve, I don't think you'll see that in the third and fourth quarter going forward because I think the burn off of the old card is behind us. Is that right, Steve?

Yes, that's a fair statement.

Okay, and last question on development, specifically in terms of the lifestyle expansions and the storage. What kind of -- are you're generating very impressive yields on these Premium Outlets expansions, and I wonder if you have gone through that, how much more Phase II, Phase III project s are there domestically and outside the U.S. in terms of the Premium Outlets and whether those yields are something you can expect that will persist?

Well I'll just tell you that that business was great and we're very excited about it. We are doing a lot of new development in that -- with that platform as you know. It's -- the new developments come fast and furious. We're executing extremely well on them. There are some additional expansions. We're landlocking a number of the good centers, but [Camario] is a great example. Rick if you want to talk about that quickly what we're doing there, but there's more to do there, but also where else can we take the product is what we're really thinking about? As you know, we've taken it to Japan, which is doing very well. We've taken it to South Korea, which is -- I don't want to get -- I don't want to be over dramatic but it's obviously off to a great start, and so there are more opportunities there. Can we take it -- Mexico City? Which was slow and is doing better and better, so South America, Latin America, where else can we take a most successful business forward as something that we think about all the time.

And the one thing just to expand on that a little bit is that we're not only finding incremental new development opportunities for Premium Outlets, but we have gone back and some of the most successful like Las Vegas Premium Outlets and Orlando Premium Outlets have been able to put together substantial expansions, and what we're doing now is the land that we are buying is much bigger tracks than what was historically bought by Chelsea. So what you're going to see from us is that Philadelphia Premium Outlets is opening in November. We've already started on Phase II, because the demand has been significant, and you will see a con -- an acceleration of expansions on the new products almost simultaneously with the opening of it, because there's just a lot of demand in that business.

Yes, that's a great point because I think both in Philly we're doing Phase II already without even opening Phase I. Same thing in are Rio Grande. We're doing Phase II after Phase I has been opened and we're already -- I mean, Phase III is down the road there as well, so that's an excellent point in terms of the success of these -- the Phase I and Phase II are are happening pretty quickly.

Great, thanks.

Thank you.

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

Good morning.

Hi, Jeff.

In light of the market sell off, David, would you consider or reconsider the middle market fund that you looked into several months ago?

Well, I -- at this point, no, I think our focus continues to be on the -- we've got our plate pretty full. We've obviously got The Mills transaction. We've got all of the development, redevelopment, and needless to say, our international business is 5% of our Company, but continuing to grow significantly. So I think we've got our plate full there. I think the front business is something that could play a role here for us ultimately, but I'm not sure we would be in the mall business. The reason it would -- it might not be in the mall business is only because of the conflicts in trying to go mind the conflicts, it would be very difficult. So for instance, when does the mall go in? Is it a radius thing? And we would like to a very all of else kind of conflicts that make it very transparent to the investor. So it could be in other retail real estate categories that may make more sense for us as opposed to the pure mall business, but at this point, given what we've got to do, it's clearly continues to be on the back burner.

Okay, great. And staying on international, can you just provide a quick update on Russia and China? I guess an update on when we'll see the first development open?

Russia has run into some roadblocks. I mean, we were looking to make sure about our underwriting. The market continues to be of some interest, but it's a very unique place to do business and we are not going to be in a position to be comfortable there until we get very, very just -- just underwrite a heck of the opportunity and continues to be of interest. But the deals that we referenced earlier are probably not going to occur in there current state, which is fine for us because, again, we're very focused. We can't afford to make a step in an emerging market like that. So that's Russia. With respect to China, we've got four under construction, the tenant demand actually is very surprisingly long. More and more we're finding more and more retailers that want to come, a lot of European retailers, even some U.S. based retailers, and that's -- I mean look, the proof will be in the pudding in '08 and '09 as these open, but that joint venture is proceeding according to plan.

Okay. And then just on the tenant side, maybe for Rick, at ICS, we had heard that several of the new concepts were struggling a little bit out of the gate I think [Martin rule] and do you have an update on any of how they're doing now?

Well I don't want to talk about the specific concepts particularly with publicly traded companies. I think that's for them to talk about. I will tell you that the trends we saw at ICSC with the vendors wanting to aggressively rollout their brands in their own formats are continuing. If you have seen the recently announced restructuring of Liz Claiborne, that was all about creating a very significant retail platform for their "power brands" like Juicy, Kate Spade and Lucky Jeans. The trade is continuing when they bought [Viap] announced they bought Lucy, and Seven Jeans with a view towards accelerating their growth in retail format and we're seeing that continue unabated.

Thanks, guys.

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

Good morning, guys. Hi. David, what sort of opportunities are you seeing on the buy side beyond bread and butter property investment? I think as Steve highlighted, there has been such an abrupt change in pricing and underwriting and yet you guys have significant capacity. Are you seeing -- do you have interest in financing retailers or other opportunities that might be outside investing in just the fee?

Well, we -- we're certainly not going to finance emerging retailers as I think we bought a Company that had done that and didn't do it very successfully, so we -- it's conceivable we could ultimately play a role a little bit like what [Fernado] has done with Toys "R" Us and what [Kimco's] done, kind of like what we did with Service Merchandise. It's very conceivable that we could play a role in an established retailer that is looking to do some financing that has to do with something dealing with our real estate. There is a value add there that ultimately we could take advantage of and we could certainly play a role in that other than the note, nothing really is eminent. And so we'll see that. And I don't think we'll ever get to the point where we'll finance emerging retailers, given the risk spectrum. If we do it will be very marginal dollars. On the deal side, I think from my standpoint, I'd like our business to be more international. We are making great strides in how we approach the business, but it's mostly through development, and as you might imagine that takes some time to do. And so for us to make a quantum leap internationally, it's going to need to be on the M&A side. But with the weak dollar, with the multiples there versus the multiples here, there's just, there's just -- it's just not going to happen right now. So that's fine and we'll just be patient and see if something arises. With respect to M&A activity here, I want to see some multiple separation for us, and we haven't seen it, but before we do another M&A deal here, I'm looking to see whether or not we can separate from a multiple standpoint. If we can't, then the only way to really justify it is if there's some way to finance it or acquire another Company through a fund management model or something like that, or unless we find the opportunity to be so unique and where we can add so much value that we can make the numbers work. On the deal side, I will tell you that there still is a dearth of retail properties whether the malls are high end, lifestyle centers, and if they are out there, I think the bidding will be fierce.

And there's nothing imminent on the retailer finance front. Is it fair to say that that is an active market today, or less so?

Well, I think everything is less active today than it was yesterday, and whether we see stabilization or not, I don't know. I mean, obviously, you saw the Macy's rumors and so on, but we'll have to just see how that plays. We could play a role in some of that activity, but I will tell you I think a lot of that speculation on deals is probably going to at least for the time being go through some quiet period here.

Okay, and just last question for Rick. Can you quantify us -- quantify for us the NOI that might have come from I guess I'll call them the noncore entertainment uses in Mills and how much space could potentially be reclaimed from our productive uses?

Yes. Well, leaving aside quantifying the NOI, virtually every one of their Mills properties did have a large format, dining, bowling, games scenario. Some were more successful than others and were focused on whether those are the most appropriate uses. They had a couple of racetracks. One is very good, it happens to be right next to the Charlotte Motor Speedway. Great use. Others are maybe not as good and that's really why David alluded to the fact that we're really focused on trying to make sure that each of those big blocks of space that could be from 60,000 to 100,000 feet, are the best use of that space and happily there's a lot of incremental demand which is accelerating our activities on trying to reuse some of that space that's not as productive as it could be.

Great. Thank you, guys.

Thank you.

Your next question is from the line of Michael Mueller with JPMorgan.

Hi.

How you doing?

Good. I know you haven't explicitly talked about yield on Mills going in, but can you give us an idea of how much the yield could step up from just the implementation, first round of promotions, gift cards, operating efficiencies, by putting in your platform?

Well, look, I think again we want to be cautious here because we've only owned it for three months and it is a complicated Company. We told, as you know, we told the market when we did the deal originally that we would have double digits kind of return on our investment, at least 10%. Everything that we see we'll -- we should be able to out perform on that. But we don't want to separate it at this point because we're still going through the transition period. I will tell you, though, we are very comfortable with how this transition has occurred both on the financing, the personnel side and we've got our team together. We put all of this on our systems and we did a lot of unbelievable work very quickly, and there's still a few unknowns out there before we quantify everything, but we expect this to be a very profitable overall transaction for us, and one that will add to our accretion, just like we did with Chelsea and all of the other ones that we've done historically, but we're -- at this point, we're still not going to pinpoint it.

Okay. And what happens to the Mills-related lawsuits once they liquidate, once Mills is liquidated?

They they are still out there and it's, again, it's a joint venture. Those can't get back to SPG. It's a joint venture obligation, so we'll just have to see how those play out and that's -- they are an unknown contingent liability that we have -- we'll just have to kind of see how that progresses.

Okay, and just two last questions. What was the average rate on the debt paid down with the refinancings and then what was, if you're pinpointing the source of the guidance increase this quarter, what was the driver of that?

Well, I think primarily that had to deal with Mills and we also have felt the mall businesses will perform pretty much according to our initial expectations of the comp 3% to 4%. The Chelsea platform continues to outperform given sales, so I would add all of those have kind of added to our outlook. And, Steve, I don't know, you may have the number on what the average debt pay down was?

Yes. Well, Mike, the financings, the proceeds that we generated out of the Mills refinancings, it was just shy of $1 billion of excess and it either went to pay down the mez which was 275% over LIBOR or at the end of the quarter, we're sitting on not quite a couple $100 million dollars of excess cash at the Mills that will be partially used to pay down the preferred or to retire the preferreds that are are being liquidated here over the next couple weeks. And that blended rate on the preferreds is in the very high 7% to the low 8%. So -- But again I think just to put it in perspective, I think our business last year we're going to be lower inland sales than we were last year. We also lost Mall of America management fee and that deal, so the growth that we've got really is a function of the mall business. The Premium Outlet business all performing at or above our initial underwriting and then what we will add through on The Mills deal.

Okay. So The Mills fees were in the guidance before and they are are in the guidance now? This is operating upside?

Yes.

Great.

Thank you.

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

Good morning. Morning. Just to follow-up on the fees, let me try to understand those fees by the back half of this year, those are in your guidance?

The management fees?

Yes.

Yes.

And just to reiterate the reason for them being back-end loaded, is that a structuring issue or it just took you this long to negotiate exactly how they were going to work? No.

Well, we decided there was so many transitional items between us and Farallon, like the overhead. The deal is going forward with Farallon to make it clear. We're going to be running the business but we're also going to be incurring the overhead associated with running the business. So -- and we expect to make a profit from that. Obviously, the second quarter had, as Steve mentioned, the wind down of The Mills. We weren't at a stabilized Mills overhead number because we had a number of people that we needed for a transition period, and so we felt like instead of trying to isolate that we didn't want to take the risk frankly of running the business during that transition period because of the costs associated with the transition and the overhead, that we said okay, we're going to run the business as a joint venture for the first quarter as we -- first quarter being our second quarter, and then as we transition the business, we'll take over the property management and we'll take over the overhead, all of which will end up being a profit for us. But we didn't want to take that risk in the second quarter for us or our first quarter of running The Mills business.

Okay. So you wouldn't expect some kind of a catch up in the third quarter or anything from that perspective then?

Well, no. I mean, it -- we'll be earning our profit, we expect in the third quarter.

Right, but the clock starts running as of when you --

July 1, correct, and there will be some ongoing obligations of the joint venture that we won't be taking, the biggest of which will be the office lease. And that office lease is $10 million a year or something like that, and -- but that won't be a risk we'll be taking. That will continue to be a joint venture obligation.

It's going to appear on your income statement as an uptick in management fees and an uptick inG&A? Is that the right way to think about it?

An uptick in management fees, Matt, but then the costs will primarily be in our home office costs, not necessarily in G&A.

Okay. But at a corporate line item anyway?

Right.

Other than like I said the office lease will end up being in the JV line somewhere.

And David, when you think about your profitability on this transaction, and the fees in particular, I know you don't want to quantify anything, but in your own mind, is it these ongoing management fees that are going to make it sort of exciting to you or is there the possibility of some kind of a promote down the road that might make it more profitable?

Well, I think -- listen. I think the one business we don't want to get in is not liking the real estate that we buy, because we just like working for our own account. I know the fund management business is a different business and you end up buying real estate you may not like. We want to buy real estate where we like it. We like the real estate. That's the most important part of this transaction. And number two is -- not to say that all of the real else thought that we bought is perfect. There's some of it that we'll sell. There's some of it that we don't like, but when you look at the totality of it and you look at the pricing of it, we like what we bought. Added to that, obviously, is the fact that while we have the joint venture in place, we won't be running the business for profit and beyond that, it's really a relationship with Farallon that I'd like to not go in, but overall, we expect this to be a very good transaction for our Company.

But to put it more clearly, the fees are sort of aligning your --

I thought I was pretty clear.

Well I guess you're not answering directly the question about promote, which I understand is intentional but you're saying that you understand that there's some kind of nuance of the fees that would be required to fully align interests here. Is that the right way to think about it?

Well, the fees, we're being compensated compensated appropriately running the value add we can bring to the table.

Okay, thank you.

Thank you.

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

Good morning.

Good morning, David.

Can you clarify the same-store sales numbers? You've given a year-to-date, I'm sorry, a 12-month trailing. How about Q2, compared to Q2 last year and Q1 this year?

You -- our retailers or our NOI numbers? I'm just --

I'm sorry, same-store sales, retailers.

Steve, do you want to answer that?

Well, I don't have the specific number in front of me, David, but it is fair to say that we saw a moderating of sales in the second quarter. Part of it was obviously the Easter effect in April, and so there's a little bit of noise in the second quarter, but it did -- it clearly did slow down in the second quarter, stand alone.

Negative? You have 5.8% in Q1, you're 4.3% Q2, so it looked like a sequential sort of flat to negative.

No, it wouldn't be flat to negative. It would be a couple of percent up. I mean, you can't get the --

Yes, okay, I understand. A couple little minor Mills questions. I've had a chance to look at a couple of them. They are looking substantially better already. You can't buy a Simon Gift Card at least at the ones we visited. When will you be rolling SPG and all of its other elements out?

Well, most of that will be in the fourth quarter. Remember, as you know, a number of the properties -- a number of The Mills properties have joint venture partners, and so there's a process in terms of educating and seeking approval on a number of the programs that we have. Now we're making terrific progress with our partners at the property level, and our relationships generally speaking at the property level. The property level partners are very good and, in fact, have improved dramatically since the acquisition, but that is a process to go through appropriately, and I think the ones that we're holding onto, the ones that we own 100% with Farallon are moving for fourth quarter implementation.

Okay. And last question, can you tell us which of The Mills assets were in that financing and how will the banks come from an LTV perspective?

You mean the financings that we have already completed?

Yes. The cash out, refinancings that you've announced.

David, most of them we did very early on in the first half of the quarter, so we --

Most of the wholly owns.

They were all the wholly owned.

Yes, because so Gurnee and Potomac and those, because essentially again the JVs we need a partner approval to finance. And I will tell you just from a valuation point of view, very similar to the underwriting standards and those are very similar to Regional Mall -- super Regional Mall.

Okay. But it's fair to say that it might be a slightly different picture given at that market today?

Well I think that's for everything, sure, and I don't think The Mills are any different than -- the New York office building I think would have different underwriting criteria -- even a New York office building.

Thank you.

It was primarily the four original Mills, Franklin, Sawgrass, Potomac, Gurnee, and then the two malls that we, Simon, had a prior ownership in Atlanta, Cobb, and Gwinnett, because as David said those are all in essence wholly owned.

Thank you.

Thank you.

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

Hi. Good morning.

Good morning.

Just a question on FX. I know you referred to it earlier on. I was just wondering how much that is influencing perhaps the greater appetite to invest in Japan and then sort of a pulling back from Europe. And was FX an issue at all in your consideration around Russia?

Not really. Russia was -- Russia continues to just be a very unusual place to get to that comfort level where you're going to ultimately want to make an investment, and we were -- we thought we were there and we ultimately just couldn't get there. Didn't really have much. Look. I think the FX issue is -- unfortunately, the U.S. continues to be in a declining currency point of view, and I don't see this is just a personal opinion for whatever it's worth, I don't see the change on the horizon here for the foreseeable future. So if we think down the road and our aspirations are to be very important player globally, we're in need -- we're going to need ultimately to reduce our risk to a declining U.S. dollar. Now we see a lot of benefit from that because obviously, the tourism that comes here shops at our malls, but we would like to be able to see a little bit of different than that. But I -- ultimately I don't think a reason to do a deal, let me see if I can explain it this way. I don't think a reason to do a deal is to decrease our exposure to the dollar, and I think a reason not to do a deal is because you don't believe in the currency -- country's currency. So we have chosen not to -- at least historically, not to invest in certain countries because we necessarily couldn't get comfortable with that currency, so I think that's a reason not to do it. I don't think we can justify doing a deal internationally because we want to reduce our exposure to the dollar.

So if we think about Poland, the -- you referenced the potential sale and what you've gained?

Yes, that closed actually.

Okay. Would you be keeping that money offshore or are you looking to repatriate?

We repatriated that money, because we were able to do it very tax efficiently, so that happened in the third quarter and that money came back here. And the good news is we got the benefit of obviously the strongest converted to Euros and they made a bad hedge, we didn't get quite the top of the Euro to dollar ratio.

So that means you can still see (inaudible)

You'll stay as your CFO rather than go to switch to be an FX trade?

We were prudent. We hedged. We said, ah, the Euro can't get any stronger, and we hedged and little did we know it could get stronger in two short days.

Now would you be reinvesting in Poland, or is that been a dust and you'll move along to another?

I think there's -- we might knick and knack, but Poland, we feel might be a little bit overbuilt right now.

Okay. And then in terms of the balance of where you're putting the money it seems like you made a fair balance between developed economies with mature property markets and those that are more emerging markets. Is that a fair way to think about your allocation?

Yes, other than I'll tell you that we don't know it was that , I mean if I could use that line, that would be great. I'm not sure that we got there by happenstance more than thoughtful approach,

What about go forward?

Go forward, we are very careful in emerging markets, primarily because of the reputational risk that comes with that, and also the financial underwriting aspects, so -- and the currency issue and all of the things that I've mentioned before. But our focus with our Simon Ivanhoe entity is mostly in France at this point. And if we -- assuming we do get the right to build on a few of these things that's going to be a great value enhancement opportunity for us. Japan clearly we want to see how we can take that relationship and do more full price. We still think there's some legs on the outlet side, but it's been such a great profitable partnership, how can we take it to more full price. South Korea continues to look at more opportunities. And I think ultimately, the whole big Asian market, people are building institutional quality real estate, I think their yields are a lot lower than they think, and ultimately, I think there will be some pieces to pick up pretty cheap.

Okay. One final question of detail for Steve if I may and maybe you covered this and I misheard -- didn't catch it. I think that David, you referred to potentially additional costs related to the Mills. Are we talking in terms of variability a couple of cents here?

I think, David, this is Steve. What David was mentioning is that there are some ongoing costs that are venture level costs. The biggest one is, until we release the office space or sublease the office space that Mills was occupying, The Mills Corporation is on the hook for that lease. We're making really good progress on that subleasing. We've got a good chance to have the vast majority of it subleased by the end of this year and all of that was in our underwriting. We did assume that there would be a time period before we successfully subleased all of that, so I think we'll actually do a little better than our original underwriting. But yes, it will be a cost at the venture level.

Okay. And just in our second quarter overhead numbers, we did have additional ramp up of our people that ultimately will be responsible for running Mills, and that went through our P&L and that was higher than our budget in terms of what we originally had going forward, because we didn't anticipate The Mills deal in our original budget.

Okay. Steve, just back to you on that point are we talking a couple of cents here for the balance of the year?

Well, no, probably not. Probably a little less than that.

Less than. Okay, all right

It is all in our guidance.

Okay, great. Thanks, guys.

Thank you.

And your next question is from the line of Michael Gorman with Credit Suisse.

Thank you. David, could you just quantify a little bit for us what the timing and the magnitude of the redevelopment pipeline looks like on Mills, and maybe any potential dispositions that you've come across as you look through the properties?

Well, let me, I'll push the development -- redevelopment to Rick, but I will say that, again, I think there's some clearly articulated opportunities both in The Mills portfolio, and the malls that were owned by The Mills. We have not yet, unlike our own portfolio, we have kind of the $5 billion pipeline. We have not done that. It would certainly be our intention to be able to quantify that by year-end, but we want to be a little bit more thoughtful. I mean, the last thing we want to do is start telling you all of these plans that you've heard about historically with the Company, and then not really be able to produce them. So that's under -- currently being under taken. I don't know Rick if you want to add to that but that's. So the number is not yet there, but it will be a meaningful number to that portfolio.

Yes. The only thing I would add to give a little more color is that the opportunities really divide themselves into three categories. There's the regional malls from The Mills and in those regional malls, we have identified three or four very substantial expansion opportunities. We're now in the process of discussing those opportunities with the appropriate candidates that would trigger those opportunities and that just takes time to develop. In both The Mills and the malls, there are the whole range of strategic, if you will, opportunities that are just add a box here, replace a box there, and we're in full bore in starting to implement those, and I would suspect that you'll see some of that start emerging over the rest of this year because they are shorter lead time items. And the last category is what David referred to in The Mills properties. We are are having conversations with a number of more traditional retailers and we've got to decide whether that's right for the mix and how we want to pursue that incremental activity. But the good news is we have demand and, therefore, we have a lot more things to review and try and decide whether we want to implement.

And on the sales side, I think we look at it in a couple different ways. I think The Mills portfolio by and large we will keep intact, because we do think there is some real benefits in terms of the retail relationships, the branding, the sponsorship opportunities, etc. If you put that whole portfolio together , other than maybe one or two of the laggards there, so I expect that portfolio to remain more or less intact. On The Mall side, we will ultimately not own all of the malls, and we'll end up selling a handful of them, and it just depends on kind of how things look, what the value is. But we will probably narrow that mall portfolio down to a more manageable number that makes sense for us in terms of the long-term view of the

Okay, great. And a question for Steve, actually. I apologize if I missed it, but going through the changing guidance, does that assume any share repurchases through now -- from now through the end of the year?

It's -- no. It does not. But given the cost of the borrowing, the share repurchases aren't going to meaningfully move the needle.

Okay, great. Thanks.

And your next question comes from the line of Lou Taylor with Deutsche Bank.

Yes, Steve. Just a followup on The Mills financing. How much of the financing was just absorbing existing Mills debt versus repaying notes that were in place at the time?

Well, when we bought The Mills, Lou, every property was encumbered, so we are -- there is a maturity schedule that was already in place, but what we were able to do is to identify a number of the wholly-owned assets that were relatively underlevered and we were able -- which was contemplated as part of the original deal, go out and refinance these properties and generate almost $1 billion of proceeds. And that was at a much lower cost of funds. Then the second thing that we were able to do is complete a $925 million senior credit facility for The Mills that was at 125% over LIBOR, which is essentially replacing mez capacity at 275% over LIBOR. So again, much more favorable than the way the deal was originally contemplated.

But these are all new financings. I mean, they aren't assumptions of existing financing, so they are all new.

Well there's six financings that we did, Lou, are all new pieces of debt.

So like the operating Mills, you've got $175 million with an October '07 maturity. That's --

That one we have not financed because that again is the ones we focused on mostly were the wholly owned. We're going through the partner approval now, but that's one we would expect to refinance. Sure.

Okay, got it. Thank you.

Sure.

Thank you. Your next question comes from the line of Jim Sullivan with Green Street Advisors.

Thanks. David, as your team has read through all of The Mills leases, as you guys have had a chance to really evaluate the joint venture agreement, as you have gone through the development opportunities, does anything surprise you negatively? I'm curious, is there a situation that got more distressed that they did things that really boxed in the opportunity to really fully make the advances you'd hoped to make?

The fact of the matter is we found more -- I mean I can't think of a negative out there of any material -- nothing jumps out, no, obviously, we're still not done. We're only three months into the deal, but obviously, we underwrote it carefully prior to that. I think we have found, Jim, more -- much more positives and the negatives even like at a negative development that just wasn't, just like Cincinnati Mills is a great example. I mean they spent $170 million or whatever the number they spent, there's $3 million of NOI. Okay? Well, we don't have to worry about the $170 million. We just need to think about the $3 million of NOI. And so as we go through that and we are not burdened by the historical spend there, I don't think there's any real, there's no boogeyman out there and certainly the leases -- the leases are like any portfolio, certainly on the small shops. There's kick outs, and co-tenancy and that kind of crap, but nothing that materially can change our view of what's out there. Rick, I don't know, any -- I'll ask Rick as well. I don't think anything jumps out at me.

No, and in fact, the thing that we have really found is that there is a lot more that was in suspended animation because of their circumstances than we had projected. So for example, at St. Louis Mills, which is certainly not a strong property, Cabella's opened last quarter and it's substantially helping the property and helping the cash flow. And there are a number of other projects like that that were in various stages of receeding that now were able to pick up and just run with. And, frankly, had not anticipated that there would be that much already in the pipeline.

Okay, a great example of the positive, Jim, they did not -- it's not going to be an earnings number for us but just from a cash flow perspective is they did not bill their CAM billings, Steve, for I don't know how long, at least a year, right?

Yes.

So first thing we did for every lease was we sent out a bunch of bills and that doesn't necessarily make us popular with our retailers, but they owe the money. And that's not going to be an earning's benefit from us, but it will certainly be cash flow benefit of us. And there's -- there was more cash in the system than what we underwrote, whether we saved transaction costs, or we were able to bill what they hadn't billed, or they forgot about escrows, I mean the list goes on and on, so in that sense, it's good. The only big liability we need to deal with is the office lease and that market remains strong. And we're hopeful by a year from now, we'll be out of that office lease, or at least, if we're on the lease, we'll be getting enough subtenants in there to deal with the obligation.

And just to clarify, David on the joint venture side, there weren't any surprises there, either?

Not at all. We knew the rights of the partners. That's not to say that all of the partners still have a number of rights, but in terms of how the preferences work or that kind of stuff, nothing of note at all.

Okay, thank you.

Thank you.

And your last question comes from the line of Rich Moore with RBC Capital Markets.

Hi. Good morning, guys. You said that that you had one B-mall that, I think, you were wrapping up the sale of and should we assume that given these debt markets and the situation out there that asset sales for the next quarter or so are probably kind of dead?

Well we've had a couple of deals where -- we've had a couple of deals that are on hold, and it's hard to predict ultimately what might transpire, but that market clearly on -- not so much the B-mall that we just don't want to focus on, but the C-mall or something like that. I mean it's a little choppy. It's hard to predict, but we still expect to continue what we've done over the last several years, which is to sell assets that we think ultimately we just don't have the management time to deal with.

Okay. So it will probably just open back up. Is that your thought?

I think so, and there's nothing wrong with putting more equity in a deal. That's why all of this equity was raised. So --

Okay, good.

We'll have to see if these guys are ready to put more equity in deals.

Sure, okay. good, fair enough. And David given the tone and the conversation, it sounds like the pyramid portfolio would be something you guys wouldn't be terribly interested, is that true?

I hate to comment on other deals that are rumored to be out there, but from an M&A side, point of view, we -- there's nothing out there that we would indicate stay tuned for. We're doing what we're doing.

Okay, very good. Thank you. And then, Steve, on the home and regional office costs, those were actually lower this quarter than typically. Maybe $0.01 or $0.015. Is there anything special in there?

Rich, it's just that we've kept -- other than the ramp up that David talked about that occurred for The Mills anticipation of taking over The Mills, our home office headcount has been relatively flat, and because of the ramp up in development spending, we're actually capitalizing a little bit more of the costs. So your overall costs are static, but the capitalized cost is up a little bit, so what's flowing through the P&L was actually down.

Okay, good. I've got you. And that will probably stay down I take it?

Given the level of development activity, I would say, again, ignoring The Mills ramp up, it would stay down, but we will clearly see some increased costs because those people that we've hired to do the back office functionality are now in place. And they will flow through the P&L fully in the third quarter.

Okay, good. I've got you. And then Rick, last thing for me is year-end '07 occupancy, what are you thinking there?

Right now, things seem to be on track that we're going to continue these trends and hopefully up a touch as we have in the last couple of quarters. Obviously, bankruptcy is the wildcard there, but things seem to be fairly moderate on that front.

Okay, so you would end the year probably similar to last year maybe, something like that?

Should be. Hopefully a touch up.

Okay, great. Thanks, guys.

Thank you.

Alright. Thanks, Rich.

And with no further questions, I'd like to turn it back to management for any closing remarks.

Okay. Thank you for your interest, and we'll look forward to keeping you abreast of what's happening, and we'll talk to you next quarter.

Thank you for your participation in today's conference, ladies and gentlemen. This does conclude the presentation, and you may now disconnect. Have a wonderful day.