西蒙地產 (SPG) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Simon Property Group earnings conference call. My name is Akia and I'll be your Operator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session toward the end of the conference. (OPERATOR INSTRUCTIONS) As a reminder this call is being recorded for replay purposes.

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

Welcome to the Simon Property Group's third 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 refute -- please refer to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties. Acknowledging the fact 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 October 29th, 2007. The company's quarterly supplemental information package was filed early this morning as a Form 8K. 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. Participating in today's call will be: David Simon, Chairman and Chief Executive Officer, Rick Sokolov, President and Chief Operating Officer, and Stephen Sterrett, Chief Financial Officer. And now I'll turn the call over to Mr. Simon.

Good morning, and thank you for joining us today. I will just take a few moments at this time to provide comments on the results for the quarter and recent activities, and then we'll open the call up for your questions. Third quarter diluted FFO was up 12.3% over the prior year to $1.46 per share. Positive factors contributing to the quarter include: strong portfolio operating metrics in all our domestic platforms, strong operating results from our European investments in our Premium Outlet centers include -- in Japan, and the accretive impact of our acquisition of The Mills. You should also note that our 12.3% FFO growth was achieved despite the fact that our share of land sale gains was $7.8 million lower than last year at this time, and our share of the provision for credit losses was actually $5 million higher in the third quarter of '07 compared to the third quarter of '06. In addition, during the third quarter of '06, we recognized a one-time $3.7 million gain related to the sale of our holding in a technology venture by Chelsea. Comparable sales were up 3.6% to $491 per square foot in our domestic regional mall portfolio, sales increased 8% to $499 per square foot in our U.S. Premium Outlet center portfolio.

Comparable regional NOI, mall NOI, was 5.6%, up for the quarter, higher than both the first and second quarters of 2007. This is primarily a result of strong operating results. Comparable NOI growth for our Premium Outlet portfolio continues to be strong at 9.4% for the quarter and the nine months. Occupancy in the mall portfolio increased 20 basis points over the year earlier period to 92.7%. Our Premium Outlet portfolio is affectively fully occupied at 99.6%. Re-leasing spreads remain very strong. The mall portfolio was $8.85 per square foot, representing a 23% increase re-leasing spreads for the Premium Outlet portfolio was $7.53, representing a 31.8% increase and we're well into dealing with our 2008 expirations. The general economic health of our tenants remain strong through the end of the quarter. We lost only 53,000 square feet of occupancy to bankruptcy for the first nine months of 2007, versus 612,000 square feet lost in the year earlier period.

We opened three new international centers during the quarter: Kobe-Sanda Premium Outlets in Japan on July 5th, the Porta Di Roma, the largest shopping mall in Italy, opened in Rome on July 26, and Cinisello shopping center opened in Milan on September 27th. Construction continues on six new U.S. projects, two Community/Lifestyle centers, three Premium Outlet centers and a 950,000 square foot open-air regional center, as well as two shopping centers in Italy and five in China. On July 5th we completed the sale of a portfolio of five noncore assets in Poland. Our share that we repatriated back to the U.S. from the sale exceeded $121 million. We would calculate an IRR for you for the transaction, but since we had no equity in those centers we can't come up with a number. I think this is a great example of the value we have created through our international development activities. I just want to make a note on the mall numbers, they don't include any impact from The Mills, so that's just strictly the mall portfolio out The Mills malls as well.

As we have grown our business, we have mainly -- maintained the integrity of our balance sheet, as evidenced by our A minus A3 ratings, the highest investment grade ratings among U.S. REITs. We believe it is critical to be positioned at all times to access capital in multiple forms. In these challenging credit markets the strategy continues to pay off as evidenced by our ability to execute two significant capital market transactions at favorable terms. On August 22nd, we syndicated a senior loan facility for The Mills limited partnership. The facility was initially closed for $925 million in June of 2007, but due to strong demand the facility was increased to $1.025 billion including a $50 million revolving credit facility. The facility interest rate is LIBOR plus [125], and on October 4th, we implemented the $500 million accordion feature of our revolving corporate credit facility increasing capacity of our revolver an our credit facility up to $3.5 billion. The base rate on this facility is currently LIBOR plus 37.5 basis points. As a result of our strong performance and confidence in our business strategy today, we announced that we expect to achieve at least the high end of our previously updated guidance of $5.83 to $5.88 per share for 2007 diluted FFO. I remind you that our original 2007 guidance issued back in January was a range of $5.70 to $5.80 per share. With that said we're now ready to open the call up for questions, Operator. So we're pleased to begin the Q&A session.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Jay Habermann of Goldman Sachs. Please proceed.

Hey. Good morning, everyone. I guess David or Rick here, can you give us some thoughts just on Mills in terms of your leasing to date and I guess the strategy and especially as you head into the end of the year?

Well, I think it's safe to say that we've had some impact on Mills, not a huge impact, because we took it over as you know in the spring, so we're optimistic we're going to have a significant impact in the future, but I think the results of '07 from Mills, ultimately, will have marginal impact, but not a material impact, just given the nature of how long it takes to lease and open up space. I think we've had a relatively big impact on charting the future strategy of a number of the centers, and redevelopment opportunities, outlining those, coming up with a game plan, but I would think that '08 really is going to be the year where we're going to see kind of the impact that we'll have on a number of the assets. Some will take longer, but it's safe to say that '07, we've had marginal positive impact but not a lot.

Okay, and then you mentioned I guess 53,000 square feet in terms of bankruptcy as year-to-date. Any sense of how you anticipate sort of the upcoming holiday shopping season and implications for next year?

Well, look, I mean I think in our last call, we threw a little bit caution to the wind and we continue to throw a little bit of that. The -- there's a lot of economic uncertainty out there. We'll have to see. Our properties are well positioned, they're high quality, high quality tenants, but it would be naive for us to suggest that we won't have -- we won't have some -- there won't be some impact in terms of what's going on in the economy for us. Now remember percentage rents aren't a huge part of our business. They're a little bit higher at the Chelsea level because they have a number of the anchors that do straight percentage-ranked deals, and -- but look, there is caution to the wind economically. We actually embrace these kind of economic changes. That's when we've done some of our best work, so we'll just have to see how the next few months transpires.

Okay, last question for me, in terms of just expenditures internationally, can you give us a sense of just how much you're thinking about spending over the next several years in terms of new development overseas so whether it's China or Europe?

Very hard to quantify, other than what's in the hopper that's laid out in our 8K, primarily because China, we're going to build the five and take a kind of step back and see how those are resulting. Japan and South Korea, just on the outlet side, I think we have a good handle that we think over the next few years will add more -- two or three more to South Korea, perhaps two or three more to Japan, but there's nothing eminent in terms of what's going to happen on the construction side. And then in Europe, primarily through Simon Ivanhoe, we're still awaiting various approvals to construct some great high quality product, but the approval system in France is taking a little bit longer. And I think we've laid out a pretty good plan in Italy. We've got a great franchise in Italy. We have a handful of projects through '10. We're also looking at a handful of other projects, so we expect development to continue, but beyond what we put in the 8K, we'll just -- we'll just have to wait and see how those transpire as well.

Okay, thank you.

Thank you.

And your next question comes from the line of Christy McElroy of Banc of America. Please proceed.

Hey. Good morning, guys. Just following up on Jay's question. Do you see the potential for closing that 400 point basis occupancy gap between the portfolio and The Mills regional malls?

Between the malls and the outlet business?

No, between your mall portfolio and The Mills regional mall portfolio, in terms of what you see as the frictional occupancy in The Mills portfolio -- regional mall.

I would hope so.

And do you see that next year? You talked about progress being made next year.

I think -- I think like anything, it will take a little bit longer than you want it to take. I think we should make progress next year, but I don't remember exactly where we had budgeted. We've gone through the budgets on those. I don't remember exactly kind of where we budgeted for the malls that The Mills owned, but I would think we'll bridge at least half the gap is my gut. We also have a couple that are in the midst of major redevelopment, so let's take Southdale as example. We expect to -- over '08 to create kind of a major redevelopment vision for that property, so there may be some leasing that we won't be doing because we're in the process of coming up with that plan, [De Lamo], as another example ,might fall into that category. So there is, there are a couple there that may make it look a little bit lower than really what it is just because we're going through the redevelopment process, but I would think over the long haul there's no reason not to anticipate that we would get enough to where we are the centers due $450 a foot on average, so we don't see any reason why we can't get it up to that level.

Okay, great. That's helpful. And then just quickly, what was the average price on the shares that you bought back during the quarter, and have you repurchased any additional shares in October?

Christy, this is Steve. The shares we bought were at $86.25, and we've not bought any since the end of the quarter.

Great, thank you.

And your next question comes from the line of Jeffrey Spector of UBS. Please proceed.

Good morning.

Good morning.

Can you comment on '08 at this point?

Well, we expect it to be a good year. We will work our tails off to make it a good year, but we tend to -- we're in the midst of our finalizing our budget. We spend really November fine tuning it, so and we normally announce it kind of what our budget -- internal budget is some time in January, so we'll stay with that program.

Okay, what are some of the latest comments that tenants are making?

Well, I don't -- look, I think September and October have been slow sales months for sure over -- overall. Some of it in terms of our retailers attribute it to the warm weather. Some of it may be the economic uncertainty that exists in our country today, but so far it's safe to say the vast majority of our retailers have not changed their plans in terms of store openings for '08 and their view on their future performance. So it's business as usual across the board. There's always a couple of retailers that have a tough business model that they're working through, but I would say generally it's business as usual, even though sales for September and October have not met their expectations.

Okay, and just last question. Can you provide an update on Domain and any latest thoughts on mixed use projects?

Let me just -- this is Rick. Frankly, we were just down in Domain, and when you walk through there it is very vibrant. The addition of the residential component and there will be a hotel component and an office component that provides a much more vibrant environment. The restaurants are all open at Domain, and on a Wednesday night we're fully filled with people extending our shopping hours, and to the extent that we can bring in these kinds of elements on a basis that makes sense economically and completes the environment that we're creating, it's something we're continuing to look at and we have a number of others in the pipeline. The ones that have opened so far for occupancy, which are Domain and Firewheel and SouthPark in Charlotte, are all leasing up in accordance with the pro forma to most cases, at higher rents than we budgeted because they really are presenting a unique environment in each of those markets.

Great, thank you.

I'll just -- Shelly had this in and I took it out, but in Austin, it's kind of unique because we did have our board meeting down there last week, and if you can see the breadth of the Company in Austin. So for instance, we did the high-end Domain, wonderfully executed development anchor by Neiman Marcus, as Rick mentioned with office and apartments and the high-end tenants. We have [bargain creek] traditional fantastic enclosed regional mall, Lakeline which is a nice suburban mall, we did kind of a power end power center up in Georgetown, North Austin on I-35, which is anchored by Kohl's and Target, and we did our outlet center there as well. We own some other property that we've -- as well, and it kind of gives you the depth and breadth of the organization to be able to execute all reasonably well, all various different products. And on Domain, we'll be starting in early 08, Domain two which will be about another 500,000 square feet of shops, we'll be finishing building P in '08 which is a pad associated with Domain one and we also anticipate expanding the Premium Outlet center in Round Rock.

Thank you.

Thanks.

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

Thank you. The focus of the international outlets, will that remain in Asia, or do you see any other opportunities for some Premium Outlet businesses?

Well, Craig, I think long term, I don't know what that means anymore, but we would anticipate having at some point a presence in Europe. And we still are sorting through exactly how we are going to execute that, but it's -- I think it's an objective that we have. Obviously, we're going to do it on a basis where we think we can add value and if we can't do that, we won't, but it's clearly an objective that we have is to have a Premium Outlet presence in Europe over the longer term -- medium term to longer term.

Is zoning the primary hurdle or --

I think it's more organizationally, just dedicating the resources. I would put that -- to get the right to build in Europe is a real headache. We're not even at that point where we can use that as an excuse. We had that problem in Simon Ivanhoe. I'm hopeful we're going to make some progress there, so we're not at that point where we can blame it on the zoning. I'm sure it's a challenge, but we have a great presence in Italy that we think we can take advantage of with our Premium Outlet product. I think Central Europe is another example as ultimately there being a time and place for the outlet business, so I think it's a matter of time, we got to address it organizationally, but hopefully we'll be able to do that.

Great, and do you have a cap rate for the two noncore malls you sold in the U.S?

No.

Okay, thanks.

Thanks.

And your next question comes from the line of Jonathan Litt of Citi. Please proceed.

Hi, this is Ambika with John.

Good morning.

Hi. Is the upside in Mills more on the traditional mall side and on the Landmark assets? Is it more on the occupancy side or is there also some upside in rent?

Well, I'll let Rick answer too, but I would say that I think the upside is going to be across the board. It's going to be development, redevelopment boxes, marketing, the operational side, leasing, increasing the occupancy, so I would view it across the board and the portfolio is not perfect, as you know. The good news, the less perfect assets don't contribute a lot of material NOI to our venture or FFO, but I would say the upside should be across the board in each and every aspect of the business that we're in.

And I would just pick up on something David mentioned earlier. We have put together for the entire venture portfolio, both malls and Mills, very detailed strategic and tactical things to be done in each of these properties. And one easy example at Esplanade in New Orleans, we've been operating with a vacant Macy's, and well Macy's has announced they're reopening in the fall of next year, and we are adding several other anchors there and that is going to substantially reposition that asset and drive occupancy and rent. Each of our groups have put together their plans for integrating these properties into the programs we have already in Simon, and those things are ongoing, and we would expect and we've seen the beginnings of contribution from all of those efforts.

Okay, and then on the management income side, it basically doubled from 2Q to 3Q. Should we think of 3Q as the run rate or were there one-time items in 3Q?

No, Ambika, you should think as 3Q as the run rate.

Okay, and then on the expense recovery rate that also ticked up as you previously had guided in the first half of the year that it was going to come up in the back half. Will it remain at this level for the fourth quarter and also into 2008?

I would expect it to remain at that level for the fourth quarter. As you know, as we talked about on the call last quarter, some of the variability and the recovery ratio is because of the timing of [CAM] capital. As we get into 08, clearly within quarters we could see some variability again, but I suspect as you look at the full year '07, we would expect '08 to be at least comparable on a full year basis with where we ended '07.

Okay, great. And my last question, do you have any guidance on gift card revenues in the fourth quarter now that the timing of revenue recognition has changed?

Well, the -- I mean, the timing hasn't changed relative to where we were last year. The timing changed as a result of our change in the program, which was back in I think late '05, early '06. We expect the card sales to be up double digits this year. I think we did about $515 million last year and will be in the high $500 million maybe $500 million to $600 million this year, so I think you'd see a corresponding increase in the revenue growth in that kind of 10% to 15% range.

Okay, thank you.

Thanks.

And your next question comes from the line of Paul Morgan of FBR. Please proceed.

Good morning. In terms of the -- you've been in the market where they're selling some of your noncore properties or with The Mills properties and again your -- I'm interested in what you're seeing since July/August in terms of the number of bidders for B and C type properties and the spread between the cap rates on those types of properties and at least what you think they might be for A still?

Well, let me go back to Craig's question a little bit. We have, I think it's safe to say on a quality project, the cap rates haven't moved in any material way, and whether that's an enclosed mall or a community center or anything else, and I think we're in the -- we're very close to selling two Mills malls as you know. Westfield disclosed the cap rates associated with those which were, I don't know, 5.5% or something, maybe a little less than that. The ones that we sold just -- and these aren't perfect cap rates, but to give you a sense, like Boardman Plaza, we sold, was -- it's not pretty real estate, but I think we sold it around a 7% cap rate. University Mall we were losing money, and we sold it, and Alton Square was -- it's been a tough project for a number of years, but my guess is that around a 9% cap rate. Now that's a very small mall, so it did like $1.8 million of NOI or $1.4 million or $1.5 million, somewhere in that range. So that gives you a sense, trades are happening, but I think it's safe to say that if it's a quality asset like Westland and Broward, they're quality assets. I think in the mall side you're still at the 5% to 5.5% cap rates --

Are you less likely to go for more of those 9% or just keep them, or do you think this is actually sort of a return to what might be a more reasonable spread between A and C and there's no reason to expect, no reason to wait?

Well I think Alton Square, I hate to say it, was going to be a 9% today or a 9% a year ago.

Right.

Okay? I mean --

Yes.

So we're one of the few companies that admits that sometimes we don't have perfect Real Estate, and I don't think that change in the credit markets or anything else really affected the -- we've been trying to sell Alton for maybe this is the reverse, think about it. We've been trying to sell Alton for two years and in the height of the real estate market we couldn't get anybody to buy it and we finally found somebody to buy it. I hope they do well. I'm sure they will. So what does that tell you about cap rates? I don't know.

Right. Okay. My other question was about there's been a lot of talk over the past couple years with lifestyle developments in terms of some of the lenient leases for a lot of kick outs or co-tenants, and to people who speculated that when sales slow, you might see the ramifications of that and opportunities for it to get retailers back into the malls who have left these projects or to see a lifestyle center completely unwind. And do you think you've gotten to the point where you might to see that or has it not been a long enough period of soft sales?

Well, my gut is to tell you that the new stuff on the drawing board, I don't have, this is just my gut, but I would tell you that the new stuff on the drawing board, I think it's going to be very hard to execute. And without naming names or retailers but the four or five retailers that are involved in most every one of these are not -- they aren't like having really high comps, in fact, negative comps.

Yes.

So the bargains there going -- I mean the deals that they're go drive to do those are going to be tougher and tougher in a very tough comp environment and in some cases even in a negative comp environment, and I would think that construction lending will be much higher standard because there's not the immediate CMBS take out for the construction lender. So I think the good news for us and other mall owners is that the hypothetical, let's get four tenants and give them a bunch of great deals and we'll do a Lifestyle Center are probably currently, they're probably going to go by the wayside if I had to guess, just because I think it's going to be very tough to execute. So I think that gives us some opportunities. Maybe they will partner with some people. Some of the ones that have been built may come undone and maybe you can buy those at a decent price. We haven't seen much of that yet, but I think that's coming, so I think that world has changed significantly.

The only other thing I would add is the biggest constraint we have on adding those retailers to our properties is inventory, so when we are -- we basically we took back all these Macy's stores and are knocking them down and adding square footage expansions on our existing properties, every one of those retailers is saying, let's come in, and in fact they are opening now and you can see that in 8K we've got four or five of those projects opening over the next literally two months. We just opened an expansion of St. John's that opened last Friday, so one, when we have the inventory that's well located, the retailers want to come into those projects.

Right. Great. Thanks.

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

Good morning, guys. A question I guess for Rick and for Steve. Are you guys seeing a change in the pace or tenor of either financing or pending lease discussions around AMB properties, and can you break that down if possible I guess by segment or geography?

You mean, Jeff, is it taking longer to get leases done?

Yes, or conversely, yes, exactly, or are tenants showing more hesitancy?

We have not seen -- in the stable properties the tenant demand is consistent. Obviously in the best properties, we could add substantially more square footage and have more demand, but it is not a slackening of demand in the other -- in the stable properties. Steve, what about on the financing side? Are you seeing spreads widening much more aggressively there in the B assets?

Well, Jeff, the CMBS market as you know has been really pretty much shut down for the last 60 to 90 days. It's interesting because we're seeing more activity from the life companies now, which I think is just a function of them having always been kind of the same pricing level and the market kind of have come back to them if you will. I mean, there's no question that it is at wider spreads to get a refinancing done on a property. There is a little bit of differentiation in quality, but I would say most of what we're seeing now is just a reaction to the repricing of risk in general and less specific to differences in quality of assets.

And I think, Jeff, the issue for A and B is not spread. It's loan to value, okay? So you know the days of having a big huge over refinance at least currently is probably tougher to come by, obviously, dependent upon how much debt you have on the existing property. But the big issue, whether it's A and/or B is really, it's really loan to value right now.

Okay and just maybe a follow-up question on --

But, Jeff, let me just finish.

Yes.

That is what puts us at a competitive advantage, because we don't just rely on that market.

Okay. Rick, to follow up on your comments then, do you expect maybe the time frame for projects and design or planning could be pushed back as a result of -- call it maybe less robust retail interest there at the margins?

We would certainly expect that some of the new projects that are in various stages of the pipeline are going to be delayed in their execution.

Particularly the ones under construction today or just ones that are more in the design stage?

Once you're under construction, the people have to deal with it. Frankly, we have been more conservative in our approach to new ground-up stuff and happily our pipeline is pretty much being delivered over the next six months and is substantially leased, but to the extent we were in construction today for a brand new ground-up project, I think that that would be a much more conservative approach than underwriting them would have been the case a year ago.

And let me just give you, maybe I could capsulate our strategy, Jeff, if I could to take the moment. We are full steam ahead on our redevelopment pipeline, because as you know, it's very easy to under write, you know what you're trying to accomplish, you know what tenant demand is going to be, and not only do they add value from the redevelopment but you add value from the existing assets, so -- and that's a huge program. It's $3 billion to $4 billion that will increase with The Mills, both The Mills and the malls from The Mills, as we sort through those opportunities. Nothing from our point of view has really changed as we look out in the future. Our new development on Chelsea, same thing. And we're -- demand is great. Returns are fantastic, and we're on an extreme mission to continue to find new Chelsea outlets, domestic as well as in Asia, and hopefully one day in Europe. From new development in the U.S., though, I do think it's safe to say that all other projects that we've had and now none of this is material because the stuff that we were looking may have been in '10 -- '09, '10, '11, we're making sure that that's stuff that we want to do that can be executed and an appropriate return, some of which won't change and some of which may be deferred and/or dropped.

Well, if you guys are becoming more stringent say underwriting future ground-up development, is it fair to say you're concerned or are are you concerned that any of the domestic markets could be oversupplied either due to sheer construction or just roof tops that are failing to materialize out there?

I think you have -- that's certainly part of it and you also have the general economic malaise. You have high land prices, construction costs haven't come down a little bit, so you need a little bit of -- if you're going to go into a tougher economic environment, I think you'll want to see some flexibility from land pricing and construction costs. Now, look, the fact of the matter is we all think about these things on the five to 10-year horizon, so it's not going to defer us completely. On the other hand, we have plenty to do and plenty of opportunities, so for us to chase any new development that we're going to have to work our you know what's off to weather that, we'll take our resources and plow them back into our existing portfolio, plow them back internationally, plow them back with Chelsea, and I just think we are taking, it's not so much the economy. This was really brewing, but just to make sure that the new stuff that we have really is going to meet future demand. And, look, a lot of new stuff has been built, not by us, thankfully, but a lot of new stuff has been built, and it's still taking a long time to meet the demand, and certainly meeting the demand is going to -- it's -- given the rooftop situation is going to take longer to accomplish.

Just one last question for you, David, is I think you guys sold Alton Square during quarter. Was that something specific with that asset or more of a call in your view of St. Louis?

It's across the river. The people in St. Louis I'm sure don't consider it part of St. Louis.

Well, would you have had a different view if you guys had acquired the asset from Westfield that we saw CVL take?

Well, let me just finish, we certainly tried to sell it at St. Louis, but that river is a boundary that we couldn't overcome. So I'm sorry, what was your question?

No, just wasn't sure if you'd have a different view on that asset to the extent that you guys had acquire the assets from Westfield that we saw CVL take?

No. No.

Okay, thanks.

And your next question comes from the line of Matt Ostrower of Morgan Stanley. Please proceed.

Good morning. Just on the -- a follow-up on the fee question, was that increase in fees was that basically attributable to Mills?

Primarily, Matt, it was as we talked about I think before , starting July 1, we did receive all of the benefit of the fee stream in The Mills properties and incur all of the costs associating with

And is there a specific cost to offset this item here, or is it just part of our overall operating costs?

Part of it would be in the property operating cost line and then part of it would also be in the home and regional office.

Okay, and I know you had talked about -- I think you talked about giving more disclosure on this whole issue. Obviously, you've given us more numbers here in the income statement. Is there more sort of to come here in terms of either an increase before some specified time period, or is there a promote that will come in down the road here? Can you give anymore specificity about that?

Yes, I'll just answer that, Matt. We have a, and I hope you respect this, we have a -- our relationship with Farallon is a private partnership, and we would obviously whatever benefits we get are going to flow through our income statement, our balance sheet, but the terms of that and the nature of that will remain private.

Okay, and then on Mills, it just strikes me, and I don't know -- I don't have any specific statement I can point to, but it seems to me that you guys were a bit more optimistic about getting NOI up a little bit faster when you first bought this thing. Is that a missed statement on my part, and if it's not what's changed here to slow things down?

I think it's a misstatement. We have done a lot on the operational side, but I think it's -- the leasing side takes time, so I really think that the response to the earlier question was what impact have you had on leasing, and we've done a tremendous amount on the operational side. Our view hasn't changed at all. Just trying to be realistic that it does take some time to get the leasing repositioned in the appropriate way. Our view on the properties and the potential hasn't changed at all.

Thank you.

Thanks.

And your next question comes from the line of Michael Gorman of Credit Suisse. Please proceed.

Good morning. David, if we could just go back to the Mills for a second looking, more on the productivity side. Could you sort of look out and see over the mid-to-long term , how productive can these assets be? Are we talking something in line with your current portfolio average, or are they always going to sort of be at a discount productive wise to

Well, I would think it would clearly, we would be able to clearly improve the average, and I would anticipate, it's hard to say exactly where they will end up, but I don't see any reason why it will have any kind of material difference from what we have.

Okay, and that includes --

Now like Rick said, Esplanade is a great example. We're adding a Macy's. We haven't been able to really lease that part of the center because of that. It's got low productivity associated with that. We're adding another anchor and a movie theatre on the outside, so can you -- you can imagine a year from now when all that is done, sales are going to pop and be much higher than they are. And all -- so that, as you go through the list, we would anticipate the ability to increase the sales per square foot.

Got you. And then I guess just turning to your own portfolio, looking among the property types, this is a second quarter in a row where the outlets have been more productive than the regional mall portfolio on a sales per square foot basis.

Right.

Is this a long-term shift we're seeing, or is it sort of a quirk in current market conditions that is making these properties I guess have better sales?

I think it would be -- I think one of the big reasons for that is because they do is, as you know, or we do have a number of tourist-oriented outlet centers, and the impact of the weak dollar certainly helping the mall portfolio, but given the smaller number of centers, it's having a bigger, larger impact at the Chelsea level, i.e. Woodbury, Orlando, Las Vegas, just to name a few.

So I guess just looking out over the long term, assuming that the currency situation doesn't last forever --

That's a big assumption.

I guess it is, but over multiple years here, are these portfolios going to be essentially at [parody]?

Well, look, I think the great thing about Chelsea is that the reason they aren't at parody is because the occupancy costs are 8% and ours are at whatever they are, 13%, so we do anticipate, I think we've said consistently, we do anticipate having a little bit higher NOI growth, because of the low occupancy cost, and I think you're seeing that over the last year or so. Sales, look, it's hard to really know how that all shakes out, but they're both -- the good news is they're both very high quality portfolio. They're both generating very good rent spreads. Chelsea has got a little more immediate upside because of the low occupancy costs, and on the other hand the redevelopment opportunities in our mall portfolio are immense.

And the only other thing I would add to the Chelsea productivity is that as we have worked with the Chelsea leasing team and our leasing team, there are now a number of incremental full-priced concepts through our intersession and pitching that portfolio that are now looking to expand within the Chelsea portfolio, and these are operators that are also going to drive sales at a higher percentage.

Got you, okay, great. And just one last one if I could. Steve, I guess this would be for you. I notice that the [mezz] loan to the Mills picked up during the quarter. Was that due to redevelopment spending or is that just normal fluctuations?

It was due to the cash component of the limited partners of The Mills. We cashed a number of them out. We also redeemed some of the preferred stock in The Mills.

Did they have an option to stay in the partnership or no?

It was dependent upon the number of units in The Mills that you held to begin with.

Got you. Okay, great. Thank you.

Sure.

And your next question comes from the line of Michael Mueller of JPMorgan. Please proceed.

Yes, hi. I know you already talked about the tenant demand a little bit, but do you worry at all about the industry as a whole, the ability to lease up the space that's slated to come on line in '08 or '09, if times are still tough? You just have an issue with looks like a lot more development, redevelopment going on than say five or six years ago.

I don't think from our standpoint we're concerned at all. We have a lot of work to do, but I don't -- we don't anticipate opening projects that aren't leased, so I don't think that's a relevant concern. I do think you got to be careful about pushing new development. A couple of years ago, maybe a new development where it was easier to push today, but the stuff that we're building we don't anticipate having any lease-up issues.

And on the redevelopments that are opening in '08 , they're leased. In fact, Burlington, Nordstrom is opening next March, we're opening small shops yet this quarter because the small shops are ready to open and the space is available for them, so that really is not

Okay, and you mentioned the impact on Mills leasing. Is most of that to date been on the Landmark side or on the traditional mall side?

Well, the impact for us has been relatively the same, though we kept a lot of the existing Landmark people together so the down time associated with that was not as great, whereas the malls we basically had to put a new team together that we did here in Indianapolis and that has had a little bit more of a transitional nature to it, but again, and that's easier. You have to remember as you know, if you walk a Mills, it's easier to get a tenant in there because the build-out is not like a mall build-out. So you can make a deal in April and get them open in October, where in the mall you can do that but you have to depending on the mall, you have to -- it's going to be a little bit tougher to get done.

Okay, and last question. I know it's not exactly apples-to-apples but the leasing spreads on your malls up over 20% outlets about 30%. When you look at the Landmark Mills, any, can you give us any color as to where the spreads are there?

Mike, I think it's really too soon to say. One of the -- you'll notice in the 8K, we didn't provide you any historical information and there's a reason for that and that's our lack of comfort with the integrity of that historical information. I mean, suffice it to say there's leasing activity going on. We think we're getting market rents. We think we can both grow the occupancy and the rent at both the Legacy Mills portfolio, but also their mall portfolio, but I think it will be another quarter or two before we'll be in a position to give you much color on what the leasing spreads are, just because we need to get that data in our system and make sure we're comparing a good apple to a good apple.

Okay, great. Thanks.

Thank you.

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

Hi. Thanks, good morning. David, can you talk a little bit about the tourism impact and especially if you can talk --

Lou? Hello? Lou, we lost you. Lou? Operator?

Operator?

Yes, I'm here.

Did we just lose him?

Yes, one moment.

Okay.

Your line is open, sir.

Okay, yes, sorry. David, can you talk a little bit about -- more about tourism and especially the impact on Florida? I mean, is it offsetting some of the weakness that may be occurring during -- due to the weaker residential market there?

Well, I think put Chelsea aside for the mall business, yes, we are seeing a sales -- the tourist malls that we have, and we have a number of them like Florida mall, Miami International, Boca, etc., are still doing great in sale increases. And I think the malls that are catering more to the particular marketplaces are relatively flat. And so I think we are seeing a little bit of a bifurcation between the tourist centers there than you are traditional enclosed mall that basically caters to the marketplace.

Okay. And second question, Steve, could you talk a little bit about your expanded credit line? Given your just vast financial resources anyway, I mean, what kind of opportunities do you see out there that would necessitate the larger line?

Well, we did this initially. We always had the accordion feature. I think as we all know in August, it was a volatile month. We decided we wanted to be aggressive in this kind of marketplace with respect to allocating capital. We continue to have that view of the world and so we thought it was just best to go ahead and implement that. It's not so much for any liquidity issue here at the Company, but really just so we can be ready and able to take advantage of whatever else is out there. I mean, if you look at some of the best deals that we've done, we have always been -- it's always been a little bit contrarian, we were contrarian with Chelsea to some extent, we were contrarian with [Rodanco] after 9/11 to some extent, we were ahead of our time at CPI, and I'll let Rick decide how he wants to classify (inaudible), but so that's what we're about. So we just figured it's there. We don't have to really pay much for it and it's always nice to have that kind of corporate flexibility.

Could you just give us a little bit of color, I mean, are you seeing opportunities either by debt, by assets, by land, I mean is anything percolating to the surface in any of those categories that is particularly interesting?

I tell you, not yet, to be overly simplistic on it, but I think it's coming.

Okay, thank you.

Thanks.

And there are no more questions at this time. I would like to turn the presentation back over to Mr. Simon. Please proceed, sir.

Okay. Thanks for everybody's interest. We're proud of the quarter, and I think our business is well positioned to prosper going forward. Thank you.

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