西蒙地產 (SPG) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Simon Property Group earnings conference call. My name is Lauren, and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Shelly Doran, Vice President of Investor Relations.

Good morning and welcome to the Simon Property Group's fourth 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 may be webcast for some time to come, we believe it is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, February 1, 2008. The Company's quarterly supplemental information package was filed earlier today as a form 8-K. This 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 packages. Participating in today's call will be David Simon, Chairman and Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Steve Sterrett, Chief Financial Officer. And now, I will turn the call over to Mr. Simon.

Good morning, thank you for joining us today. Let me take a few minutes just to provide some comments on the quarter and then we'll open it up for your questions. We're very pleased to report FFO for the fourth quarter of $1.76 per share, up 12.1% over the prior year. You should note that our 12.1% growth in FFO was achieved despite the fourth quarter impairment charge of $0.12 per share net of applicable tax benefit of about $19.5 million resulting in our tax benefit of $12.2 million. We had a tax expense of approximately $6.5 million, so we netted those two.

Related to the write-off of our equity investment in an Arizona land joint venture, excluding the impact of the impairment charge, diluted FFO per share increased 19.7% for the quarter to $1.88 per share. Positive factors contributing in the quarter include strong operating results for our regional mall and premium outlet platforms, positive net tenant recoveries related to our continued conversion to a fixed cam program with effective cost control and lower costs related to our captive insurance program, continued integration of and positive impact from the Mills acquisition, including our benefit for managing the portfolio. We did experience a slowing of retail sales in the fourth quarter, and our regional mall portfolio comparable sales were $491 per square foot, up 3.2% for the year, but flat in the fourth quarter. Sales increased 7% for the year to $504 per square foot, and our US premium outlet center portfolio and fourth-quarter sales were up 5%.

Comparable regional mall NOI growth was 6.3% for the quarter, 4.5% for the year. Comparable NOI growth for the outlet portfolio continues to be very strong at 11.1% for the quarter and 9.8% for the year. Occupancy increased 30 basis points in both the premium outlet portfolio and the mall portfolio. Releasing spreads for our mall portfolio contracted somewhat during the fourth quarter as a result of opening of several big box and large restaurant tenants, in particular at our lifestyle expansions. For the year, spreads in the mall portfolio were $5.64, or 14.4%, which is somewhat lower than our historical average, but if you take out the openings related to our lifestyle expansion, the releasing spread for the mall portfolio for the year would have been $7 and 21% or 18%, which is obviously slightly above our historical norm.

Releasing spreads for our premium outlet portfolio was $7.79 for the year, representing a 33% increase excluding embedded renewal options in some of our older leases. The premium outlet portfolio releasing spreads were over 40%. Gift card sales in 2007 were relatively flat over 2006 at $516 million. We attribute that really to the proliferation of retailer gift cards throughout the nation based upon the results of '07 and our outlet -- outlook for '08. In addition, our Board of Directors yesterday increased our common stock dividend for the quarter of 7.1% from $0.84 to $0.90 for this quarter.

Let me turn just briefly to talk about the capital markets. Our balance sheet continues to be one of the strongest in the real estate industry as evidenced by our A-minus A3 ratings. We built our balance sheet so that we would be positioned at all times to access capital in multiple forms. And I believe we are well positioned to weather the continuing challenging capital market and credit market.

Given the state of the capital markets, let me just walk through, just for your benefit, what our 2008 plan is. We only have $350 million of unsecured bonds maturing in 2008. Our share of secured debt maturing in 2008 totals $1.7 billion, although almost $700 million of that total will be extended through pre-existing extension options.

We also have a development/redevelopment pipeline that is not otherwise funded by construction debt of approximately $800 million in 2008. And, in total, when you add the unsecured maturing, our share of the mortgage debt and our pipeline that's not funded by construction debt, that's about $2.2 billion. We anticipate funding this, but I underline but we're not limited to this. But here are the following sources that we available to us. First, $1 billion of secured debt maturing as an aggregate loan devalue of less than 40%. The underlying assets generate sales per square foot of $555 per square foot. We expect to generate total proceeds of $1.5 billion or $500 million of excess proceeds from the refinance of these high-quality, low-levered assets. We don't expect any issue with that. We currently have $1.1 billion available in our revolving corporate credit facility. We have over $500 million of cash in the bank at year end. And we will generate over $400 million of free cash flow in 2008. Therefore, when you add it all up, we're not obviously -- we're very comfortable with how we're going to fund our business plan for '08.

Finally, in '07, we had a very good year for our Company. We generated very strong FFO growth, continued to successfully execute our development and redevelopment pipeline in the U.S. and abroad. We completed a strategic acquisition, again very financially profitable, with Mills. We fully integrated that portfolio and now working to grow the cash flow of those assets.

And while 2008 promises to be a challenging period because of the macro economic environment, we believe we're poised for success. Demand for space for our retailers continues to be solid. We will expect to get more space back than in recent years. However, much of that space comes from healthy retailers abandoning certain concepts, and obviously they're going to have to negotiate with us to exit their corporate guaranteed leases. We have one of the strongest balance sheets in the industry.

Our development/redevelopment pipeline will continue to create value for us, and we'll also look for opportunities in this type of environment when they arise. And we also expect to continue to create value from the Mills portfolio as we work through the development/redevelopment pipeline associated with that.

Based upon these factors, the results of our internal budgeting and planning process, and our view of current market conditions, we provided 2008 FFO guidance of $6.25 to $6.45 per share, representing per-share growth of 6% to 9% for the 2008 time period.

With this said, this concludes our prepared remarks. We are more than happy to open it up for questions so, operator, we can begin the Q&A session.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Paul Morgan with FBR.

Good morning. On the expense recovery rate, it continued to be high. You mentioned it contributing to the upside. And it came up last quarter. As I look into '08, what what should we expect sort of the full-year recovery rate to be versus the full year for '07?

Paul, this is Steve. I think you have two things that really contributed to the improvement in the recovery ratio for the quarter. One -- which is ongoing, is just our conversion. We are north of 60% now. We'll be north of 70% by the end of '08. And so that improvement I would expect to continue. There was also an improvement in the quarter which is related really to a bit of a catch-up. And that's in our insurance program. We had lower insurance expenses in the quarter which improved the profitability in the recovery. There is an element of that that I do expect to continue on an ongoing basis. But a part of it was clearly a bit of a catch-up for activity that had occurred throughout the year. So when I think you look at it on an annual basis, I think we're comfortable in telling you that the recovery, the profitability in recovery is there. We probably got a little bit of an outside performance in Q4 that, in retrospect, some of it could have been pushed back into two quarters.

I'll just add, Paul, that as we said historically, and I think we were one of the first companies to anticipate the fact that the macro economic and retail environment was going to slow, we have been very focused on our operating expenses. So we have a pretty good plan for '08. Obviously we have to execute it, but we have a pretty good plan for '08 to drive down our operating expenses. So we're -- we're enthusiastic about that opportunity.

And because, Paul, over the course of the year two-thirds of our leases will be fixed cam, two-thirds of that benefit would endure to out bottom line.

Right. Okay. David, last recession you guys dialed down development pretty meaningfully. And given your outlook for sales and the overall environment, you have a bunch already under construction. If you think about your starts over the next 12 to 24 months is there any moving pieces that you might push out?

Well, the biggest focus we've had is on redevelopment and, Paul, I will tell you that that really has not changed. I mean, we're obviously very focused, in terms of reaffirming the profit potential from the redevelopment given the current environment. Now, on the new development side, we have pushed a couple of the potential deals like we have a site in west Houston, we think that's delayed a year or so. I wouldn't attribute that to the economic environment. I just think retail demand is not quite there yet. But no real change in Chelsea at all. I mean, I think there's real demand there, we're very excited about opening Houston, New Jersey, we're very excited about getting the right to build in New Hampshire. They've got a couple of other sites that were doing it. So I would say no change in redevelopment. No change in new development on Chelsea. And on the -- kind of the mall or the mall side, we've pushed a couple of deals back, but I wouldn't attribute that too much to the economic environment, more just feeling that the retail demand was not quite there.

Okay. And my last question for Rick. In terms of that composition of the store closings that have been announced over the last quarter or so, is there any color you could provide about the mix between top-tier properties versus lifestyle centers versus B malls?

Let me answer that if I could, Paul. The closings that have been announced, we're always going to have some closings every year. But the -- the biggest closings that have been announced have been more concept-oriented closings. So take an example, Jasmine Sola from New York and Company, we have five stores. They're going to close it. They're in good centers. In fact, I think all five are in the New England area because that's where they wanted to start. And that's really a concept change. I mean, you had the -- one of the problems we had, I still don't know how to pronounce it, Pavia/Pavia, the Finish Line concept again. Those are in good centers, but that's women's oriented, Talbot's Kids, and, so right now the biggest potential closings are associated with -- with the concept closings as opposed to closings associated with a, b, or c malls. That's what we're seeing the most of. Sigrid Olsen with Liz Claiborne. And you have things going out of business like Bombay. I'd say that's across the board. Most of the new closings that you've seen year to date have been associated with -- with that kind of activity. We'll still see a Footlocker shedding a few stores, KB shedding a few stores, Ann Taylor announced shedding a few stores. But that's by in large happening year in and year out. And that can happen basically across the board a, b, or c properties.

On that basis, you think you might not lose as much space if the retailers are -- are maybe trying to put in a different concept in that location?

Well, my guess is we'll end up making a deal to get them out of the space and releasing it. So we may have downtime. But obviously we're going to be very focused on getting the appropriate value for letting them out of the lease.

Thanks.

Thank you.

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

Hi. Good morning.

How are you doing?

David, when you outlined your funding options, I don't believe you mentioned potentially accessing the unsecured market. Do you see this as another option or is the pricing there too high? Can you give us a sense for what the pricing potentially may be?

The -- the market is not -- I mean, the market's there for us if we wanted it, but the price is too high. And we have no real need to go to that market. I will say that obviously we have the liquidity to deal with our '08 plan. And the -- and there's all sorts of other ways we could finance the business beyond what I just described. But we are not -- there is just no motivation for us to go to that market as choppy and as expensive as it is. And there's no reason for us to do that. Now, at some point it might calm down. If it doesn't -- we're assuming it does not calm down.

Certainly in the near and immediate future. Yes.

So, but that -- and where it would be, I mean, it would be very wide where we did our last big deal. Now our -- our credit default swaps, I don't know if this is damning with faith praise, but this is what Steve and our treasurer tell me all the time, I mean, where they're kind of the lowest, lowest credit default swaps in the industry and much lower than a number of big, well-known companies. But it's -- I think it's damning with faint and praise at this point.

I think they are certainly much wider than where they were ago a year ago at this time.

Okay. Who are the likely types of lenders for the refinancing of the billion of secured debt that you have coming due, whether it's life insurance companies or banks? Well, I think you'll have that, I think you'll also have the -- the secured market as well. The CNBS market I think is still available for good, quality stuff. I mean, the mall product really hasn't experienced any kind of hiccup. Obviously spreads are a little wider, but there's still demand out there for -- for some financing on that level.

Right. And the life companies historically have always valued the mall product very highly because of its stability. So I would expect them to be much more in the mix than they've been over the last three to five years.

Okay.

And the bank market for credits like us, companies like us, the bank market, to the extent that window is not there, to the extent the insurance window's not there, I don't expect that but, again, with that market, the bank market's very strong for a company like us. So we can access basically wherever we need it if we need it.

Okay. Great. And then just lastly, following up on the question before about the store closing announcements. What level of lease termination income are you currently assuming in your '08 guidance? And then I think you're forecasting roughly flat to down occupancy at year end. Can you give us a sense for what that should look like throughout the year?

Yes. Our historical run rate over the last three to four years has kind of been in the $15 million to $20 million-a-year range. Actually, if you look at I think '06, that's about where we were. In '07 that's where we were absent of the two or three large department store terminations that we did. And that's kind of consistent with our plan for '08. If it is -- if it exceeds that, you'll typically have an offset up in your minimum rent line somewhere so the two tend to net out.

Thank you.

At this point it's no different than what we've historically budgeted.

Okay. Great. Thanks, guys. Thank you.

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

Hi, David, it's John. I'm here with Ambiqua.

How are you doing?

Very good. There's obviously been a lot of press about what's going on in the debt markets. And discussions about the impact that's going to have on the pricing of real estate. What's your sense of what's happening in your space, any large assets that you're seeing on the market?

Well, our -- the big A-quality malls are -- there just hasn't been any transactions. The last couple have been, frankly what we sold to Westfield and what I guess Macerich bought recently. And my personal view is that on that -- on that kind of quality asset, if cap rates have moved, they haven't moved all that -- all that much. Where the lack of really understanding value is probably on the lower quality product where a lot of that was bought by entrepreneurs with cheap debt. And that market is shut down for the time being. It's hard to figure out where those cap rates are. But it's safe to say they probably moved up.

So what would you peg -- if transactions came to market in the sort of class-A space, you think that's in the fives?

Yes. No question about it.

And pension funds probably do it with relatively low debt at those levels? You guys?

Yes. I think that's right.

And I think Ambiqua has a question, as well. Thank you.

Thank you. If we were talking about the same-store NOI guidance for the malls, you mentioned that Simon's really focusing on driving operating driving leverage. If we think about the guidance, what percentage, is it half of the growth is really going to be driven by driving operating leverage? And then could you kind of list the specific items that you're focused on to reduce operating expenses?

Let me talk a little bit about the guidance. We are beholden to some degree to our lease expiration schedule. We ordinarily have 7%, 8%, 7% of our leases rolling per year. We have not seen any diminution of our pricing power. We would expect our leasing spread as we noted in the guidance to be in the historical range. If you got 10% a year leases rolling and you're releasing them at up 20%, inherently that's 2% comp NOI growth. And the rest of it comes from either better recoveries or growth in the ancillary revenues or, as David mentioned, we may get more of a bump in '08 from driving down the operating costs.

And then could you give more color on what specifically you're focused on the operating cost side?

Yes. I would say we have -- we are reviewing a number of our vendor relationships. We're also looking at how to take advantage of economies of scale in the field level with personnel. We've got obviously we're very focused on increasing energy efficiency for a number of reasons. One of which obviously is we think it's the right corporate thing to do. In terms of trying to get back to the environment. But also because it makes good, sound business sense in terms of driving our operating expenses.

So I mean, those are a few that jump out at me. We are -- we're using our kinds of scale on purchasing. But we've grown a lot, we've been very income oriented, which is appropriate when you have a very strong economic environment. We are in a less strong economic environment and so it's always good every few years to take a step back and figure out how we've become more efficient and more expense controlled. So I mean, those are -- I could sit here and tell you a few that come out, the top of my head. Now when we budget, we do it by lease, by mall, by asset. So we would have to I guess spend this some time to say this effort would get you 20 basis points or not. But basically when we roll it all up, even in a tough environment, we think we can grow 3% to 4% comp NOI.

Okay. Great. And then just one last question. Do you have an update on Gap and Limited and their strategy? Should we expect any store closures or a reduction in their size of their stores?

Well, let me -- let me say Limited just essentially Vicky's and Bath and Body at this point. They're actually growing, at least at Vicky's, they're trying to grow their store size. And so there's no real change there. And on an express it's spun out now. It's -- their actual results have been pretty good. I think they're -- it's interesting now it's out of Limited. We are very excited about the prospects of that company going forward. On the Gap, it's early. We haven't, I personally have not met with the new CEO. I think that's obviously one of my goals here in the next few months to get a better handle on the real estate. We are pretty well set on a real estate strategy for them through '08. And I think, we'll be working on '09 here shortly. But not a -- not a material change in the -- in the '08 Gap plan for us.

Okay. Great. Thank you.

Thank you.

And your next question comes from the line of Jay Haberman with Goldman Sachs.

Hi. Good morning. A lot of questions on store closings. I'm just curious, as you look out 2009, 2010, is it too soon to have a sense of new store openings or do we really have to wait until ICSC and what sort of early read are you seeing at this point, in terms of tenants pulling back on store -- in terms of new store openings?

Well, Rick, I can answer this as well. I'll just say that most of the feeling that we get is a little bit of a hunkering down but not a -- but not a -- not a -- most of the retailers that we talked to are pretty bullish on their business. Are pretty well capitalized. They understand that we're going through an economic cycle here. They're hunkering down for '08. It hasn't changed their long-term view on what they're able to do in '09 and '10. So assuming that we get kind of back with some more economic growth in '09 and '10, I think we'll get back to the store openings that we've had historically. But that's more of a -- that's more of a gut feel as opposed to a specific -- specific data at this point. Most of the retailers we're talking to understand these cycles happen. Are pretty well capitalized and are just being extra cautious for '08. Rick, I don't know if you want to add anything to that.

The only thing that I would add to that is there are several retailers that really look at this as an opportunity. They're hoping that there will be a -- little increase in supply, and they're approaching us now opportunistically saying I still have open to buys for '08. If you've got several spaces that open up, I want them. And there are a number of examples like that that we're working with that are going counter to that trend.

Yes. That's a good point. A great example of that is like a J-crew that's, I -- that they've called and said I want to know who's on the ropes. I want to look at the space. So, Abercrombie is in that spot, too. So I think that's a very good point.

And it sound like it's not going to come so much from bankruptcies. Is it more of a case of just tenants not renewing so your renewal percentage drops this year?

I think the biggest -- the biggest closings are going to be concepts where the tenant no longer wants to operate them. For us right now it's like demo with Pacsun Wear. And the rest are kind of not a big, the only real bankruptcy liquidation that we're dealing with thus far in a material way is Bombay where we have 35 stores. But Talbot's Kids and Men's is closing, that's seven stores. They're going to be in good malls. That's not a big issue. So most of it's really just concepts not working quite the way they want it to. And -- and going from there. Now, the KB Toys, Transworld, Radio Shack, they've been over a two or three-year period weaning down their portfolio. And we'll always have a few of those. But I don't -- I don't sense a huge change from historical closures on that.

Now, I mean, Jay, if you look at our top 50 or 100 tenant relationships, the risk of bankruptcy of any of those is not high. They're in good financial shape. I think we will always have some of the smaller tenants just by the nature of the beast. But as we kind of look out, I think bankruptcies will be relatively modest in '08.

Okay. And just on mills, turning to that, could you provide -- is there any additional upside you're expecting in terms of occupancy from the value centers, and I guess as well, can you provide cap rates on the assets sold?

Well, the -- the two that we sold to Westfield were about a five cap rate. And that's -- that's -- so that's that. There are -- there's -- we feel very good. We think we'll have about 5% plus growth in the mills EBITDA this year. And primarily that's a handful of better running of the portfolio, more efficiency, more lease-up, bringing outlet tenants there with given the relationships with those tenants through Chelsea. So it's really across the board and better -- in terms of better performance.

And I'd also say, Jay, there's a significant opportunity to improve the occupancy in the regional mall side of the mills. Those malls are $450-foot malls. They kind of look and feel like ours, but they're 400 basis points lower occupied than our overall portfolio is. So that will be clearly a point of focus in '08.

Thanks, guys.

Thank you.

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

Good morning.

Hi, Matt.

I know you guys in the past looked at the B mall thing and didn't take it up in terms of adding to your portfolio. From your comments and looking at the public markets and from everything people are talking about the private market, it sounds like the only, looking at it today, which could change, it seems like the only really obvious place where you might be able to put some opportunistic money out is in the -- in the B and C mall arena. I guess I'm wondering, based on how things keep evolving here, is there sort of a price that makes sense for you? Are you waiting for a price? Or have you really made a strategic decision here that those operations are too challenging, and the fundamentals may be too challenging, so you're just not interested in that?

No. I mean, I never get too worried about the classifying mall. I, frankly, hate classifying malls a, b, or c. To me it's whether we can increase the cash flow. And -- obviously what kind of return we would get based upon the price. I don't think our strategy is going to change, in terms of what we've done over the last several years, Matt, in terms of we want quality real estate.

Now, if we think we can pick up a mall that people might be a b or c, but we think we can redevelop it and make it better real estate and we can justify it on a risk-adjusted basis, we'll do it. I don't think you'll see us chase not such good real estate just to -- just to create short-term accretion. I think our strategy has been pretty consistent. We flirted with the idea but we felt at the end of the day we were going to chase not such great real estate, and we didn't want to do that. Mills we felt, hey, they have -- had some real estate that wasn't great, but we felt, hey, by and large, this was pretty good real estate. And pretty good major markets. And that's why we chased that deal. So I'm rambling, but the bottom line is I don't think our strategy will change given -- given the environment today.

Okay. Great. Then just on -- on mills. If I read it right, it looked like the average rents on the traditional mills' assets came down a little in the quarter. Did you comment on that already?

Nothing remarkable there, Matt. That may be as much as anything just a mix in terms of the -- the space leasing. Because that includes boxes the size of the -- the lease activity could move it. Quite frankly, it could also be just us continuing to refine the data. I mean, it's as you might imagine, we took our first stab at the end of the third quarter. I would tell you we're 99.44% - 100% pure. Give us a little wiggle room there. There is nothing remarkable going on in that portfolio.

You might. I would just say since you -- you may have a little more volatility in those numbers quarter by number just because, as Steve said, you do have boxes that are included in those numbers. If you sign two or three boxes in one quarter versus the next, you're going to get some volatility.

Okay. And then finally just on the impairment charge, does that all flow through the way that you guys projected in the press release that you put out?

It did pretty much. I think the press release, Matt, when we said it was $0.11 a share, it ended up rounding up to 12. It was a $55 million gross million charge. And then in our tax line in the P&L, there's a $20 million benefit against that charge. So the net's 35 on the -- on the SPGLT basis.

And you only see the benefit on the tax line of 12 something because we have a tax expense.

Yes, we have a tabs expense.

Okay. Thank you.

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

Hi, thanks. Good morning. Can you guys just talk a little bit about your development or redevelopment starts in '08, and what you expect for volumes and give us a sense for in terms of mix, in terms of international domestic outlet center versus redevelopment that within the core mall portfolio?

Yes. I -- let me if I can turn to page here, you may hear some rough numbers. Give me one second. Unless, Rick, you have it --

Yes. The ones that are under construction for delivery in '08 are going to be Hamilton Town Center in Noblesville, Houston Premium Outlets in Houston, Jersey Shore in Kenton Falls, and Pier Park in Panama City. Those are the new developments that are coming on line in '08. And all those are in the 8-K --

Let me just -- let me do it this way if I could. We have our share, again, this is our share, of about 1.37 billion, okay. So it's pretty specific here, but just to give you a sense, the -- the regional malls are 611 -- we do it by platform. And this does not include -- does not include international. So we do it by platform. So let me just walk you through it. If you're interested.

Yes. Dave, I was actually looking for the -- the new activity for '08 in terms of the additions to the pipeline in '08. Should we -- ?

Yes. Well, it's pretty -- I mean, the pipeline is pretty much what we thought it was going to be. So it's a billion -- 1.37 billion domestic, of the new starts, again, this -- this doesn't include -- this kind of goes over periods of time. But we have $300 million in the premium outlet business, new, in the mall business about $100 million new. And the lifestyle centers about 70 new. The balance of that is basically redevelopment in -- in the mall portfolio. A little bit of capital dedicated to the mills portfolio, and then we do have some asset intensification of about $50 million, in terms of residential and hotel.

Right. So this would be new activity just to begin construction in '08?

No. That's the total spend, Lou, of everything -- some of which we'll obviously start in '08, but some of which has been under construction and that's the '08 spin.

Okay. I'm not looking for the spin, I'm looking for kind of -- what new projects do you expect to add to the there's year.

There's -- the best way to do that is to go through the 8-K. The ones we may that are not in there are Chelsea's got two or three deals that are close to getting board approval and close to getting permitting approval.

Okay. Now, beyond the outlet center expansions that's you've listed in the 8-K, is there many more opportunities within the outlet center portfolio to expand existing centers, say two to three years down the road?

Yes. Rick, you want to add to that?

Yes. We are just as we've created a number of expansions that really were not on the Chelsea radar screen before we started really focusing on how we can maximize returns and out of -- from our start we've expanded Orlando, we've expanded Las Vegas, and we are doing -- we're expanding Camarillo, and we're working now on expanding at least three other expansions. And as we've pointed out previously, even in the Chelsea new product, we are now building in much larger pieces of land and master planning expansion. So literally right now, Rio Grande is already expanding and it's open a year. Philadelphia Premium Outlets was opened in November and it's got a phase two expansion opening in March. And we've got additional expansions built into Houston. Another expansion for Rio Grande that are also building off of just the new product that's coming on line. So there's going to be considerable activity in that portfolio adding space.

Let me -- let me, Lou, also just see if I can round up the conversation here. When we announced kind of our $5 billion development or redevelopment pipeline, when we did that, we probably spent, by the end of '08 we will have spent probably $2.5 billion of that. And we're -- some of it is kind of pushed out like a site in Houston, we had a site in north Atlanta that we don't think is ready. We've pushed a few deals out. I will tell you that Chelsea opportunities have probably increased. So the balance of that $5 billion is still probably good. And we are more than halfway through that. But we still anticipate kind of the billion a year, again, that it -- it ebbs and flows. But about a billion a year, and I'd say we're well over half of that done.

Great. Okay. Then once, a small follow-on for Steve. With regard to the expense recoveries, was there much in the way of capital recovery in -- in '07?

There was. Yes. And capital is a little bit of a wasting asset as you convert to six cam. Now, some of that was -- was not actual capital spending, but it was capital that had been hung up on our balance sheet as deferred. And we were able to accelerate the recovery of that while we're still fairly substantially pro rata. Not a meaningful number to Lou but a little bit of it.

Great. Thank you.

Thank you.

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

Good morning. In terms of 4Q sales, can you discuss how the different regions performed and maybe the different retail categories as well?

For fourth quarter? Is that -- I didn't hear the first part.

Please. Yes, fourth quarter.

Well, it's interesting. I think generally, as we reported, it was flat. It's pretty consistent with Midwest which is relatively flat. We did see some softness in Florida and California more than what we would have thought, ex whatever assets are that cater to the international tourist. And I guess that's -- that's really the color. I mean, Florida if we had a regional mall in Florida that -- that caters to kind of the general marketplace, not the tourists.

It was -- it was either flat or maybe even down a tick or two. Orange County was pretty soft. Midwest has been flat, I think midwest has been flat for I don't know how many years. Other than Indianapolis, seems to be the best of the midwest. But generally, the thing about our numbers, our averages mean something because we have such a vast portfolio. I would say generally flat now and with respect to the specific retailers, there were some shining, some shining spots in each category, but there was no great category at all when it came to results other than I'd say the electronic, electronic eyes seemed to have the best performance. Rick, I don't know if you want to add anything.

Yes, the only other ones that I agree totally with the characterization, accessories were also a little stronger, juniors were a little stronger. Books and records continue to be a little weaker. And the woman's -- I don't know how to phrase it, politically correct, but the mature woman's segment was softer.

Okay. Then just a followup to Matt's question about B malls and where implied pricing, let's say cap rates for the malls are now. Is there any institutional demand to partner with you, you previously had talked about a B mall fund? Or is that in this market, is that -- ?

There is demand to partner for us with -- on new deals. It's always a little more challenging on existing assets because we always have to confront the issue, why are you selling X of this. But in terms of new deals, new opportunities, we always have interest into to partner with us. Look at the mills as a great example of that. That hasn't changed. It's a little tougher when we're trying to sell maybe half an asset. We really don't do that. I don't really like the strategy. If we're not comfortable operating it, we're better off just selling the asset. And so we don't do that as a routine. When we do bring in partners, they tend to be for new opportunities.

Okay. Can you comment on how much of your '08 leasing is completed at this point?

Rick, you want to do that?

Yes, we are -- matter of fact, we're meeting next week with all of our regional teams to focus. And I was going through that. We, today, are probably 65% to 75% through the renewal process. And we're now working on, frankly, starting on '09. And we've been pushing our leasing group to be more proactive in anticipating perhaps where there may be some renewals that won't come through so we have other tenants already lined up that we can move in that space with main mum of downtime.

Last question. Can you just update on domain and how that's doing?

It's -- it's basically 100% leased doing about $500 a foot. And we will, we're building -- I don't know why we ever called it building P, but we call it building P, we're building building P; should open in the fall. And we will be starting domain two here in the next month or two for an '09 delivery.

Okay. Thank you.

Thank you.

Operator?

Yes, your next question comes from the line of Steve Sakwa from Merrill Lynch.

Good morning. Steve, if we think about kind of your normalized number for 2007, it's a little over $6. I know you mentioned lease termination fees would maybe be cut in half. Is there anything else we should think about that was nonrecurring? I know you had the Mezzanine loan to the mills joint venture. I don't know, from a profitability standpoint, how much that contributed. Outside of those thing, is there anything else nonrecurring?

Well, the -- you're right in that Arizona obviously and the $20 millionish of lease terminations from the department store deals that we did. There was probably an accelerated amount of fee income, primarily related to the financings that we did around the mills transactions. So that that would be nonrecurring. The only other thing is a nuance, Steve, is that for the first half, actually the first three months of our loan, the Mezzanine loan, we did not have an ownership interest in the mills. If you recall, we made that loan before we closed the transaction. And under the accounting rules, we could recognize 100% of the profit, where post closing, because we owned half the enterprise, we could only recognize half the profits. And that's probably $10 million. So I mean, there's -- but those would be the big items.

Just to be clear, $10 million of earnings in '07 that won't recur because of a change in ownership.

That's correct.

A decrease in lease termination fees. And an acceleration of other fee income from the mills deal.

Part of that you'll offset because you'll have a full year of mills. And we'll have a full year of running the business, which is profitable. So the net-net of that probably is pretty close. We probably -- we can give you specifically, we don't have it at our fingertips. It's probably going to make it a little bit lumpy quarter by quarter. But from a year end it's probably going to be close because we'll have the business longer, we'll run it longer, and that may offset some of the extraordinary fee income that we got from the transaction.

I guess the reason I'm asking is if you take kind of the 602, which I think would be a normalized number, and you look at the low end of your guidance, it's about 4% growth. And given your expectations for NOI growth this year, even though you're cautious on retail sales, and given your leverage profile, one would think you'd get higher growth than 4%. So there's clearly something that's pulling that growth rate down at the low end.

Well, certainly you have to back out the $20 million of lease terminations that we got in the first quarter of '07. Those are as nonrecurring as the Arizona writeoff was.

So if you take that out, then you're back to the --

You're basically back to 6% at the low end and 9% at the top.

Okay. And then, David, I guess from a big picture you've obviously been, I think, appropriately cautious. But the NOI forecast that you put out there I guess is more optimistic than maybe your tone would be about sales. And is that just because it's the spillover effect that happens from all the things that but in '07 that just kind of carry over? And the real impact of this slowdown to the extent it continues would really be felt more in '09?

Well, look, we -- the mall product is very resilient. Even in a -- if we get into a terrible recession, then that's a different issue now. We are thinking it's recession-like. But the mall product is very resilient. And we are pretty confident that we ought to be able to agree our business 3% to 4% even in a tough economic environment. Now if it gets to where we're in a deep recession, all bets are off for us and anybody else. But I don't think we're going to change our tune in '09 given what we think the environment is now. And if it gets worse, maybe. But there are ways we're going to run the business so that we can create that kind of cash flow growth.

Okay. And one last question on international. Can you remind me where you are and sort of your thought process on Brazil?

We think Brazil. We're not really active in Brazil. Some of the recent deals, we think it's -- listen, the growth there is pretty interesting. But we think clearly you're better off -- on a risk-adjusted basis, put capital in at the evaluations they're talking about now, and you contrast that to the U.S., the US is a no-brainer. And I frankly feel that way in most developing countries right now because I think the growth expectations on a lot of the developing countries is probably overstated right now. So I think it's a no-brainer, in terms of putting capital there versus the U.S. I -- I'd bet on the U.S. right now.

Okay. Thanks.

Thank you.

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

Good morning. I'd like to circle back on the releasing spread question. I'm a little confused about how the Lifestyle Center openings and releasing affect that number and pull it down from a run rate that had been more like 23% to 14% in one quarter.

Well, David, if -- if recall, and we've talked about it several times on recent calls, we're doing a fair bit of redevelopment of some of the old federated boxes. And several of those came on line this year fourth quarter. A lot of that was big box activity, those are 20,000 - 30,000 square-foot boxes instead of getting $40 or $45 a foot, we're getting $20 or $25 a foot. Still a good reutilization of the space. Certainly more profitable than the original department store. But if you do enough of them, and there was 600,000 square foot of the stuff in the fourth quarter alone, that's enough to pull your spread down.

And if you look at -- if you look at, again, quarter to quarter, you've got to be careful. I think year-end is a pretty good number. You look at, we were at 17.6% last year, 20.7%. When you take out 17.1 in '04 and when you take out the boxes that Steve pointed to, you're at 18%. So it's right on line. And just to give you an example, I mean, we did a -- I don't want to quote the rent here because hopefully it's a good rent. Like an AMC at Castleton Square Mall, that's well below our average. It's also 62,000 square feet. So we thought it would be appropriate just to subtract that out to give you a better sense of what the number is. And we did several Crate and Barrels at Boca Town Center. We do a Crate and Barrel at Burlington. So that's -- that just happened to be a lot of fourth-quarter openings. No big deal in terms of --

And you're using the same box? I'm just wondering why it's -- why it's is even seen as releasing development.

David, it's not the same box. This is tearing down a department store and building an outward-facing lifestyle component to a center.

That's what I assume. So I don't know why it would even be considered releasing. I guess in terms of the --

The way we look at releasing, which I think is comparable with the way most of the industry looks at it is, what was the sum total of all your expiration and terminations and compare it to the sum total of all the states that you lease. We do look at it, David, on a comparable space basis. And we look at only the leasing activity that we did in '07 and go back and look at what that identical expiring rent was for that same population of spaces. That number was over $9 a foot in 2007.

But we --

As a percentage?

I mean, that number's available. We don't really post it because --

The percentage was in the low 20 -- like 23%, 24%. It was north of $9.5 a foot.

That seems hugely relevant. Thank you. David, could you comment on your exposure to Sears in growth and where you see their process right now as it relates to you?

When you say the -- what our total base rent is from Sears?

Yes.

Is what that what you're asking?

Yes. And strategically how you're viewing them now as a tenant.

Look, we've had a -- we've had an underperforming Sears for several, several years. I mean, we do think -- we do think they're very smart people. So we are optimistic that, that they will turn the business around. Our financial exposure is --

About $13 million a year in base minimum rent.

So it's not huge. That's $0.04 a share.

It's spread over, I don't know what percentage is 150 stores we have have leases, but it's clearly spread over a large number of stores.

We have a good working relationship with them. We get things done. Development approvals and whatnot. But we are not privy to their internal strategy, much like, they -- they keep it close to the vest like they -- they do with everybody else. So we'd like to know more, but frankly we just don't.

Okay. And then finally, you didn't buy back any stock in fourth quarter. What are you assume about this year, and what's your current posture on what are your share prices?

That's a good question. Right now we have not modeled any stock buyback. We still have authorization to do it. But it's not in our numbers. Obviously it would be accretive to do so. We feel right now, given the world, that we want to keep our powder dry to be opportunistic. We don't rule changing out, changing that view on a day-by-day basis. So we'll just have to -- we've got their authorization. We didn't in the -- the fourth quarter was tumultuous. I don't want to be reading we bought the stock at 100 and it's trading at 80. Which a lot of corporate America did, frankly. So we're going to be conservative there. But our authorization is serious. And to the extent we think we should do it, We'll do it.

Thank you.

Thank you.

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

Hi, it's Greg Stewart with Mike Mueller. Just have a couple of questions. The first one is relating to guidance. Noticed that the range seems pretty widened. Wanted to know what key concerns impacting the sensitivity of that range that will probably make you come out on the low end versus the high end?

Well, look, the world is a little whacky right now. We tend to be, when we do our guidance at the beginning of the year, we tend to be conservative. We also tend to narrow that range as we get -- as we get through some of the operating months. We're taking the same strategy we've taken over the last few years. Nothing's changed. When we roll up our budget, LIBOR had not materially moved. There's a lot of volatility this today's business world, so we felt like a higher or wider range was appropriate given the -- the extreme volatility that's occurring with the economy, with job growth, with interest rates, with capital availability. That's reflected in the wideness of the range. At the end the day we're comfortable with our business and we're positioned and we'll operate accordingly.

Okay. And can you run over quickly for me like CapEx expectations for '08?

Well, as David mentioned earlier, we're going to spend just a little bit over $1 billion in new developments, redevelopments here in the US. I think our spend internationally is a couple hundred million dollars. And in terms of just the operating CapEx, it won't be much different than we've seen in -- in prior years. I think in '07 our share of operational CapEx looks like it was about $175 million and our tenant allowances were about $120 million, I think. So you're about $300 million in total. I think that's probably a fair number for '08 as well.

Got it. Final question here. Bigger picture, as you guys look at the world, what will have to happen for you to like have push-back on your developments, or like do you think -- what do you see for tenants? What will have to happen for tenants to pull back on the '08-'09 development pipeline?

I'll tell you what, with what we have now in the pipeline we feel confident we're going to go ahead and execute that. There's a couple that are -- like, for instance, we're going through the approval process on Copley to expand the retail as well as build a residential tower there. That's the one deal that we might be somewhat sensitive to in terms of timing. But, on the other hand, it's really that -- assuming it's a 2-1/2, 3-year build, it's really -- it's really given the quality of the real estate, you're really talking about what it's going to look like in 11 or 12. So I don't think there's much that's going to deter us with our existing pipeline based on '08, '09.

We're very well capitalized. We have our plan very well put together. Again, on the margin, a few deals here and there. I would say the one that jumps out at me that, that is -- that we're very sensitive to the -- the market would be the -- the residential tower in Copley. Again, that's a judgment call on 12 or 11. Depending on when or if we get the approvals we need to build it.

Got it. All right. Thanks, guys.

Thank you.

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

Hi, good morning, guys.

Good morning.

Are you seeing any -- any concessions, any retailers asking for concessions from in-place retailers? I guess I'm looking for guys who aren't going bankrupt or necessarily closing stores, but are looking for some kind of concession.

We always deal with that on a -- I mean, there's always some retailers that do that. Nothing, nothing out of the ordinary. Nothing, nothing, and I underline this emphatically, nothing like what we had to deal with in, I don't know, it seemed like early 90's, mid-90's. Nothing, nothing even close to that. There's always going to be a few tenants that, that are, doing the horse trade on that stuff. But nothing out of the ordinary. And nothing, nothing like what we've dealt with in prior economic slowdown. Rick, you want to add to that?

I think that's right. We have not seen anyone coming in saying we want a wholesale renegotiation of our rent. And I think one of the things to underline is our retailers generally, their balance sheets, notwithstanding their stock prices, are really very good. And so I think that we really are not particularly seeing that at all, and it's really just the case-by-case basis and ordinary course of business.

Okay. Good. Thank you. And if you did get any of that, the mechanics of that would be that they would actually renegotiate the lease, is that how that works? Or would you just let them not pay a month?

Well, we tend to say no first, okay. I can't give you my -- I don't want to give you my negotiating strategy over the phone. But it -- really ultimately our decision is if we don't work with the tenant, what -- what's the ramifications of that? Are they going to go into chapter 11? Do we believe in the long-term viability of the tenant and the relationship? That -- that kind of goes through, and there is no one pat answer other than we always start with no.

Okay. That's fair. That's good. Okay. And the second thing, do you guys have any thoughts on what's going on with equity interest in the sector from private equity, from big pension funds, any -- any color on that?

You mean on a direct investment basis, Rich?

Yes. I realize, Steve, that that's not so much what you guys are doing, but have you got any feel for how many times your phone rings on requests or any color on it?

The answer's a lot. I think it's always been a product that the institutional quality investor has very much liked. Their interest tends to be skewed toward the a-level assets. But demands for space or demand to, to own the higher-quality assets is very strong. And the phone rings a lot because frankly I think they all recognize they need another operator partner because of the intensity of the management of the assets. But they're -- there is an asset class that has always been very highly valued by the institutional committee.

Okay, you have not seen that slow as a result of what's been going on in the broader market?

No. I mean, we -- obviously, as David mentioned earlier, we don't have a lot of product. But there is -- there's high interest out there.

And I would say that the interest tends to be for new opportunity just because that creates a level playing field. If we were to buy a new mall or new company X, I think the interest on those kind of deals is extremely high and unabated. Then you can underwrite it together. Everybody's on the same page versus if we were to sell a half interest on an existing asset, there's some concern as to why we would do that. We certainly don't need to do that from a capital point of view.

Okay. Very good. Thanks. Then the last thing is the other subcategory under "other income," was a bit higher this time, Steve. Any thoughts on that?

Yes. Rich, I did mention that there was a little bit of mills fee income. That was one of the drivers financing fee related. That's pushing that number up because when you compare it to '06, obviously there was none. That's probably the only thing that's really remarkable in there. Simon brand ventures continues to grow to the extent that there is a component of income in there, and some it flows through that line item. That's adding to some of the growth. Those are the two biggest drivers and difference.

Okay. Very good. Thank you, guys.

Thank you.

And your last question comes from the line of Ben Yang with Green Street Advisors.

Hi, actually Jim Sullivan.

Hey, Jim.

Question on Lifestyle centers. Dave, I would love to get your opinion on how you think the Lifestyle centers will fare in a recession situation. It seems like the retailers that you see so commonly at all Lifestyle centers are the ones that are reporting already some pretty ugly same-store comps, same-store sales comps. And when you think about the product type that they're in, the mature women's apparel, the national restaurant chains, what is your outlook on how Lifestyle centers might fare in a recession? And is there much of a difference between say the lifestyle centers there that are attached to your existing mall properties versus the stand-alone center that a private guy might build across the street or down the road?

That's a good question. Let me just take the last first. We've had great success in adding the -- kind of doing the two-fer which is adding some of those tenants and book stores and restaurants, popping it out on the mall. There's a lot of -- I hate using the word synergy, but there's a lot of good that comes from it. It reinvigorates the mall, it gives the customer what it wants. It's really a nice thing to do. And it seems to work for the tenant. Seems to work for the developer. So that seems to be continuing on unabated. Obviously some of those tenants are being more cautious, as you point out, because of their macro thing. We have not been a big believer in the -- other than, there have been some that have been good, but we have never been a big believer in the cutsie Lifestyle center that has a couple hundred thousand square feet. We do think they have some long-term viability issues.

And the bigger ones, the ones that we built and some of our colleagues, I mean, you got to look at these as a mall -- frankly without a roof. Again, that ends up being is it good real estate, does it have the right mix, the right anchors. We do think and we should ask Rick, as well, but I do think that the cutsie ones that do rely on the, as Rick phrased it, the more mature woman are certainly going to fare poorer in this environment for the next -- until those retailers turn around. Because that's what's drawing the customer there in the first place. So they don't have the diversity of mix to draw that customer. So those will suffer significantly. Rick, what do you think?

I agree totally. I -- I think the way to think about a Lifestyle center is what's its franchise value. As David pointed out, the properties we've built that are open air are basically anchored by the department stores, restaurants, theatres, book stores, and are upwards of a million square feet. They've created a franchise and a market share that's significant in their markets. Where you have a project that doesn't have that market share and franchise value, I think it's going to be much more subject to losing its market share because there are many less reasons for any shopper to visit that particular location when you have a narrower mix and a narrower number of offering and less square footage.

I would say the only other point, Jim, is that it's clear that at least what we're seeing is that there are a number that are being built that are going to have a hard time leasing. None of ours, of course, okay. But there are. And a lot that's been on the drawing board, I think obviously in this current environment both from a capital point of view mostly but also from a macro economic view, I think are going to have a very hard time getting off the ground.

That's very helpful. And David, on your last call in response to a question regarding the state of the economy and retailer bankruptcies, you said we actually embrace these kinds of economic changes, that's when we done some of our best work. What did you mean by that, and do busted Lifestyle centers perhaps represent the opportunity this time around?

Well, I think they could. There's a few that, again, we would want them to have a certain critical mass because, again, I think generally the 200,000 square-foot ones were not that enamored with long term. But they could. And I think simply we have always, we have conservatively financed our growth over, since being public we've been criticized over how we did it. But that's fine, I mean, that's what being public's all about. But we're -- when the times are challenging is when we've done some good work. Look, it's challenging out there. And we -- we like that -- I mean, listen, I'd rather have no bankruptcies, I'd rather have no leases turn over. But on the other hand, that's when you can make some hay, and that's where great wealth, great wealth in our industry has been created either through development or buying at the right price. And you tend to be able to buy at the right price when few can buy.

Thank you.

Thanks.

And this concludes our Q&A session. I'll now turn the call back over to Mr. Simon for closing remarks.

Okay. Well, thanks, everyone, for your interest. And look forward to talking to you over the upcoming months. Thank you.

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