西蒙地產 (SPG) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Simon Property Group earnings conference call. My name is Tawanda 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 the conference. (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Miss Shelly Doran, Vice-President of Investor Relations. You may proceed, Ma'am.

Welcome to the Simon Property Group second quarter 2008 earnings conference call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission for detailed discussion of these risks and uncertainties.

Acknowledging the fact that this call may be Web cast for sometime to come we believe it's important to note that today's call includes time-sensitive information that may be accurate only as of today's date July 28, 2008.

The Company's quarterly supplemental information package was filed earlier 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 Steve Sterrett, Chief Financial Officer.

And now I will turn the call over to Mr. Simon.

Good morning and thanks for joining the call. I'm just going to take a few minutes to discuss the highlights and then open it up for your questions.

Second quarter FFO was $1.49 per share, up 13.7% over the prior year. Please note that this growth was achieved in spite of the $20.3 million extinguishment charge incurred in connection with the redemption of $200 million of MOPPR notes. These notes, which matured on June 15, contain a repricing mechanism that allowed the underwriter to [remarket] the issuance as a new 20-year SPG security.

In exchange for this remarketing right we received an $8 million payment from the underwriter when the MOPPRs were issued in 1998. This remarketing feature would have resulted in the issuance of above market rate debt, due to Treasury rates being lower than when the debt was originally issued and marketing conditions on the exchange date.

Therefore, we elected to simply retire the notes and pay the premium. As a result of the redemption, we expect to save approximately $5 million annually in interest expense over the $20 million -- or 20-year term that these notes would have been in place had they been remarketed and reissued as compared to current rates available to us from our other financing activities.

Excluding the impact of this one-time charge, diluted FFO per share increased 19.1% for the quarter to $1.56. We continue to benefit from the impact of solid operating results from all of our five property platforms as well as decreasing LIBOR rates. Results were also positively impacted by cost control, including our energy efficiency efforts.

Occupancy in the mall portfolio was down 20 basis points as compared to the year earlier period. Square-footage lost to bankruptcy for the first six months of 2008 totaled 151,000 square feet as compared to 30,000 square feet during the first six months of 2007.

As we discussed in the first quarter call, the decline in the premium outlet occupancy is primarily due to lease terminations or bankruptcy of four tenants comprising about a dozen spaces in the late March 2008 openings of Houston Premium Outlets and Phase 2 of Rio Grande Premium Outlets. We expect occupancy within the premium outlet portfolio to return to previous levels.

Sales in the mall portfolio, that is comparable sales, were $494 per square foot, up 1% as compared to the year-earlier period. Sales continue to moderate due to the general weakening of the US economy as well as our portfolio's exposure to Florida and California.

Premium outlet sales growth remained strong, increasing 5.5% to $519 per square foot, driven by our centers with substantial international tourist exposure. Comparable NOI for the mall portfolio was 4. -- excuse me, 5.4% for the quarter; comparable NOI for the Premium Outlet portfolio was 7.3%. Year-to-date comp NOI is up 3.7% for our malls and 5.7% for the outlets.

Releasing spread for mall portfolio was $8.32 for the first six months, representing a 23.1% increase. The releasing spread for our Premium Outlet portfolio was $13.33, representing a strong 50% increase.

Pricing power remains strong in the outlet business due to low occupancy cost, continued sales growth and ongoing demand from -- for space from tenants. In addition, the Premium Outlet bankruptcy space that we mentioned earlier had a positive impact on the re-leasing, at double the previous rents.

Effective cost control and continued conversion of tenants to fixed cam resulted in continued higher recovery of common area maintenance expenses. To date, we're about 70% converted to fixed cam.

Interest income included in the Other Income line of our income statement was $11.5 million lower in the second quarter 2008, as compared to the prior period - - prior year, primarily related to our loans to Mills. The loans are now nearly $1 billion lower in 2008 than they were in the first six months of 2007.

The Mills portfolio is performing at expectations if not above, and its contribution to our FFO was equivalent in the second quarter of '08 to the prior year as improved property performance and profit for managing the portfolio offset lower interest and fee income from a year ago. Our development, redevelopment pipeline remains intact and will be a contributor to future growth. We continue our focus on redevelopment and expansion of franchise assets in the US and new Premium Outlet development in the US and Asia.

Our recent US openings include Pier Park and Hamilton Town Center and are performing very well. And our Chelsea projects currently under construction include Jersey Shore opening later this year and Cincinnati Premium Outlets opening in the summer of '09. We remain very disciplined in the allocation of capital to only those projects that meet our return expectations.

On May 12, we raised $700 million of five-year, 5.3% notes and $800 million of 10-year, 6 1/8 notes at a re-offer spread of treasuries plus 235 basis points. This pricing implies zero new issue premium on the new offer. We received over $5 billion of order for our bonds and our issue is well timed, as market conditions have deteriorated since then.

We remain exceptionally well positioned following the bond offering. Our share of maturities in 2008 is less than $500 million evenly split between secured and unsecured debt. We also have approximately $2.8 billion of current capacity on our line as well as $500 million of cash on the balance sheet.

Based upon our strong second quarter results, projected activity for the rest of the year, and our view of market conditions, today we gave 2008 FFO guidance of $6.38 to $6.45 per share, increasing the lower end of our previously provided range by $0.03.

Please note that this guidance includes the impact of this second quarter extinguishment charge of $0.07 per share. This is particularly meaningful as when guidance was last given in early May, we were working toward exchanging the MOPPRs into new notes, which would have resulted in no charge being recognized.

Finally, let me say before I open it up to questions, these are clearly challenging times, but we're well positioned to succeed in this environment. Our high quality and diverse portfolio real estate, strong balance and robust infrastructure provide the necessary frame work.

On a final note, I'd also like to thank all of you for your support and confidence. We were pleased to be recognized by Greenwich Associates in June as having one of the best IR programs in corporate America.

Operator, we are now available for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Mr. Michael Gorman from Credit Suisse. Please proceed, sir.

This question is for Steve. Can you spend a little time going over the provisions for credit card losses in the quarter? Obviously , it was up a lot year-over-year and sort of in line with what we saw in the first quarter. Could you talk about what went on

You've got a couple of things. We take a relatively conservative tact in that when a tenant files for bankruptcy, we reserve 100% of the receivables. So with the tenants that are currently in bankruptcy, including the recent filings like Steven Berry, we are fully reserved for all of the receivables that were outstanding June 30.

I think when you couple that with just the fact that it's a tougher environment out there and we've got receivables that are at a little bit higher level than they were a year ago, we think we're conservative in how we provide for that expense. And I wouldn't necessarily expect to see that run rate in the first half translate into full year provisions. You couple those two or three factors and we are where we are.

So the run rate should drop off a little bit from here.

I would think it would a little bit because I think with some of the tenants who are out there, we won't necessarily see a closing of all the stores. So if they affirm some of the leases then those receivables will come back to us.

And, Rick, quickly, could you talk about what happened with the leasing spreads on the Community Center portfolio? I noticed they went negative this quarter.

They are a relatively small inventory so they are much more influenced by if they are a couple of boxed deals that are in there. There is nothing -- the amount of activity in that portfolio is very small so it can have a higher degree of deviation from quarter-to-quarter.

I guess what type of space was it that had a negative mark-to-market.

We had basically a couple of boxes and we had two CompUSA stores that closed and a Nordstrom Rack at Shops Northeast that closed and the Rack was replaced by Barnes & Noble and we are working on the CompUSA.

I wouldn't classify it as mark-to-market. What happens is you take the opening versus the closing and it's really -- it has nothing to do with marking-to-market. So it's not a -- we don't match the numbers. It's the average in and the average out. It's not a mark-to-market issue.

Okay. Great. Final question. Sorry if I missed this, but what was the loss from the unconsolidated entities in the quarter?

That's Mills extra depreciation expense. That's all.

Great. Thank you.

Your next question comes from the line of Christy McElroy from Banc of America. Please proceed, Ma'am.

David, you talked about how specifically outlets have benefited from an increase in customer traffic as the dollar has weakened and international tourism has spiked. How much would you say that trend contributed to your sales growth in that portfolio? And kind of anecdotally can you give us a sense for how much you think traffic could be at risk as we've heard that airlines have started cutting international flights?

So far we haven't seen an impact on that. It certainly could be at risk. I will say it's certainly adding, I would say, around 300 basis points so 5%. But generally -- out of the 5% so maybe 3% of it -- but generally, the outlet business even across the portfolio were up. It is having some added benefit but not -- it's not the entire benefit.

Okay. And then regarding in City Plaza, what percentage occupied will the asset be when Wal-Mart opens in August? And what are you expecting in terms of the stabilized yields on the project and can you give us a sense have you learned anything from the development and lease-up of this first center in China that you would do differently with the other four projects in process there?

Well, let me just say I think it's essentially fully let. So it may be 98, 99%. I will tell you that the demand from the small shops is increasing. There's more tenants.

But I will add that it is much more difficult to do business there. Rules on land values, on process, on debt continue to change. So we are taking a very deliberate and cautious approach.

I think our going in yield is around 9. We expect it to at least achieve 10%, by year three. And I will -- my general anecdote is that it's very difficult to do these deals though we seem to be meeting with certain success.

But the proof will be in when sales start to come in and tenants perform. We are happy we are doing it. But we are also happy there is only five of them at this point.

Got it. And then finally, Steve, given that your prior guidance range did not include an assumption for the extinguishment charge, can you walk us through what changed over the last three months to cause you to effectively raise your guidance for the year?

You have two or three things going on. One, we certainly have visibility, not only into the rest of our '08 leasing activity, but we're well into leasing '09.

Two, you have LIBOR where it is but also the forward curve for LIBOR being where it is.

Then three, I think the fact that we did go to the market and we are very successful in doing a $1.5 billion bond deal that put us in a very good position related to our balance sheet for the rest of '08 and into '09. I think those are the three primary drivers.

Great. Thank you.

Sure.

Your next question comes from the line of Michael Bilerman with Citigroup. Please proceed.

And [Pika Gowell] is here with me as well. Maybe we could touch a little on the 2009 leasing which I think, Steve, you just mentioned you are well into it and talking about what tenants are and how those negotiations are going. You read an article in the Iournal that Lou Lou Lemon is saying we are getting fewer built-in increases, we are having the ability to terminate our leases early, we have higher percentage rent thresholds. I'm wondering if that's a special case or is that more the norm into your negotiations.?

It ain't with us. I guess my one point is, don't always believe what you read.

Look, tenants are -- the negotiation's always been a process. But I don't think we are doing, Michael, anything out of the ordinary or anything different given the more challenging economic times. The demand is still there.

Obviously, we are going to have more spaces back because certain tenants for all sorts of reasons have run into financials. Some because they were buyout-oriented. Some because the category's not good. Some because they're not great operators. And all of this comes to the forefront in a tough economic environment.

But I will tell you, unquestionably, we're not really changing how we -- what we think is market rent, what the terms are, given the environment at all.

Now, I'm sure there are others that are doing it. Certainly, the smaller guys that have lease up that they have to achieve. But we aren't quite in that position.

Rick, you can add anything to that, I guess.

The only thing I would say to you is that if anything we are even more focused on our lease terms, and we are spending a great deal of time ensuring that the lease rental flow we are negotiating for we are going to get. And eliminating kickouts, eliminating cotenancy and we have been successful in doing that.

We are as we sit here today, ahead of our '09 leasing in '08 than the pace we set in - - when we were working last year. We've had a continuing emphasis on dealing with our tenants on a portfolio basis. When they come in, we are talking about '09 renewals as we were finalizing our '08 transactions and that is going to continue as we get further out ahead of our leasing.

You are saying you are ahead of how much -- ?

We are ahead in, as we sit here today, we have more of our '09 leasing done in '08 than we had our '08 leasing done in '07.

You are more than 50% through.

We have between the things in process, we are.

And how are the -- I know the rental spreads in the Mall portfolio this quarter came back at least for year-to-date [toward] your historical levels because there was some stuff I think in the first quarter that it made it wide. Where are your rent spreads as you're rolling those leases next year coming out?

I think it's entirely consistent. We have not seen a change in that trend at all.

Can you comment on your appetite for acquisitions, internationally? There have been speculation that you are looking into Europe and UK. Given that your cost of capital has increased, how has that changed your appetite for acquisition?

Well, we are always thinking about how to appropriately grow the Company and one of the ways in doing that, I think one of the ways we have been successful is through our acquisition activity.

Sure, our cost of capital has increased, on the other hand. I think values have adjusted worldwide. The two of them potentially have, in a sense, gone hand-in-hand. So there is still that relationship.

You know, we look. We have the capacity to do transactions. But we're -- there is nothing imminent, you are going to hear or read about. We are always thinking about how to effectively grow our Company and we will continue to do that.

I think this environment frankly -- gives us a little bit more opportunities than an environment, say, a year ago. So in that sense there is more to think about. Like I said, the math has got to work over our analytic period before we do anything.

Would you say that you are more focused on acquisitions in this kind of market relative to developments which you have been more focused on recently, internationally?

I would say development -- we are very fortunate in that we have a platform in Chelsea where development yields continue to produce the results we want to do. I think as we look out -- look at the two platforms that we want to continue to develop new would be Chelsea, if we could find the opportunities. I think we still are very strong believers in redevelopment.

I think what's clearly changed in our thinking is that the new ground up development outside of Chelsea is, at this point, tougher to justify. And it's longer. The returns are going to be longer than we want to wait, given the risk.

So, as we look [out], I think that gives us a lot of financial wherewithal to look at other opportunities.

Now the product side, there is a lot of new -- kind of new development that is out available that is for sale. Kind of open last year. Open the year before. The price expectations we think are still higher than they should be. And in addition they aren't very good.

That's the bottom line. They aren't overly compelling properties. So, we are not very excited about the individual acquisition market, primarily because the quality is not there. And there is too much on the COM given on the lease up and given the pricing.

So in that sense we will be patient. I don't know if I answered your question.

That's okay. Thank you.

Your next question comes from the line of Paul Morgan with FBR. Please proceed, Sir.

David, you said that using values have adjusted worldwide. If you can pin that down. How much do you think, A, mall cap rates in the US, even though we don't see them trade -- how much do you think they have moved if they were to trade?

Well, when I was talking worldwide I was really looking more at the -- my -- I was really talking about the public market. And I was really talking about worldwide public company equity values as opposed to cap rates on particular properties.

All you have to do is look at what happened with the UK and European property companies and a number of Asian companies in terms of adjustments. That's really what that comment was intended to reference.

Do you think that then maybe the implied cap rates for these companies is unfair, given what you think is happening or going to happen in the private market?

Well, it's hard to pin that down, Paul, only because there's just been no trades. I think if you had an A to A+ quality asset. I don't think the cap rate has moved all that much. Probably -- certainly, 50 basis points just to give you a number.

But it would really -- so much depends on who is selling it. What the basis of selling it is. Is it 100%? Do you have a partner? Do you get the management?

And there has not been that kind of A+ unambiguous asset that's free of all of these other items to be able to pinpoint on. But it's safe to say, look, I think return expectations are certainly up. So it would be naive to suggest that even on unambiguous quality stuff that it hasn't moved up at least 50 basis points.

And then, Rick, maybe regarding store closings, do you think this year will be atypical in the sense that a lot of retailers from now through the holidays will hold out and then you would see more fallout in the first quarter? Or do you think we might see more than average in the third and fourth quarters?

Interestingly I think it's been atypical and then, typically, you will see your closings in the beginning of - - in January after the December receipts and we've seen the closings now come more in the second quarter. We still have a number of tenants that we are monitoring and it remains to be seen.

Certainly, they are going to want to remain in business as long as they can remain in business. And the key issue is whether they can get the support from the vendors and the factors to fund their business.

I would point out -- and I think it's very important to point out -- that the vast majority of our tenants are in very good financial shape. When you go through our top 10 tenants, virtually none of them have debt, at all.

As David pointed out earlier, the ones that you are seeing have issues are either where they were private. Private equity came in in very highly leveraged capital models that couldn't survive in this environment, or you have chains that are very well capitalized that are going in a different strategic direction. And in those instances we are getting substantial lease buyouts that are making it a profitable enterprise for us going forward.

I'd just add, Paul, though, it is -- we are going to have more store closings in '08 and '09 than we did in '06 and '07. There is no ambiguity about that.

Now, again, we still think the way we operate and the way we can -- we will still be able to grow our cash flow. We are going to have -- we were going to deal with more store closings in '08 than in '09 than what we have at least in the last couple of years.

The one thing I will say at this point, the cycle we are in doesn't feel like or seem like anything different from a retail perspective that we haven't already dealt with previously, unfortunately, numerous times. At this point, it feels like, seems like something we have done. I would say deja vu all over again. We have seen it.

My last question on the outlet spread for rents, is that being driven by like the expansion of Orlando or the new centers? Or is this more -- how much of it is same space versus -- ?

That didn't come online yet, so that would not be impacted by that. A big chunk of it is because we have got some of that MiCasa space back that was released. But again, I think as evidenced, there is a lot of inherent value in those leases as they come up.

Okay.

Some of it was a little bit extraordinary because of the MiCasa space that we got back.

Thanks.

Sure.

Your next question comes from the line of Jay Habermann of Goldman Sachs.

It's actually Tom Baldwin and I'm here with Jay and [Jahon], as well. Just trying to get a sense of the magnitude of the impact of California and Florida on your same-store sales number. Could you provide what growth in comp sales per square foot would be, X those two states?

It is -- this is Steve. Florida is probably 100, could be as much as 150 bps. California a little less so, maybe 50 bps. Between the two you are probably in the 150 to 200 bp range.

That's judgmental as opposed to scientific. We could -- obviously have that number but we don't have it right in front of us.

Thanks, guys. My second question, could you provide an update on lease up at the Mills Regional Malls? I'm wondering if you revised your expectation with regard to how long it will take to close the occupancy gap between the Mills and your core Mall portfolio, given how much the environment has deteriorated?

The actual Mills side is actually doing well now. The Mills did have -- does have a significant exposure to Steve and Barry's. But actually the inside of the Mills, we are making good progress.

And I would tell you generally, all of the assets are trending up except one or two from both sales and new occupancy and things going on there. There is clearly a benefit we are seeing as the consumer moves a little more toward value in today's environment.

Now, the setback being -- Steve and Barry, is something we will have to approach. But I would say generally speaking, we are in pretty good shape there.

So --

On the Mall side, the Mall side, is taking a little bit more time, a couple were being brought down by a couple that were repositioning and they're big centers. So like a Southdale is bringing down the average pretty significantly as we try to reposition that asset in a meaningful and significant way.

Okay. What's your best guess in terms of how long it might take to break the 90% level in the Mills Regional Malls portfolio.?

We don't have that right in front of us, but we're working on it every day.

Okay. And then my final question relates to Hamilton Town Center. I noticed that the leasing level at delivery on that center was a little bit lighter than you'd expect at 79%. Can you elaborate about what transpired there?

It's -- basically, it's going according to plan. This is a -- some of the development you do or you have -- if you do do it, is going to be a little bit early. And in this case we always knew going in that it was a little bit early.

So we are not completely dissatisfied or we were not completely off the mark on the 80. And I think we will, over the next year or so, will get it well into the average, the 90-plus percentile.

It's a little early. It's doing very well. It's not a big transaction for us. So it's getting the returns we thought it would get.

It's a great market. It's hard to believe but the county that it's in, which is the northern suburbs of Indianapolis, is actually one of the 20 fastest growing counties in the United States.

It's -- (multiple speakers).

There you go. And this is where the retail hub will -- the next retail hub will be in that market. It's a very good piece of real estate.

Okay. Thanks a lot, guys. Appreciate it.

No problem.

Your next question comes from the line of Lou Taylor with Deutsche Banc. Please proceed, Sir.

Thanks, good morning. David, just going back to the outlet center dynamics and sales trends here a little bit, could you add a little bit of color with regards to how much you mentioned the boost from the international activity? But you see much of impact from consumers just going to lower price points and then what kind of impact is that maybe that being offset by the higher gasoline prices?

Well, so far, I will tell you, Lou, that this theory that people aren't going to go to an outlet center because it costs too much to drive there? I don't know where the science behind that is. But we are certainly not seeing that in any respect.

And as I said, of the 39 Premium Outlet centers, we had one that was down, one or two that were down primarily because they are at the lower end of the one or two. And one was actually in -- outside of Indianapolis. We had a flood during June, which thankfully the center wasn't hurt; but it did affect the ability to get there.

So I haven't seen that, Lou. We haven't seen that. And if anything, I think people are seeing the benefit. We are seeing that a little bit in Mills where people are seeing the benefit of value-oriented shopping. And they are offsetting that against whatever incremental cost it is to go out there.

We could do a lot of analysis to get to the specific numbers; but I don't have that in front of me.

Steve, a question for you just on the JV debt maturities. Can you give a little bit of update on that and maybe some color on the status of the mortgage market right now?

Well, the status of the mortgage market, it's still much lower loan to values. The life companies are there, but cannot be there in size. So once you get above a couple 100 million dollars you are talking about pairing up people. In terms of our specific maturities -- I would make one other comment, was that the CMBS market is still virtually nascent and just don't expect any recovery there in the near term.

And then, with respect to our maturity, both on the consolidated portfolio and the JV portfolio, what we have coming due in the next 18 months is all relatively good assets at relatively modest leverage loan to values, so feel very comfortable about our ability to rework those loans.

Obviously, given the bond deal we just completed, we are exceptionally well-positioned from a balance sheet perspective.

Great. Thank you.

Your next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please proceed.

Good morning, it's actually Dave Fick with Nate. Most of my questions have been answered.

Can you comment a little bit about, A, how much NOI you are getting out of Florida and what you are seeing in terms of traffic there and what you expect to happen over the next year?

The NOI, our share of NOI out of Florida, to be specific, is 13.2%. It's in our 8K. And I think what we said earlier, the first quarter call was basically pretty much online. There are a number of centers in Florida that are doing extremely well. What'd I call the traditional suburban mall in Florida is underperforming compared to what it's -- how it's performed the last couple of years.

Now the predominance of what generates that NOI obviously is our big time centers. So [Datelee] and Aboca, Sawgrass Mills, Florida Mall, the Falls at -- in Miami, to name a few, Aventura is all still going very, very strong where you may see -- where you have seen some sales under performance. Not leasing under performance but really sales under performance would be the malls' -- kind of the suburban traditional mall.

Your new project in Chelsea - I'm sorry -- Chelsea project in Cincinnati is a little eye opening. Are you out of good markets?

Well, actually we are very bullish on that and the demand I think -- this is Dave -- the demand is very strong. And this was a site that a number of developers were on to build a high-end center.

Some of the redevelopment took place in Cincinnati proper. That demand was reduced so we feel very bullish about it. I think we will pull off a great mix and a great return. I think it will have very good sales productivity.

Dave, between Cincinnati and Dayton, which is a half an hour to the north, you have two million people in those metro areas.

I understand that. But there are already two or three outlet centers there not of this quality, but I assume you expect to cannibalize a certain amount of that.

The ultimate test is that we are opening in August of 2009. And we are already 40% leased with very good receptivity. The products that we build are, frankly, designed to be the dominant outlet channel in their markets and we fully expect that we are going to repeat that in Cincinnati.

Great. Thank you.

Thanks.

Your next question comes from the line of Craig Schmidt with Merrill Lynch. Please proceed, Sir.

Maybe this is a Rick question. I guess, I am just curious. Do some of the tenants that you are talking to right now to potentially backfill Steven Barry's and to a lesser extent Linens 'N Things?

We have been working on the Steven Barry portfolio for over a month. An important thing to point out is that in the Simon portfolio, the vast majority of our Steven Barry's are smaller sized stores in small shop space, and not all department store spaces.

So, in addition to having it out to a number of alternative anchors, and depending on the markets, we are talking to Ethan Allen, DSW, Maggianos, Nordstrom Rack's, Sports Authority, Saks Off Fifth, A.J. Wright, Ross Dress for Less. Medieval Times, that's more in the Mills outlet. Target more in the Mills portfolio.

We also have an ability to just reconvert that space back to small shop. It's not particularly deep and it has a great deal of frontage on the mall. Not only are we having our traditional box teams look at it, but our small shop leasing people are also simultaneously looking to chop it up.

I will tell you, to give you a specific anecdote with respect to that, Livingston Mall is a great example. We did a Steven Barry's probably three or four years ago and we debated it. We thought about it.

And we said, you know what? We haven't figured out how we want to reposition the mall. So come in and fill space. We never thought that maybe it was a temporary [gap] measure.

And in fact, as we've renovated Livingston, we are bringing Barnes, we've redone the Food Court. And now we want the space back. And we are going to chop it up and it's 50-yard line space.

Same thing in The Source in New York. So it's interesting. It was kind of -- in some cases, it was the path of least resistance. And I should say, in a lot of cases, in the Mall portfolio was the path of least resistance.

Now I think we -- I think -- are going to turn the small shop, or turn it back into small shop space in a number of centers, which obviously will generate more NOI in the long run.

Great. And if you could believe it, this will be another question on the Cincinnati outlets. I'm wondering what direction you can work with the Mills in. Given the 120-shop outlet, 20-minute driveaway, it limits moving in that direction.

What can you do with the Mills at this point?

I think you're referring to Cincinnati Mills?

Yes, sorry.

Yes, Cincinnati Mills is an asset I don't think, over the long run, we will be an owner of. We made that decision that it's just not -- it produces little NOI. It's a lot of work. And, we just don't view that as being in the long-run portfolio at the Mills.

Great. I am sure Saks was going to be happy to hear about the Livingston Mall.

Exactly. If he brings a deal or two, we will -- I guess you can't say that. I said -- .

I'm sure his wife will make up for in shopping.

Your next question comes from the line of Ben Yang with Green Street Advisors.

Good morning. Just building off the Steve & Barry's bankruptcy. We also heard some rumors in the market about Mervyns and potentially Bosca's heading down a similar path, given what's happening in the vendor impacted communities.

And while your exposure to these particular anchors is not large, it must concern you to some degree. Can you share your opinion on what you see happening to this particular segment of the department store industry?

Look, I think the fact of the matter is Mervyns -- Mervyns has always - we've always earmarked Mervyns to go away. And the fact of the matter is, the fact that it's lasted this long is a testament to the guys that own it and operate it. Just been outpositioned between Penney's and Target.

Bosca's has always been a unique retailer and did things a little bit different. Now they have a different capital structure and I think that's putting a little bit more pressure on them. From the uniqueness of in terms of retail actually, in some markets it performed reasonably well. It's not a performance issue. It's more capital structure issue.

I think Mervyns is simply - - Target, Penney squeeze, and we would look to reclaim that space and operate -- look for those. So I don't think -- I think you see very similar tenants like Penney that have performed reasonably well and it's just that Mervyns was an afterthought at Target and it's not something that we have not anticipated.

We aren't going to see maybe any big consolidation happening for these lower end department stores, you say?

I don't think so. I think it will boil down to real estate play. I do think Bosca's has a little different retail angle that may be able to - - in a different capital market structure may be able to operate accordingly. I think they are more constrained capital. They do things a little differently from a retail point of view.

Great. Then last question, you talked about your China investment, garnering a 9% going in yield. Are there any regional structural differentials in how leases are signed there versus how you do them here?

Look, there are lots of them because let's face it. And this is what I think we all have to be sensitive about this sexy overseas development. The right to pursue tenants if they don't pay is a lot different in a lot of different markets.

And so I think our big issue if a lot of these tenants don't perform, how do you get rent? We don't know yet. We're not confronted with underperformance. But the laws associated with that are a lot different.

These are longer-term leases. The leases look a lot like ours in terms of rent and fixed common area reimbursements and the like. The real issue though is if performance isn't there and they don't pay, do you have an issue?

Now, it's interesting in Japan, which I like this system. I'd like to bring it to the US, is what they do is they collect sales from the actual customer and then they send the retailer everything but what the landlord share is. We're actually putting that in China as well.

But the process of that hasn't been adjudicated. So it's a risk. That's why we would like to see higher returns. It's a huge market. We are doing this in R&D. We've executed the plan the way we thought.

But we are very, very cautious in a lot of future opportunities there until we get a better handle on exactly that question.

Great. Thank you.

Your next question comes from the line of Michael Mueller with JPMorgan. Please proceed, Sir.

You mentioned earlier about it being harder to lease up new development space and harder to justify it. Can you take a minute and talk about the pace of leasing and the appetite for space when you look at the redevelopment projects, particularly the ones where you are adding new shop GLA?

Well, it depends. There are -- we have a lot more scrutiny in ability to execute, not that we've had execution problems. But the days of all "the tenant is interested, let's build it" are done. It's a function of who the tenant is. How much we can rely on their good faith intentions. And our judgment -- it's a judgment call.

Now we have doing this a long time. So our judgment here ought to be pretty good, our track record is pretty good. But the intense focus has certainly increased because we've got to rely on the tenant. We have to rely on our people in terms of what they can deliver. And there will be a few instances where we are going to slow it down just to make sure that we can pull it off as pro forma.

The one thing in the redevelopment area, because you're adding tenants to an already demonstrated productive property, it is an easier proposition. If you look at the redevelopment program, we've added Nordstrom to Burlington. We are opening in the spring of next year Nordstrom at Northshore. Year after is Nordstrom at South Shore. Nordstrom opening at Keystone Fashion this fall, opening at the Tacoma this fall. While in all of those instances where we are adding incremental small shop space, we 're substantially improving the market share of the property and it's an easier proposition to attract a retailer.

And I would say we just don't have a lot of risk. To us, if we add GLA we want it 100% leased. The risk we have is that it's 90% leased.

The deviation from our plan to the results is not going to be all that material. Yet, it's going through a further level of scrutiny given the environment that we live in.

Okay. So for new ground of development, non-Chelsea in the US, it sounds like that's slowing Chelsea, it sounds like the pace is keeping up. If we're looking at the redevelopment expenditures, say '07, '08 levels versus 2009, 2010 expectations, do you think the capital spend is still about in the same ballpark?

I would say clearly new ground up ex-Chelsea, you're right. I mean, it is. It is. The only thing we have opening in '09 that's Phase 2 of Phase 1 which is Domain. And we had three or four others that we have back burnered for all sorts of reasons not all of which are the current economic environment. But they were early projects and there's no reason to push it.

On redevelopment, we're on the straddle of a couple. But I think it's safe to say that I think redevelopment in '09 will be similar to '08. Though it could be less, I don't think it will be more. And there are, like I said, a couple projects that we are straddling.

The good news is, I look at it both -- I mean, obviously you want the redevelopment because it's accretive on the other hand. If we don't and we want a hold on it, our cash flow increases and from after that, after dividend and so on, and there is nothing like fire power in an uncertain economic environment.

Okay. Great. Thanks.

Thanks.

Your next question comes from the line of Jeff Donnelly of Wachovia. Please proceed, Sir.

Good morning, guys. David, I guess a two-part question for you on the outlook for occupancy more broadly. Given your experience of cyclical downturns, retail space demand, and the time for retailer appetite to change to be absorb that excess space when do you think mall occupancy in the US as a whole will maybe find its bottom?

Is that a 2009 event or do you think it'd be far as 2010 and do you think we'll see much variability in the performance between A and B malls over that time period?

Well, I think it's tough because we are -- I think kind of in the down -- we are in the first half of the downturn, let's say. So it's a very tough judgmental call. I do think we'll see the works of it manifest itself in '09, not 10'. But a lot of the story hasn't been written. Clearly, the trend of better properties getting better and worse properties getting worse is only going to accelerate in a tough economic environment. But it is -- that trend has been with us for quite sometime and I don't -- it will accelerate a little bit but it's not going to be a dramatically different outcome in that I think good properties are going to continue to get better and bad properties are going to get worse. And I don't look at it so much A or B. I look at market share. The property getting better. What's the -- what are the demographics. What's the trade area. Et cetera. So that trend I think is with us and has been with us for quite some years. On the other hand we had some centers that have really underperformed that we had some very interesting development plans and that's the big delta I mentioned earlier. That if we can pull off some of the things that we are working on, we have some real upside in some these and we suffered through the down side. That remains to be seen. I think '09 will be a little bit -- we are going to use 09' to bounce back, the industry, I should say, because you will see more stores closing because of the credit situation.

And I guess building on that, this one is for Rick. Since the Kiosk and temporary tenant business, would say tends to skew more to less sophisticated operator than perhaps your typical in line tenant, any sense how this economic environment is weighing on appetite for rental demand from those tenants particularly as we near the holiday season where it's more dominant for the mall business?

So far, and this is as of June 30, we are on track to hit our budgets in those businesses for 2008. So it's one of the things we have been -- we are focused on the leasing as we get more space back from the small shops closing that incremental inventory for that business. And that is on track still.

And how are your rents typically structured there as a percentage of sales or fixed rate?

Fixed rate plus a percentage.

And that one last question for Steve. I don't want to leave you out. For your 2008 guidance, can you tell us what's implied from an occupancy perspective from the back half of 2008 versus where we were the same period of 2007.

Well, continuation of the environment that we are in right now and I think it will be reasonable to say that we are expecting occupancy to be lower at 12-31-08 in the malls than it was in 12-31-07.

Just on the occupancy stuff out of our hands because we have tenants in Chapter 11. Whether they reject their assumed leases is out of our hands. As precise as we like to be, precision is not available to us at this point. With that said, we will grow our comp NOI in the way that we described it. And that's going to be a function of temporary tenants and the like and so on. Pinpointing occupancy is going to a little bit tricky given at this point it's a little bit out of our control.

Okay. Curious then, is there a chance your year end '09 then is lower than you year end '08, or just too difficult to say right now?

Too difficult to say.

Thanks, guys.

Your next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed, sir.

Hi, good morning, guys. Rick, you had a good list of tenants that might be available to backfill Steven and Barry's. I was wondering who in the small shop space is opening stores? Who stands out for you as particular strong in that arena?

We are doing a lot of business now with Forever 21, with Sophora, Apple, Coach is still opening stores. Tilly's coming out of California, Zoomie's, Express. Abercrombie, American Eagle with Arei. Abercrombie's rolling out Gilly Hicks. We have substantial demand across the portfolio from tenants. GameStop is still opening stores. Liz Claiborne is converting from a wholesale distribution channel to a retail distribution channel so they are opening Lucky Jeans, Lucky Kid, Kate Spade and Juicy. Couture Stores. H and M. A lot of business with H and M. So there is still a great deal of activity here. And the tenor of the demand is strong and echoing David's point of the good malls are getting better and supply almost is any -- demand is inelastic in those better property that are subject to downtime to reconfigure and release the space while we could add more space to our better properties and have demand.

Are you thinking of those names for 2009 and 2010? Is that where their interest is? I assume 2008 is mostly done. Not as important. But 2009 and 2010 both have interest in both years.

Oh, yes. Absolutely.

Thank you. And then, Steve, on the debt, if you had to redue a mall port, like redue Roosevelt Field, would that get done? As a mortgage or how does that work in this environment?

Yes, it would because we don't have a mortgage on it.

Say you would put a mortgage on it?

I was kidding.

Rich, as an example, we refinanced Stanford, which is an A-plus outfit. The demand at that end of the quality spectrum is obviously better but even then run into two challenges. One, is loan to values because the underwriting is very conservative. And two, the big malls are worth a lot and so if you want to put in an appropriate loan to value piece of debt on the property, you have to do it through the bank market or you have to involve multiple life companies and some kind of club deal.

Okay. So it would probably be multiple banks you think and maybe multiple insurance companies but probably a consortium of banks?

That's the most likely scenario.

Okay. Great. Thanks a lot. Thank you.

Your next question comes from the line of Michael Gorman with Credit Suisse. Please proceed.

Thanks. David, you mentioned earlier a little bit earlier about getting more restrictive on your lease terms. Can you talk about the existing leases. Cotenancy exposure you have, especially to some of the names on your top anchor list, like a Sears or a Dillards or Bonton?

It would depend on the center. Not that much. Usually any co-tenancy it's at a four department store small and maybe to anchors. The fact of the matter is if the anchors are going out of business you don't have that tenants anyway. So it's somewhat of a -- I can't recall anywhere where co-tenancy has affected us financially. It's the thing here or there but it's really not for us material financial issue.

Michael, guys probably three or four years ago we now started writing in those instances where there are co-tenancy show harm provisions. It's just not the event. It's the event then coupled with a sales decline.

And sorry if I missed this. When you were discussing acquisitions earlier, do any of those opportunities include buying back space at existing centers that you don't own?

Sure. If the price is right.

Have you had any?

I would say at this point nothing major is happening there. Sure, occasionally, Rick whispered to me Sharper Image. A good example of demand for retail space is Sharper Image is liquidating. And we had to bid on some of our leases because there were hostile retailers bidding on it and even though we love that retailer in this particular few malls we didn't want that retailer in that particular space. So we had to pony up some money to buy the leases from the estate. Yes, we are doing that in cases. When it comes to the big department stores, we were still -- there is bid mask there that is a normal process with us we are going to be buying some anchor spaces over the next few years. But there is a value gap between the owner and what we want to pay for at this point.

The only thing I would add is that as David said, this is not new business for us. We acquired a lot of stores from Macy's when they merge with May. We acquired stores from Belk. We acquired stores from Lord & Taylor. And we have been able to very effectively redeploy those assets to make our properties better and if you go back in past 8Ks, you will see the capital we spend and the returns we got through those redeployments.

Great. Thank you.

Sure.

Your next question comes from the line of Michael Bilerman from Citigroup. Please proceed.

One follow up for Rick. Rick, as you think about your leasing plan and being ahead of pace for 2009, how does that leasing plan for '09 compare to what it was for '08. You're dealing with 6 million square feet of scheduled roll in the mall portfolio. How much did you increase your store closures? How much did you increase your bankruptcy expectations relative to the '08 plan?

It's not a plan per say it's really a productivity measure. What we track is what results we were generating. So we have basically told our teams that we need to be far, further ahead in our expirations so our teams are now working on '09 and 2010 expirations so we can get further and further out ahead of the tenants in the planning. So it isn't really a plan per say that we wanted to be X. We were tracking it against our past performance and every year we were getting better in getting further out ahead of the expirations so we can be proactive in dealing with these spaces rather than reactive.

I would just add to that, Michael, that we are clearly aware of inventory -- the inventory has increased just because take an example, Demo is out of business. And we decided to work with PacSun, take a lease termination payment and added that to the inventory. The inventory at Sharper Image is obviously added to the inventory. And even guys that are in 11 where we don't know exactly say Whitehall where we don't know exactly what space we may or may not get back, depending on the outcome of that proceeding, our people are leasing as if they don't exist. So the inventories increased, yet we are fully aware of it and we are obviously shopping the inventory to the best of our abilities.

Thank you.

Thanks.

Your next question comes from the line of [LaVon] [Vonritten] with Hocky Capital. Please proceed.

My questions have been asked and answers. Thank you.

Thank you.

Your next question has come from the line of Lou Taylor of Deutsche Banc. Please proceed.

David, with the limited acquisitions and more difficult development environment, is it more likely you will be a buyer of your stock around these levels?

Well, I guess, we have been very conservative given the world in terms of capital at this point I think we will still have the open and buy. We were ready to take advantage of volatility. Yet we were prudence at this point is not an unwanted asset. We are going to be prudent as we think about that.

Thank you. At this time there are no further questions in queue. I would like to turn the call back over to Mr. David Simon for the closing remarks.

Okay, thanks for your interest and questions and we look forward to talking to you again. Thank you.

Thank you for joining today's conference. That concludes your presentation. You may now disconnect and have a wonderful day.