西蒙地產 (SPG) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q2 2009 Simon Property Group Incorporated earnings conference call. My name is Steve, and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating 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. Please proceed.

Welcome to Simon Property Group's second quarter 2009 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 terms. Acknowledging the fact that this call may be webcast for some time to come, I believe it is important to note that today's call includes time-sensitive information that may be accurate only as of today's date, August 4, 2009. The Company's Supplemental Information Package was filed earlier today as a Form 8-K. The filings are available mail or e-mail, and 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.

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

Good morning. Thank you for joining us today. I will take a few minutes to review financial and operational highlights for the quarter, and then we will open it up for Q&A. SPG sound business fundamentals as well as our stability of our high quality regional mall and premium outlet platforms, continued to drive results in the second quarter.

We reported diluted FFO per share before an impairment charge of $1.38 for the quarter ended, in-line with expectations. FFO per share including the impact of the impairment charge was $0.96. In the second quarter the Company recognized a noncash impairment charge of $140.5 million, or $0.42 per share, representing a decline in the value of the Company's investment in Liberty International.

As of June 30, 2009, we own 35.4 million shares of Liberty at a weighted average price of GBX574. Liberty's quoted market price was GBX397 at quarter end June 30, although now it has traded up, closing yesterday at GBX436. We have reported today, the impairment charge would be $30 million less given the improvement in the stock price, and the current exchange rate. Until this quarter, we marked Liberty investment to market through our comprehensive income on the balance sheet.

We concluded this quarter, that the decline in value is no longer temporary, and therefore recognized a loss in our income statement. We continue to have confidence in the longer-term value of our investment in Liberty. FFO for the quarter also reflected dilution of $0.14 per share, as a result of our 17.25 million shares of common stock that was issued in March, and an additional 23 million shares in May. The issuance of the 40.25 million common shares in March and May offering, as well as the eight million shares issued through our common stock dividends, served to strengthen our industry's leading balance sheet. We also recorded $13 million, or $0.04 per share less in straight line rent and fair market value of lease income in the second quarter of 2009, as compared to 2008.

Now I will comment on some operating performance measures, occupancy across all platforms, continues to be affected by the weak retail environment as compared to last year, and has been impacted by store closings of retailers, filed bankruptcy in 2008 and 2009. Across all of our platforms, we have lost over two million square feet year-to-date from bankruptcy related store closings. Regional malls occupancy was 90.9% at quarter end, which was a decrease of 90 basis points for the second quarter of 2008, primarily as a result of the aforementioned bankruptcies. Premium outlets was occupancy at quarter end was 97%, a decrease of 130 basis points from the second quarter of 2008, again primarily due to negotiated store closings, where we wanted to recapture the space, and again, more bankruptcy related closings.

Comparable retail sales continued to decline due to the overall economic environment. Our mall comparable sales were $442 per square foot as June 30, impacted by the performance of higher end retailers, that have been more significantly impacted in today's economic environment. Those retailers had higher productivity to begin with, and decreases in the sales had a greater impact on portfolio.

Comp store sales, we have also been impacted, given our Company's important position in Florida, California, and the Las Vegas markets. As of June 30, premium outlet comparable sales were $493 per square foot. The sales decreased year-over-year was less significant in this past platform, as the consumer continues to seek value, and in these economic times our mall releasing spread was 17% as of June 30, in-line with historical levels. Our premium outlet releasing spread continued to maintain its strong position at 34.6%.

Regional mall comp NOI for the quarter was flat to slightly up, actually, and for the six months year-to-date was up 1%. Premium outlet comp NOI was 6.1% for the quarter, and 7.1% for the first six months. During the quarter, we completed the transition of the Chelsea back office operations to Indy, Indianapolis, a move that will generate annualized cost savings of approximately $10 million. We continue to be laser focused on all aspects of our operation. Our operating margin actually increased by 100 basis points in the mall portfolio to 68% for the quarter.

Now let me turn to capital markets. We returned to the capital markets in May, raising an additional $1.75 billion through two offerings. On May 12, the Company completed the sale of 23 million shares of common stock at $50, for total proceeds of $1.15 billion. On May 15, the Company issued $600 million of 6.75% senior unsecured notes due 2014.

The second quarter capital activities included the following. We redeemed $85 million of our operating partnerships, 8% cumulative redeemable preferred units at par, two secured debt closings were completed during the quarter, aggregating $230 million. In addition, on July 30, just a few days ago, we closed an additional $400 million of new mortgage financing. These transactions that I just described generated an additional net cash to the Company of $350 million.

In 2009 we also exercised or completed extensions of more than $1.1 billion of mortgages. Our net debt to EBITDA ratio was 6.36 times and SPG's prudent balance sheet management, strong franchise value, was again acknowledged in May when the Company's ratings were reaffirmed by three major rating agencies, including S&P reaffirmed at A- corporate credit, and unsecured senior debt ratings with a Stable outlook. On May 11, Moody's Investor Service affirmed the A3 unsecured debt rating with a Stable outlook. On May 29, Fitch ratings affirmed the A- unsecured senior debt rating with a Stable outlook.

All three rating agencies cited the Company's high quality portfolio, including the magnitude of its unencumbered funds from operations, diversified asset base, stable income stream, conservative capital structure, strong access to a variety of funding sources, and accomplished management team as the primary reasons for these affirmations. Now as of June 30, our balance sheet includes, including our share of joint venture cash, $2.9 billion of cash, and our availability on our corporate credit facility of over $3 billion, for a total current liquidity position, including the recent mortgages I talked about, of $6.3 billion. And I think the most important thing I can tell you about that, that includes $9.50 a share in cash.

Now development, redevelopment on April 23 we opened the Promenade at Camarillo. This 220,000 square foot expansion expected to generate a 13% first year return. On April 17 a new Nordstrom opened at the recently developed and expanded Northshore Mall in Peabody, Mass, and Thursday we will be opening the Cincinnati Premium Outlet, and we expect that to be a very exciting development. That will add to the country's best collection of outlets, generating the highest sales per square food, strongest comp property NOI, and the highest development returns.

Construction continues on two other projects in the US, second phase of domain in Austin, Texas, re-development and expansion of South Shore Plaza in Braintree, Mass, and both are scheduled on time and on budget to open in early 2010. We have no other significant projects scheduled to begin. International on July 7, we opened Ami Premium Outlets, the eighth premium outlet center in Japan, the 225,000 square foot first phase opened fully leased to over 100 merchants. We own 40% of this project. Construction continues on five other fully funded projects, two in Italy, which will open in 2010, and three in China scheduled to open in the fall of 2009.

Today we also reaffirmed the guidance provided on May 1, 2009 after giving effect to the impact of the May 12 equity offering, the May 15 senior notes offering, and the second quarter non-cash impairment charge associated with our investment in Liberty's common stock. The current FFO guidance range is $5.35 to $5.50 per share. Out outlook on core operations is unchanged.

And let me just conclude, and we will be ready for Q&A. While the economic and retail environments remain difficult, we believe we have maintained our leadership, industry leadership position, due to our high quality and diverse portfolio, and our willingness and our ability to access various forms of capital.

With that said, we will turn it over to Q&A. Operator.

Ladies and gentlemen, (Operator Instructions). Questions will be taken in the order received. Your first question comes from the line of Craig Schmidt of Bank of America. Please proceed.

Good morning.

How are you doing, Craig?

Good. I just wondered, is there any increased activity regarding store closing of the mall anchors?

Not dramatically from over the last couple of years. I think there might be a couple that we are at risk for, but I would tell you nothing that hasn't been consistent over the last few years. Rick, you can add to that?

The only thing I would add, is to give you a sense of where we are today, we have got 766 department stores in the mall portfolio. Of those, only 19 are vacant. Of the 19, 12 are owned by others, and of the 19, we are actively discussing replacements in 12 of the boxes.

So, I mean, you are actually doing better on the anchor front than the in line?

That is more stable. Their occupancy costs are obviously much lower, or they own their stores to begin with.

No, I understand.

Look, Craig, I don't think it would surprise us if we had some department store closings, over the next year or two, depending on the economic retail environment. But it's really nothing that is out of the ordinary, and that we haven't seen over the last couple of years.

Okay. Great. And then what is the current occupancy or leasing on the Cincinnati Premium Outlet?

It should be about 85% by year-end.

Okay. 85% at year-end. And obviously you left the Mills project. What was the fatal flaw in that, was it its location, or just the layout of the center?

The location got better, but the layout, it was actually an old original regional mall that was built, so it had two levels, just didn't fit the Mills one level value-oriented proposition, and we were very happy to sell it.

Okay. Thanks a lot.

Sure.

Your next question comes from the line of Jay Habermann of Goldman Sachs. Please proceed, sir.

Good morning, everyone, here with Jehan as well. David, just in your comments with the environment, I know you mention it is still challenging, but as we are starting to see signs of improvement, and obviously to date you have to be somewhat pleasantly surprised just given that your occupancy is holding up well, and leasing spreads have held firmly, and same store NOI is positive year-to-date, can you give us some sense for maybe leasing toward the back half of the year or maybe even 2010, what you are seeing at this point?

Well, look I think the holiday season is going to be important in terms of the psyche of the retailer for 2010. And I think retail, even though the economy, and a lot seems to be shifting in the right direction, I think it is safe to say that retail is somewhat lagging in that.

So we haven't seen that pickup, but it is moving in the right direction. I do think that the second half of the year is going to be important, and will have some important implications for 2010, but we are still doing business, we are still opening stores, there are still retailers that are growing. I don't think 2010 will have, one way or another be overly dramatic when it comes to NOI, but we are battling it out. It is not easy, but we are figuring a way to get it done.

I guess maybe better asked, I mean do you expect to see another leg down in rents, because the beauty of your business is you have got a predictable lease rollover schedule, and rents that are 10 years old, but are you anticipating sort of another step down in rents over the next six months or so?

I think it is too early to tell. We still feel very comfortable that we have got leases under market, but it is important ultimately for sales to stabilize, and I think that is why, see, looking at the second half of the year it will be important, especially as we get to October, November because, as you know, the dramatic downturn in retail really occurred in that period of time.

So if we can see some stabilization in that, and the comps aren't as down as what we have seen in the first nine months since September, then I think our leases will continue to show those rent spreads, and that is what we are anticipating, but we have got to see the retail performance.

And my second question is would you like to co-investment with any REITs seeking to sell portions of assets, or seeking to sell assets, and any sense at this point of updated pricing of where, you look to deploy capital?

Well, I am not sure I understand, can you just restate the first part because I didn't pick that up?

Would you seek to co-invest at any REITs at this point, whether seeking to sell portions of assets, or would you really like to just buy assets altogether from those seeking to sell?

I don't think we would co-invest with another REIT. I think we might buy another REIT, but I don't think we would co-invest with another REIT. The answer is we are feeling better about deploying capital opportunistically, but beyond that, there is not a lot I can add there. I mean there is nothing imminent in what we are planning to do. But I don't think we would partner with another REIT to buy assets. I think we would certainly buy assets, if we felt it was an appropriate opportunity to deploy capital, and get the appropriate return that we want to see from that, we would certainly consider that.

I mean the one thing I said and I hope it's important, we do have $9.50 of cash on the balance sheet, so there are very few real estate companies, that have that. That is almost 20% of our market cap, so I mean that is not an insignificant asset in today's world.

So what would be the pricing level that would push you toward deploying that capital?

Well, I don't want to give it away because it may hurt my negotiations, so I think we would, we understand our cost of capital very well, even though it is volatile, and the cost of equity has been volatile, we have a better handle of our cost of debt, and so I think anything we would do we would feel comfortable that it would have an accretive, and be above our weighted average cost of capital.

So it is a function of the going in yield, what we could do with it, and the potential growth in that asset. So we will see. Beyond that, it is hard for me to comment. I will say to you from our standpoint, I mean we have a lot of capital approach us to joint venture our existing assets, and/or joint venture new opportunities.

Given our capital position, we have felt we have positioned that capital to look at, and this is institutional capital, Jay, we would look for that capital to position for new opportunities, and we are really reluctant to sell our best assets, even at what we thought we would be able to get those at, say a seven cap rate, even today, even in today's uncertain environment we have kind of said, look, selling our best assets, wholly-owned best assets at a seven cap rate, given the long-term growth of those is probably not in the best interest of our shareholders.

Great. Thanks for the information.

Thank you.

Your next question comes from the line of Ross Nussbaum of UBS. Please proceed, sir.

Hi. Good morning, everyone.

How are you doing?

Good.

I won't welcome you back, because you have probably been welcomed back a ton of times, right?

I will take it, though. David or Rick, if you break down the portfolio, either geographically, or if I segment the malls into sort of sales [stratas], what are you seeing in terms of trends, both on rent and occupancy? Is it weakness on the high end and low end, and the middle of the portfolio is sort of the sweet spot?

Well, I'll let Rick add, I will just say sales clearly have been most impacted by the better the property, okay, which is gives me a lot of confidence that as the better consumer gains their economic footing, that that will rebound quicker and faster, and the sales at kind of the middle market malls have been relatively stable, and kind of benign in terms of this downturn. Now the occupancy, it is interesting the occupancy is really not that affected by the higher quality properties, and our occupancy downturn, that is only 90 bips from last year is more impacted by the properties that don't have the higher sales productivity, which is not uncommon, and that has been going on for years and years. That would be, if I articulated that right, that would be the easiest way to see that, and in sales regionally, I mean it is look, Las Vegas, California, Florida, are markets that continue to be under more duress than, say, even the New York metropolitan area, or the Midwest.

Okay. And if I think about your occupancy line, am I remembering correctly that you are not including tenants with lease terms under one year in that number?

Correct.

So what percentage of your mall square footage right now is occupied by those short-term leases, and how has that changed over the last year or two?

Well, I would say that it is, probably, if you walk our mall, you would see, a lot less vacancy than 91%, which we are at, and if you weighted averaged that in and out, you would probably add another 200 to 300 basis points.

Okay.

And a lot of these are temporary tenants that come in for six months, go out, but if you walk the mall, you would see that, if you did kind of a weighted average, Ross, I would add at least 250 to 300 basis points.

Okay. And then on the cart and kiosk business, how should we be thinking about that? Obviously there is not a lot of disclosure of that business across the entire mall industry. Do you look at it from the standpoint of your effective occupancy rate is X, versus the number of spots you can put these things in?

Sure.

And what has happened to the rents on that business?

That business is under pressure, but it is not dramatic, and we are still shooting for the cart business to be relatively flat from last year. And we look at rent and occupancy.

Okay. Holding up better than I would have thought, given the credit--?

Yes. It is muddling along is the best way to describe it. It is not killing our numbers, it is not making our numbers, it is what it is, and it is kind of muddling along.

Okay. And then last question. I was a little surprised to see the dividend announcement today, with primarily a majority of it being stock, given your strong cash and liquidity position. What was the thinking behind the Board's decision there?

Well, I think we signaled to you last quarter that that is what we are going to do for the balance of the year. So you may not have been working then, so you missed the signal, which is okay.

No, I got the signal. I guess I am asking, market conditions have strengthened.

I think our view and our goal is to return to pay cash dividend in 2010, cash, and that is our goal and that is essentially what we have signaled to the market, and we just felt like we might as well be extra conservative and prudent for the balance of the year, and a lot of discussions with a lot of shareholders that supported that view, and so I think we are just going to ride our decision the balance of this year, and then hopefully as we signaled to the market for 2010, obviously subject to Board involvement and Board guidance, to be shooting for taxable income as a dividend, and doing that in cash.

Great. Thank you.

Thanks.

Your next question comes from the line of Mark Biffert of Oppenheimer, please proceed.

Good morning. Just continuing on with that, David, I mean if you guys when you look at the debt maturities that you have coming up, and the amount of cash that you have, I mean is your intent to keep your leverage level at the current levels, or could you use some of that cash to pay off some of those maturities as they arise?

We will definitely use, not really so much for the balance of this year, but our plans next year is to take a couple of our better secured, properties that are currently secured, and unencumber those with our cash.

And, Mark, this is Steve. Remember, we have also got $1.1 billion of bonds coming due next year, which we could use the cash to pay off as well, or obviously depending on market conditions, could go back to the market.

Okay. And then on that $400 million of mortgage financing that you did, what was the average cost of debt on that?

It was 8%.

8%.

Okay. And then in terms of lease termination income, I noticed that that fell considerably in the quarter. What are your expectations into the second half of the year in terms of lease term income?

There might be some. I mean we have had some discussions with some retailers. It is very, very lumpy. I think our total budget for the year will be met, and probably not exceeded, but somewhere in that range, and I don't remember that number off the top of my head.

It was about $15 million for the year.

Yes.

Okay. And then --

It should be in-line with that. Again, it is a tough number to both budget and see where it ultimately comes up.

Okay. Lastly, just relating to leasing spreads, I notice that the mall portfolio leasing spreads came down a bit to 17% from 25%. I am just wondering into the second half of the year, do you expect to hold at that 17% long term rate, or do you think that will come under more pressure as we head into the second half?

I think it should, we should finish the year pretty consistent with that. It is still about $6. Maybe under a little pressure. Getting the historical rent spreads that we have had over the last three or four years is obviously harder to do today, than it was in the first half of '08 and '07, et cetera. But we still feel confident that we have got leases under market, and our goal is to get that $5 to $6. We have actually outperformed over the last three or four years, our goal is to perform kind of where we thought.

Yes, Mark, this is Steve again, if you go back and look at our history over the last seven or eight years, we have kind of always said 15 to 25%. David is right, over the last couple of years, we have been at the higher end of that range, but given the economic climate that is out there, for us to be at the lower level of that historical range is not surprising.

And then with the outlet centers, I mean do you expect to stay at that elevated level, because of reduced tourism or other pressures, or do you expect that to compress as well?

Well, I think the number was really outstanding for the quarter, so it will probably have some reduction on that, but we still feel very, as we said at the beginning of the year, we felt like we could deliver the mall business flat to up to 1%. We are at the 1%, we still have some things out of our control, including percentage rents and what the sales are, bad debt expense associated with bankruptcy, tenants, and the like. Still feel like, hey, we are going to be able to deliver within that range, we are confident about delivering very healthy, robust, comp NOI increase in the outlet business, and obviously given the occupancy, a big driver of that is the rent spreads.

And that we feel like we can still deliver that. Now the comp NOI, as we look at '10, probably won't be in the 6 or 7% range but we think that business ought to be 3 to 4% at least, we hope. Again, a lot of this is going to depend on the consumer, and the stabilization that we hope that the economy seems to be getting to will ultimately get to the consumer.

Okay. Thanks a lot.

Sure.

Your next question comes from the line of Steve Sakwa of ISI Group. Please proceed.

Good morning.

Hey, Steve.

David,is it fair to say that the discussions with the retailers about asking for rent relief has stopped at this point, or is that still continuing?

I think it is still continuing. In a lot of cases, our view it is a short discussion, but I think a lot of retailers jumped on that bandwagon very early, and some have jumped off, but not everyone has jumped off. So it is still there. Our approach to it has not changed, meaning that if we think they are financially stable, and they have an existing lease, we are not really entertaining it.

Now, obviously lease expirations, that is free game for everybody involved. If they are financially difficult, or in 11, or about to go in 11, our approach changes to some extent. But I think, Steve, I think it is too early to say it has passed us. Rick?

I agree. We are still having people trying us out, and as David said, our philosophy is if you are stable, you have an obligation, we expect you to meet your contractual obligation. At the end of that contractual obligation, we will have a discussion based on each of our views of what the market rents are for that property, that space, and that use.

Okay. Let me ask a question about leasing. I think maybe Jay had asked this, but just to try to follow up, as you sit here today, it is probably fair to say that most of the '09 leasing is done at this point, but can you tell us what percentage of '10 leasing might be completed, and how would that compare to a year ago, when we were sitting in '08 looking at the '09 leasing?

So far through June 30, we are about 30% through '10. That is either fully executed, or deals cut and in process, and this time in '08 for '09, we were about 37%, and I think that is a combination of two factors. One, and I think we mentioned this in our last call, we are not aggressively looking at renewals in the back half of '10, because as David has indicated, that is over a year away, and we are waiting to see hopefully some stabilization in sales trends, and more optimistic and constructive outlook for more retailers, so we are not really pressing now for those back half renewals, and that is one of the reasons why it is slightly lower at this point as compared to last year.

Okay. Thanks.

Sure. And just to add, I mean, our rent relief that we have granted year-to-date has basically been de minimus. If anything, less than a $0.015 a share. So it is not a big driver of our numbers at this point year-to-date.

Your next question comes from the line of Paul Morgan of Morgan Stanley. Please proceed.

Good morning.

How are you doing?

Good, thanks. The outlet rents, am I looking at it incorrectly, or was there some change that shows that they are 22.8% higher than a year ago for the premium outlets?

No, Paul, you are looking at it correctly. David mentioned earlier that we pulled all of the back office to Indianapolis, and in the quarter when we did that, one of the things we did, is we loaded all of the rents, and all of the Chelsea lease data into our existing Simon operating systems. And in doing that, we tweaked the classification of how we calculate the rent for Chelsea, and all that did is move the overall average base rent up a little bit. But it is just conforming to the exact definition that we have for the rest of the platforms.

Okay. Does that have an affect on the way your lease spreads appear, or anything else?

No, it did not. Lease spreads have always still been, or always been ending cash rent old lease, beginning cash rent new lease.

Okay. What percent of your renewals have you been doing on a short-term basis, two years or less?

This is Rick. Through June 30, less than 20% of our leases are for terms less than two years.

And what is that typically?

That is in-line historically with where we have been. Now, I know there is a lot of focus on duration, but you also need to remember there are a lot of good reasons to keep terms short. We are trying to put spaces together with tenants, we want maturities to be at the same time as the adjoining space, we want to be able to give these tenants an opportunity to work through this cycle, where they have told us they are optimistic about where they are in the mall and the market, and so we are not willing to tie up space long term, when we and the tenant believes it will be more productive, we can get more rent down the road, so we are keeping terms shorter, but even with that said, they are historically where they have been in the portfolio.

It is interesting that given the size of your portfolio you are at 20% when some of the other portfolios are saying they are at 50%. Are you seeing a different need to do short-term for different quality levels in your portfolio? I mean there must be something going on with it, or is it your negotiating leverage that keeps you doing longer?

I would like to think we are doing a good job for our shareholders, and how we are approaching our lease renewals. There is no particular pattern as to better or worse properties in lease term. We have the motivations to maximize our rent, and we do what we think is the best approach to maximize that rent.

I just would, I mean look, there are strategic reasons to go short-term, as Rick said. So if that trends up, it is a little bit because, we may not like the rent we're getting, and we may want to just keep the tenant in the space for a period of time. As Rick said, you may want to put the space together, you are waiting for the right tenant, and so that number may trend up, but it does give us options, too. So it's not the end of the world if that trends up, and just keep that in mind as you assess it.

Okay. On the investment opportunities, given your cash position, you talked about potentially buying portfolios, or REITs, et cetera. I mean how focused would you be when you are looking at opportunities on just highly productive assets, or would you look at sort of more exposure to the B quality centers?

I think our philosophy on what we would want to acquire has not changed, given this world or any other, given this economic environment. I still think we are looking to, if we do something, it would still be quality retail real estate, that we think we can add value to. And we would not want to do a transaction where we chased yield, if we thought the quality was suspect. So I don't think our philosophy has changed there at all.

Okay. And my last question, any thoughts about how CMBS given the, you are doing new mortgages at 8%, and you look at the rates that are being talked about for those deals, albeit at a lower LTV, what your thoughts are on the trade-off there, if you just want to be involved in both or what?

Well, let me go back on the 8%. These were with two long-term relationship institutional insurance lenders.

And we locked rate back in March, we were in a very different place.

Yes. And that is the point. And it is great to be, and that was the important point. I mean we locked rate when the world was still very, very squishy but we were doing it when no one else was doing mortgages, so I think you have to assess it from that standpoint. Steve is right, we locked it in when the world was very, very uncertain.

The CMBS market is, obviously the spreads have rallied significantly, they are starting to be trading, there is starting to be a lot of talk. We will assess the impact that TALF will have on it. We are able to see extensions in that market, with good assets and good borrowers, so I think that market is getting better. I don't think it is going to be anywhere near where it was, but we do seem to think that there will be a securitized market here shortly, and down the road.

Thanks.

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

Hi, good morning.

Hi Nate.

You just mentioned that you had locked the rates back in March, do you have any loans that are out for commitment right now, and where are you seeing rates today?

We do. We have got a community center portfolio pool that we are in the market right now refinancing, and we are going to end up at about 7% blended with seven-year term. We just closed a mall loan that is 7.5%. So I would tell you the market is in kind of the low 7s to 8% range right now.

Okay. But it has come back a little bit since March?

It has. Just to amplify on that, obviously the other side of our debt portfolio is the unsecured market, and obviously our spreads have come in quite a bit. I just saw as of yesterday, the five-year was trading under 6%, and the 10-year was trading at about 7%. So spreads have rallied quite a bit on that market as well.

Okay. And there has been a lot of discussion about potential acquisitions. Are there any high-quality malls currently being marketed today?

Individual malls?

Or portfolios?

Yes, sure, there are some.

Okay. Thank you.

Sure.

Your next question comes from the line of David Harris of Aroya Capital. Please proceed.

Good morning, everyone. I have a couple of questions, if I may. David, back in early May when you had your second equity raise, I asked you in a public format, if you were comfortable with the notion that you would be able to record meaningful acquisitions by year end '09. Would you still say yes to that question?

Well, I think I hedged my bets in that response a little bit, but there is opportunity for us, but to add the appropriate quality at the right price in '09, but I think more importantly, David, we don't want to rush to do a deal just to do a deal, and our view is, we have made a lot of steps to maintain our leadership position.

I feel very proud of what we have accomplished, even though a number of these decisions were very, very difficult to make, and we do think that there will be significant opportunities, there are opportunities today, but most importantly, we don't want to jeopardize all of the hard work and effort that we have gone through to position us for the long run. And I still feel confident that we will, over a reasonable period of time, be able to add to our franchise through acquisition opportunities.

Okay. My second question relates to the UK. The data I look at, whether I am looking at currency, housing, interest rates, would suggest the UK is poised for some kind of a recovery. How vigorous that will be is I guess open for debate. Could you just give us an update as to what you are thinking about your Liberty International investment, particularly in light of obviously what is a substantial impairment charge?

Well, we are not happy about the impairment charge, and as you know, it is non-cash, and we do think over time, that our investment has the opportunity for us to get our basis back, if not better. It has got great real estate, it is going through a temporary, we think, downturn, but we haven't lost faith in our ability to recoup, if not add value to our investment. And the interesting thing there is that, the shopping centers there, they don't cater to the high, high end customer like they might, most of the high end retail there is on the High Street, as you know David.

So there seems to be a leveling off in terms of the consumer, almost like what we have seen from kind of the moderate malls here, and the higher end, they haven't seen the dramatic decrease in sales, because the high-end tenants probably are feeling the brunt of that as well in the UK as they are here. So we believe in it. We are going to monitor it. I don't think there is an immediate change to what we are thinking. Obviously we did step up when they did their offering, and I think we feel over time that we will be able to recoup our investment.

You are not concerned that prices might firm up? I mean after all there has been a more dramatic fall-off in property prices in the UK than we have seen here to date, and it seems like we are running maybe six months ahead in terms of property value, things are starting to get active again around acquisitions.

Yes. Well, I expect it to firm up, and I think ultimately whether we participate in that, or even just maintain our stock holding, we will be the beneficiary of that.

And a question to Steve related to this as well. Is that position hedged in any way, shape or form?

No, it is not, David.

Okay. So we can look at FX impacts as well?

Correct.

Okay. Great. Thanks, guys.

Thank you.

Your next question comes from the line of Michael Mueller of JPMorgan, please proceed.

Yes, hi. Most questions have been answered, but, David, a few minutes ago you mentioned a comment about the outlet center portfolio. I think you said you thought in 2010 you could see some growth there, maybe 3 or 4%. Just wondering what your early feelings are about the mall portfolio as you look out to 2010?

Well, it is early, I think there may be a little bit of pressure there, but it is going to be de minimis, as we go through our budget process, I think our goal for 2010 will be to deliver it flat. I think that could be a challenge. I think a lot will depend on kind of sales, but if it is not flat, we are seeing all of these comparable NOIs down, what I would call dramatically, 3, 4, 5%. We don't see that with our portfolio.

I think it is up to you to figure out why. I am trying to figure out why from our standpoint, but if it is under pressure, it is going to be at what may be at 100 basis points, so in other words, last year or this year we said zero to one, maybe next year it is negative one to zero, but I think we are still early in the process to do it. We do not see the kind of the dramatic comparable NOI down, like we are seeing with other retail portfolios, and with other mall portfolios, with apartments, with hotels, et cetera. We don't see that.

Okay. Great. Thank you.

Thanks.

Your next question comes from the line of Quentin Velleley of Citi. Please proceed, sir.

Good morning, it is Michael Bilerman, I am here with Quentin. Let's go back to this whole notion of potentially buying a REIT, in your view could be a UK REIT like Liberty, or a bankrupt REIT, like General Growth in the US, or maybe a strip center REIT in your strip center portfolio, and I guess there are a lot of different opportunities given your size, about where you can sort of place your bets. I guess maybe if we start on Liberty, I think you talked a little bit about potentially recouping your investment.

You are obviously about a 6.5% shareholder today. Are you looking at that relative to just seeing the market price firm up relative to your cost basis, or potentially given your sheet today in owning, being the largest shareholder out of [Donnie], being a more being a more activist type, or maybe not activist, but trying to work with them to either Simonize, or do something else to improve your operation, in some way to get your investment up?

Well, it is a very good question and I wish I could answer it, but it is a very good question and I guess I wish I could answer it. We think it is a good company. We are not pleased we are underwater. We are not giving up hope, but Michael, I wish I could add to that, but beyond that, we are just going to have to see how that evolves. It is a very good question. We are in an interesting position there. We do have optionality with our material stake, and we do see opportunities in the US, we do want the strongest balance sheet in this industry, so all of these, we are suffering through a thunderstorm here, so we do see all of these as strategic.

I hope God is not giving you a signal?

Exactly. I don't know which part he didn't like, but we will talk to him later. All of these are very strategic decisions that we have got to evaluate appropriately.

Yes. I am just curious of how, you have obviously put $350 million into Liberty, right. I mean it is a size of a regional mall in the US, so it is not like just play money. I am just wondering how active you are in trying to make money on the investment?

Well, we want to make money that is for sure. Michael, I can't really say anything other than what I said. I apologize for that.

The other thing you mentioned that there are opportunities today. Can you just characterize a little bit about at least the type of opportunities that are on the market that you are referring to?

Well, I think there are domestic US retail opportunities today, there is no question about it. There are opportunities that we can create today, sometimes it is not just showing up in your lap, sometimes you have got to go create them. And I think where we are focused, obviously we have got the UK situation where we talked to you before, and we do think beyond that, our focus will be in addition to assessing the strategic opportunities there, is primarily focused on the US.

Now, obviously you talked a little bit about your own CMBS issues, and being able to cover that with new mortgage debt, unsecured financings, and being able to go out and tap other forms of capital, whether it be TALF, but I guess are you thinking about trying to be on the offensive on other people's CMBS problems, and how far down the road you may be, in trying to maybe lose some of those assets, that may not have the same successes you are having, in terms of other financing?

Well, I think there will be opportunities, I absolutely think there will be opportunities along those lines, though the stuff that we have seen thus far doesn't meet our quality spectrum. I mean there have been some amazing retail, a lot of that is in new development. I mean there has been an amazing amount of damage done, in terms of the retail development, the NOI generated, the amount of leverage, so I do think there will be, I don't think it is huge massive opportunities, but there are going to be some opportunities on kind of a one-off basis to pick up some of those broken developments.

It is Quentin here. Just in terms of your $6.3 bill of liquidity, and looking at opportunities, is there some sort of amount that you have got set aside for potential opportunities, versus some amount you have got set aside to ensure your CMBS financings and so forth get done?

Well, it all goes into the blender to produce the appropriate result. The last thing we are going to want to do is jeopardize the foundation we have built so long for, right? So sure, I mean, it would be hard to pluck all of that capital, toward an external opportunity without having addressing the refinancings that we need, and will continue to do. But Quentin, as there is lots of capital that is circling opportunities that we would think we could be able to tap into, if we find the right opportunity.

And that is the joint ventures?

Sure.

So could you give us some kind of indication of what the volume of that capital might be? Is it $2 billion or $4 billion, for example?

It could be in the billions range, yes, if the opportunity was there.

Okay. And just one on Mills, just looking at the portfolio, just wondering if there is an increased desire of your joint venture partner, to potentially exit the joint venture, and whether or not that could present some kind of an opportunity for you?

They've been a great -- Fairlawn has been a great partner as well as [Can-Am] at the property level, Fairlawn obviously at the corporate level.

There has been absolutely no indication, I think they kind of view this as kind of a medium to long-term investment, and there has been no indication at all that they are looking to exit the portfolio in totality. I mean I think our joint venture will sell assets as situations arise, but beyond that, it is business as usual.

A question on the sponsorship income, you talked a little bit about the temporary leasing, the carts and the kiosks. What is sort of happening on sponsorship, and other income that you are generating?

It is actually above our numbers year-to-date, and which is a little bit above last year, and so far they feel like they are going to bring in '09 slightly above budget. So again, it is a tough business, a lot of it is local driven, but the mood is a little bit better there, than it than certainly it was at the beginning of the year.

Do you have as much visibility as you had into 2010 in terms of those contracts? I mean it does make up almost $100 million of EBITDA at this point.

Well, I think a couple of the bigger relationships are being renewed and solidified. So we do have color on that. And then a lot of that is just driven locally, which you have got to fill your book essentially every year, and that visibility is not there for 2010 yet, but the big important relationships, in terms of corporate relationships, really hasn't changed in our being fortified.

And how much of that $100 million is those big contracts versus the local?

Well, I am going to say, I don't have that on the top of my head, but I would say that the regional and local probably produce over half of it, as a general indication of kind of where that is.

And just our last question, just as you think about the US acquisitions, and you talk about opportunities, you have got malls, the shopping centers, and the outlets. Is there opportunities in each of them, or are you more inclined one versus the other?

I think there are going to be opportunities in all of them, and I think it is safe to say that you see an indication of where we have leadership position, and I think our view as we kind of talk about the strategic buckets that we are trying to sort through, that we would want to solidify and enhance, I should really say enhance our leadership position in those buckets, as opposed to other buckets.

Okay.

And so, I mean you can see where the predominance of our NOI comes from, and I think those are the areas we are primarily focused on.

Great. Thank you.

Thanks.

Your next question comes from the line of Dennis Mitchell of Sentry Select Capital. Please proceed.

Hey, good afternoon, guys. We started in the morning, but good afternoon.

We did.

We are getting hungry, so --

I had some questions on leasing, but I think we have beaten that to death, so just last question I had was, in terms of the opportunities, more and more we are seeing people dip into securities or extending their reach into other areas. I am just wondering if you guys would be looking at purchasing the securities, of not just the equity securities, but possibly debt, or anything like that?

Well, look, I think our preference would be to own the asset directly, because that is where we could add the most value. So that is certainly our preference. That is where we have had our best success, and when you can control the asset, and I think primarily will continue to be our focus.

So not even in an opportunity where you might purchase the debt, in light of at some point in the future, getting your hands on the asset itself?

No, we absolutely wouldn't rule that out at all, but I think again, just in terms of our preference, it would be to own the asset, because that is where you can, as a mortgage holder, as a mezz holder, you don't have all that much influence in the operations as an equity holder in a public company, you don't have that much influence, unless you really rattle the cage. So our focus will be continue to be primarily, and again I wouldn't rule it out, but primarily in the ownership. Now, we could buy some securities, and in theory loan to own, but the biggest focus will continue to be own actually the bricks and mortar.

Okay. Great. Thanks, guys.

Thanks.

Your next question comes from the line of Alexander Goldfarb of Sandler O'Neill. Please proceed.

Good afternoon. Just some very quick questions here. Just going back to your earlier comments at the front of the call on the tenant, and what they are experiencing at the moment, are you seeing them change their ordering habits for the holiday season, or are they still looking at scaling back materially from last year?

Hi, this is Rick. Our conversations with the tenants are indicating they are taking a very conservative position on inventories. They are really looking at inventory as the best way to increase their cash position by decreasing their inventory, and so you are going to see them, I believe, positioned to have tighter inventories, which we believe is going to still put some pressure on sales in the fourth quarter, but is going to hopefully substantially increase their cash flows and their margins, because if there is any uptick at all, I think there is going to be considerably less goods available to be purchased by the consumers.

Okay. So even with the equity markets up, and some of the positive economic indicators, they haven't changed, they haven't increased their ordering for the holidays?

No.

Okay. Next question is just going back to your earlier comments about sales decline and the relationship of that and tenants' ability to pay, do you have a sense for how much sales decline, like if sales declined in the second half another 7%, would that put pressure on tenants' ability to maintain their current rent structure, or what is your view on where the break point is, for how much sales can decline before tenants start to have issues?

Well, look, that is an individual tenant by tenant review, and clearly there are some tenants that have had dramatic sales decline, they are under pressure already, including like the jewelry business, and as just one example of that, where they have had dramatic sales declines.

So it is a category by category approach and I will just tell you that, the important thing is that the decrease that we have seen thus far, has been kind of at the higher end tenants with the higher margins, so they probably have a little more room to go, than certain others. But to answer your question, you really need to do it specifically by tenant, by category and certainly within that category by tenant.

Even in a category like the teen retailers, you have got a number of tenants that are performing very well, and some that aren't, and so it is very hard to answer that generally, other than I do think the fact that we are seeing it at the kind of the better tenants with the higher margins, gives us some comfort that they can continue to withstand a sales decrease.

Okay. Thank you.

Thanks.

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

Yes, hi, good morning, guys, or good afternoon. Steve, on the five financings, the two you did in second quarter and the three you did post the end of the second quarter, were those on existing loans, are those unencumbered at the time?

Rich, the two we did in the second quarter were on existing loans. The $400 million financing that David mentioned that closed last week was unencumbered assets.

Okay. And so what roughly would you say is the unencumbered NOI pool you think in total?

It is still about 56 or 57% of our total NOI.

Okay. That is fine. Great. Thanks. And then Rick, do you have thoughts on which tenants are, in particular are opening stores at this point? You usually have a pretty good laundry list of tenants who are opening stores?

Well, I can tell you that in '09, we have entered into leases in '09 for stores to open in '09 or '10 with H&M, Forever 21, Zara, Bare Essentials, dELiA's, Crazy 8, which is a new concept from Gymboree. We are having a great deal of focus on the franchisors, so we are doing business with Five Guys and Noodles.

We are very pleased, Microsoft has just gone into the retail business, and they have announced their first two stores, and we have one of them in the Mission Viejo Mall. So there are still a number of tenants that are doing business, and as David said, there is a lot of activity going on in the portfolio.

Okay. Very good. Thank you, guys. And then, David, on TALF, are you actively working on anything with TALF?

The answer is no, we really were more focused on it a couple of months ago. Obviously with all the success we have had in capital markets, we are really waiting and assessing kind of where it ultimately shakes out. That is not to say we won't use it, and be a participant in it, but at this point we are not active.

Okay. Thank you. And then the same sort of thing on general growth. Are you still mostly monitoring that would you say, or is there anything new to report on what you are doing with general growth?

Nothing currently to report new.

Okay. And then last thing for me, guys, is Domain, could you give us an update on the progress there, with regard to the various pieces you expect to come online over the next six or eight months?

Absolutely. In October of this year, in the expansion Dick's is opening, in February of '10, Dillard's, Village Road Show opens, we have an apartment complex and a joint venture with Columbus Realty and GE Pension Fund, that is opening in the fourth quarter of this year, and then in February along with the anchors, we anticipate opening about 85% leased, and we will have those tenants open over the next month to two months in the first and second quarter of next year, and then in March of '10, we are opening our Westin Hotel at Domain in a venture with White Development. So it is coming together. We have got a nice lineup of tenants, primarily focused on the juniors category and food, because we pretty much did not put a lot of juniors in the initial section of Domain, so they were anxious to show up in this section, so it is coming together.

Okay. Great. Thank you, guys.

Thanks.

Your next question comes from the line of Jim Sullivan of Green Street Advisors. Please proceed, sir.

Thanks. David, I respect your reluctance to talk about some of the opportunities, as it relates to Liberty, and what you might do or might not do. But I was hoping you could talk about relative value, as you think about deploying some of your large cash pile in the US, versus perhaps other parts of the world, including the UK. When I look at Liberty, I see a company trading at an implied cap rate after making all of the adjustments you need to make to compare the UK to the US, an implied cap rate that starts with five, and Simon, I see a stock that trades at an implied cash rate starting with eight.

We saw a recent deal announced that suggests some of the cap rates for some of the best malls in the United States are probably in the cap rate range of the sevens. As I think about you protecting a position in Liberty, considering perhaps expanding that position, how should I think about relative value? I get it that there is scarcity value to the Liberty portfolio, but as a company that certainly has challenges ahead with 10% of its tenants in bankruptcy, a bunch of high loan to value maturities about to mature over the next couple of years, and then finally seeing property NOI drop at an even faster than expected pace, why should I be excited about that kind of company, at an implied cap rate in the fives, versus what you might be able to do with your cash in the US?

Well, I think, Jim, you articulated right on, where we are where we are, as opposed to doing more than what we have done, and there is no question in our mind, that as we look at external opportunities, we do like the long-term prospects potentially of the UK market, but our primary focus will be in the US, and won't be in Asia, and it won't be in Europe, it will be here. We do think we can add most value here with our platform. We do think the opportunities, there are more opportunities that exist there, and I think our view would be that that is the primary focus.

Now, Liberty, we think we will recoup our investment and beyond that, there is not a lot I can say. We do think, there are elements of what we can do that might add to what they do there, but that is what it is. We will see how that shakes out, but our intentions, if we do look to deploy external capital, we do think there are great opportunities in the US, and certainly on a risk adjusted basis, and what we could add value to, it is hard to argue that point. So nothing that you have said isn't what we have grappled with, and we are not pleased.

We are currently underwater, but the worst thing we could do is try to recoup that in a not so intelligent way.

That is very helpful. Thank you for that. And, Steve, a follow-up on the current mortgage environment. You mentioned that current rates are in the low sevens to eight. What we have seen over the last many months, is that capital was available for malls, but only the highest quality, only for the best sponsors underwritten at very low loan to values, and very conservative underwriting with respect to NOI. Is that still the case as you look at the deals that you are looking at today? Could you get financing, mortgage financing on say a B+ mall or lower, if you didn't provide corporate recourse?

I would say this, Jim. I would say the sponsor matters a lot. So for us, I would say yes. In fact, we are in the market now with what I would describe as a couple of middle market malls, and there is money out there available, yes.

Now in terms of the leverage and the underwriting, I think it is still relatively conservative. You are seeing debt yields in kind of the mid-teens, going to translate into about 50% LTV, but I think, especially the insurance companies that are doing on balance sheet lending, I think the quality of the sponsor is very, very important these days. And as a result of that, we are seeing very good interest, even in assets other than our top tier assets.

And just to clarify that, the sponsorship is important, because these insurance companies are asking you for recourse, or they are non-recourse deals where they want to know that you are behind it, versus somebody else?

The latter. Non-recourse deals where they want to know that a quality operator with a stable balance sheet and a long track record is behind it.

Thank you very much.

Sure. Thanks, Jim.

Your next question comes from the line of Jeff Donnelly of Wells Fargo. Please proceed, sir.

Good morning, or I guess afternoon now. Rick, retailers and retail developers arguably got into trouble expanding the markets where I guess all of the opportunity was predicated on household growth, which obviously isn't happening today. What is your sense, and I guess what are you he hearing from retailers about their longer term plans beyond 2009 and 2010, as they think about unit counts a few years down the road, do you think they retreat from those types of markets over time, and is this just a blip, or do you think there is maybe an overreaction, where they actually look to concentrate in the more infill markets in the next upcycle for retail?

Based on the conversations that David and I have been having with these retailers, they are viewing their new store, new development program very guardedly. They are going to be very cautious deploying capital, and where they are going to deploy that capital, they are going to do it where there is a high degree of certainty as to results, and the highest degree of certainty as to results, is deploying that capital to open new stores in proven assets and proven markets, and we are seeing that, that there is still demand for our proven assets and proven markets.

And I think that the retailers' attitude is reflected by the fact that when you look at the new development pipeline, it is nonexistent, it is the lowest it's been in 20 years, and I believe that is a silver lining to our current situation, as retailers do get more comfortable with allocating capital for new stores, that is going to benefit the existing supply, because there is going to be virtually no new supply available to them.

And, David, I know you got to sort of take the acquisition opportunities that will come to you because of the mall industry is not exceptionally large, I guess in the number of opportunities available. But given what Rick was just saying, do you have a unique view, I guess, about the markets you would like to see your marginal dollar go into in the US, or put differently, if some malls come to market, and metros that are out there, has your appetite changed to the better or worse than maybe two years ago, because your view on those metros has changed markedly?

Absolutely. There are certainly markets, that you would have to factor in and underwrite their current situation, because though they may be good long-term markets, they are going to be dislocated for a reasonable period of time. And I think a lot of those were kind of the typical markets where you had a lot of new retail development that has not stuck, and I absolutely think you got to factor that in because, those are markets that are a little bit dislocated, and again, they are great long-term markets. I think eventually, but you are going to have to be really smart, in terms of how you would underwrite those, and how you underwrite any deal.

Today underwriting potential NOI is going to be a challenge for anybody that wants to make an external investment. I mean thankfully we are equipped to do that, but I do think that the markets themselves are very important ultimately in where you want to deploy capital.

What are examples maybe of some of the larger metro markets, where you think it could take longer for them to recover?

Well, if I say, I might offend some people, so --

Okay.

Again, I will defer, but I mean I am sure you have a sense of where, a lot of them are where there is a lot of new retail development plopped into the market, or in fact, there is new development going on right now that has got to be leased up. I will let you draw the appropriate conclusions.

Okay. I guess the last question or two before I let you, I guess, get your lunch, but what are --

We certainly can't go outside to eat today.

Unless you have a boat. What are capital partners telling you about their geographic preferences, and I guess are there holes out there that have emerged or deepened, given where they want capital to flow, and related to that, have you heard of any private equity funds trying to assemble funds to pursue mall assets?

Well, there is definitely an interest to deploy capital in good retail. I think they look at, just like we would, I think they're looking at the individual asset, and its position in the marketplace. They have not red lined any particular market, as far as we know. It is more asset by asset review.

But any private equity guys, do you think, gearing up to go after mall business assets or --?

Well, some of them have a lot of capital. The good news is the mall business has always been operational intensive, so it has been harder for them to justify a lot of significant bets. I mean they have always wanted a partner with an operator. I don't see that, certainly in today's environment, where retail relationships are critical, I don't see that changing at all.

Thanks. Stay dry.

Thanks.

That concludes the Q&A portion of today's call. I would now like to turn the call over to Mr. Simon for closing remarks.

Yes. Thank you. Listen, I think the questions today were very good, and we appreciate you asking them to us, and we appreciate your interest. Thank you.

This concludes the presentation. Thank you for your participation. You may now disconnect. Good day.