西蒙地產 (SPG) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Q1 2010 Simon Property Group earnings conference call. I will be your operator for today. At this time, all participants are in a listen-only mode. Towards the end of today's call, we will conduct a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded for replay purposes. I would now like turn the conference over to your host for today, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Thank you. Welcome to Simon Property Group's first quarter 2010 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, we believe it is important to note today's call includes time sensitive information that may be accurate only as of today's date, April 30, 2010.

The Company's supplemental information package was filed earlier today as a Form 8-K. Filings are available via mail or e-mail and it is posted on the website in the investor section, under financial information, quarterly supplemental packages. Participating on today's call is David Simon, Chairman and Chief Executive Officer, Richard Sokolov, President and Chief Operating Officer, and and Stephen Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.

Good morning, everybody. Thanks for joining us. I'll give you the highlights and then open it up for questions. First of all, we reported FFO is adjusted for the first quarter of $1.41. FFO, after the loss on extinguishment of debt related to our January tender offer was $0.94 per share, $0.09 above first call estimates. Per share amounts reflect the impact of issuance of 52.1 million shares of common stock through public offerings and dividends in 2009 and the first quarter of 2010 the impact to FFO per share of that activity was $0.17 per share.

It was a good quarter operationally and financially consumers are spending more and our retailers are feeling better about their business and the debt markets are strengthening. We are clearly seeing the impact of an economic recovery, and it's beginning to surface in our results. However, we continue to believe that the recovery may be slow and there will be challenges in the weeks and months ahead. I'll walk you through some of our key operating statistics. Beginning with this quarter, we modified the reporting of statistics of our US business by combining our malls and outlets.

We made this change for several reasons, including there is more representative of our entire enterprise performance combined together these assets represent over 86% of our net operating income. The historically bright line between malls and outlets is becoming more blurred every day. Many tenants are leasing space in both property types. Tenants that are historically operating in outlet centers are now leasing space in malls as well as other venues including strips and street level shops and traditional mall tenants are now opening concepts in the outlets.

We also consolidated the back office of the premium outlet business into our Indianapolis infrastructure last year. We believe this is an improved methodology, but understand it may take time for you to adjust your models. Therefore to assist in that process, we provided historical data for occupancy sales rent and leasing activity on a combined basis for 2005 through 2009 in the 8-K we filed this morning. We continue to lead our peer group in comparable property net operating income growth, generating 2.5% growth in the first quarter.

Drivers of that increasing comparable NOI include much improved bad debt expense, as well as a reduction in the bankruptcies in 2010, higher overage rent sales or overage rent through the sales growth as well as our continued focus on cost control in the home office and field. As of 3-31, comparable sales on a rolling 12 month basis was $467 per square foot, sales growth accelerated in the first quarter with tenants reporting sales 6.6 higher during the first quarter of 2010, as compared to the first quarter of 2009. Excuse me.

We also saw a very strong improvement in the month of March. With sales growth of 10.6% as compared to March 2009, partially aided by the shift of Easter. A sequential quarterly occupancy changes from 2009, 12-31-09 were in line with historical trends and were consistent with our budget. As of 3-31, occupancy was 92.2%, ten basis points higher than a year ago. And now, beginning with the first quarter of 2010, the re-leasing spread is being reported on a rolling 12 month basis. This spread was $2.11 per square foot, or 5.2%, and we are seeing improvement in leasing activity in 2010.

The first quarter spread under our old reporting method for the first three months of 2010 was at $2.69 per square foot or 7.2%. Demand for space continues to improve as the economy recovers and tenants continue to experience positive sales trends. In January, we commenced a tender offer to purchase for cash outstanding notes maturing 2011, 2012 and 2013. It $2.285 billion of the bonds are weighted average interest cost of 5.76% in our duration of two years we recorded a loss on this of $166 million, which is what was recorded in our first quarter with this transaction and obviously we told you about that as soon as the transaction was done in January.

Concurrently, we sold $2.25 billion of senior unsecured notes. Our largest ever notes offering, we had a great book, our orders totaled $10 billion. The average duration was 14.4 years and the weighted average coupon was 5.69%. As a result of this activity, we extended the duration of our senior unsecured notes with no overall increase in our weighted average interest rate. During the quarter, we paid off $300 million of senior unsecured notes that matured on 3-18 and unencumbered two malls totaling $282 million for mortgages, as well as paid our cash loss on the extinguishment of debt of $166 million.

Subsequent to the completion of the Company's new unsecured corporate facility in December of 2009 five additional banks have added a total of $280 million, increasing our borrowing capacity to $3.845 billion. The facility has accordion feature allowing burning borrowing capacity increase to as much as $4 billion. As of March 2010 we had $3.6 billion of cash on hand including our share of joint venture cash, approximately $10 per share. The availability of our corporate credit facility of $3.2 billion for a total liquidity position of $6.8 billion. Additionally, we anticipate generating over $750 million of free cash flow after the payment of our dividend. We also declared an all cash dividend of $0.60 per share.

At this time I would like to make a statement regarding our acquisition of Prime outlets. First let me say that we expect to close this transaction per our definitive agreement. The federal trade commission is reviewing the transaction that we have met with the FTC, and are fully cooperating in that review. As as you may know, the US Antitrust authorities have consistently recognized that the retail real estate industry is highly competitive and fragmented, and is one of only, one of the only industries exempted from Hart Scott Rodino filing requirements and it is whether they are discount, retailers, manufacturers or otherwise and do lease retail space in a variety of locations.

According to recent estimates, there is approximately 14 billion square feet of retail space in the US. Approximately half of which is space in shopping centers of all kinds. Our assets comprise only 3.5% of the total shopping center space. In addition to the wide variety of physical sites, e-commerce websites and mail order catalogs have become established in powerful retail outlets, and only a small percentage of US off price retail sales are conducted through retail outlets located in the properties owned by SPG and Prime. This will be my only comment today regarding this transaction.

Just let me conclude, as I stated in the morning release, the year is off to a positive start for the Company. We reported solid results and are encouraged by the trend of the retailer sales, our retailers are exhibiting more confidence in their business, and we are seeing increased inventory in the stores. The environment for new store openings is slowly improving. Going in the secured debt market as significantly and positively changed in the last two quarters with the reemergence of structured secured leaning and the condition activity from life companies.

10 year transactions totaling $515 million at an average interest rate of 5.95. We expect a locked rate within the month on two more ten year fixed rate transactions comprising approximately $550 million at even lower rate spreads than in the first quarter and all of our 2010 secured debt maturities are done. While we do not believe the demand exists for any non-outlet development projects, we are selectively spending capital dollars on expansions and selective international activities, all with expected double digit returns.

We are adding 116,000 square feet to Houston premium outlets, we are adding anchors and big box tenants at more than 20 regional malls, mills and community centers. We started construction on our second premium outlet center in South Korea, as well as expansion at two premium outlets in Japan and once again, we believe we are well positioned to continue to deliver solid results in 2010, and as a result, we have increased our bottom end of our 2010 FFO guidance by $0.05 per share. So with that, operator, we are ready for some questions.

(Operator Instructions). And your first question comes from Alexander Goldfarb from Sandler O'Neill. Please proceed.

Good morning. Wanted to ask some questions on the general growth. Sort of for perspective. What's been the feedback as you guys have had your discussions as far as the warrants from the boards perspective? Are they viewing the warrants as something that yes, would disrupt the bid? Or are they viewing that as an integral part of the alternative proposal for the Company?

Well, I don't really know. Other than to say, Alex, that there is no reason to issue warrants when you have a better deal economically, or certain better sponsorship, better diverse group of investors. But, so I don't know why they would issue any warrants, given the current state of play. It doesn't compute for my perspective.

Okay and then the second part on the GGP, is what is the dynamic? I think earlier the unsecured creditor community came out in support of you guys. But given that Fairhome and Pershing own a good chunk of that, what is your sense of the dynamic between the unsecured credit stores committee and the respective unsecured debt holders themselves?

I can't speak for Fairhome or Pershing Square. I can only tell you that we have had positive support from the creditors committee and they view our deal is more certain. We think they'll continue to support us.

Okay. Then the final question is just on the guidance. Just two line items, just for your lease term expectations for the year and provision for credit losses and then as far as Prime goes, should we be assuming that in our numbers for this year? And is that in your guidance? Or what is your recommendation to us as far as our estimates?

Well, I'll let Steve answer the first two. But let me just say on Prime, as we said at the beginning of the year, Prime is in our guidance. And when we issued our guidance earlier in the year, we anticipate an earlier close to Prime. So we're not going to pinpoint exactly for you at this moment when when we expect it to close. We do expect it to close, but the fact of the matter is we haven't changed our guidance. In fact, we've increased the bottom end, even though what we gave you initially we have been delayed from when we thought we would close Prime.

Alex, this is Steve. I'll just talk a minute about the other two items you asked about. The bad debt expense you did see we actually had a recovery in the first quarter. I wouldn't expect that trend to continue, although as I look at the landscape right now, I do think bad debt expense will be relatively muted throughout the rest of the year. But I would expect to see some expense, not necessarily recovery. On the lease settlement side, we did have a spike in activity in the first quarter. Historically, we run about $5 million a quarter. $4 million to $5 million of ordinary normal course of business. And I would expect the run rate for the rest of the year, the remaining three quarters to sort of fall back to that historical level.

Okay. Thank you very much.

Thank you, Alex.

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

On the outlets, versus the malls, I think I understand why you are combining them. Could you just last say for 2009 there is a 500 basis point difference in the NOI growth and you are up in the first quarter. Could you talk about kind of the contributing factors and whether that disparity disparity is consistent with whether you last broke it out.

The disparity has narrowed and we had comparable property growth in the mall business. If you just look at the mall assets. For the first quarter.

Okay. Then the lease spreads, the rent on expiration was much higher than you reported previously. Obviously your lease terms were way up. I wonder if those were sort of related and whether we might see that number as a blip that comes back down based on maybe closings of high-end stores or if that's not accurate?

Paul, it's Steve. We clearly are seeing some positive momentum in the leasing business. I think David mentioned in his prepared remarks if you looked at just the first quarter activity on a stand alone basis the spread was actually almost $3 a foot. So, no, I would not expect it to be.

My question was whether that lie number on expiring rent is your average for the year is quite a bit lower than what you reported in the first quarter, $40.71. Is that indicating anything specific relative to what closed in the first quarter?

No, don't forget our business is such that a lot of the leases are still geared toward the retailer's year end. So we have the largest expirations at January 31. But it's not reflective of anything different, no.

Okay. And then just Rick, maybe you could talk a little bit about where you are seeing open to buys increase and also maybe a little bit of clarity on whether we are seeing kind of more activity from kind of the bigger footprint type stores.

Let me do the first on the specialty store tenants across all the platforms, it is obviously a more constructive leasing environment and we have a number of tenants that are now coming back and wanting to open the stores in 10 that otherwise they might have opened in 2008. There are a number of new concepts, like PS by Arrow, that are moving ahead Sperry and Stride Rite from collective brands and we are looking at a lot of fields with Microsoft. As you know they opened two stores and one of the two is in our property and it is performing really well and they're excited, and we are excited that they are looking to grow their footprint. On the back area, if you look at the schedule we have in the 8-K, you are going to see a increasing amount of activity there as well. And the thing to remember is the development today is probably at 40 year lows as David referenced, so that is certainly playing into our hands to absorb the existing inventory.

Okay great. Thanks.

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

Thanks. I want to try to maybe continue the line of questioning from Paul. But if you look at where we open leases in the quarter and kind of look at the lease expiration schedule, I guess what I'm trying to figure out is if Chelsea has historically 30% rent spreads and we know the malls were sort of slipping last year.

Let me interrupt you. We also had positive rent spreads in the mall business in the mall assets. So, and again, remember there is a lot more activity just given the size of the portfolio malls versus outlets. So I mean, if that's what you are headed to, we have had positive in both. And again, the expirations for the quarter, you know maybe there is some unusual.

Well the mix can change.

Yes the mix can change.

I guess, David, my question was, I'm trying to think, when you were giving guidance or we were talking about your business, I thought kind of late last year the beginning part of this year, you thought that the mall spreads would be down and maybe closer toward the single digit range or very low double digits versus spreads that had been closer to 20%. Now you are kind of merging these things together and we have to think of them as kind of one number, what do you think spreads collectively for both the malls and outlets will be for this year?

Well, I think it is going to be consistent with our guidance, the specific number I think we'd have to get back to you on. We don't see a big change in the business.

Okay. And then, I guess, maybe for Rick, talking about open to buys, is it fair to assume then that the maybe the leasing that was put in place here in the first quarter was done under an environment that was pretty stressful? Is it fair to assume that this was kind of reflective of really tough situation the last six months? And I guess when would you expect to see maybe those numbers start to trend higher, is that a flee quart event or might we start to see the spread start to rebound had in the second quarter?

I think it's going to be further out. You have to understand leasing that we are doing today is not going to open until the fourth quarter at the earliest and we are starting to talk about 2011 leasing. Obviously the stores that are opening new in the portfolio were done last year with a little less constructive sales and profit dynamics. So that is going to reflect slightly lower, slower rents.

I'll just say, Steve, we continue to have a lot of pressure put on us by the retailers on the rent. It it is a challenge. And we are doing the best that we can. But there is there is a lot of, there is a lot of leverage and pressure the tenants are putting on us in terms of reason.

Okay I just just lastly David you are looking at selective development opportunities on the outlet side?

Yes.

Can you just talk about maybe how return expectations for that business have changed, if any?

Well, I think it's not just us. I think generally the properties are attracting a lot of new entrants into the outlet business and there is lifestyles that are being converted to outlets, there is malls that are being converted to outlets type tenants, part of the morphing that we see going on in the industry, so that's one of the things that we are dealing with. But it was not just us, I would say generally, the returns are under pressure, not dramatically so. I mean, the returns historically Steve, have been really, really positive. They are still double digits, but it's probably off a couple hundred basis points, if not more, just because you know the rent pressure in that business, even though the demand is good, is you know the retailers are just generally cautious and able to negotiate. Pretty good deals.

So low teens might be down toward ten?

I think it will be a little bit better. But I would say 10 to 12. I guess you want to pin me down with a number?

If you could go down to decimal points yes, that would be great.

Yes you probably went from the 14, 15 range, probably to 10 to 12.

Okay, thanks.

And I think the other thing is the outlet development pipeline, not just us, but generally, is different than it was five, six, eight years ago. these are, the idea of being next to a full price is kind of out the door. The land costs are much liar, because they are you know they are really in in the in regional mall locations, essentially. And construction costs have kind of stabilized. But I think land costs and tenant improvement costs have certainly gone up.

And your next question comes from the line of Jim Sullivan with Cowen and Company.

Couple of modeling questions first. And for Steve I guess, the same story NOI number you are quoting here, is that pre or post lease term fees and credit loss?

It does not include lease termination fees, Jim. It does include bad debt expense.

Okay, so that very positive variance we had in Q1 is part of that number?

It is.

Second on the home and regional cost line, that number was below 20 oh I think that is the first time since before I retired the first time. Can you just tell us why? And where that number's going.

We continue to do more with less. Of that.

Let me amplify on that just a bit, Jim. Don't expect the same amount of positive variance. Because we did have a true up from legacy incentive plan related to the outlet business. That provided some of that favorable variance in the first quarter.

But I still standby my comment.

And how much less?

How much more? Where do you want to start? Anyway.

Well typically that number has been over 25 for some time. So it was a big.

I'm kidding you. Steve's right. But Steve's right.

Most of the favorable variance in the first quarter, Jim, was attributable to the legacy incident.

Okay and that was how much?

I think the favorable variance was about $8 million in the quarter.

Okay. And the final question for me is really kind of a big picture question for you, David. That is you have obviously been talking with a lot of major institutions, in terms of joint ventures, both domestically and overseas. The question I have for you is whether you've seen any change recently, that kind of matches what we saw on share price performance over the last couple of days. Whereby those institutions are showing a clear preference to invest in North America, as opposed to Europe?

Well, I think they see the US, I agree, and they see the US as having certainly better growth prospects than Europe. We see the same thing, frankly. And that is part of what's driving us in some of our decisions in Europe. And I think they see, they are also moving toward the alternative investments, been put a little bit on the back burner, and they are looking for core investments. And when you look for core investments, they like A regional malls. So both of those are kind of aligned in terms of what's happening on the capital front.

Okay, then finally, regarding the international side, you announced a company of projects, new project expansions in Asia. Should we be expecting more of the same? Does that continue to be a sex tore where the opportunities for new development are going to continue?

Yes. But primarily, if only exclusively in the outlet, in the outlet format. So South Korea we have a few more opportunities. We are very close to starting in Malaysia, which we hope will attract the Singapore market. That is the focus, as we sold our Wal-Mart anchored malls in China. could we do outlets incline? Maybe. But at this point, we are very comfortable with the outlet format in those kind of areas in Asia. So we'll continue to push that.

Is it a competitive advantage that you have in the outlets in Asia versus full price, is it a lack of opportunities or yield?

I'd say we are good at what we do there. We've got the right partners, we have had success so it is always, success begets success, and full price, certainly in China, and other, I think the yield on full price is very, very tricky. The thing that I have seen in Asia is that if the tenants don't produce, they don't really necessarily pay you what they want to pay you. So we just think the outlet sectors are actually a little more risk averse. And we have been successful there.

Great. Okay thanks.

Thanks.

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

Could you talk about the anchor stores versus the in-line stores, and perhaps some performance by segments. Also, David, you talked about some challenges ahead. Are you worried about store closings at this point or is it sort of comments about the slow recovery?

I'll let Rick talk about the department stores, but absolutely store closings our occupancy went down, store closings are an every day event. The retailers are, if they don't have the right rent as a percent of sales, they will close the stores. We have suffered through that a lot last year. I think I give credit to Rick and the leasing team for maintaining occupancy. But store closings absolutely continues to be an issue. I don't think it will go away anytime soon. I'll turn it over to Rick on the anchors.

And I would say to you, in addition to store closings, a lot of the specialty stores are downsizing their footprints. So there is pressure in that regard as well. They are trying just like us to do more with less. On the anchors, performance is obviously better. Balance sheets are dramatically better. Virtually every one of them are at stock prices they haven't seen in years. They are more optimistic about their future and they are more focused on top line growth. I don't think it's going to immediately transfer into department stores looking to open new units. They are just working on making their existing product better and it is more productive and that helps us drive more traffic.

And David, just sticking with the store closings theme, do you expect that to happen throughout the year? Or do you think retailers try to hang on for much of this year and it falls into later Q4 and even Q1 of next year?

Well, they have already made some decisions. So we know that in 2010, when the lease expires, we are going to have to deal with store closings. So look. The environment, we have got a better shot of keeping some open, given that the world's getting better. But it continues to be a focus for retailers that they don't have the right rent for sales, they are going to close the store. So you have seen our rent spreads can compress and our occupancy get dinged a bit because of that environment. The good news, it's moving better. But it's got to continue to move better for us to be able to deal with the store closings.

Just last question for me on the dividend. I know you had to right size the dividend last year whether liquidity obviously dried up. When do you reconsider the dividend in those conversations with the board given your yield is now about 2.7% and your pay out ratio is as low as I've seen it.

Very good question. We are going to address it a little bit with our taxable income at the fourth quarter depends on kind of where we see that. I think it is a good question. We'll be able to see how the year shakes out. There won't be a change in the third quarter in term of the $0.60, we'll see where taxable income is in the fourth quarter. I think depending on you know kind of our view of the world, we'll see what the right number is for 2011. Good question though.

Thank you.

Next question comes from the line of Craig Schmidt, with Banc of America Merrill Lynch.

Good morning, on your two expansions, how was the leasing on the small shop space? The 136 at Domain and 138,000 at South Shore?

We've had challenges in both, Craig, these were brought on, they were under construction during the.

Lean years.

Lean years, yes. Two days ago. Right. So two days ago, but in any event we struggled frankly, we've got good momentum. I'll let Rick talk to you about the percentages. But we brought them on at obviously a horrific time. We are making progress. I don't know if you had the numbers in front of you.

The only, I would add at Domain we are going to hopefully by the third quarter be about 80% occupied and at South Shore Target is operating in October and we anticipate it being about 80% open at that time as well when Target opens. David is right they were very well executed but the timing could have been a lot more fortuitous.

Obviously we believe very much in both projects. But we just have to keep pounding away and get it leased.

I know you are not thinking about non-outlet development at this point. Is the hesitancy of the department stores to open new units, might we see more like a St. Johns Town Center opening than a traditional mall?

The outlet, there is a good pipeline out there for the industry. Rick should comment, I just don't see that on the, I just don't see the demand. I just don't see it from our standpoint. Rick?

The only thing I would add is the discussions we are having with department stores is how we can add them to our existing properties. I don't think any of them believe there are a lot of underserved markets left in the United States.

And I would just add that the focus, we had obviously you know a lot of redevelopment stuff that we put on hold. So I think, as I said, probably the last call, I think we'll start to see some of that put on the drawing board again. And I think that's the first step to -- for us in any event as to ground up new development ex the outlet assets.

Okay. Thank you.

Thanks.

Next question comes from the line of Quentin Velleley with Citi.

It is Michael Bilerman here with Quentin. David, I want to go back to the leasing stats for a second. If we look at the on page 18, for 12-31 for 2009 lease spread was about $5, right? 3-31 the trailing 12-month number, which includes most of 2009 in the first quarter, in the store closing rent, jumped up from that $38 to $41. Which is a pretty massive spread to include all the first quarter expirees. I think you had said there was a $3 positive spread in the first quarter. But I'm having a hard time figuring how that math works when 2009 was positive 5 trailing 12 in the first quarter is $2, something is just not matching up.

Well hey Michael, it's Steve, just from a math perspective, what's happening is the first quarter of last year was very positive. In fact if you go look at our 8-K from the first quarter of last year my recollection was the videos in the mall business were $9. You had a very positive quarter burning off. And obviously David and Rick alluded to the leasing trend is getting better. We are seeing better spread in the first quarter of 2010 than we saw in the first quarter of 2009. But you are replacing a quarter with lower spreads from taking out the first quarter of last year which had very high spreads.

I guess in the expiration number of that $40.71, the $41, your average, if we go back to the prior subs, average mall rent for 2010 that were expiring were $36, $37. The trailing 12 month average to be $41. It just doesn't, something is, I guess, the where you are signing rents make sense. I guess where they are expiring doesn't. And so I don't know if there is something particular in the first quarter relative you know the last 12 months from 12-31-09 the expirees were $38? Right. So if you roll from the first quarter for the first quarter to roll on to $41, that would mean the first quarter expirees were probably high 40s or even 50s.

But don't forget, Michael, two things. One, the closing square footage in our spread calculation is comprised of two things. It is comprised of normal lease expirations, and we disclosed for you what our lease expirations are over the course of any period and you can see what the average rent is. But it's also stores that closed prematurely, whether that's bankruptcies or lease settlements or lease terminations. And obviously, as David and Rick alluded to, in the environment that we are in, if a tenant doesn't have the right rent to sales ratio, they are going to close. We had some high rent tenants that closed. I mean, as an example, think about all the jewelry stores that have closed over the course of the last 18 months.

Right. I think that is what you are seeing then, in terms of having a pretty big impact in this year, first quarter. Because we had a lot of jewelry stores close.

But you don't see like moving the 12-31, going down from 13 down to 5 as being a concern? Of what that would have implied for the first quarter?

No. Because we told you what the first quarter is. No.

Okay. David, going back a couple of months ago, you had said in a release that there was a number of other things that you were working on in terms of growth opportunities and that you were not going to sit on your hands and wait around for a situation. I guess, can you give an update as to where those other situations are? The size of those opportunities, and how you are thinking about that aspect of your business?

Well, look. I think it's safe to say we are good. But it's hard to work on one big deal and a lot of other ones at the same time. So our focus, let's not forget we have a time deal, where we are looking to close. But our focus, obviously, has been on general growth. And I think at the time that we mentioned it, we were still debating what role and how we might play in general growth. Obviously, a lot changed from the last time we spoke, and we have been exclusively focused on that transaction. So, if it so happens that there is nothing there for us, which is a distinct possibility, I'm very comfortable with the ability to grow our business externally, but I can't give you chapter and verse as to when and how. I don't think that would be appropriate.

I guess were those opportunities being marketed? And at this point, now that you have pulled back from them, they'll go to someone else? Or I'm just trying to get a flavor of what.

I don't think any of these were auction oriented marketing deals. And it wasn't like that kind of stuff.

Yes, just quickly, in terms of you mentioned the redevelopments in the malls will probably be the first projects you start looking at. Just wondering what you feel is the timing of when they might commence and probably still quite a way out?

I think, no I don't think it's quite a way out actually, Rick. I will tell you, we are going to end up spending more redevelopment dollars this year than we thought. as we were planning at the end of 2009. last year, actually, our CapEx expenditures, now some of it by the time you get it all done will be spend in 2011, but there is a lot of activity on the redevelopment front. And we'll spend more in this year than we anticipated. And I think that will carry over into 2011 as well.

Yes. And if you would just look at page 34 of the 8-K, we have shown you a number of the redevelopment projects that are coming online in the remainder of 2010. And some of these are significant upgrades to our properties, and we have a pipeline of opportunities that we are working on. And as they get to the point of starting, we'll share them with you.

And retailers looking for the smaller store sizes or a reduction in store size, is that something that's going to drive more redevelopments over the next five years?

I don't think it's a redevelopment as much as it is going to enable us to maximize the NOI out of our better properties because we are going to have more space to lease to more tenants without having to add additional space.

Just on the outlet versus the mall, what percentage of the NOI has the cross pollination or the cross fertilization tenants? I know you have been increasing it, but I still thought it was predominantly a separate tenant base.

I would say at least 40%. 50% if not more.

50% of the outlet NOI are also in the mall.

Yes, essentially. You have a lot of companies like Liz that do both and the GAP that does both. That is off the top of my head, I don't know specifically. The pure manufacturers are more vertically integrated now, so they do retail and manufacture the pure retailer or GAAP does both. So if you go through the list, I would say off the top of my, the old like Mikasas of the world are gone. If you are happy to walk an outlet asset with you, but I would tell you just off the top of my head it is 50, we could certainly do that math, wouldn't you say 50.

Understand anecdotally if you look at the announcements made about new concepts coming to the outlet, they have been almost exclusively from retailers that are already operating in our malls, such as Ann Taylor Loft. Now outlet Coach Men's, LensCrafters, Vera Bradley, New York and Co, Christopher & Banks, those are all mall retailers that are moving concepts into the outlets as well which is again an example of the convergence that David talked about in his opening remarks.

Thank you.

Your next question comes from the line of Tayo Okusanya, with Jefferies & Co.

Good morning, going back to the numbers again Steve. If you could just help me out a little bit. The recovery of the credit losses in the first quarter. Could you explain exactly why that happened.

Sure. We were overreserved ADT year end, based on absolute account by account analysis of receivables that we didn't think we would necessarily collect. And we collected them in the first quarter. So when you have a reserve out there and there is no receivable left, you have got to reverse the reserve.

Got it. The $20 million lease settlement charges in the quarter, was that specifically from a few concentrated tenants or from a bunch of tenants?

It's a bit of both. There were a handful of multi-stores that did normal ordinary course of business as well.

Okay. And then operating expenses for the quarter, $98.7 million. That was a little bit light, versus 1Q of 2009, year over year comparable. When I finally think about forecasting going forward is that $98 million and $99 million number more the run rate you are expecting? Or did you have a special thing happen in the quarter?

David mentioned trying to do more with less. We have obviously been focused on costs. You do have seasonal costs, as an example utility costs are much higher in the summer because you are air conditioning the centers. But there is no question that we are seeing the benefit of aggressively managing the cost in the malls.

I just want us to take credit not only did we out perform, we also out performed with all the snow expenses. So we had one goal this quarter was not to use the extra snow as the reason we missed our numbers.

Fair enough. Thank you very much.

Your next question comes from the line of Ben Yang with KBW.

I was wondering if you could give us your updated view on your acquisition landscape? Obviously general growth is the elephant in the room and you previously commented that you are exclusively focused on this. But they end up going with the broke up sponsored recap do they end up selling assets? Also there is speculation that some of your mall could be consolation prizes if you don't get general growth? Wondering what you are thinking or perhaps expecting?

Let me just make a general comment. I have no idea you know if Brookfield is successful what they'll do with the Company, or how they'll run it. So I have no sense of anything on that. And if we are not successful, the last thing we are going to do is just go into a deal to do a deal. When we look at deals, this is really, Ben, are you there?

Yes, I am.

I just got some feedback. When we look at deals, we look at what the value of the real estate is. Not what we can pay for the real estate. If we did that, we'd get ourselves in trouble. So look, at the end of the day, if there's good real estate to buy at the right price, we'll buy it. If it's not, we won't.

And we'll wait for that opportunity. So that's how we look at things. So it's not what we can afford to pay, that would be, that would be, it's not the way to run anything. It's really what we think the real estate is worth. And what the real estate might be worth in our hands. But with that said, I hope I answered your questions.

I have no idea what Brookfield will do, if they are successful. We'll continue to look like we always have, over the last 15 years, 16 years, that if there is real estate appropriately priced that we think is more valuable on our hands, we'll be prepared to buy it. If not, we'll just wait for the right time.

Great, then if those good deals aren't there in your term, do you just use the cash to pay down your debt? Is that kind of plan at there point?

Correct.

Great. Thank you, guys.

Thanks.

Next question comes from the line of Cedrik Lachance with Green Street Advisors

Thank you. Going back to expenses what is your ability from this point forward to further cut the expenses?

You were muffled there. Can you repeat yourself.

Going back to the expenses, and operating expenses in particular, so from this point forward, what is your ability to further decrease your operating expenses?

Look. Our philosophy is we hope there is no snowstorm, I'm kidding. I think we are running a pretty good shock. You got it. The number one focus is, you can't, you have got to have a pleasant consumer experience for the consumer and obviously for our retailer partners. So I think we've, we are doing that. And can you continue to drive those down, I think we might jeopardize that. So I'd say, Cedrik, we're operating probably as appropriately as we can. We've got to be very mindful of the consumer experience. So I wouldn't expect us to be able to push that much further.

Okay. In regards to the recoveries on the expense run, you alluded a couple of times to retailers, needing to have an appropriate occupancy cost in the properties. So is the can recoveries one of the items that is currently going down versus previously? Or are you still able to recover as much if not more than tenants?

Remember, we have essentially gone to fixed. So it is all part of the negotiation with our retailers in what they pay in terms of gross rents. There are very few lease discussions. We've still got some older leases running off, but there are very few lease discussions that have pro rata cam at this point.

When you negotiated this point, it is much more of a gross number than trying to divide between base rent and cam recovery?

We still allocate it between operating expense recovery and, and rent. But it is, it is not, there is certainty for the retailer in terms of what they are paying us, in terms of what they are reimbursing us for operating expenses.

Okay. One final question. I notice you have purchased the partial interest in two of the Mill properties from your German partner. Were you able to disclose the cap rate on those transactions?

I actually don't know. Probably not, but I think we made a good deal.

All right. Thank you.

Next question comes from the line of Jeff Donnelly with Wells Fargo.

Good morning guys. David, I'm not sure you can break it out. How much of your interest in GGP is given by the structure of your balance sheet rather than the mall portfolio per se? Because I guess a pursuit of a platform with above average leverage, abundant long-term rate could convey that you might have a view on core growth that will be soft for some time. Or maybe the better way to ask this question is for the cycle ahead, who do you think has the better balance sheet?

Let me answer it this way. I hope you are not serious about that last part. I think their balance sheet scares me as opposed to there is still a lot of secured debt and a lot of highly leveraged assets. Again I hope you weren't serious on the last part. So we look at the assets.

Obviously the big issue here it is still a highly leveraged company with not a lot of financial flexibility. And so the secured market as you know is still, Jeff, not back and doing big secured deals is tough. It is getting better. But it's not there, obviously. Our balance sheet compared to theirs is an apple and an orange.

That is fair. I guess what I meant by better is to the extent that you see a more sluggish growth environment or a rapid growth environment, having a higher leverage warranted?

Well, look. I think that was an argument that was made by them earlier. And you saw the result of that. So, I don't think so.

To switch gears, in your opening remarks. I think this was touched on a moment ago, you had pensioned outlets and full price mall are blurring. I know that shift hasn't happened overnight but what does that say about the long-term sales growth potential for regional mall sales if brands are ready to effectively open off price channels do you think the next ten years will be weaker than the last ten?

That is a good question. I think everything has to be done in moderation. I don't know that it will be dramatic changes. But like we have said before, Jeff, here is a retail real estate that is going to become yesterday's news. the retail real estate environment is under pressure. And it's certainly the internet and e-commerce has had a dramatic impact on our business. And that's the biggest concern we have going forward. There is certain elements of that, that aren't a level playing field, for instance on the internet sales taxation, and the ability for the pure internet retailers to just avoid it. But I think this will cause and the whole environment, generally, is going to cause some retail real estate to essentially have to morph into something else, or go out of business.

I guess one last question on that then. Is a lot of the lifestyle center activity we saw, whether it is stand alone centers or just the new wing on a mall was some what reliant on you know restaurants as that new anchor and they are still on their heels. To the extent we do see more shake out in mall anchors down the road, hypothetically say it's Sears, how do you think I guess about the alternative use for those big boxes down the road? If there aren't a lot of big box users kicking around and again the anchors for them right now seem to be on the sidelines.

Jeff hi, it's Rick. Again I think if you look in the 8-K, you will see our most current thinking on how we are handling these boxes and frankly, it's a function of the size of the box. Is it a one level mall in a two level box? Two level box with parking on both levels? There are still users that want to locate in our properties, utilizing that real estate that are going to make our properties better. But it is a lot of work, and it takes time to get done. But the demand is slowly reemerging.

I would say look at the end of the day if it is good real estate it is going to get recycled. and the mall still if you have the right critical mass and the right location, I think we've all demonstrated in our industry the ability to recycle boxes. And that ought to continue.

That is helpful. Thanks.

Thank you.

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

On the financing side Steve, can you just walk through what you see happening at the back end of the year? Anything contemplated in terms of another bond deal? I think David may have referenced something in terms of locking in some rates. And does it still look like you are going to end up paying off form shops and, comfortably et cetera?

I think what David mentioned earlier is our 2010 secured maturities have all been addressed.

Okay.

That plan does continue to include paying off the debt at form.

Okay. And one other question not to beat a dead horse. But going back to the closing rent levels of $41, given the comments about higher rent payers and their store closings, the jewelry stores and that, what should we put more weight on? The first quarter spreads were $3 or that you had some high rent payers if the first quarter that seemed like they closed? Where if you look forward the spread may increase a little bit?

I'd focus on the spread and I would also focus on the bottom line results. Which is we grew NOI by 2.5%. That is what I would focus on. That is just my, that is my personal preference. So you know.

Got it, noted.

I have a simple model. As long as cash flow is growing, then I'm reasonably happy. Rick's saying not really. But I'm reasonably happy. If it's not growing, you know then that's the focus.

Okay. Got it. Thanks.

And frankly, guys, that is how we run the business. Looking at EBITDA or NOI growth.

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

Hello, guys. The question for you on the mills properties, I mean, you have regional malls kind of on one end, you have outlet centers on the other end. I mean why not put the Mills metrics into the metric mix too? They have the whole cross fertilization thing you guys were talking about.

Yes, Rich, that is a good question. The reason we don't is because it's its own separate company. And we have our partner in there that's got its own separate revolver, its own separate balance sheet, it's kind of one entity generally. So --

And it's contributions as a percentage of NOI to the total enterprise is a fraction of what the outlets and the malls do.

We do disclose operating statistics for it. But that's the primarily reason. Whereas potentially the malls and the outlets are kind of all together. The Mills because of a separate corporate structure is kind of run independent.

Okay. And you know the metrics seemed a little softer this quarter. How do you feel about the whole Mills venture? At this point?

Look, I think the actual Mills projects are doing very, we are pleased with it. Rick and I are pleased with it. Look when we bought Mills, there were a couple of two or three Mills that were really tough. We knew that going in. It is effectively the Mills share of the cash flow was de minimus. We don't pull our hair over it, we continue to try to improve it. I would say we have made a lot a lot of progress on the mills and improving from Potomac, and reciting all the stuff we've done, Block, Ontario, the Great Mall. There is a lot of good activity.

Where we have had some slower results and we got kind of caught in the significant down turn is the malls that the Mills owns, where a couple of them had some, we were really excited about certain redevelopment opportunities like at Southdale and Delamo, that has taken a little bit back burner on the other hand. You know we got a Target deal with Esplanade and we are working stuff with South Ridge. We are regaining momentum with the Mall portfolio. But that has been, that's taken longer. But generally, the results are exactly what we underwrote, despite the significant change in the economy. Tenant demand at the Mills has been good. So we are okay there other than the tougher ones, like a St. Louis, continues to be tough.

When you guys are sitting at ICSC, these are just part of the mix, that you are showing the retailers?

Yes.

And I would just make a comment that we are also finding the convergence many of our tenants that are operating in the malls are looking and opening full price stores in the mill. I had a conversation yesterday with a retailer on a space and he said well we are definitely going to go we are debating internally whether we are going to have a full price store or outlet store in the mills. We are having outlet tenants open outlet stores in the mills. It is all things to all people and a very good distribution channel.

One last thing for you, Rick. You made a comment about smaller footprints on some of the in line guys. I'm curious how widespread is that in how far does that go? That could be serious over time if guys are reducing 10 or 20% or 50% or whatever they are doing.

It's on the margin. There are a number of retailers that are growing their footprints. But it gives us an opportunity to improve our tenant mix because in a number of our properties where tenants want to consolidate their concepts, it gives us more space to deal with and we can drive our NOI.

I would just add the only one that's really out there doing it in a big way is the Gap. But I think as Rick as said, they have very good locations. So could be a win/win for both of us. We downsize, we get back decent space and we go from there. That is the only, I mean, not to say there aren't tenants here or there with a store here or there that likes to get smaller. But I would say that is the biggest one out there. That wants to do it on a more on a broader basis.

Okay great. Thanks, guys.

Your next question comes from the line of Christy McElroy with UBS.

Hey guys, I'm here with Russ Nussbaum as well. In your conversation with national retailers as they shift to taking more space would you say there is more of a quality in location bias today than in the last two to ten years rather than focusing on blanket square footage growth. But generally speaking what do you think is the ultimate fate of some of the class C secondary tertiary market malls out there that stand today with above average small shop vacancy, maybe an anchor or two gone? Do those malls eventually become obsolete? Or do they get recycled?

Let me answer the last part. I would say to you that depending on what's happening in that market, if it's a dwindling, dying market, those malls are going to go away. If it's good real estate and the market could be a small market, but it's got good employment, good prospects, and I think it can be recycled. And we've seen it both, frankly. Where we have been able to Rick mentioned Richardson Square as a decent in fill place, mall you know that we basically, tore down and redid it.

On the other hand, we had a mall in Indiana, we actually sold it, a couple in Indiana, I won't mention names, but where we, it was an old manufacturing town that the employment base was shrinking, the age of the customer was increasing, and wasn't well located. We had no shot at it. Thankfully, we sold it and we went on. I think you'll see a little bit of both.

On your first part, I would say to you that it really depends on the retailer. What they are really focused on is what sales productivity they can achieve from the space. And that's the focus. From there results in the deal or the rent negotiation. But there are certain tenants that love moderate, moderate scenario. They have their idea of what they can afford to pay. And depending upon that asset, that may be perfectly fine deal for that asset. So, I do think, though, Christy, there is clearly the focus, much greater focus on what the sales productivity is I don't want and then Ross has a question as well.

And then Ross has a question, as well.

Hey guys. Just in reference to the combination of the operational information on the malls and the outlets, I guess just a comment. Then I think David, I understand your rationale. But I do think that the investment community would prefer to be able to see how those two distinct formats are performing individually, particularly after this as the Prime transaction closes. So just a thought there. But on the Mills portfolio, I'm curious you don't disclose the same store NOI growth for the community lifestyle centers or the Mills assets. I'm curious what's the cash flow there? And how would that influence the 2.5% number you reported for the quart quarter?

Ross, this is Steve. They are not major components of the overall enterprise. They are not going to move the needle much in any event, but I will say the cash flow for both the strips and the mills is positive.

Okay. And then David, about a month or six weeks ago I asked you a question at the end of the NYU REIT conference about what you thought about real estate evaluations and REIT share prices. You were a little cautious, thought things might have gotten ahead of themselves and here we sit 10% higher and cap rates have come down a built. I'm curious where you sit today on our overall evaluations of REIT valuations and commercial real estate valuations happening all over the world over the last 60 days?

Certainly our Company being undervalued, but look, I think generally, the we've just got to be very careful. What I don't want to see our industry or, and I think it is broader for all equity markets. I don't want to see us go from one bubble to the next bubble. And there are certainly is a sense that we created just another little false sense of euphoria. So I have been surprised, obviously, we think we are a little different position than a lot of companies. But it is a great surprise to me. And I just, I think we have to be careful, as an industry that we don't go from one bubble to the next.

Next question comes from the line of Nate Isbee with Stifel Nicolaus.

Good morning. Following up on the line of questions, can you talk a little bit about the sales trends you are seeing across your portfolio? Maybe the As versus the Bs and the geographies, what you're seeing, strength versus weakness?

Let me just say on the regional thing, we are just starting to see a little pickup in Florida, California, not so much. the outlets are producing a little bit better sales growth than the mall assets. And as I have said repeatedly, I mean, the Midwest is just the Midwest. God love us. But the good news is we are starting to see a little bit better trend in Florida. Rick, I don't know if you want to add to that?

Just a little more color. In the outlets, the one area that has gotten substantially better is the international tourist is back. So those were doing significantly better. And in terms of you asked about categories, home furniture, family apparel, woman's shoes, specialty and family shoes are better. Not surprising, books, music and kids' shoes and woman's popular prices were a little softer. I think as things got better, people have moved up a little bit on their price points and I think you are seeing that in the results that are being report by our retailers.

Okay. And then just looking at the Prime portfolio, are you expecting to sell any of those assets? Any Prime redevelopment opportunities in there?

We don't have any plans to sell any assets, no.

And are any of them Prime opportunities where you could invest some serious dollars?

Well, there is a, the good news with Prime is it also comes with a couple of development sites that we are anxious to be able to build when the deal closes. So, that will be a big focus for us.

Okay, thanks.

You have a follow-up question from the line of Paul Morgan with Morgan Stanley.

Hi. Just a couple of quick things. Do you have a transactions expense number in your guidance?

Not really. The 3.7 we didn't really have that in our initial guidance. But that is what we spent.

So it is likely you'll continue to have those?

Yes, it is likely we'll continue to have those, at least for the time being.

You think that is kind of a, downside component? Or do you think you are sort of comfortable, given you will have those, that your range is still okay?

I can't I can't yes, I think we are baking it into our range more or less. But it doesn't seem like it is going away anytime soon. But it could.

Last thing, on tenant allowances, they were high in the first quarter relative to the full year last year. Is there any color about that? How tenants are still very, how are they thinking about kind of capital? Apart from rent?

Hi Paul, it's Rick. There is not been really any change in negotiating dynamics on the TA. I think if you look at 34, we have had increased box activity. So that is a little more of the dollars. But in terms of the specialty stores, same trends we've experienced.

Thanks.

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

Thank you everyone. Appreciate your interest. We look forward to talking soon. Take care.