西蒙地產 (SPG) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Simon Property Group earnings conference call. My name is DeAnna and I will be your Operator for today. At this time all participants are in a listen only mode. But later, 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 to turn the call over to your host for today, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Thank you.

Welcome to Simon Property Group's second 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 risks and uncertainties.

Acknowledging the fact that this call may be web cast for some time to come, we believe it is important to note that today's call includes time sensitive information, which may be accurate only as of today's date July 30, 2010. During today's call, we will discuss certain non-GAAP financial measures as defined by the SEC's Regulation G. Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release or the Company's supplemental information package that was included in this morning's Form 8-K. This package is also available on the Simon website in the Investors 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.

Okay. Good morning, everybody. Thanks for joining us. I will just give a few minutes of overview and then we'll open it up for some Q&A.

First on the financial and operational front, we reported FFO of $1.38 per diluted share for the quarter, which was $0.04 above First Call consensus estimates, and which was also burdened by over $0.03 of non-recurring transaction expenses for the quarter. In addition, we continue to lead our peer group in comparable property net operating income, generating 1.9% growth in the second quarter of 2010 and 2.3% for the six-month period. Drivers in this leading comparable NOI include revenue and rent growth, increases in occupancy, higher percentage rents as a result of increasing sales in our continued and effective cost control and management, as well as reduction in bad debt compared to the previous period, given the lower bankruptcies.

As of June 30, 2010, comparable sales on a rolling 12 month basis were $474 per square foot, as compared to $456 per square foot last year. Tenant reported sales, 4.9% higher during the second quarter as compared to the second quarter of 2009. And on a year to date basis reported sales for the six months ended June 30, 2010 were 6.2% higher as compared to the same period in 2009. As of June 30, 2010, our occupancy was 93.1, 90 basis points higher than March 31, 2010, and 80 basis points higher than one year ago.

At June 30, 2010, the releasing spread for our trailing 12 months was $0.50 per square foot or 1.2%. Leasing spreads have been impacted by a number of jewelry store closings. But I also want you to keep in mind this is just base rent. We have had an increase in our CAM of at least that number if not more. And also we would like you to keep in mind that our increase in occupancy of 90 basis points or 700,000 square feet includes some leasing of some tougher locations that we were able to accomplish in the second quarter.

Demand for space continues to improve. The ICSC convention was positive. Leasing activity has increased. We fully executed 6.3 million square feet of new leases and renewals in the first six months of 2010 in malls and outlets as compared to 4.7 in the first six -- 4.7 million square feet in the first six months of 2009. Finally, in -- operationally, I want to say the important point is our year to date comparable NOI is up 2.3%, with higher sales, higher occupancy and positive leasing spreads.

Dispositions, let me move to that, and acquisition activity, as we disclosed in our earnings release, we sold one asset in our GCI joint venture property, Porta di Roma, where we had a 19.6% interest and our gain in that was $20 million. Of course, this is not included in FFO. On July 15, 2010, we completed the previously announced sale of Simon Ivanhoe, our 50/50 joint -- European joint venture with Ivanhoe Cambridge. We received EUR715 million and Simon Property Group expects to gain -- recorded gain of approximately $280 million on the transaction in the third quarter.

We also entered into a JV with Unibail and Ivanhoe Cambridge to pursue the development of four new retail projects in France. We will have a 25% interest in this venture and have the ability to determine on a project by project basis whether to retain our ownership interest. On May 13, 2010 we acquired the 345,000 square foot outlet center from Prime, the Puerto Rico asset. In addition on May 28, 2010, we increased our ownership interest of approximately 19% in Houston, which culminates in over a 50% interest in this terrific asset. The combined cost of these acquisitions was approximately $385 million and including the assumption of existing indebtedness.

Let me turn to the capital markets. In the first six months of the year, we have paid off $700 million of senior unsecured notes. We have also unencumbered three malls, paying off approximately $800 million of mortgages and maturity. In July 2010, we unencumbered two additional malls with $282 million of mortgages. The net result is we reduced our leverage by over 200 -- or I'm sorry, $2 billion in the last seven months.

The secured markets continue to improve, both on the life insurance market as well as the CMBS. Year-to-date we've closed seven new loans totaling $900 million. $515 million was from life companies, $330 million from CMBS placements, and $55 million from bank loan. We have also locked rate in the third quarter of another $500 million of loans. $375 million coming from insurance companies, $125 million from CMBS originations. These three loans will have a weighted average of 5.3% and a term of 10 years.

At the end of the quarter we had $2.6 billion of cash on hand including our share of JVs and the availability in our corporate credit facility, including the Simon Ivanhoe sale that occurred in July 2010, which we used the partial proceeds to pay down our Euro tranche of our revolver, will have $3.5 billion. So a total capital availability of over $6.1 billion.

Development activity, we are higher than our budget given improving economic conditions. We originally budgeted around $100 million. We think we will end up spending close to $200 million. We expect to have double digit returns on this capital. We are also excited to announce that we will start the construction of Merrimack Premium Outlets in Merrimack, New Hampshire this fall, with the projected opening in 2012. And we have two outlet centers undergoing significant expansions, Human Premium Out-- Houston Premium Outlets, and Las Vegas Outlet Centers.

Also we have done a very good job in our tactical projects, redevelopment opportunities as we have reclaimed certain department store locations in big boxes. During the first six months of 2010 we opened 14 new anchors, or big boxes, including Nordstrom, Best Buy, Bed, Bath and Beyond, HHGregg. In addition, we have 15 additional stores under construction and scheduled to open in 2010. And again, they include Forever 21, Whole Foods, Crate and Barrel, and Target.

On the international front, there are two new premium outlet centers projected to open in 2010. Paju Premium in South Korea commenced construction in late March. That is in the northern part of Seoul. And Johor Premium Outlets in -- broke ground -- is going to break ground in August. That will serve the Singaporean market. We are partnering with Genting Group, a well know, well respected company in Malaysia and throughout the world. And on completion in 2011, we will have 11 premium outlet centers in Asia.

Now let me turn to Prime, and then we are prepared to open it up for questions. Our acquisition Prime Retail is still being reviewed by the FTC. And we are fully cooperating in that review. I wanted to give you a couple updates on the specifics of the deal. As I mentioned, we closed on the Puerto Rican asset or the outlet -- of Prime's outlet center, and we are currently in the process of negotiating leases for all the vacant space, and once those leases are executed, we will be 100% occupied. We subsequently amended our agreement with Prime so that they will retain its Saint Augustine center as well as its Livermore and Grand Prairie development projects.

And as we noted in our May conference call, US antitrust authorities have consistently recognized that the retail industry is highly competitive and fragmented. Retailers have many options to choose from when deciding where to sell their merchandise, including both a variety of brick and mortar locations, and of course, the internet, where sales growth has exploded in recent years. We have received an overwhelming show of support from this deal from our retailer tenants. They recognize the highly competitive nature of this business, that our acquisition will provide a significant amount of new capital to a company currently in financial distress, and put that capital to work to improve the operations of Prime assets and therefore, improve the retailer's performance in those centers. We remain confident we will close the remainder of the transaction and, as noted in our release, we have reaffirmed our 2010 guidance, and once precise timing of the closing of Prime transaction is known, we will provide an upgrade to our guidance upon that conclusion.

So finally, let me just say, I'm proud of our organization and the quarter that we produced, given all of the continuing uncertainty in the economic environment. And we are ready for questions.

DeAnna?

(Operator Instructions) And the first question will come from the line of Alexander Goldfarb of Sandler O'Neill.

Good morning.

How are you doing?

Hello, Alex.

Doing well. Happy it's Friday, although we have another week of earnings to go.

We don't.

Well then you can enjoy the weekend.

That's true.

Just going back to Prime. Just want to get a little more color here. I mean, United and Continental only announced a deal a few months ago. EU has already has approved that. What are your advisors and what is the FTC saying is just taking so long on this?

Alexander, I would love to be able to comment further on it. But you'll just have to rely on the statements that I've made. And again, we remain confident, but I really don't have much to add beyond what I have mentioned.

Okay. And then switching to leasing, just want to get sort of an update on where you think TIs are going to end up this year? And then if we look at the releasing spreads over the next -- or the, the rent rollover the next few years, if we think about $38 being the market and $34 rent rolls, should we expect 12% releasing spreads over the next few years?

Well, look, I think, a lot's been -- you know, we have read some of the analytic research today about the rent spreads, and I think we need to harken back on a couple things. One is, last year was a tough, tough year. And as you know, we did a number of things to help our retailers survive last year, and as those leases have been executed, it has put, undeniably so, pressure on our leasing spreads. So, what we are seeing in our results is exactly what we expected. And in fact, I think the guidance that we gave to you early in this year, actually thought -- we thought we would have comparable NOI down, and we are actually performing much better than we anticipated.

I think as the market stabilizes, we're convinced that we've got the ability to continue to generate positive leasing spreads that we have done historically as a public company for the last 17 years. So we are not immune to the economic environment that has occurred over the last eighteen months. I'm proud of what we've done. The fact that we still have positive leasing spreads is a testament to the quality of our portfolio, a testament to our positive relationships with our tenants, and a testament to the organization. And I would also say to you we leased -- we increased our occupancy, and in this market that's something to be proud of.

So, bottom line, long-winded -- this is -- as sales increases, certainly rents are related to the ability to deal with -- to rent increases. Given that we have seen rents stabilize and rents are -- or, sales are moving in the right direction, we feel good that we will continue to generate positive leasing spreads.

And then, the TI expectation for the year?

TIs have not shown any appreciable change. We're still basically seeing the same amount of TIs that we've had historically.

Okay, so like, 75 or so for this year is fine?

I believe that's about where our run rate has been for the TIs .

Okay, great. Thank you very much.

Thanks Alex.

Thanks Alex.

Your next question will come from the line of Jeff Spector, Bank of America, Merrill Lynch.

Actually, it is Craig Schmidt here Actually, I wanted to talk on the -- you had a really strong sequential pickup in occupancy, the 90 BPs, and I guess in part, it sounds like you were able to lose some of the tougher locations, you were saying. But as we look in the third and fourth quarter, should the sequential gains slow, or are there still more tough locations you think you can get leased up in the last half of the year?

Craig, this is Rick. We are still seeing a good flow of deals. Remains to be seen how much more we can sequentially increase on a 90 BP gain, but we should be able to hold those gains year-over-year.

And certainly, historically, there is a pickup in occupancy as you go into the third and fourth quarter, so I would hope we continue to do that. Obviously, there was one reasonable size bankruptcy, Premier Salon. We don't think there is a lot more. But that's always the unknown. But we think that will move in the right direction.

Okay. And do you have a sense of where the occupancy might actually end up, end of the year?

Again, I think it'll be positive. I wouldn't want to pinpoint the number at this point. But we'll -- we were, again, looking for flat occupancy compared to last year, but I think we'll -- in our guidance, but we'll be able to do better than that.

Okay, thanks a lot.

And the next question will come from the line of Christy McElroy, UBS.

Hey, good morning, guys. Just following up on some of your comments. I know how much you guys love questions on re-leasing spreads. I realize that the stores that are opening now are still reflective of some of the tougher leases that were signed last year, or over the last couple quarters. Can you give us a sense for what kind of spreads you're seeing on the small shop leasing that you're doing today? And is that giving you the confidence that you're -- in the forward looking comments?

Christy, it's Steve. And we are seeing an improvement not only in deal flow, as David and Rick have talked about, but also in a strengthening of the quality of the deals. So, I do think the trend is positive. I also think one of the things to think about, and I don't know if other people have talked about it on their calls, but one of the things that's impacting spreads, is we have had a disproportionate amount of jewelry store closings, which are high rent payers. David mentioned it in his call, but to the extent that that has run its course, that drag on our spreads will cease to be there and, because the rest of the activity is getting better, you should see a natural pickup in the spreads.

Okay. And then, Steve, just following up on Prime, thinking about the timing, can you remind us, what -- was expected accretion from the Prime deal in your current guidance range, and how did it contribute?

Well, again -- this is David. Let me -- I'll take the Prime questions, if I could. I think the important point at this point is, we are going to update our guidance once we know the precise timing of the closing of the transaction. The fact that when we gave guidance originally, we had Prime in it from March 31. So, we have not backed off our guidance even though we have not had Prime since March 31, and we have reaffirmed our guidance and we will upgrade it and update it once we know the precise timing. So beyond that, Christy, I can't really shed any more light on it other than, again, we had budgeted that. We told the world that that was in our guidance from the end of the -- or the very begin-- April 1, essentially, in the second quarter.

So, we produced the results. We beat our own internal budget even though we had Prime in it for the whole quarter.

Okay. Rick, you've talked in the past about things looking up for the department stores, performance is better, balance sheets are better. But they're still working on making their existing product more productive. Could that include more department store closings or maybe even downsizings on the horizon? Would you be willing to modify REAs and other agreements to allow certain underperforming anchors to maybe sublease a portion of their box?

Well, that -- that covers a lot of ground. First, David and I literally last week were with three of our major department store companies, and none of them were talking about at store closings. In fact, the emphasis now is looking for new opportunities and primarily in our existing product. So, we expect that to be the trend rather than store closings.

Secondly, in terms of the modification of subleases, we are in -- we are always trying to make our properties better. I think David has pointed out on past calls that we've been very active with replacing under-performing anchors with better anchors, and we're going to continue to do that. So if there are things we can do working with existing department stores that we believe will make the properties stronger, we are going to be open to have that conversation.

And Christy, this is David. Let me just say -- and again, I think we are still in an uncertain economic macroenvironment. But one of the things, we had -- we have, I'd say, roughly 20 potential transformational redevelopments that we've been working on. We essentially put them on hold, obviously, last year. And we have reinvigorated the Company to pursue those. And I think they are very exciting. It will add a lot of opportunity for our Company and we are going to accelerate that process. They go from South Hills in Pittsburgh, to Plaza Caroline in Puerto Rico, to La Plaza in McAllen, Texas, Dadeland, the [Llamone] Nanuet, Roosevelt Field, the Walt Whitman. So there is a lot that we are excited about internally that we've kind of said, let's get started on.

Great. Thanks so much.

The next question will come from the line of David Harris, Gleacher & Company.

Hey, good morning, guys. I have two --

How are you?

Good. I'm fine, thank you. I have two quick questions for you. One is a point of detail and then another big picture question for you, David.

You want me to do the detail?

Why not? Have a go. Real estate taxes were down notably in the quarter. Is that just a timing issue? Or are you doing something wonderful to keep your tax liabilities down?

I think it is more of the latter, but I wouldn't categorize it as wonderful. We have an ongoing, sophisticated process to make sure we believe we are being fairly assessed reflecting the value of the properties. And that's -- there is a whole group of people that are focused on that, and we are yielding some results by engaging with the taxing authorities on the real estate taxes.

So the second quarter number is a reasonable run rate, Rick?

I believe it is.

Okay. Terrific.

Now, now there is, David, here is my detail response. You know, there are -- at times, there are recoveries -- it's a little bit lumpy because at some point you get recoveries, and obviously if we do have those -- I don't know in the top of my head if we had that in the --

We did.

We had some recoveries in the second quarter. So, sometimes it's a little bit lumpy because you do get recoveries that you are allowed to offset against the expenses. And obviously, though, Rick's point is right on. We are extremely focused that our property is appropriately assessed.

Okay. Stay there, I've got you for the big question now. I think about your Company, which has been public, what, for sixteen, seventeen years --

Yes.

-- we have been through two recessions now. Can you demonstrate that your management and ownership of the underlying property performance is demonstrably better than the market? And if so, how do you use that in your discussions with -- in terms of forming potential joint ventures, or potentially talking to pension funds about transfer of assets that have perhaps underperformed under direct ownership, and that could do so much better under your ownership?

Well, that sounds like I need a white paper to respond. But, look, I think our results over the years have clearly spoken for themselves. We've transformed properties. We've upgraded our portfolio. We've produced terrific operating results in all sorts of different environments. We've made appropriate strategic decisions, like the outlet business and like.

From an operating point of view, David, we get solicited all the time to be partners with institutional investors. There's not a deal that we couldn't have done with an institutional investor. And I think they look and welcome our ability to partner with us. And I'm sure we could probably back all these statements up with numbers if you give us some time, and maybe that's a good assignment for us. But there is no question in my mind that over the years our performance and our results have certainly indicated that we're better than just what the general economic environment could produce.

Well --

I don't know if you guys want to add anything to it --

My thinking is along this line, David, is that clearly your focus has been from the beginning of the year, let's look at the opportunities in the US. And clearly your pursuit of general growth ended when it did. And I'm thinking, where does Simon go in terms of potentially buying assets in what is obviously -- there aren't that many assets to buy in the marketplace. And some of those have been held for a long time. But probably with people that have, perhaps, underperformed in the performance of those assets relative to what you could do. Is there a line of conversation you can have with those folks and say, look, over an extended period of time, we could do much better with this asset. I'm not talking about FFO or earnings per share from the corporate level. I'm talking about underlying property performance.

Well I -- look, I think the evidence of our ability to do that is in a couple of cases. First of all, if you look at what we have built in Asia on the outlet side, we basically exported our talent there, and we're going to have a portfolio of 11 outlet centers that are producing close to $1000 a foot in sales. So, also, even though we just recently sold our properties in -- the France, the two in Poland and the five in France, the fact of the matter is we built them, we developed them, we leased them. And we brought an institutional quality product to those marketplaces with our guidance and our leasing expertise and the like. So, I think there is plenty of evidence of our ability to export our know-how.

Now, you don't want to do it in a way that suggests hubris, because there has been plenty -- well certainly plenty of developers that have tried to do that and have not been able to produce the results that are necessary to be profitable overseas.

I would also point out a number of our customer, or retail tenants, have been successful in exporting their brands. So, even though we have sold seven assets in Europe, the fact of the matter is we are not foreclosing the opportunity to grow our Company globally. I think we have been successful in our efforts thus far there and I think the ability to demonstrate that is readily apparent.

Is one way to summarize what you are saying is that you see limited opportunities to buy domestically?

I don't -- I didn't say that, and I don't necessarily believe that. And look -- you could say that in a point in time, but I do think circumstances change and the environment that exists today, in my opinion, is not necessarily going to be the environment that exists tomorrow or the next day, and you have got to be in a position to deal with that.

Okay. I'll let you answer the next detail question. Thank you.

See you, David.

And the next question will come from the line of Jay Habermann, Goldman Sachs.

Hey, good morning. David, you are still sitting on a pretty strong balance sheet with, as you mentioned, lots of cash and current liquidity. I'm just wondering, of the various options you have today, how you would rank either development, acquisitions, or even looking at further paying down debt?

Well, we are going to continue to delever if there's not the acquisition opportunities to pursue. But like I said, Jay, is that I do think I have given Rick and the team the green light to go re-energize our redevelopment program. And again, we have 15, 20 really transformational assets that I think are going to require meaningful capital and produce wonderful results.

So -- there's plenty to do. Obviously we are working on some interesting opportunities today, but look, our focus clearly has been to -- we pursued general growth. We weren't successful there. I will leave that for you to judge that whole process. But, our focus obviously has been on Prime and we have been working very hard to get that transaction closed. And so, I think once we can get some of that done, then I think there will be plenty of opportunities for this Company.

Fair enough. And just going back to leasing spreads and I guess sales, the trend has clearly been positive this year in terms of sales productivity. When do you start to see that translate into some pick up in asking rents? And just balancing that against retailers that continue to be pretty sensitive to occupancy costs?

Well I think it's a -- look, we are still -- we are in a recovery mode. The mood is much better. I mentioned we have increased our occupancy, but we're not -- it is not in the period that we were in, in the 2006, 2007 period. So, I think that's still, Jay, going still take some time to max out on lease spreads. But look, the mood is better, the demand is better, and sales are increasing. So, there is a lag in all of that. But, we feel we will get back to the spreads that we would like to see going forward.

Okay. Thanks, David.

It may take a little more time, but it is moving in that direction. Thanks, Jay.

And the next question will come from the line of Quentin Velleley, Citi. Please proceed.

Good morning. There's been a bit of chat about acquisitions again. I'm just curious whether given the demand from all assets at the moment, is there some kind of opportunity to start recycling capital and potentially looking at selling some of your middle market malls?

I think at some point, we still, there is still -- we like our middle market malls that dominate a good trade area. Because they have shown historically, growth. The stuff that we would like to sell really is what I will call the gum on the shoe. That market is still slow to develop, Quentin. So, hopefully, maybe that comes along. There is not that many that have been earmarked for that. But, to the extent that that market starts to generate, we'll move forward. Now, we do have certain non-strategic assets on the market that have some redevelopment opportunity. So, I think -- and they're getting more and more interest. So, I think we've demonstrated, we've probably sold fifty assets over the years. We certainly have recycled some of the European capital. So, I think we have shown a pretty good discipline that we're prepared to recycle capital through asset sales.

Okay. I think I saw that your joint venture partner in the Karp New England portfolio is potentially selling their stake. Is that something that you have any interest in? And if so, is there a right of first offer or anything that you have on that?

Well, there are contractual restrictions, Quentin. It's not appropriate to get into that. But we are working with our partner in a way -- it has been a very good investment. It has been a very good partnership. And obviously, institutional investors, to some extent need to recycle capital. So, there is a lot of different ways that can go, but it has been a good transaction for all of the folks involved and we would expect that to continue whether they stay a partner or whether they exit.

Okay. And maybe one for Steve. I just noticed in the second quarter that interest in dividend income jumped by quite a lot. Just wondering why that was, and whether that is likely to run into the third quarter?

Well, a couple of things, Quentin. One, we certain -- and I don't know if you are comparing it to last year or to the first quarter, but Liberty -- or now Capital & Counties, and Capital Shopping Centers -- does pay a semiannual dividend. That came in the second quarter. So, if you were comparing it to the first quarter, that would be part of the explanation. And we have seen rates on our short-term investment cash get marginally better, so we are investing the cash at a little bit higher rates than we have seen. Those would be the two major pieces.

Okay. And just the other one for the model. In terms of transaction costs, I know you closed the Simon Ivanhoe sale to Unibuy on the 15 of July. Are there going to be any costs that come in, in the third quarter?

It's likely, given that obviously, some of the transaction costs associated with Prime will continue in the -- in parts of the third quarter. So, yes. Hard to pinpoint that number down right now. As you know, there -- you have the accounting change -- normally, that would be capitalized. But -- Quentin, it will continue, but again, it's hard to pinpoint that number at this point.

Got you. And then just lastly, Liz Claiborne in the Chelsea Outlets, they have obviously announced they will be closing some of their outlets. Just wondering if you have had any discussions with them yet and what your exposure is?

Well, we have had ongoing discussions with them. We've got 16 outlets that are exclusively Liz, and that's about 190,000 square feet. We've got another 12 outlets that are hybrid, where there is a Liz component along with other brands from Liz Claiborne, like Lucky, Kate Spade or Juicy Couture. That's about another 46,000 feet. We list our top tenants and they are not in our top tenants. So it's -- their rental contribution to us is substantially below 1% of our minimum rent. And we're going to approach this like we approach everything else. They have their business objectives, we have ours, and we are going to work with them to hopefully come up with a mutually acceptable conclusion.

And Rick, do you think that those leases are currently paying rent at market, or are they below what you would expect market rents to be?

We think that there could be opportunity for both of us if we can come up with a thing that allows them to satisfy their objectives, and us ours.

Okay. All right, thank you.

Thanks, Quentin.

And the next question will come from the line of Paul [Morgan], Morgan Stanley.

Hi, good morning.

Hi (inaudible).

The -- thinking about the short-term leases that you were signing, I know you didn't do maybe quite as many as some of the peers, but over the past couple of years, and what's your experience been as those have started to expire? And are tenants more interested in doing longer term renewals now? Or are you still kind of rolling over a year at a time?

It's a combination of both. Again, a lot of it is retailer-specific. But there -- there is still a level of uncertainty out there. And so -- and again, a lot of it is tactical on our side too in terms of what we are trying to accomplish with the property. So, I would say it is marginally better, there's marginally, probably, the ability to get a little longer term lease, but it is not dramatically different than the beginning of the year.

Okay. And then, going to the redevelopments that you mentioned, you've characterized those as transformational. A few years ago transformational often included some mixed use component, or opening it up partially. I mean, are these more conservative do you think? Or --

Yes.

-- is it the same type of project that you were thinking of doing four years ago?

The good news about our mixed use stuff, it's been highly, highly successful. Like Domain in the residential market has been terrific. And so we've -- we haven't had net-net the mixed use elements that we have brought in. The Westin Hotel there has been very well-received. So, I think we have done a pretty good job in bringing that.

But, to us, the number one priority in any retail development is make it a better retail project. And, I think generally speaking though, there may be certain elements -- that maybe there is a hotel opportunity here or there, or a residential opportunity here or there -- the primary focus is on the retail aspect of it. And yes, I would say generally, the scope may have been narrowed to some extent. So, we are trying to figure out how to do it a little bit -- a little bit less grandiose, but not wildly different.

And the return hurdles, now that we're seeing them again?

I think the return hurdles, given the cost of construction and the demand out there for construction jobs, is actually going to be pretty good, pretty consistent. Otherwise -- look, at the end of the day, if it's not, we go on to the next deal.

Okay. And then just lastly, Rick, you said TIs were -- no real change there. But at least in your supplemental, what you report is about $75 million year to date, which is quite a bit higher than past years' run rates. And I was wondering if maybe if some of this is just catch up from having such a low year last year? Or whether really it is certain economics of the deal environment right now, or what? But it is higher than what you have reported, at least, over the past few years.

Paul, this is Steve. I think Rick's comment was more to the point that on a deal-by-deal basis, we have a --

Per square foot.

-- per square foot, we haven't really seen any change in the bid and the ask on the TI side. Clearly, we have had more leasing volume this year. Our leasing volume is up about 1.5 million square feet year-over-year. And that's driving the size of the number. But the composition of the deals and what deals get TAs, and how much, and all that really hasn't changed.

Okay, great. Thanks.

Thank you.

The next question will come from the line of Michael Gorman, Cowen and Company.

Thank you, good morning, guys. If I could just follow-up on that TI question for a second. Can you just walk through, in this environment, how you think about the allocation of TAs and the potential return on those as you sit down with tenants, especially given the strong position on your balance sheet and the cash that you have to invest? So, the trade off between potentially earning a higher rent from a tenant versus having to commit the capital?

Well, look, I don't think you want to -- I don't know, maybe I'm misunderstanding the question. But, I don't think you want to get in the point where -- you're giving more TA and buying up rent. I think that creates an unholy alliance. And frankly, the retailers -- from their standpoint they are in good capital position as well. So, they want to pay market rents, and market rents are determined by sales productivity.

So, I think that, that the traditional way that we have done leasing is -- still holds. We have never been -- as a company, we have always been reluctant to do some of the new, fancy, under-capitalized retailers that have a history. Not to say we have been perfect in this area, but we have certainly been, I think, at least from what I see externally and internally, we have always been relatively conservative in terms of putting capital at risk for tenants that are under capitalized. But I would say, generally, if you have a healthy retailer, you just don't get in that scenario. It is not a win-win for either side.

Got you.

And the only thing I would add is we, when we are doing our lease approvals, we analyze each lease based on net rent that takes into account the allowance, and we also have a very stringent credit process, as our leasing agents will attest. So, both of those things tend to limit the allowance in relation to rent.

Got you. David, if I could turn for a second to the outlet business. Obviously, with Prime going on, there has been a lot of discussion about consolidation in the space. But looking at it from another perspective, you guys have had great success with that property type since 2004. How do you think about the potential risk as the regional mall property type tightens up that you see more entrants into the outlets' inner space, more competition for land, more competition for deals, and potentially lower return hurdles going forward?

Well, look, I do think you've put on a -- you do make an excellent point. Forget consolidation. There are a number of new entrants in the outlet sector. Obviously, we all saw the Taubman announcement. We think there are our mall companies out there that are looking for it. And the product is in favor and we expect to see more and more developments. Tanger's announced a number of sites and they have a large pipeline.

So -- it is competitive, and it will remain really competitive if not more competitive given the new entrants and the possibilities. So that's the fact of life. We're -- retail real estate is wildly competitive. It's competitive on a local basis all the time, and so we will just have to deal with it. It doesn't force us to do bad developments at low returns, but obviously there is going to be a number of new opportunities out there for the retailers to assess and participate in.

Great. And then, and just one last one, maybe for Rick. Can you just talk for a little bit about the performance of maybe what you would call non-traditional anchors as they've come on to your malls? Maybe some of the newer leases, it's too soon to tell, but some of the other atypical anchors, how they've been performing and, and maybe even more so, how the wings that they are on have been performing as well?

Well, if you look in the 8-K, we are accelerating that activity and our approach is, there is nothing sacred about our hundred acres. And we want to bring as much quality retailing as we can to our properties. And they have helped drive traffic. They have helped to create additional internal traffic, and to the extent that they are adding uses that are not otherwise available in the property, it is all very positive. So, it is something that we have been very good at for a long time and we are going to continue to do it because I think it adds an additional dimension to our properties.

Okay, great. Thanks.

Thanks.

And the next question will come from the line of Jeffrey Donnelley, Wells Fargo.

Good morning guys.

Hey.

David, I think you guys were fairly successful winding down developments and other activities ahead of this most recent downturn. Has the specter of a slowing economy that we continue to hear about lead you to think differently about the tactics you're employing now on leasing, or leverage, or capital allocation?

Well, certainly capital allocation and not getting over your skis. There is no question about it. And I'd say to you that the redevelopment, I will call the transformational properties that we would like to kick start, is all really led by retail demand. So, it is not an issue that we are forcing. I think, if anything, we don't want to force the issue on redevelopment, or new development. We want the demand to be there. And if you can -- if the demand is there today, in a still uncertain environment, that obviously these centers have been around a long time, and have proven to withstand a lot of different cycles and it's in-fill, core real estate.

So the answer is, we think we can make some of this work. And again, not all of it will work. But there is no question about -- the last cycle here has taught us a lot, told us that we had to have access to a lot of different forms of capital. It told us to -- it taught us never to over promise, to have good relationships with our shareholders and our institutional partners. And I think we've always been -- we've done a lot of M&A stuff over the years. But we've always financed it conservatively, and certainly as that develops, we certainly understand that going forward.

And just since you mentioned the redevelopment and development, on New England, do you think the Merrimack property that you are looking at starting will pencil to the, I guess, the 12% to 14% yields you traditionally get out of the ground-up development in outlets? And, how do you underwrite cannibalizing the other properties, such as the Kittery or rent them outlets?

Well, we think it is its own separate market. And, look -- I think you bring up a good point. The numbers that we are proformaing now are less rents than we would have thought two years ago, because I think we have to be more conservative in underwriting it. But we still see it as an 11% return on cost. And yes, it is lower than what it was, but it's --

But we also carried the land --

Yes.

-- for three years.

And I think Steve is right. The land has been there for a while. And like I said, the demand is there. If the demand weren't there, we wouldn't force the issue.

And just one last question, if I could revisit what -- Quentin's line of questioning on the New England assets. Is it fair to say though that your chance -- that there's a chance that you could increase your ownership stake in some of your New England assets? And, I guess as a followup, can you give us a little color on the Atrium? Do you think that property ceases to be a mall in the future?

Well, there is a possibility we could increase our ownership in our Mayflower joint venture. So, it could play out a lot of different ways, but that's certainly a possibility. Atrium, in our opinion, probably needs to be redeveloped. And there is a great opportunity in doing that. We think we just have other, better uses of our energy in terms of what we are trying to accomplish. So, that's why us and our partners have decided to put that on the market. Obviously, we are price sensitive in terms of it is very good real estate. But ultimately, it is less of a retail development, and it is more of an alternative use, which is just -- not that we couldn't do it, but just not our core competency. We would rather focus on retail.

Great. Thanks guys.

Thanks.

And the next question will come from the line of Nathan Isbee, Stifel Nicolaus.

Hi, good morning.

Hey.

Hey.

A few quick questions, this is just going back to the same store in Hawaii. The original guidance was 1% to 1.5% positive for the total portfolio. You're tracking 2.3% through the first six months. Where would you peg that now for the full year?

Well, can I just say, Nate, before I answer, I just want to say I saw Dave is retiring. I want, obviously, everybody from our side to wish him well. He's been a -- and I'm going to miss his barbs, you know.

He gave me long lessons before he left on how to do it.

I get that sense some of that may have rubbed off. But we'll -- hopefully we can handle it. But he has been a -- obviously, a very well-thought of analyst and we just want to pass on our best wishes to Dave, and we will miss his barbs. And -- but I'm sure you will pick up on that front.

I will do my best.

In any event, your question on comp NOI. Look, there is still uncertainty with it, but if we can maintain that, I will be very, very pleased given where we originally projected.

So, you are not willing to change that yet?

I'm not willing to change it at this point.

Okay.

Look, I do think the fact that we've reaffirmed our guidance, given what I described about Prime, indicates to you that, look, we're doing -- I'm pleased with how we are performing at this point.

Okay. And then just move -- moving to Prime for a minute. In the papers here a few weeks ago there was a little blurb about Prime giving notice to the state of Maryland that by September 5 they plan to dial back their home office significantly. Is there anything to read into that date?

No, other than what I have described to you, there is nothing more that I can add.

Okay. And then just going back to the outlets in general, you had mentioned Tanger's pipeline. They've mentioned looking at 17 sites currently, in addition to three that are more live. When you look at the landscape, over the last 15, 20 years there has been net decline in outlet centers in the US. Where -- how much can this country -- how many more centers can this country absorb in your mind as you look at it?

Well, look, the answer is we are going to find out. I do think there is going to be a number of centers built. So, we'll find out. But there are a number of centers planned. There is very competent developers that are going to do that. Obviously, Tanger's successful in their developments. Taubman is a very good developer. They'll be very successful. There's a number of potential conversions that are taking place, like what Vornado did with Bergen, even though I would really like to know his returns. He won't tell me. But -- no, I'm kidding. I think he has done a very good job on Bergen Town Center. There's a number of malls that are looking to conversion.

So, it is clear the consumer wants value. And it's clear that there's going to be a lot more new and redeveloped centers focused on value for the benefit of the consumers and for the benefit of the retailers. And whether we will do too much or not remains to be seen. I think our industry always pushes the envelope. I would think if you saw some of the developments that occurred and that have stopped over the years, over the last couple of years, you could see that we've pushed the envelope. I would not be surprised if we didn't push the envelope here, but there's a lot of new opportunities out there and they are being pursued by very competent developers, both on new and redeveloped formats, for the outlet sector.

So, how many sites is Simon/Chelsea looking at today?

Our focus, obviously, has just been on Prime. But we, besides Merrimack, we probably have two or three in the US that we are looking at. And I will tell you this, though, we're very focused on our Asian outlets, Nate. We have been very successful there. We are very excited about a Singapore market, Malaysia, we're very excited about what's going on in Korea and Japan. Despite all the macro stuff there, our centers are very -- performing very well there. So, our ability and brand might grow reasonably well in the outlet side in the US. And -- I'm sorry, outside the US. And I will mention -- Rick is pointing to me -- I do think it's important to note that we also expanding a few of our outlet centers here in the US and that will also happen I think in our industry.

All right, thanks.

Thanks, Nate.

And the next question will come from the line of Carol Kemple, Hilliard Lyons.

Good morning.

How are you doing?

Good. David, earlier in the call I think you said something that Prime was going to retain interest in three of their centers.

That's correct.

And what is the reason for that? Is that they feel better capital wise or is that something the FTC is wanting them to do?

I really can't add more, Carol, than I have already told you.

Okay. Can you add, or can you say if it's going to change the purchase price?

There has been a modification to the transaction. And I can't say that the capital that Prime would receive as part of the transaction will allow Prime to go develop -- I guess I should have mentioned this too, in Nate's call, or question, it will allow them to go develop their deal in Livermore and Grand Prairie. And that's their intention to do so.

Okay. And in the quarter, were the leasing spreads positive in both the malls and the outlet centers? Or just the outlet centers?

We put those statistics together. Obviously the malls have a significant impact on the results, given that they're in the 75% to 80% range of our domestic NOI in that number. So -- but we don't break that out now, Carol.

Okay. I didn't know. I knew you didn't break it out percentage, but I didn't know if you could comment in general. Okay. Thank you.

Thank you.

And the next question will come from the line of Ben Yang, Keefe, Bruyette & Woods

Yes, hello, good morning. I'm just curious how much of the occupancy gain was attributable to you converting your month-to-month tenants to longer term deals, because it looks like you have about 200 fewer temp tenants compared to last quarter? Did you just convert most of this 900,000 square feet into longer term deals? Or did these guys just end up closing their stores?

Interestingly, for the most part, we have been transitioning to more national tenants as opposed to the month-to-month. And a lot of times, the month-to-month is because we don't want to go longer term because we want to have a room split, we want to combine rooms for a different tenant that will pay more rent, so this was not really a process of a lot of month-to-month conversion.

Ben, this is Steve. I would just add one more thing. As Rick and David have talked a lot on our calls over the last four or five quarters about consciously slowing down the leasing activity because of the difficulty in the environment. So that month-to-month number was to some degree the result of a lease expiring where the we chose, and the tenant chose, not to -- a year ago or nine months ago enter into a permanent deal. We are now, if you will, addressing that given the recovery in the economy.

And Steve is right. I don't know what the exact number is, but it's certainly some of those month-to-month have gone to longer term leases.

It sounds like most of them ended up just closing their stores, and maybe just --

Yes it was. I mean there's --

Is that fair?

Yes, we suffered a lot of store closings, that's for sure.

And then you mentioned some actually converting to permanent leases, when you do make those conversions, does that number show up in your releasing spread?

It does. If a temporary converts to a permanent deal, then we treat it as a new lease. That's correct.

Okay, so -- okay. Great, thank you.

Thanks.

And the next question will come from the line from Michael Mueller, JPMorgan.

Yes, hello. A few quick ones here. On the development JVs in France, can you give us a sense as to how much Simon capital could potentially go into that, and over what time frame that will begin to play out?

We're only laughing because to build in France is a long, frustrating process. Mike, we don't -- right now to pursue the development is not going to be a lot of money for us. You know -- as an example though, the Toulouse development itself could be north of EUR200 million. But again it's this timing and the approvals is really uncertain so -- I would hate to venture, but for us to keep our optionality alive -- it will be a not a very big number.

So, it is longer term stuff?

Yes, it is.

Okay, okay.

I mean, the biggest one of which is on the potential front burner is the development in Toulouse that all of us are, Unibuy, us, as well as Ivanhoe Cambridge, are excited about pursuing. But again, that needs to go through a certain process. Don't ask me to explain it.

No problem. And a few quick ones for Steve. Steve, going back to the TI question, I previously had down, looking through notes, in 2010, maybe $75 million on the low end, $100 million on the high end. What's the full year expectation now for TIs?

Michael, we've had an increase in velocity. So I wouldn't necessarily expect it to be 2X of what it was for the first six months. But I think it will be clearly be at that $100 million or a little bit more range.

Okay.

And I think that's just an increase in the leasing velocity.

Okay. And then, when we look at debt maturities over the next year or so, a lot less bonds maturing in 2011 than we saw in 2010 and 2009. How should we think of -- are you thinking differently about what a more normalized cash position is?

Well, that is a very good question. I mean, the answer is yes -- eventually we are going to have a normalized number. I cant -- it would be hard for me to pinpoint exactly today what that is as we still try to sort through the uncertain economic environment, but today we are over-capitalized. Not wildly over-capitalized, but we have reduced our debt by $2 billion. We are generating cash flow -- positive cash flow. Our dividend is obviously very safe and sound . So, at the end of the day we want to kind of just still be a little more thoughtful, a little more cautious as to where the economic environment comes out, obviously. There's the deflation spector out there. There's a lot to weigh into that that we have got to continue to be just really extra conservative in our thought process for the time

Okay. That should be it. Thanks.

Thanks.

And the next question will come from the line of David Wigginton, Macquarie.

Thank you. Good afternoon guys.

Hi David.

Just -- most of my questions have been answered. Just had a couple of quick follow ups on lease term fees in the quarter. Was that -- I mean, kind of spiked up in the quarter. I wasn't sure if that was as a result of the jewelry story closings you had mentioned, or if there was something else that had played into that?

There were a couple of those and another -- we don't, you know, it's not -- we don't like to name the tenant -- but there were a couple of deals that were store close -- closings were negotiated. And again, that is not in our comparable NOI number. But I, I'd just prefer not to name the tenants. But it -- there was one aspect of jewelry retailer that, that exited the business. So that did spike up because of that.

Okay, so in just staying with the, the jewelers, where would you say we are sort of just in the shakeout process among operators at this point of the cycle or whatnot? Meaning, are we -- have we worked our way through the majority of jewelers that need to just shut down and go out of business? Or are there more to come?

I would think that a lot has taken place. So I think we are past. I think we're past fora lot of that, but there's still, there's still probably excess capacity in the jewelry retail space overall. So, it's like the restaurants have -- in a sense the restaurants get in demand of, I don't know, closed 1% of the restaurant space in America. So I still think there is probably a little bit more to go, but I would say, you know, that we have gone through a lot of it.

And I recognize that the split among store closings is probably pretty evenly across your portfolio. But have you noticed any, like, excessive closing, say, in one segment of your portfolio versus another? Meaning, like, maybe the higher end or the lower end?

Not really. I think the region, regional economies have a lot to impact, but not necessarily the, a particular property type.

Okay. And then just last question, and this was touched on a little bit earlier, but with respect to sales increases leading to rent increases, historically what, what has been the time line that you've observed in your portfolio? If, if anything, have you guys -- is it different from what you would expect to see in general in a regular mall portfolio? Or do you feel like you were able to capture pricing power quicker than maybe most mall operators?

No, I, I think we're, we're no different than others. There is a lag and there's also a certain level of certainty that the retailer wants as, as they see their sales increase. I mean, I -- they don't, they're -- if they have good quarter, it doesn't necessarily mean -- their open to buy might increase but they are still going to be pretty conservative on the rent to sales ratio. So there is a lag, and it is a macro impact and we are no better than anybody else in that category in terms of being able to accelerate that gap.

Okay, and is it I mean, is it just a matter of them seeing several quarters -- consecutive quarters of sales increases that gets them going?

I think it is also very specific on the retailer and the position that they are in, and what they are trying to do. Are they trying to gain market share? Are they trying to penetrate a, a regional market further? So it -- there's a lot that goes into it, but there, generally the retailers are taking a reasonably conservative stance. And rightfully so. Just like we are in a lot of respects.

Okay, thank you.

Thanks.

And we have a question from line of Rich Moore, RBC Capital Markets.

Hello guys. On the dividend, David, where you do you guys stand at that? It seems to me that, that you are at some sort of a minimum payout ratio at this point and you've got to raise the dividend? Does that, does that sound right?

You are warm.

So not yet, but getting there?

You are warm. Yes, look, I think, we're going to have to assess, obviously, our taxable income is going to be affected by the Simon Ivanhoe sale. So, we have to factor that in and obviously we are going to spend the next four or five months doing that.

But in addition to that, Rich, I think as we look at '11, our taxable income, there was a lot of stuff that has gone on with us in terms of our taxable income. We had the share issuance, so we had more shares outstanding . We had the taxable writeoff associated with the bond premium that we paid. Assuming all of that kind of just normalized, we spend this year normalizing all of that. Then I look at ' 11, and again it's obviously we're projecting an economic environment about '11. But let's assume it is consistent with what we have, I mean we are, I would venture to say, at the bare minimum of what we need to pay given where we are today. So that will definitely have to be addressed on a more permanent basis in ' 11 as a lot of the extraordinary events of the last year have played

Okay. Very good. Thank you. And then, Steve, on the straight line rent item, that seemed to jump pretty high in the quarter. Is there anything special in there? And then does it go back down from here?

Nothing really special, Rich. And again, we talked about leasing velocity being higher. You know, that tends to be driven by -- directly to the deals you are doing. So --

Okay. Got you. And then, same kind of thing on the preferred dividends for I. That was actually negative. I assume that's some sort of accounting treatment for the retirement of the I? Is that right?

Yes, it is just a clean up and a true up for the redemption of the I that we did on the first quarter.

Okay, great. And then on the recoveries? The recovery ratio, that was also a bit higher than usual. Is that going to continue, you think?

Well, I mean, with the -- we're in an environment now, Rich, where we are 80% converted to fixed CAM, most of those have contractual, annual increases in the recovery. So, to the extent that we are able to manage our expenses at a rate below that, you should see the recovery continue to, to get better.

Okay, excellent. Good. And then last thing, Rick, the list of retailers that are hot today, or that are getting hotter in the second quarter, have you got that?

Well, we always hesitate to do that because everybody else then starts calling them. But we are doing deals in '10, PS by Aero, is rolling out, Sperry and Stride Rite from Collective Brand, Michael Kors, Rue 21, Francesca, we're doing Microsoft deals, we're doing Pandora deals with LEGO, Crazy 8 with Gymboree, and David has -- Forever 21 as David has alluded to there is a little bit higher velocity of tenant interest and we're hopefully taking advantage of that.

And, and on the box side, Rich, you know, Target, Kohl's, I mean they are looking for mall opportunities. So that, that's that bodes well for us as well.

Okay, excellent. Great. I knew you had that list. Thank you guys.

Thanks Rich.

Thanks for asking.

And we have a question from the line of Ian Weissman, ISI.

Yes, just a housekeeping question for Steve. The $13 million of transaction costs that you had this quarter, is that related to Prim? And if so, can we expect similar expenses for the balance of the year?

No, it is not just Prime, Ian. It is a combination of all multiple transactions that we were working on. So, some of which will occur, some of which didn't occur.

Yes, I said, Ian, earlier, that we will continue to have Prime expenses in the third quarter. But that's, that's a higher run rate. And then obviously upon that transaction closing, as we expect, that that number ought to obviously come down.

Okay. All right. Thank you very much.

Okay.

Thank you.

And this concludes the questions and answer portion of today's call. I'd like to turn the call back to Mr. David Simon for closing remarks.

Okay, thank you everybody for participating. We look forward to talking to you in the future. Take care.

And ladies and gentlemen, this concludes today's' conference. Thank you for your participation. You may now disconnect and have a great day.