西蒙地產 (SPG) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2011 Simon Property Group earnings conference call. My name is Tania, and I will be your conference moderator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to hand the presentation over to your host for today's call, Shelly Doran, Vice President of Investor Relations.

Good morning, and welcome to Simon Property Group's second-quarter 2011 earnings conference call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties, and other factors. Please refer to our reports filed with the SEC for a detailed discussion.

Acknowledging the fact that this call may be webcast for some time to come, we believe it's important to note that our call includes time-sensitive information that may be accurate only as of today's date, July 26, 2011.

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 Investor section.

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. We reported FFO of $1.65 per share for the quarter, which represents an increase of 19.6% over the prior-year period. These results exceeded the First Call consensus by $0.07. And we now have met or exceeded expectations for 28 of the past 30 quarters, which we believe is one of the best records in the REIT industry.

Of course, I would like to talk about 2 of the quarters -- the 2 quarters that we did not do that. One was an impairment charge which we took on Liberty, which is now fully recovered. And the other was just a timing issue, which we made up in the subsequent quarter, and in fact, in that year we exceeded our -- both consensus and our initial guidance. So 28 of the past 30 quarters, we have met or exceeded First Call consensus estimates.

Let's talk about the portfolio. Total sales on a rolling 12 months basis were $513 per square foot, up 9.4% from $469 as of June 30, 2010(sic - see Press Release). Occupancy was 93.5%, an increase of 40 basis points higher than the year-earlier period, and 60 basis points higher than the first quarter. The releasing spread for 12 months was positive $4.60 per square foot. Our releasing spread continues to include all in-line space, including spaces larger than 10,000 square feet. Comparable property NOI growth for the quarter was 3.5%. And I want to put that in context that in 2010, our second-quarter comp NOI growth was a positive 1.9%. So it was not off a low base, given the fact that 2010 was still in recovery mode.

Let me turn to development activity. We have 2 new developments under construction, both are premium outlets -- Johor, Malaysia, which will open in November of this year, and Merrimack, New Hampshire, which will open next summer. Leasing activity is strong for both projects. We had 18 renovation and expansion projects under construction with completion dates in 2011 and 2012, and the restoration of Opry Mills continues with the completion expected in the spring of 2012. We currently plan to invest approximately $650 million in domestic and international development and redevelopment activities in 2011. And our number, though still in process, is approximately $800 million in 2012. As always, details on costs, returns, and timing of these projects are provided in our supplemental reporting package.

In June of this year, we sold the Jefferson Premium Outlet -- Prime Outlet, I should say, for $134 million. We used $86 million of those proceeds in a 1031 exchange last week to acquire ABQ Uptown, a 222,000 square-foot Lifestyle Center in Albuquerque, New Mexico. The Center, which generates sales of approximately $650 per square foot, adds to our presence in the growing Albuquerque market where we also own Cottonwood Mall.

Let me switch to capital markets. During the first 6 months of 2011, we closed or locked rate on 15 new mortgages totaling approximately $1.6 billion, of which our share was $1 billion. The weighted average interest rate on the loans is 5.1%, and the weighted average term is 9 years. As of June 30, 2011, we had $1.1 billion of cash on hand, including our share of JV cash, and our availability in our corporate credit facility at $3 billion for a total liquidity position of $4.1 billion. And as we said before, we still expect to generate $1 billion -- more than $1 billion of cash from operations after dividends.

Japan -- let me just tell you that we've reopened Sendai Premium Outlet, which was damaged by the earthquake, and closed. On June 17, the center reopened, and the response from shoppers has been very positive. Costs to repair the center, other than the deductible, is covered by insurance. For our other 7 centers in Japan, things are returning to normal. And we continue to like the prospects in our Japanese business, and admire the will of the people in Japan as they rebuild and grow their country after some of their tragedies.

Now let me turn to guidance. Based upon our results for the quarter, and expectations for the balance of the year, we increased the low end of our 2011 FFO guidance by $0.10 per share, and raised the top end by $0.08. The midpoint of the range of our current guidance is $0.165 above the midpoint of our original 2011 guidance provided in February.

Let me just mention the Main Street Fairness Act, you've seen some editorials, in fact, in The Journal today, or an article in The Journal, you saw The Indianapolis Star wrote an editorial on it. Let me just say that we've been very vocal about the unfair advantage that internet retailers have in not being required to collect sales tax. We are urging Congress to introduce and pass the Main Street Fairness Act, which will allow states to end the subsidy being provided to retailers such as Amazon.com.

Let me be clear, this is not a new tax. It would merely require internet retailers to collect sales tax on behalf of the states where they do business. Something that brick-and-mortar retailers, and even those who sell on the internet, have done for years. And this is required by law. The economy is helped by having a level playing field, allowing an open market to determine consumer behavior without government subsidies, which we believe is occurring for the online retailers.

Now just a few concluding remarks before Q&A. We are certainly proud of the size and scale of the portfolio we have at SPG. As we have said many times, our business is where scale can be truly an advantage. And I believe that our industry-leading operating results, growth and profit margins are an absolute testament to that.

I do think, however, that sometimes the quality of our portfolio is not fully appreciated. Our portfolio is second to none in our industry. We own more of the country's iconic shopping destinations and centers, by far. To help illustrate this fact, I will point out a few facts. First of all, in the mall sector, the 20 malls from which we get the most EBITDA, provide approximately $800 million of EBITDA annually, and this is our share. As of June 30, 2011, these 20 properties generated sales of $777 per square foot.

Now let me turn to our top-20 value centers from which we get the most EBITDA, provide over $600 million of annual EBITDA. Again, this is our share, and as of June 30, these 20 properties generate sales of $721 per square foot. And just as a reminder, given the focus on the value and outlet sector that seems to be occurring in the marketplace, our share from -- projected this year from that platform will generate approximately $1.5 billion. That's $1.5 billion of EBITDA from our value-oriented centers, both mills and the outlets.

So with that, operator, we're prepared to answer any questions.

Thank you. (Operator Instructions)

Jeffrey Donnelly with Wells Fargo.

Good morning, guys. David, since you left off with the outlet center, I guess I'll start there. First, here at home there's been a growing push to recast busted malls and retail projects as outlet properties. Are you concerned that supply of new product could exceed demand in some markets and segments? And how do you think about differentiation in that sector to assure success? Is it location, size, price point; what do you think?

You broke up. You broke up the first part. Could you re-- I didn't hear it all. Could you repeat?

Yes. That's fine. I was saying that there's been a push here at home in the US to recast retail properties as outlet-focused properties. Do you think there's some risk that the supply of assets could surpass the demand in the next few years?

Look, my own view is that I think it's going to be a challenge to build many of the new outlet centers that are being bandied about. There's been a list of 50 outlet centers out there that are in predevelopment stage for several years. We think, obviously, demand is, is good, but they're -- the retailers and manufacturers are very sensitive to where outlets can be put. So, we think the market should be circumspect to the amount of new outlet development that's being talked about. There will be some. I think it will be more challenging than, than what people believe. I do think there will be some mistakes made. But I don't see a redux of the lifestyle center development.

Never put it past real estate developers to overbuild. But I'm hopeful that year after year experience will lead to better judgment. In this case, I do think the retailers and the manufactures are very sensitive to their full price operations, and I think that's a governor here that probably will not be a redux of what we saw in the lifestyle center area. And I think the redevelopment of existing enclosed malls to do this again will be in that same category and more challenging than people lead on.

And sticking with outlets, where do you see the development yields on Jahora compared to, say, the projects in Japan and Korea? I'm just curious, thinking down the road, ultimately how big of an opportunity do you think there is across Asia for outlet properties in your portfolio?

Well, the yields there are actually -- we think they're going to be fantastic. The yields in Japan have been very high. I mean higher than in the US. Malaysia, we're projecting to be higher than the new development yields here. And we think all of the -- everything that's lined up to build there is-- the consumer is there. The growth in income is there. They love the American-European brands. So, it's all lined up to continue to grow that.

We've been successful in everything that we've built from Korea to Japan. We see the same thing in Malaysia. As you know, we're back to really seriously thinking about China for outlets. So, we think there's an opportunity to continue to grow that business in Asia for us. Hard to put firm numbers on it yet. But the good news is we have got 10 centers, soon to be 11 centers, and we've got a good, solid business already up and running. And we've been at it for several years.

Just one last question on asset sales here at home. You guys have been in the market with some malls recently, and there's been some transactions on A malls. I'm curious, where do you see pricing on sort of A, B, and I guess I'll say C assets right now? We've heard some A malls actually touching 5 caps or lower, and I'd just love your perspective.

Well, we have seen some again -- we've seen some price talk on some, let's call them A assets. I'm not sure whether they're a mall or an outdoor center, however you want to describe it. A couple of these we think are more salty than they should be, because we don't see the growth that the other people that are buying them see. We could be wrong, they could be right. But we think pricing on some of these individual assets that are out there are still what we see as very aggressive, given the lack of growth characteristics in some of these assets.

Now on the B and C, Jeff, I would tell you, we're still all in a discovery mode in terms of where the market is. Obviously we have told -- we have nothing to announce in that area though we do have a very small amount of malls for sale as part of our strategy that we've had for years to sell assets here and there. We -- the B and C assets are more dependent on financing, the financing market in that area continues to be somewhat volatile. And I still think we're in price discovery on those kind of assets.

Thanks.

Thank you.

Quentin Vellely with Citi.

Good morning, it's Michael Bilerman with Quentin. David, let's just start with you. Obviously during the quarter you had your employment contract set up under a long-term basis. I want to just focus just in terms of the length of time that it got to take to that place. And obviously when the proxy came out in April it was disclosed that you were working with the Board toward something. And in the disclosure it talked about taking -- you've had negotiations for 18 months. I'm wondering if you can just talk a little about what transpired over a year and a half, and in terms of setting the goals that you wanted to achieve and that the Board wanted to achieve, and how you ultimately got it resolved I guess a couple of weeks ago?

Well, it -- look, I think, Michael, it took longer than it should have. I think part of the length of it is just the care that the Comp Committee took in deciding what was appropriate. We, obviously these kind of things are very sensitive, very focused given the -- rightfully, I have no problem with the scrutiny that something like this comes with. And I think, again, I wasn't privy to the Comp Committee's deliberations, but my guess is, given the -- what was going on, that they took a lot of time to feel comfortable with it.

Now, and also that there's been a lot of volatility in the world during this period of time. Obviously my primary focus over the last 20 months has been running this Company. And this has not been the number-one agenda on my plate. I do think -- again, I was not part of the Comp Committee deliberations, but my guess is they studied past performance. I'm sure they looked at some of the recent Comp deals that were out there for new and existing Chief Executives. I'm sure they considered, if for whatever reason they had to replace me, what it would cost for a new CEO and just generally what are the requirements that the Company needs to lead the Company from a CEO in the future.

With all that said, I think they concluded that the deal they struck with me was in the best interests of the Company, and the share amount was generally the same for that long period of time. And so the size of the apparent transaction -- so it's an 8 year deal, which I think the market sometimes loses sight of -- got bigger because obviously the stock performed -- has performed well over that period of time. So, I don't know if that answers your question. But they were sure they were very deliberate in their efforts. I was very focused on running the Company. And we've been living in a very volatile world. You put all that together, and it takes a pretty long time.

From my standpoint, look, I've been doing this for-- I've been running this Company for 16 years. And I -- it was appropriate for me to kind of assess where I was, what I wanted to do in the future. I wanted to work out a deal that recognized what I brought to the table. And over that 16 years, I want you to realize that I've never had an employment agreement. I've never had -- I've never had a deal. And both from my standpoint and I believe the Cop Committee's standpoint, though I can't speak for them, we both felt it was appropriate to negotiate something for a longer period of time. That delivered a certainty and that we all felt, myself included, because I'm a shareholder, that was in the best interests of the Company.

And you get to do 32 more earnings calls.

Yes. I can't guarantee the performance we've had in the past 30, (laughter) but hopefully we'll have some level of success along those lines.

That's helpful color. Just diving into the portfolio stats you gave at the end of the comments, you're the top 20, so top 20 malls and top 20 value. The value you're saying are, what, mills and outlet centers? That's how you're combining that?

Yes. We are. Now it included a couple of mills, but generally we included both.

And so you're looking at -- so those top 40 assets are about $1.4 billion of EBITDA on a base of call it $3.5 billion, $3.6 billion -- so 40 assets, 20% of the asset base is generating 40% of the EBITDA. Is that the way we should think about it?

Correct, Michael.

And that's our share, as well.

Right. And then so when you step -- the rest of the portfolio probably is mid-400s in terms of productivity.

Well, look, we gave you some facts today. Maybe we'll give you more facts later. (Laughter) But that's -- we thought that would be helpful for people to understand at least. Again, people lose sight of the quality embedded because of the size. We understand that. We don't like to tier assets even though Rick does, and it bothers me, but I let him do it. We want people to know that our top 20 assets in these categories generate a lot of cash flow, and I think over time we'll be more descriptive to everyone kind of how we look at it. But, that's what we want you to start thinking about at least today.

Great. Thank you.

Thanks.

Operator. Our next question comes from the line of Jay Haberman with Goldman Sachs. Please proceed with your question.

Good morning, everyone. Maybe following up where Michael just left off on the top 20 on both the malls and the value centers. Are you willing to share, David, perhaps some of your near-term outlook? What you think NOI growth could be perhaps for some of these top tier assets relative to the rest of the portfolio?

Well, I don't have a specific number, but it's safe to say that these are under-rented, and they're going to grow faster than our average. And they possess a lot of upside. But I don't have that record, Steve, if you want to add anything. But I don't have anything more to say other than that. They certainly historically have generated significant EBITDA growth., better than our average.

And maybe even just stepping back broadly for the entire portfolio, if you think about this recovery to date combined with sort of where the economy is today and somewhat mixed, what's your general perspective in terms of where we are for rent growth going forward in the cycle?

Well, I would say we feel pretty good other than there are a couple of tenants out there that -- again, I'm not going to name names, because we certainly shouldn't be in that business publicly. But there are a couple of tenants there that are sizable mall operators. When I say mall, that could be both outlet and full-price malls that are still haven't had the benefit of the recovery, that are going to put pressure on the industry and us included, in terms of renewals and potential store closures, and the like. And that's the biggest headwind. Now we've had that headwind, hasn't gone away, so we've been managing our way through that headwind. But that to me is the biggest headwind that's out there for us in terms of what we have to deal with on a day in and day out basis.

Our leasing people obviously understand that, they know that, and they're out humping to find those replacements either through voluntary or lease expirations or to the extent that even one or two of these guys could end up in a chapter 11. So, that's the governor right now that we see. The consumer actually-- I feel a little bit better about what we -- we all know we live in a extreme volatile world. We could witness last night and understand that, what happened on TV last night. So, but I would say that's the biggest headwind that we've got to deal with.

The only thing I would add -- it's Rick -- is that our portfolio is not static. So, as you look at the potential for NOI growth, we're renovating 20 properties, we're adding a considerable number of additional anchors. We just announced in today's press release three additional department stores as we continue to lease up our properties with more productive and impactful tenants and restaurants. We're enhancing the market share. And the better we make our properties, the faster our growth is going to come.

Rick, you -- we've got some major re-dos that are in the works, that we may take space out of service, that we're redoing the food courts. All sorts of that stuff that, again, it's not overly material, but it might have somewhat of a governor on our EBITDA growth. But we're performing -- the point is, we are performing better today than we thought we were, and we're beating our budgets. And that's the good news.

And I guess Rick sort of took my last question. But if you think about the $650 million of development, redevelopment for this year and $800 million I guess you're planning redev for next year, it sounds like that $1.5 billion target you guys had outlined for 3 years, you're perhaps going to well exceed that. Is that a sign of you just want to reinvest more in the existing portfolio rather than look for acquisitions at this point in the cycle?

Well, I think those possess, at this point, greater opportunities for us. We've always felt taking what we've got and making it better is a huge priority. One of the reasons why we brought David on board was to help us do all that is there to do with the existing portfolio. And we're -- I'd say from that standpoint, we're very pleased with the amount of activity that our teams are generating. That's not just the malls, that's the outlets. We've got expansions in the outlet side that we feel good about like in Seattle, in Chicago potentially, in Woodbury Commons. Allen, just to name a few. So they -- the best thing we can always do is take a good property and make it better. And now that we feel good about capital and feel good about what our teams are doing, that's the number-one priority.

Thank you.

Our next question comes from the line of Paul Morgan with Morgan Stanley. Please proceed with your question.

Hi, good morning. Just on international, I just want to get a feel for how you're thinking about the investment landscape outside the US. I mean, you have your Asian developments, but have you thought more recently about acquisitions? I mean, a lot more US-based mall retailers are looking to grow outside the US. I don't know if that's having any input into the way that you think about international investment? But, both kind of from an acquisition perspective And then, maybe anything that would lead you to accelerate your development pipeline beyond the sort of couple at a time you've got going in Asia?

Well, the development side in -- internationally are you talking?

Yes.

Look, I think the big frontier there is whether or not we do something in China on the outlet side. And that, and we're spending a lot of time on that front. And we've got at least a couple of more Japanese outlets to do, and we're looking to another one in Korea. So, the answer in the Asia new development is, I mean, we still want to dot the i's, cross the t's, but there's more to do there. And that could be -- that could be accelerated to the extent that we do something in China.

International generally, when you talk about acquisitions, we mostly talk about Europe and potentially, what's going on in South America. And I will tell you that we're thinking a lot about it. It's very interesting. When we initially went into Europe in 1998, we had this premise that the US retailers were going to come. Fact of the matter they didn't come, but we were still successful. Now they're coming, so there is some industry logic to do it. We have felt comfortable we could add value, but the deals there, to do a sizable deal are --. We don't want to just buy a one off here and there. We think we would really want to try and create or invest in the platform.

Those deals are not easy, but it's on the radar screen. We spend a lot of time thinking about it. But it's very hard to predict, in fact, whether or not anything will ever transpire there. And it -- the math is always a challenge. And which-- we don't feel compelled to plant a big flag there because we've got lots of stuff to do here and lots of growth opportunities with our existing platforms including Asia.

But the focus would be set right now as kind of equally between like developed Europe and, and South America, say?

Yes. I mean, I think we've studied a lot in both markets. We actually have a trip scheduled. Contis knows Brazil pretty well. He served on the Board of BR Malls for a long time. That's a market we're not in. Who knows -- I have my own view. It looks a little toppy, but long run, long term you got to look at all these things.

Do you think we'll have news about kind of what you're thinking about doing in China this year sometime?

Potentially, potentially.

Okay. Thanks. My last question just maybe for Rick. Could you walk through maybe some of the -- we're not hearing much about that many new contests in the malls compared to maybe other points in the cycle. Could you talk about who sort of -- you're, you've been doing deals with, and particularly anything that might be a growing concept?

Well, we've got a lot going on with a number of our traditional retailers, but in terms of the new ones, Love Culture, Pandora, Lego, Sperry, Francesca's, Teavana, Cotton On, Madewell, lululemon, Michael Kors, Tilly's. Those are all relatively newer concepts, and they're all growing very aggressively in our properties. So, from that regard it's very encouraging. And when you also take into fact that recently we had Fresh Market, Francesca, Pandora went public, Teavana I think is going this week. So, the equity markets are being very receptive to providing growth capital to our retailers, and that's certainly benefiting us.

Yes. Some of the existing concepts have been trying to downsize lately. I mean, are you seeing it kind of work both ways? I mean, are as many concepts looking to grow, or is it kind of a general theme of trying to get your space to be more efficient?

I think that for the more mature concepts that are saying our store count perhaps is too large or not as productive, we've got people that are very focused on growing. And the fact that our occupancy keeps going up is testimony to that.

Okay, thanks.

Thank you.

Our next question comes from the line of Cedrik Lechance with Green Street Advisors. Please proceeds with your question.

Thanks. Looking at the activity on the big box side, obviously you've added a lot of big boxes, or you will be adding a lot of big boxes in the near term. And, David, do you think it prevents some mall development when you have the likes of Macy's adding a lot of space in existing malls?

Yes, I think so. Rick, do you want to --?

I think that one of our main strategies is trying to maintain the viability and market share of our properties. So, to the extent that there is demand in a given market, to the extent that we can capture that demand by expanding our existing properties, it's a win-win for us. As David pointed out earlier, that's the surest way to get appropriate risk adjusted returns, and in addition we're making our properties stronger.

Yes. And I think the demand from the boxes to go into proven retail centers including the malls is just greater. So, we're taking advantage of that trend. And the pressure out there -- certainly there's pressure on certain malls. But there's a lot of pressure on a lot of strip centers just because if you lose an anchor or two in a strip center, that thing comes under immediate, immediate pressure. So the boxes seem to want to relocate where the action is, and in many cases, that's the enclosed shopping center.

Okay. And as far as preventing development in future centers, do you hear from some of the big box retailers, in particular the department stores, that by committing to so many existing malls, it's probably delaying their interest in committing to future development?

Well, it's interesting. I just -- we still -- a little bit, but I would tell you that the biggest issue on new full-price retailer demand is probably not from the boxes but more just to make the numbers work and what the real small shop demand is to make the numbers work. That would be my -- Rick, you can add to that, but that would be more of the governor than some of the boxes. Don't you think?

I agree with that. And just to give you an editorial comment, one of the things that we have heard from our department store and big box clients that are the retailers is that 2008-2009 taught them that who their landlord is matters. What we're finding is that there is a higher degree of interest in coming into properties where they know the landlord has the commitment and has the capital and has the ability to renovate as needed, bring in new retailers and maintain the market share of those properties. As David said, there's very little new development out there because there's not enough demand to generate a 300,000 or 400,000 square-foot new project. So, the retailers are looking to come into the established properties.

Okay, that's helpful. Switching tracks, Jjst talking about outlets for a little bit, you struck a JV with Tanger in Houston last month. Is it some -- is it a partnership you'd like to extend to other markets, or was it a one-of event?

Right now we're focused on Houston. It's been a very positive discussion with Tanger. They're -- we made a handshake, and it got documented quickly thereafter. We're excited about Houston, we're going to start construction probably in less than a month, in August. And we would never rule out doing more business with Tanger, but that's the number-one focus right now.

Okay. Thank you.

Thanks.

Our next question comes from the line of Nathan Isbee with Stifel Nicolaus.

Hi, good morning.

Morning.

Just staying on outlet centers for a minute, two quick questions. As you look at some of the centers that have been announced or been in the press, and the relation to-- the position relative to some of your existing centers, specifically to some of the Mills assets. Can you talk about what you've been able to do with the Mills' leases since you acquired them in terms of building in radius restrictions close to what you have at the Chelsea centers, or the premium centers -- sorry about that.

Right. (laughter)

From-- this is Rick. From the Mills perspective, what we have been able to do is really demonstrate the synergy between our platforms because the Mills, their motto and their advertising campaign is "Mills Means More." We've been able to take the outlet tenants that we have relationships with in the premium platform and bring them into the Mills. And we've also taken a number of the full-price tenants that we have relationships in the mall business and bring them into the Mills. As a result, you've seen very good growth in the Mills, and you have seen substantial increases in the anchors and the market share in those properties.

And this month the announcement of Macy's building a full line store at Gurnee on a pad that used to be occupied by Circuit City is the best demonstration of how we're able to really bring all of those varying tenants under the Mills Outlet. In terms of the radiuses, they are less relevant in that property type.

Yes. And I would say this -- that we're not overly worried that any of these new -- if I caught your question right. We're not overly worried about any of the new outlets being developed that's going to have a material impact on any of our existing Mills. So I don't -- I'm not worried about that at all.

Okay. And-- just given the success that the outlets have had, there's also been a bit of a move to move the outlets closer into major metro areas and closer to full-price retail. Do you see the retailers pushing back on that given the success that they've had at the outlet centers?

I think that's harder to do than some of the new entrants in the outlet market are talking about. I think that's a major issue for retailers and manufactures, and I don't think they're going to jeopardize their full-price operations. I do think that when you have a tourist market like a Las Vegas or an Orlando, as an example, you are able to -- because you have new customers that come in every week essentially -- you're able to avoid the traditional rules. I think that it's -- if a lot of the outlet developers think, or these new entrants, so to speak, think they're going to get retailers or manufactures to ignore kind of the old rules, we don't see it because frankly when we look -- we've looked at a number of deals, we get pushed back on sensitivity all the time. And we, I would say we know the business reasonably well.

Okay. And then just moving to the full price, we've heard anecdotes over the last few months coming out of ICSC that there's been a willingness on the part of retailers to move to stores, to mall levels that they wouldn't have thought about 6 to 9 months ago. Can you talk about what you've seen in the Simon portfolio?

We certainly have been able to take advantage of the better macro environment to expose our retailers to other markets and other properties where they currently don't have stores. So, to that degree, yes. We are finding that we are able to bring those retailers that maybe in the past would not have looked at a market or a mall that did not have the type of sales potential they thought and try it. And happily, what has happened is that as they have opened these stores, they continue to perform, and that makes them more optimistic and confident about doing additional locations in that type of property.

Okay. Thanks. And then I have just one last question. The mobile web-based marketing system you've been talking about, can you just update us on what progress you've made in there and what direction you think you might go?

Yes, happy to without divulging anything overly material. I mean, we are working with Boston Consulting Group and our retailers as we speak in the design of the product and we're making very good progress. The retailers that we're in discussions with have been very supportive of what we're trying to accomplish. Those discussions are ongoing. And we are hopeful that by 2012 we will have a product that we will be testing in a few malls, and we'll take it from there. So, the goal is to have something of a test nature in 2012.

So you're more likely to develop something on your own versus purchasing?

Well, I think you'll see a combination thereof. I mean, there's a lot of -- there's a lot out there that we don't necessarily have to build completely by ourselves, we can partner. But it's too early to say. If I had to guess today, it will be a combination of build and produce ourselves and partner some of the aspects with others.

So what type of capital are we talking about in terms of investment?

Too early to tell. But we can handle it.

Got you. All right. Thanks.

Thanks.

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

Hi, good morning guys.

Hi.

David, just wanted to follow up on a comment you made regarding the volatility in the financing markets. And maybe this is more a question for Steve if he's on. But, can you comment on what you've seen in terms of financing costs and availability for A assets versus B and C assets in the last month or two, especially in light of some of the recent weakness in the CMBS markets? And how is demand for some of these lower quality assets in the market being impacted as a result?

Well, Christy, thanks for asking the question, I was feeling lonely.

I figured.

You have a couple of things going on. Number one, there is still a move overall to more and more financial institutions restarting CMBS platforms. And so I think overall the trend line is still good. What's happened the last couple of weeks with spreads gapping out and maybe a couple of deals not getting done quite as well as people had hoped is probably just an indication that it is still an evolving, maturing market in its reconstituted phase.

With demand for the different quality of properties, I would echo, I think, the comment that Rick or David made earlier. I mean, the fact is your better properties grow faster, they're higher productivity, there's clearly more demand to lend against that type of asset holding all other variables like loan-to-value constant. But the fact is we're seeing pretty good demand for product across all the different quality spectrums. And if you've got a good asset and you're reasonable on your loan-to-value, you can get it financed.

Okay. And then a question on outlets. Can you provide some additional color on your Toronto project? I know you have zoning approvals, but are there any other hurdles from a construction standpoint that could potentially delay construction? I'm sure you've had discussions with potential tenants about the project, but what's been the retailer feedback so far as it relates to your project versus Tanger's?

Well, I think the good news is, we've picked a market where an outlet center wants to be built, and we're competing hard against the alternative. We've got a -- the site, I think it's just going to be a competition. We're hopeful that we'll get the job done, there's no guarantees that we will. Tenant demand is interested for sure in building an outlet center there. It's a great market.

So there's no real roadblocks from an ability other than we've got to get the leasing, and I'm sure Tanger needs to get the leasing. We feel like we're doing pretty good. But we're -- we still got a ways to go. We are hopeful that 2012 we start construction. That's our goal. And we're moving fast to accomplish that. There are no guarantees on that.

What percentage pre-lease is Texas City given that you're breaking ground next month?

50-ish. But it's -- we're very confident in that deal.

Okay, Ross is on line with me, as well.

I'm sorry?

I was just going to say Ross is on the line with me, as well. I think he has a question.

Hi, guys. Just a quick question on Mills. It looks like you've got about $2 billion gross value of debt maturing over the next 18 months. How does that number relate to where Farallon is in terms of their potential monetization? And with that $2 billion of debt, do you guys in the partnership need to pay down any of that to get the refinancings done?

The vast majority of that is the senior loan and our mez loan. And the fact of the matter is there's no issue on refinancing the senior loan. Its coverages are very strong. And same thing with our mez loan. So it's really not -- the refinancing of that is really not much of an issue in terms of how we look at it.

The exit of Farallon is a different issue. And I, it's really, I'm not at a point where we can really discuss that. They've been a good partner. They were happy with the investment they've made. We'll see where it goes. But I wouldn't be overly concerned about the ability to refinance the existing debt coming up.

Is it fair to say we should expect a monetization of your partners' interests at some point sooner rather than later here in the next year or so?

It's certainly in the realm of possibilities. So, it wouldn't surprise us if that happens, but there's obviously a chance that they stay in the partnership and we continue to do what we do, which is grow the NOI's and invest in the properties for the future.

Okay. Can you remind us, how does the partnership work in terms of that monetization?

They have a certain ability subject to right of first offer on certain assets. And they have an ability to sell their interests subject to a first of -- right of first refusal. So they have some ability to sell certain assets subject to a right of first offer. And then if they want to sell their interest, it's subject to right of refusal.

Thank you.

Thanks.

Operator. Our next question comes from the line of Craig Smith with Banc of America Merrill Lynch. Please proceed with your question.

Thank you. I just wanted to look at the acquisitions on the lifestyle center. I'm just wondering if -- are you seeing select opportunities in these high-productive lifestyle centers relative to maybe what is aggressive pricing on A malls? I've just, for example, thinking of Plaza Frontenac, when I back out the anchors, I'm talking about roughly 220,000 square feet of in-line space. I'm guessing the productivity is comparable, as is the occupancy, yet you're only paying $86 million and I'm assuming Plaza Frontenac will go for far greater?

Well, let me just say, look, we, we like the deal we did in Albuquerque. It's very well positioned. And consumers love it, retailers love it. We think there's upside. We saw one -- I don't know what it's called -- a lifestyle center in Carlsbad that went for, based on how we looked at it and underwrote it, very little growth for a much more aggressive price than anywhere near what we did Albuquerque for. And the other asset you mentioned, we just didn't have any interest in it. So I let others-- whatever happens to that, no idea, but we just didn't have an interest for it.

And is it an opportunity, let's say, on the cost of occupancy at ABQ? Or is there expansion?

Yes, there is potential expansion, and there is, we think, retenanting, as well.

And just I guess one last thing. Are you thinking of breaking up the Borders, or releasing it as the box that it is?

We're working on both alternatives. We've already identified 3 or 4 potential users that would take the whole box, but it's very well positioned in the asset, so there's also the potential to break it up and bring in a couple more restaurants and a couple other small shops.

Okay, thanks a lot.

Thank you.

Our next question comes from the line of Alex Goldfarb with Sandler O'Neill. Please proceed with your question.

Yes, hi, good morning.

Good morning.

Just a quick -- quickly on the, on the AAA, the deficit talks down in Washington. If the ratings agencies falls through and actually downgrade the US, do you think there's any impact to either Simon or any of the retailers as far as financing apart from just a general shift in the market? Are there any contracts that use treasuries as an underlying reference, or any of the factoring that goes on that may be disrupted? Just trying to get a sense of what the impact would be in your world if that should happen.

Well, I don't think so. I mean, we do lease space to the government. I will tell you that they, I'm known for checking our accounts receivable every month when I get the report. And they are always 30 days delinquent. So, I'm hopeful that they can rectify that. But it's, it is very interesting to note they are always 30 days delinquent.

I mean, I guess in theory we'd have some risk that would not be paid, currently. But beyond that -- I mean, the numbers are immaterial, frankly. But beyond that, we don't see any real, real risk. I mean, look, spreads will invariably widen for all of corporate America and for all asset classes. So, we'll be a participant in that, but beyond that, we can't see anything as we studied it that's going to be anything material.

Okay. And then just a second question is, on the discussion of the taxing the internet sales and folks like Amazon, is this -- I mean, it seems it's almost something that's Amazon specific because a lot of the retailers have bricks and mortar presence and they also sell their goods on line. I'm thinking about like a store like Apple where they've had tremendous success rolling out physical locations. So, it almost seems like Amazon is unique as far as more retailers would seem to want to have a physical presence, in which case they have to collect sales tax. So, just curious if the tenants are indicating that it's more than just Amazon, that there's a huge amount of sales that they're losing, or if this is just something more Amazon and perhaps books/electronics related.

Well, there's a number of pure online retailers beyond Amazon. You know Gilt.com, I'm just naming -- Blue Nile, just to name a couple. So, clearly Amazon is the 800-pound gorilla in this area. But there are other pure line, pure online retailers that are taking great advantage of the government subsidy that's occurring.

But do the retailers have a sense of how much business they lose?

Well, they're all very focused on it. So they -- they're feeling the, they're feeling the loss. I mean, what we're hearing is the number of customers go to their store, learn all about it, and buy it on line because it's 10% savings. So it's a real issue. And we need a level playing field. There's no reason whatsoever that there should not be. It's not a new tax and it levels the playing field. The fact of the matter is if a customer wants to buy online over bricks and mortar and it's a level playing field, then that's the breaks of the game. But if they're doing it merely to avoid an 8% or 10% sales or use tax that they're required to pay but the internet retailer ignores it, that's not fair. That's not what this government should be all about.

Okay. Thank you.

Thank you.

Our next question comes from the line of Ki Bin Kim with Macquarie.

Thanks. Could you give us -- remind me how much revenue you generate from strip centers you own? And if you can, give an update on if there's any momentum in the small shop space?

Ki Bin, this is Steve. The strip centers in the aggregate contribute about 3% to 4% of our NOI, which is just -- it's in the low $100 million range. Like $120 million. Yes.

On the small shop side, there's a relatively small amount of space allocated to the specialty stores and the strip centers. That business is primarily driven by the big box leasing, and if you look in our supplemental filings, we are seeing momentum there in adding boxes to that platform.

So, it's more on the box space, not on the in line -- the small shop space then?

The small shop space is a relatively smaller percentage in that platform than in our other platforms.

Okay. And turning to your 2012 lease expirations, could you give us some color on what is a vintage on average of what's expiring in 2012? And if you can, what was, on an apples-to-apples basis, the sales productivity based on that vintage, historically?

When you look at our supplemental filing, if you look in 2012, we have 9,700,000 square feet expiring. So, you can except that is going to be a very fair cross section of our entire portfolio.

Okay --.

And just as an aside, the rent for that is $32.22. So that gives us substantial room to roll those over at higher rents given the current average rent.

Right. I mean, that's what I was leaning toward. So could we expect reasonably, in the mid-double digit range?

It is hard to project. It's really a function of the specific spaces that roll, but we've been showing good momentum in our spread over the last few quarters.

Okay, and last question. How do you guys calculate -- when you add new anchors to existing malls -- how do you calculate your expected yield from that? Is it purely from if they do pay rent, the rent you're expecting, or is there some kind of formula for the increased level of traffic that would generate and over-impact on the mall?

You know, it's old-fashioned, it's called a cash-on-cash return. And we do not take into account the hope and prayer that it will mean something to this tenant and to that tenant.

Okay. Thank you very much.

Thanks.

Our next question comes from the line of Steve Sakwa with ISI Group. Please proceed with your question.

Thanks, just a couple of quick questions. Steve, bad debt expenses continued to stay low. Is that your expectation for the second half of the year, or do you think there's a turnaround back to a more normal $4 million to $5 million figure?

Steve, the answer might be somewhere in between the two. David mentioned there are a couple of tenants and actually larger tenants that we have on our watch list, are paying attention to, but the overall receivable environment right now is pretty good. Receivables are down really half of what they were a year ago at this time. And so I -- with the exception of a couple of tenants that we're paying attention to, I think it will be a relatively modest second half.

Okay, and then David, I know you said you don't like to characterize the malls. Rick does that. So maybe I'll throw the question to Rick. But could you guys just talk maybe about regional performance and kind of what you're seeing across the country? I realize you don't give the breakdowns of sales and rank growth between the malls and premium outlets, but is there anything that you're seeing, any noticeable trends between A, B, and C in terms of rent growth, sales growth? I guess anything by geography would be helpful.

I'll comment on the geography. All of our regions were stronger with good sales growth. But the strongest regions were the mountain which is Vegas, southwest, mid-Atlantic and Florida. Weaker, but still growth were the plains and the Great Lakes. Across all the platforms, those properties that are located in tourist markets have been substantially outperforming even the overall portfolio performance that we have talked about.

Okay. And then lastly, David, do you want to just talk about the dividend? I mean, your payout is exceedingly low. And I am just wondering what your thoughts are to maybe bump it in the second half, or is that something you just kind of waive until the first quarter of next year?

No, we're going to -- Steve, we're going to -- as you recall last year, we bumped it up materially in the fourth quarter. So we're going to follow the same procedure in the fourth quarter. It's going to be based upon our taxable income. And based upon -- you know, taxable income is certainly, there's a certain amount of volatility with taxable income. But based on what I know today, we're going to have an increase, obviously subject to Board approval, but I'm sure our Board wants to stay at REIT. Okay? (laughter) We're going to have a meaningful, again, subject to Board approval and subject to what our taxable income is, but we're going to have a meaningful fourth quarter dividend increase like we did last year.

And then going forward in '12, our annual payout now is $3.20. But my guess is that as part of that fourth quarter, we'll also set the expectations that what our annual -- our quarterly dividend will be in 2012. And again, I would anticipate that there will be a true-up in the fourth quarter of 012, and that will kind of be the normal routine that we'll get in. Obviously, the true-up will never hopefully ever be down, but we'll set a number and then as taxable income gets more clarity, we'll bump it up to the extent that we don't -- we're not meeting it.

Okay, thanks.

Thanks.

Our next question comes from the line of Tayo Okusanya with Jefferies & Company. Please proceed with your question.

Good afternoon, everyone. Just a couple of questions with regards to price discovery. The Albuquerque, New Mexico asset, could you give us a sense of what cap rate that was done at? And then also, any update on King of Prussia and what could happen on that end?

Well, we're not going to disclose it, with Albuquerque, but I think you'd be pleased. And we're not going to disclose what's going on with King of Prussia other than we're having discussions with our partners.

Okay. And then next question, a recent article on S&L just talking about you potentially selling some of your shopping centers. Just curious if you had seen that and if you could make any comment?

Well, we've got a couple of centers on the market. And we're in that process right now. But we don't -- we won't announce anything until we have a deal that's essentially done, and at this point we're still in discussions and still going through the process.

Is there anything thematic about the assets, though?

No, no. I think, I think the only important thing to point out is, we do this -- we've been doing this for several years. We did not do it in 2009 and 2010 because obviously the market was in major restructure/recovery mode. And so this was part of our ongoing process that we tend to look at some assets, we try to sell a couple here and there every year, consistent with what we've done in 2008, 2007, 2006. You have all of that data out there historically, and it's not a dramatic shift like, say-- and it's not an overly material deal like say what Westfield is trying to do. It's just an ongoing process that we do essentially every year assuming the market conditions are acceptable to sell assets.

Okay. Great. And then just two quick ones with Steve. Steve, could you tell us what occupancy cost were as of 2Q?

Yes. They were 12.1%.

And this is the combined number for the malls and the --?

It is, yes.

Okay and the centers, okay. And then in the quarter, Other Income, there was an Other within Other Income of about $30.5 million?

Correct.

Could you just give us a further breakdown of what's in that number?

It is a lot of the miscellaneous stuff at the mall, Tayo. It's everything from stroller rentals to sales of lottery ticket and all that. The variant over the last year was, interestingly enough, going back to an acquisition that we did many years ago. We held the key man life insurance for a former director who passed away. And that was $2 million.

Ah, okay. All right. That explains the delta. Appreciate it. Thank you very much. Great quarter.

Thank you.

Our next question comes from the line of James Sullivan with Cowen and Company. Please proceed with your question.

Thanks. Just kind of a quick follow-up, Steve, on that other, Other Income line item. As you compute same store NOI's, I understand that Other Income is in there. Is that right?

If it's related to the property, Jim, it is. But like, for example, this, this proceeds from this life insurance policy that I mentioned would not be in there.

Okay. Very good. And then second question on same store NOI. Pretty significant increase quarter over quarter up from the low 2%s to 3.5%. I guess keying off of what David had to say about feeling better about the outlook for the balance of the year, I guess that's reflected in your guidance. But the 3.5% number this quarter, should we be assuming that number of debt is achievable in the second half?

Well, I'll say this, Jim, as David mentioned, it's -- that was of off a base that was positive last year, as well, and if you looked at the second half of last year, our comp NOI growth as I recall was in the low to mid 2%s. So we're coming off of higher bases. I think the good news if you just look at the composition of the 3.5%, 265 basis points of it is percentage -- or excuse me, is minimum rent. I think Rick and David have both mentioned about deal quality continuing to get better. And 50 basis points of it is overage rent. We'll see where sales head, but if sales continue to stay at the percentage increase that we're seeing, it's reasonable to assume that there would be some pop from the overage rents, as well.

Good. Okay, thank you.

Thanks.

Your next question comes from the line of Carol Kemple with Hilliard Lyon. Please proceed with your question.

I just had a question. In your press release it didn't mention anything about the outlet you all announced in May in Phoenix. Is everything still on track for that center to be built?

Yes. Yes, we're still moving on that, correct.

Okay. And I know at least two of your peers have announced that they're interested in that market. How many outlet centers do you think Phoenix can realistically hold and support?

Well, if they all get built, somebody will be a loser, how's that?

That works. Thanks.

Sure. Thank you.

Our next question comes from the line of Ben Yang with Keefe, Bruyette, Woods. Please proceed with your question.

Yes, hi thanks. David, in past years you talked about only buying and owning franchise assets, which I thought included a minimum size requirement as well as anchors. But given that you just bought an unanchored center that was only 220,000 square feet, is this possibly a signal that you're maybe more open-minded about what you want to buy and own? And maybe in light of the aggressive pricing for high-quality assets that you were talking about earlier?

Well, look, we -- it's a very good question. The answer is a couple. One is that we really like this asset, and we've looked at a lot of assets like this. This was an off-market deal, so it wasn't -- they didn't hire East Hill to create projections that the people bid on and believe in and put in a crazy cap rate. So we think we bought it right. We still would prefer the bigger, better deals, but some of those are-- there's not a lot on the market. And too, the numbers are very, very aggressive.

And I think the other important thing on this are a very good market. We're in this market, so we know it. We cover it. And as I mentioned to you, this was part of a 1031. Again, we love the real estate, we think it's got a lot of potential, but it was kind of an off-market deal, very good real estate. Fair price for the buyer and the seller, upside, good market, 1031, we're very happy to buy it. And we have looked at those kind of centers, but even some of those are just being bid up to what we think are very aggressive levels.

I mean, why would the seller necessarily not market the deal and potentially leave some money on the table by selling it off market to you guys? I mean, it's no secret that pricing is pretty frothy overall, so I'm just curious how you guys step in and how you present yourself, and how you end up winning these type of opportunities?

Well, believe it or not, we have had a history of it. We like those deals the best. That's how we got into the outlet business. You know, we bought Chelsea, it was a negotiated deal. I bought the Bartolo, it wasn't an auction. We've done most of our work in that way, and that's the way we prefer it. It doesn't always work out that way, but in this case, our guys did a good job, and people know that we're going to close. So, they know when we have a deal, they know we're going to close. And we're fair on that side of the, the equation. So they have faith that -- they just know we're going to get the job done.

Okay. Great. And last question; it looks like you meaningfully reduced the small shop tenants that were on month-to-month leases over the past quarter. It looks like it's down about 1.4 million square feet. Is this seasonality, or were you able to convert the bulk of this to permanent tenants?

Permanent tenants.

Can you give a breakdown just to give a rough idea of how much demand there might be for those temp to perm?

Well, in this case we had a couple larger national retailers that we've been going back and forth. And I think the bulk of it has been the fact that we just finalized those leases and extended them or redid them, or whatever.

And what was the average spread for those temp-to-perm conversions?

We don't have that in front of us.

But it's included in the overall metric?

Of course, yes, of course.

Okay. Thank you.

Thanks.

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

Hi, real quick, David, just on the dividend again, I just want to make sure I heard this correctly. Fourth quarter dividend increased, likely I'm assuming the Board approves it. So, something similar to a special, and then you would give a sense as to what 2012 could be more on a run rate basis? That was the right way, correct?

Yes. Let me -- yes. Let me just restate it because it's obviously important. We pay $0.80 a quarter, times 4, that's $3.20. It's very likely that we'll in the fourth quarter dividend declaration, which will be part of our third quarter earnings announcement.

Correct.

In November, payable in November, that will include a dividend higher than $0.80 that will be driven by what our taxable income is. Remember, if you don't pay your taxable income, you can't be a REIT. That would not be good. We're going to pay our taxable income out. Right? That will, by then, we'll have a good sense of 2012s taxable income. And our quarterly run rate for 2012 will probably be outlined in that, in that context, as well. So, obviously it will be probably higher than $0.80 per quarter, but at that point we're still-- we'll have a better sense of that by the end of the year.

Got it. Okay. And then last question. On Opry looking in the supplemental share cost for the restorations, about $60 million. Is all that out of pocket? Was there insurance proceeds that are coming to play, as well? I mean, how do we think about that?

Well, just, just -- we've actually worked very diligently and very hard with our lender. They're providing those funds, and we're suing Aeon, who's been our broker for a number of years. Unfortunately, has withheld the additional coverage that we think, we know we're entitled to. And that litigation continues.

Okay. Okay. Thank you.

Thank you.

Our next question comes from the line of Robert McMillan with Standard & Poor's. Please proceed with your question.

Hi, what percentage of your 2011, 2012 leasing activity has been completed?

2011 is substantially done. 2012, we're probably about 35% completed already.

And how does that compare with normal?

We're a little ahead of where we've been historically over the last couple of years.

And can you comment on what retail sectors are doing particularly well and which ones are doing particularly poor, and which ones you're more optimistic about?

The ones that have shown better growth have been the sporting goods, jewelry, woman's better apparel and accessories. Weaker areas, obviously, books, woman's moderate, and junior apparel.

Thank you very much.

Our next question comes from the line of Rich Moore with RBC. Please proceed with your question.

Yes, hello, guys. I got to say I liked the acquisition of the best asset in Albuquerque, which is my hometown, as it turns out. I'm curious, beyond the obvious plans for the center itself, across the street there's kind of a defunct, old regional mall asset. And then across the other, across the other street there's a third tier general growth asset that's a regional mall, as well. I'm wondering if you're thinking beyond the center itself, maybe crossing one of the two streets in the future?

Well, I think it's -- I think the -- it's not -- look, we've had no discussions with general growth. So I'm not -- we're not going to speak that asset. I think you do point out that there's potential on the other one and we're cognizant of that asset and what the potential there is. But certainly not the general growth asset. I mean, I have no comment on that essentially.

Okay. So you haven't talked, David, to the private guy that owns the old Windrock Center?

Well, we're aware of what -- that could be an interesting situation, but it's too early at this point.

Okay. Because that's a great area obviously for a broader retail play, it seems like. Okay. Second thing is, I'm curious, why did you say you don't like to tier assets? That seems like, from your guys' standpoint, obviously you understand all the assets. From the analyst/investor standpoint it's usually helpful to see the kinds of stats that you threw out at the beginning of the call on a more defined and formal sort of basis. I'm curious, why not put that tiering together?

Look, I -- just believe that, to me a dollar of cash flow is a dollar of cash flow. So, and I just don't like essentially sometimes what it means internally. But it's not a big issue. I mean, we do it -- we look at it. We'll give you data that we think is important to understand. If we think the market's not appreciating what we've got, then we'll continue to do that. We can cut it 1,000 different ways.

Our averages obviously mean something because of the size of the Company. So it's not -- our averages are not insignificant because it's over a big, broad base, and you know how math works, right. So it's not just 20 assets that three or four or five could skew the results one way or another. So -- but the important thing is, look, tell us how you'd like it, we'll factor it in. But we've got a business to run internally, and I don't like to characterize assets by tiers because the fact of the matter is I want every asset we've got to be better and the best it can be or we should, we should let somebody else try and achieve that.

Okay. Good. I got you. Thank you. And then, did you guys look at that Niagara Falls outlet center that apparently Macerich has --?

Yes, we're more focused on Parano than Buffalo, frankly. We do -- and again, I don't really know what the deal is, but there are reports that it's in the -- we don't see it necessarily as a top 25 outlet center. We have pretty good familiarity with the outlets that are out there. But I'm sure they'll do fine with it. Our focus right now is Toronto, not Buffalo.

Okay, all right. Great. Thanks. And then, last thing I had, Steve, I wasn't quite sure if you kind of hit on this, you might have. Percentage rents this quarter were up sharply and certainly well above what we had anticipated. What was the reason for that do you think?

Well, it could have been your anticipation.

That could have been the problem, yes, indeed.

No, Rich, I think we're just seeing the benefit. I mean, obviously percentage rents are tough to predict, because you have tenants coming in and out of overage rent all the time. But the fact is if you have the sales growth that we have now seen for the last four or five quarters in a row, it has begun to manifest itself in higher percentage rent. It's as simple as that.

Okay, so what we saw in the second quarter could continue to some extent, for the foreseeable future?

Depending on what your assumption is about sales growth going forward, sure.

Yes. I got you. Okay, great. Thank you, guys.

Thanks, Rich.

Our final question comes from the line of Caitlin Burrows with Credit Suisse. Please proceed with your question.

Good morning guys, Gautam [Desyde]. A couple of questions on the international front. With the recent weak not in UK retailers, you guys feel like you dodged a bullet there?

Well, look, we know what we're doing. Whether we dodged a bullet or not, I don't know. We offered what we offered on capital shopping centers. A price that we felt we could make work. Based upon our industry knowledge and history of past performance, they didn't consider it. I noticed the stock -- (technical difficulty)

Please stand by, your conference will resume momentarily. Again, please continue to stand by, and thank you for your patience.

We can now hear you again, you're now live.

Ah, perfect. Thank you.

Sorry about that. I don't know if you heard the last part of my response. But let me just repeat it. In terms of dodging the bullet on CSC.

Right.

Let me just say this -- we offered a price that they weren't interested in. The stock obviously has not gotten that price since we offered it. Our offer was subject to due diligence. But we felt comfortable in offering that, because we had the history of making acquisitions work, and -- but they were not interested. So, that's really all I can say on that. I don't necessarily think we dodged a bullet. We're very comfortable in underwriting. We understood the UK market. That's why we thought they should have seriously considered our offer subject to due diligence. They chose not to. But had we done the due diligence and felt comfortable with it, we would have made the deal work like we have every other deal.

Okay. Sounds good. And my last question is what kind of demand are you seeing for international tenant expansion within the US?

Pretty good. In fact, one of the leaders is here the last two days talking about a lot of business with us. Rick and -- I'd say it's very positive.

We're dealing a lot of business with H&M and they're literally here right now. We're doing business with Desigual, Inglot, Cotton On, Aritsia, All Saints. Those are all international retailers that are looking to expand their footprint in the US, and we're getting the benefit of that.

Sounds good. Thank you, guys, good luck with the rest of the year.

Thank you.

Thank you.

Thank you.

This concludes our Q&A session for today's call. I would now like to hand the conference back to management for closing remarks.

Thank you, everybody. We are very sorry the technical glitch. We can blame that on David Contis because he took our -- my tech room for those of you who have visited Indianapolis. I gave him my office so we're in a new room. We'll obviously work this out. But have a great rest of the summer. And take care. Thank you.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect and have a great day.