西蒙地產 (SPG) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2012 Simon Property Group conference call. My name is Kathryn and I will be your operator for today.

At this time all participants are in listen only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to Shelly Doran, Vice President of Investor Relations. Please proceed, ma'am.

Good morning and welcome to Simon Property Group's second-quarter 2012 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 filings with the SEC for a detailed discussion.

Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time sensitive information that may be accurate only as of today's date, July 24, 2012.

Reconciliations of non-GAAP financial 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 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, thanks. Good morning everyone. We are pleased with our strong results for the quarter, and I will just go through some highlights. First of all, funds from operations was $1.89 per share, up 14.5% from the second quarter of 2011. Our FFO exceeded the First Call consensus by $0.08 per share. With the Malls and the Premium Outlets our comparable property NOI grew 5.1%. Comp NOI growth in the second quarter of 2011 was 3.5%, so a very healthy trend.

Tenant sales were up 9.9% to $554 per foot. Occupancy was up 60 basis points to the 94.2%. Average rent per square foot increased by 3.7%, and the releasing spread was a positive 10% or $4.77 per square foot.

On the capital market side on June 1, as you know, we completed a new $2 billion unsecured revolving credit facility that supplements our existing $4 billion revolver, resulting in $6 billion of total capacity. The facility matures 2016 with a one-year extension option at the same rate as our other facility, which is LIBOR plus 100 basis points.

In the secured market we have been very active year-to-date. We have closed or locked rate on 17 new mortgages, totaling approximately $1.9 billion, of which our share of that debt is $1.3 billion. The weighted average interest rate on loans is 4.3% and the term is 7.5 years on the average term.

Then last Friday we redeemed 2 million units of our operating partnership owned by an affiliate of jcpenney at $124 per unit or share.

On the acquisition side, June 4 we acquired a 50% interest in Silver Sands Factory Stores, a large and highly productive upscale outlet center in Destin, Florida. The 450,000 square foot center generates sales of approximately $500 per square foot. We have assumed leasing and management duties, and in the coming months it will be rebranded as a Premium Outlet Center.

Development activity is very, very strong. First of all, we grand opened Merrimack Premium Outlets, a large outlet center in Merrimack, New Hampshire, on June 14 -- strong opening. We are 99% leased, a great-looking center.

Construction continues on five additional Premium Outlet Centers, all scheduled to open this fall or in 2013. They're located in the US, Canada, Japan and Korea, clearly demonstrating the global nature of our company and our Premium Outlet platform.

First of all, two in the US are in Texas City, a suburb of Houston, which opens this fall, and then Chandler, Arizona, a suburb of Phoenix, which will open next year. We are continuing construction in Toronto, which opens next year. Another outlet center in Japan, which will be our ninth near the airport outside of Tokyo and Busan, our third Premium Outlet Center in Korea.

We started construction on July 11 at St. Louis Premium Outlet Centers. We announced a strong lineup of tenants and are opening as planned for the fall of 2013.

Progress is being made under our agreement to develop Premium Outlet Centers in Brazil with BR Malls, and importantly construction is underway on 25 redevelopment expansion projects at the Mall and Premium Outlet and Mills platforms in the US, and two Premium Outlets in Japan, all with 2012/2013 completion dates.

We continue to expect our share of the development/redevelopment spend to approximate $1 billion this year, next year and 2014.

Let me just turn to Klepierre and give you a quick update. As you know, we bought 54.4 million shares or 29% of the French public company in March. They are the largest -- second-largest owner of retail assets in Continental Europe, with their assets valued at EUR16.2 billion. They will be announcing their earnings later today.

Their business has been remarkably stable considering the turmoil in Europe. They have made excellent progress in refinancing debt, selling assets and creating additional liquidity. And I have been very involved in the development of their future strategic direction. As they accomplish their goals there is no doubt in my mind that they will be poised to take advantage of future growth opportunities.

Turning to dividends. As you now know, we have announced the fourth consecutive increase in our quarterly dividend, from $1 per share to $1.05 per share. Our dividend is now 31% higher than it was a year ago, and well above our previous all-time high before the onslaught of the Great Recession.

I'm happy to announce that we have increased our 2012 FFO guidance again. Initially as you will recall, we were at $7.20 to $7.30 per share. Our new guidance now is $7.60 through $7.70 per share. The primary factors contributing to this are strong operational performance and the impact of our recent investment activity.

Now, now just to highlight another important factor in what is happening with the company, we continue to add to our very talented management group. As you know, in 2011 we added Contis to our Mall platform, Fivel to help us in our legal and deal business.

And obviously I'm very pleased to announce the most recent addition. Many of you know, Matt Lentz. Matt is our Chief Investment Officer, which is a new position in our organization. He brings a great and extensive broad real estate background, both from a bricks and mortar point of view but also from a securities point of view. Also, very been involved in reviewing many international opportunities and in his previous roles.

He will focus -- his job will primarily assist myself and others of the management group in pursuing strategic growth opportunities for the company. And Matt's first day on the job was, in fact, yesterday, and as far as I know he is still here. But actually his wife is about to give birth, so I hope he is not at the office.

Concluding, let me just say last second quarter I addressed the unfair advantage that Internet retailers have in not being required to collect sales and use tax on remote sales. I believe our efforts and others have made significant progress at the state level, but our tenants need Congress to act to level the playing field on a national level.

In the past year the Marketplace Equity Act was introduced by a bipartisan group of senators, and similar legislation has been introduced in the House to address the inequality in today's marketplace and level the playing field between bricks and mortars and online retail business.

We support these proposals. We will continue to be very focused on making this happen. And we appreciate all -- everybody's support in showing their strong support of this very important legislation.

So with that said we would turn it over to questions.

(Operator Instructions). Alexander Goldfarb, Sandler O'Neill.

David, just going to the jcpenney for a second, $1.24 is certainly below where you guys are trading. I just want to get a little more color on, one, who approached who first? And two, just want to try and understand why someone would take $1.24 versus where your stock is trading in the open market.

Well, look, we -- let's just say we have a strong relationship with Penney. They're a very important retail partner of ours. I know -- Rick and I know Mr. Johnson, and we also know very well members of the Board. So I am not going to get into the particulars, but just so you understand, the unit holders have the ability to convert their units on a one-for-one basis for common shares. And we view it essentially as common stock equivalent, because obviously they can convert it on a one-for-one basis.

When they do that then they -- we have the option to give them fully diluted stock or cash. And it was through that discussion that we negotiated the deal. And I am very convinced it is a great opportunity for the company. And I think it met Penney's strategic goals in terms of their focus on what they're trying to do with their business. So we're pleased with the transaction, and beyond that there is not much to add to it.

Okay. And then on Brazil, Equity International sold their stake in BR Malls. I am just curious if you guys took a look at buying their stake or if there is any discussion around that?

Well, we have looked at a lot of things at BR -- with BR Malls. We have looked at a lot of things in Brazil. The good news is we are very close to approving our first outlet there, which will start construction here potentially within the next 30 to 60 days. And open -- it is outside of Sao Paulo -- and open late next year. That is not in this list that I described to you. But it is moving apace and I expect that to happen. And I think we will get our first outlet center built and open next year. So we are pleased we are making very good progress on that.

Okay, and just a final question. Just with the recent economic data, has there been any change in the conversations with tenants, are they're still full steam ahead in terms of leasing space in their program this year, next year and further out?

This is Rick. There really has not been any change. They are still coming in and aggressively looking for new opportunities across all the platforms.

Okay, thank you.

Ross Nussbaum, UBS.

Can you guys talk about the dynamics that you are seeing in the department store sector as you look ahead to next year? Obviously, you have got one big transformation going on at jcpenney, and then you have got another different type of situation over at Sears. At what point do you guys -- or do you believe there still needs to be some rationalization in terms of the number of boxes that are out there?

I put Penney in a completely -- and Rick can add -- I put Penney in a completely different category than Sears. Penney is very focused on delivering value to their customer. They have a very talented management team. We expect -- obviously, they are going through a transformation -- but we expect Penney to be a viable mall anchor in a fashion that they have been historically.

Sears is a little bit different. I mean, the fact of the matter is Sears needs less space. I think we have touched on this last time. Sears needs less space than what they currently have. And I think there will be ongoing discussions with us and Sears and the other mall people that will rationalize that space, creating opportunities for both the landlord and Sears.

I really, really would not lump them in together. They're two different companies on two different paths. And at the end of the day, look, it is going to be Sears will be a lot of work, but we feel confident as they probably reduce some of their space that that will ultimately benefit us in the long run. Rick, anything you want to add?

I would just add if you look at today's landscape in the department store universe, their equity, their balance sheets, their credit profiles are all dramatically better than they were just a few short years ago. You have Lord & Taylor that has been re-created into a very viable and aggressive growth vehicle. Dillard is very well situated. Macy's is well situated. Carson's has a new leadership and great financial upward trajectory.

So, candidly, we are in a better position now than we have been in. And with no new development these stores are maintaining their existing stores because they want to really enhance their top line.

Okay, and a second question is -- and I have gotten this question over the past couple of days from some of your investors. Does the hiring of Matt reflect in any way a signal that you intend to accelerate your international expansion or is it more of a reflection that you just needed another body or two in the door, given everything you have got going on?

Well, it is really a function of what we have got going on. We -- believe it or not, this is a big company and just like -- you know, I am never satisfied with the portfolio and where we have taken the company. I'm always going to try and add talent to the organization.

I have known Matt a long time. We've talked on and off. We wanted to fill this position loss probably in late 2008, and then the world ended, so we put it on a back burner, because we said, well, we are going to hunker down.

I just think there is so many opportunities for this company. It is very important to continue to add talent, another pair of hands, another deep thinker. He fits in great with the team. So it is -- to me it was a no-brainer. And to me -- we will take it wherever it goes, wherever we think we should invest.

Who would have thought we would have bought our stock at $124 three months ago, but that is -- we saw an opportunity. Who would have thought we would have invested internationally four months ago. Get paid -- I'm getting paid -- you know, most people pay for options. I am getting paid, as I think about that company as optionality.

What do I mean by that? If you look at the cash flow that we will get from the dividend against the cost that it took, both in equity and debt, we are going to get paid $55 million plus or minus $1 million a year to decide what we want to do with that stake.

That is a good spot to be in. There are not many malls you can build that can generate $55 million of cash flow. So having another guy to think these things with our team I think is exciting. I also think with David and Steve -- we hired Larry Krema to run our HR group -- I think it also demonstrates that this company is a neat place to work and be part of.

I appreciate it. Thanks, David.

Craig Schmidt, Bank of America.

The pace of outlet development, they may -- it actually seems as high as it have ever been. I am wondering is that sustainable going forward into 2014 and 2015?

On the new development or the redevelopment (multiple speakers)?

The new development.

You know, I still think the full-price new development still is not -- is still -- it is still a ways away, even though there are a couple of announced ones here and there. The outlet business still has some pockets, but again, I think we have discussed it last time. I don't -- I know there are all of these ones that are being bandied about, but I think it is going to be harder to do. So I think pure new development is still going to be a little bit -- still be less than everybody thinks.

The redevelopment though could -- has the potential to really pick up. And that is where, thankfully, between Rick and Contis that is where a big, big focus is. That has, frankly, a little bit of potential to do more than what we are doing, but, Rick, you can add to that thinking.

Just on the outlet side, right now it is being driven by explosive demand among a number of tenants that are not in the business that want to get in the business. And I don't want to lose sight of the fact that this demand is going to help our existing portfolio dramatically and that you're saying that in our results. There has got to be a finite end to the arc of new development. There is limited number of new opportunities.

On the redevelopment side, when David articulated, I believe it was last year or the year before, our redevelopment program, we identified some for you. Literally three quarters of them are under construction right now, and we are in the process of reloading that pipeline with the next wave of opportunities.

So there is a lot going on and we are -- as you look in the 8-K, we are producing low-double-digit yields on those, which on a risk-adjusted basis are even better than they are on just the return basis, which are terrific in and of themselves.

I guess when I look at your portfolio you have between Westbury -- Woodbury, Orlando, San Marcos, centers that are 700,000 square feet and larger. Is there the capacity in your portfolio to take some as large as that?

I think that is in the outlet side. You know, that is still going to be few and far between. We are making Orlando bigger. We are making Vegas bigger. We are making Desert Hills bigger. But these are -- I hate using this word -- but iconic outlets. Those will all be bigger. Those are all -- Seattle is getting bigger. Chicago will get bigger.

So these are all -- that is probably under-appreciated opportunity for this company. Just like -- I mean people talk -- they're going to do this, they're going to do that, you know. People are focused on a company having this particular lease here and there. We have got five outlets under construction. We just opened one. So people talk about, well, we are about to, we are hoping to lease this space. Hello, we got five under construction.

And you just mentioned expansions of many of the past outlet centers in the United States.

Yes. So -- and that couple. So there is a lot to what we are doing. That is why we have grey hair.

Thanks a lot.

Caitlin Burrows, Goldman Sachs.

We saw a report that Bank of America is it not renewing its deals to keep their ATMs in Simon Malls this year. Because of that or for other reasons do you expect any material changes in your ancillary income?

No, in fact, that is -- we have already replaced them with another operator. That has been in the works for really a couple of years -- no big deal.

Okay.

Yes, I was surprised it got the press, but no big deal.

And then, also, you reported land sale gains of over $6 million. Could you tell us who you sold that land to?

Yes, I don't have it in front of me, but it was --.

It was -- we sold a piece of land in northwest Houston for a supermarket on -- right next to our Houston Premium Outlets, and that was a pretty substantial gain.

Yes, okay.

Okay, thanks.

Cedrik Lachance, Green Street Advisors.

Just going back on outlets, in regards to Silver Sands, you got a loan there from the bank at a rate under 4%. Can you give me a sense of the appetite for mortgage financing in the outlet space at this point?

Steve, you want --?

Yes, most of our portfolio in the outlet business, because it is wholly owned is unencumbered. But where we have shown the products to the mortgage market, whether it is the banks or the life companies, I think they recognize the quality and the stability of the cash flow. So I think about Philadelphia Premium Outlets we had a mortgage on -- we just got some financings on the -- we got a construction/mini perm on Toronto at very attractive pricing. So it is a very attractive, very viable product to that market.

Yes, there is -- and I would just say, Cedrik, throw that in for the Mills projects too. We are -- we have -- you know, some of these are locked out, but the ones that are open and the ones that we bought out of the TLMP are extremely financeable, and that financing rivals any A mall that there is out there as well.

Okay, and just pulling back a little bit looking at the big picture. Where do you see the most fertile ground for investments today? Is it the primarily and publicly traded companies or is it in malls or outlets that are owned privately?

Well, that is a tough one to be honest with you. At this point I would probably say that, outside of the opportunity that we saw at Klepierre, it is probably the private deals that we see as the most -- the biggest opportunity. Primarily because the private owners are going to have a much more difficult time to get financing, and -- or the private individuals that may want to monetize their business for whatever reason -- or their asset for whatever reason. I would say to you that is probably the biggest opportunity that we see.

Though it doesn't rule out that eventually there may be some more public opportunities. But I would say to you is we think about what we are looking at they tend to be more private oriented, and it is either financing issues or estate issues or whatever that is driving the need to do it.

Now philosophically we will not -- we don't rarely, and I shouldn't -- I don't background everything -- but we don't participate in bidding. If there is a banker or a broker and it says -- bids are due at 2 o'clock PM, please send in your letter -- we don't do that. I can't remember the last deal that we did where we will participate in an auction. We just don't do it. We don't need to do it. We have no interest in doing it.

So these are people that want to do business with us. And then we -- it doesn't mean that that they are not represented by bankers or whatever, but those bankers know that if there is an auction they can send it to the next mall guy, we are not going to play.

Okay, thank you.

David Harris, Imperial Capital.

On the appointment of Matt Lentz, how much experience has Matt acquired outside of public securities over the years?

He has had a -- he used to be a broker. He has been in the bricks and mortar business, so I think it is pretty good.

Okay, and when (multiple speakers)?

We got a group here that any -- not that I think there is any holes there -- but we got a lot of guys here that know about bricks and mortar that will help him.

Okay. Will his compensation details be made public?

I believe it will be whatever these -- I can't keep track of all the rules, but I think he will be one of the (multiple speakers).

He will be a named executive officer.

Yes, yes. I think he will be a Form 4 or 5 -- I don't know, whatever the rules are he will be part of the rules.

So that will be next year's proxy?

Potentially. I can't -- I'm not going to guarantee it because I really don't know.

Okay, now turning to Klepierre, if I am doing my numbers right, it is something like you were roundabout $200 million on your investment here. About half is the stock depreciation and half is FX. You didn't put in $1 billion against your $2 billion growth investment by way of a hedge, by way of your -- I think it was a credit line facility. Have you expanded that or hedged your position against the currency anymore since then? I mean, it looks like all the risks are to the downside, David.

Well, you know, that is -- look we don't -- I don't think about -- the good news about for the investors is I actually think about the real estate long-term, not quarter-to-quarter. So, yes, the euro is down a little bit. The stock -- we did buy it at a premium to where it was trading. That gap has been closed, in fact, it has been up since where we bought it. We look at where we bought it versus the net asset value and we still think the net asset value is higher than when we bought it.

I don't -- I'm not going to panic about the euro. It is a good portfolio, it is stable. You will see the results later today. So to me this isn't -- look, it is not a quarter-to-quarter game, so that is of no concern to me, no consequence to me.

But we did increase our hedge, and we are about 16% some hedged. We did that before even the latest euro depreciation. But I think the other point is that -- and if I can put it in real estate context -- and, look, the real question is what happens in the principal. But this is not -- we didn't do this based upon short-term trading patterns. But if you look at the dividend and our cost of financing, just a simple go back -- you know real estate, right?

Just a little.

Cash on cash -- cash on cash returns. We are going to get roughly -- and this is even with the lower currency -- we're going to get $55 million added cash flow while we decide whether we love this company, we want to maintain our investment. Whether -- who knows what we do with this investment, but the fact of the matter is we are getting paid while we help make it a better company, which we are doing today. And I think about what it takes to build $55 million of additional cash flow, and I think it is a good trade. But, you know, look, the proof will be in the pudding. We will see.

Okay. Another question on Klepierre. Is it -- since the election of Hollande, there had been a raft of tax changes, including increases in the dividend tax. Have any of these prompted you to recalculate your pro forma after-tax returns?

No, no. None of those at this point will have an impact on us.

Okay, great. Thanks guys.

Paul Morgan, Morgan Stanley.

On the sales growth trends that have been continuing to impress, maybe you could answer a little bit of the composition of it. Clearly they're above what a lot of retailers are reporting on a portfolio-wide basis. So how much of the increase is a same tenant basis versus shift in the mix within the Mall? And then maybe on a trend basis how is the tourist spending side of your portfolio going?

Let me unpack that a little bit. One, the tourist aspects of the portfolios are still very strong. We're still seeing a lot of activity from a number of the tourism groups. About the only one that has softened at all is Japan. So that is still a major contributor and we are out-weighted in tourist markets.

Secondly, when you think about the contributions of any one tenant, our sales space is over 60 million square feet, so when you get a number out of us it is a broad-based trend. It is not going to be materially influenced by the outperformance of any one or any collection of tenants.

Thirdly, I believe this reflects the fact that we are doing a good job making our properties better, and hopefully taking market share from other properties operating in our markets. And that comes from adding better tenants, adding additional anchors, adding renovations, and making our physical plants better. And all of those things are feeding into what you're seeing is our bottom line sales growth.

Paul, this is Steve. I would just add one more comment that if you componentized that growth a bit the rate of sales pace growth that we are seeing in the outlets and the malls is pretty much on top of each other.

And so would you say the non-same tenant number is maybe -- if you're 10% comps year-over-year is it half of that is due to change in mix or more than that?

Let me just say this. Our comp numbers are rolling 12 are right on top of each other.

Top of each other. Right.

Absolutely right top of each other. But that is what you're getting at. The comp sales and the rolling 12 are exactly right on top of each other.

Okay, thanks. And then just on terms of new concepts, there has been good growth from -- a lot of the public chains have gotten into growth mode. I haven't seen as many new concepts, at least relative to the 2004 to 2006 period, and maybe that is what spurred a lot of development that you're not seeing now. But maybe, Rick, are you seeing signs that we are about to see an acceleration of new concepts?

Well, there is a couple of things that are happening. One, a number of retailers that were new concepts say X years ago are now public, and they're substantially accelerating their growth because they have a very firm capital plan -- Francesca, Teavana, Tumi, Five Below, Fresh Market.

We also are seeing a number of concepts that were again relatively new a while ago that are being aggressively grown by their companies -- Crazy 8, PS Viera.

But we are also seeing a number of new concepts -- Verrazano, [Vycato], Dry Goods by Von Maur, Vince by Kellwood, C. Wonder, Hearts on Fire, Tesla. Hot Topic is doing Blackheart.

We get it; we get it; we get it; we get it.

So I'm going to wear you out. But there is a lot of stuff that is going on in that sector still.

Paul, we all cringe because this gives Rick the opportunity to list all these tenants.

I have to give him that chance this quarter.

I will tell you later.

Steve Sakwa, ISI Group.

Hey, David, I was just wondering if you could maybe talk a little bit more about some of the synergies and maybe best practices that both Klepierre and Simon are sharing with each other? And I realize it is still an early days, but are there any success stories or things that you could talk about that show how things are transforming across both companies?

Well, look, the fact is we have been very focused on the balance sheet. As you know, they have raised a lot of money at the bond market, at much lower spreads than where they were beforehand. So that is a very tangible, very important credible and important thing that we brought to the table.

I am not sure that absent our investments that they would have been able to do it. We have also reduced the reliance on their funding from BNP. I mean those are real tangible -- in the bowels of the organization making happen.

Operationally we are helping them think about all of the promotional other income opportunities and that is going to take time. But we are now talking to certain sponsors on a global basis. We have helped them with a few tenants in a few areas on a global basis. Their head of leasing was in our -- at our shopping center convention, ICSC. We had a number of global meetings with him and our people, with the global brands, including H&M, Apple, just to name a few -- Hollister. So it is happening.

That stuff is going to take time. But the bond business is tangible, it is there, it has happened. And that has only been in four months. Now strategically you will see changes with this company map over a period of time. And the management team there has been very, very good, very cooperative, very interested in replicating what we have and listening to what we have to say.

So it is working. It is a lot of work. We spent -- I spent last week there touring assets with him, going through strategy, going through numbers. Going through a development is actually a scary thing. Helping design some of the extensions, it is scary because I was helping them and that is -- but there are certain things I have learned over the years too.

So it is happening. It is going to take time. There are a lot that we are providing. There is more that we will provide over period time. We are also respectful. We have been there four months. We try not to be Attila the Hun. We want to be -- we want to learn as much as we can.

But the cooperation, the synergies are available, they are there. The chemistry between their managers and ours have been great. The only negative is that every morning I have to hear about Europe every day.

Harris reminded me of some of the ups and downs that go with the territory in trying to create value. We are big boys. We know nothing is easy, but I look at it, I'm getting paid to make this company better. And I have got a Board, a management team that wants to get better. And we have got people here that can help make them better. And it is happening, and you can see it in the bond yields right away.

Okay, thanks. I guess second question, last quarter we talked a little bit about the St. Louis project and where you and the other project from Taubman were. Now these guys have started construction and had your groundbreaking, I'm just wondering maybe being first out of the ground has leasing dynamic changed at all? And can you provide us with maybe an update on where you are leasing on that project?

Well, we announced a whole host of tenants on July 11. We have added a few more to that mix. I mean, look, Taubman is a formidable competitor. I am sure they will announce certain tenants as well. We anticipate that they're going to build their project; we are going to build ours.

Our numbers -- we are comfortable with our investment. This is not driven by ego by any stretch of the imagination. We expect to get our lease. We expect to have double-digit returns. Taubman is a very formidable competitor. I am sure they will feel the same way about what they're doing. And it is most likely that we're going to have two outlet centers there. But I think -- as I said, we are comfortable. We have got a lot of experience in the outlet business. I have been at it since 1998.

We were -- people scratched their head when we did our first joint venture with Chelsea. People scratched their head when we bought it in 2004. I've got confidence in our team. We expect to build a very high-yielding outlet center and we're moving forward with it.

Okay. And then just a last question on the international outlet, I see -- I think if I did my math right -- that Japan sales were up 5% to 6%. And I'm just wondering how do you look at Japan in terms of potentially new outlets? And maybe talk a little bit about just how Korea is performing, and also the new project in Malaysia and any update on the China project.

Sure. Generally, Asia is very strong. There is supply -- even with all -- it gets down to almost Europe to some extent. Even with all the macro headlines in Japan, there are still doing roughly $1,000 a foot. And then there are just not that many and there are just not going to be that many.

We have got our ninth that will open next spring. It is in a great location. We have a terrific partner in Mitsubishi Estate. So I don't think that 9 is going to go to 18. There might be a one or two or three more to do in the next few years. We are also, as you know there, we phase a lot of stuff in, so we will do three, four or five phases there.

Japan, so even with all the headwinds and everything else, we have got a wonderful niche there. And we will continue to exploit it and increase the cash flow there. Korea is the same thing. There are one or two formidable competitors. But our outlets there are probably, what, $700 a foot -- $800.

$700, $800. Yes.

$800 a foot. The brands that we deliver are great. We have a very good partner there as well. So it is fine. And Malaysia is exactly what we thought it would be. It is really trying to get access to the Singaporean market. We have a great partner there. They're doing stuff worldwide, which we are talking to them about some other opportunities. And it is meeting our expectations there, so far so good.

China is a little bit not as far along as we would like it. It is still a very complex place to do business. We are still hopeful that we will get one started there. But it is more complex and we are being more cautious, given the -- if you think there is a robust pipeline in the outlet business here, we happen to think that pipeline has been around for years and years and not much will get -- not much of it will get built. The pipeline there expands daily.

So we are trying to really underwrite it smartly and make sure this is something that we want to do. We do have a good partner in Shanghai. But we are going to be very, very judicious in how we ultimately build something there.

Okay, thank you.

Jim Sullivan, Cowen and Company.

David, I appreciate all the commentary on Klepierre. I have one other question. As I recall, their 2011 asset sales were completed at about a 5% premium to appraised NAV. And I believe at the beginning of this year they talked about planning EUR1 billion of additional sales for this year and next. I wonder if you could tell us, number one, if that disposition plan is still in place, and what the pricing expectations are relative to NAV?

Well, look, they're going to announce probably shortly here. But generally I will say this, and I want to be very careful. All -- everything -- they're ahead of schedule. And NAV by and large has not been an issue in terms of being able to sell the assets at or above their NAV.

But I -- you will see the results. I don't want to -- I just want to be very careful here, because they do report -- or they may have already reported. I think they go out at six o'clock Central European Time. But so far so good. And it is still on plan, perhaps ahead of schedule, and it is moving right along.

Okay, second question on Woodbury, which you mentioned earlier and you mentioned also on the last call, in terms of the expansion potential there. Can you indicate whether the plan is to add square footage on land you already own or on land you otherwise control?

It is land that we own. So it is really reconfiguring a number of spaces, decking some of the parking, and creating additional space on the land that we own.

It is about a 60,000 square feet addition, primarily reconfiguring the addition -- the existing format and just substantially upgrading the whole physical plant.

Okay, and then separately on Amazon, David, you touched on this in, again, you're prepared comments. But as they prepare to pay sales taxes in several large states this quarter, and open more infill DCs, have they had any discussions with you about opening outlet or full-priced stores?

Not with us.

Okay. And then final question, just a line item in other income maybe for Steve. The interest and dividend income was down materially on a consecutive quarter basis. I wonder if you could tell us what is going on with that line item?

A couple of things, Jim. Number one, the dividend from our UK investments, CSC, was a second-quarter event last year, third quarter this year, just the timing of their payment of that dividend. And then we had some investments in some loans that were in fact paid off earlier this year, so interest income is down.

We were bummed out about that.

(laughter). So on a full-year basis so the loans that were paid off it sounds like they are variable on a year-over-year basis.

Yes, on a year-over-year basis that is correct.

And the other point is we did, as you know, we did have the mezz loan with Mills, and obviously that got paid off and retired as part of that whole transaction, so you're seeing that as well, Jim.

Okay, great. Thank you.

Quentin Velleley, Citi.

Just another Klepierre question. David, your involvement in forming the strategic direction for the company, does that involve acquisitions at this stage or is Klepierre somewhat held back by leverage and cost of capital at this stage?

You know, I don't think that they are. I don't know that it should be their number one focus. And we actually did discuss at the recent meetings a couple of opportunities that are out there. But I don't think -- I don't think it should be their number one focus.

But I don't think it is too far off in the future that it could be up there. And we do think there is going to be a number of opportunistic deals. And again, it doesn't mean Klepierre. It could be Simon; it could be all sorts of things. But there are going to be a handful of those things to do. And I think it should be on their agenda but probably not at the top of the list.

Okay, and then just in terms of Brazil, could you give us an update on discussions with retailers regarding the Brazil outlet industry? And in particular I'm interested in some of what the domestic Brazilian retailers thoughts are on the outlet industry and the outlet channel given, I guess, the infancy of that industry down there.

We had a -- I'm going to say 30 days ago kind of a presentation to a number Brazilian plus international retailers about our outlet pipeline with BR Malls. It was very, very well attended. The international retailers are growing there daily. And certainly the high-end guys that we think are important are bringing into -- you know, the outlet properties are gaining entrants into Brazil on a weekly basis, so to speak. Like Tory Burch just opened a store at a new high-end mall in Sao Paulo.

So very, very well attended. The Brazilian retailers are very excited about the pipeline, and we expect them to populate these outlets aggressively. So it is very, very encouraging what is going on down there.

Thank you.

Rich Moore, RBC Capital Markets.

This is Wes Golladay. A quick question on the outlets. We have heard the number 100 outlets in 10 years. Do you think there is actually more capacity than that for development in the United States?

No, and I wouldn't put much credence in our opinion. Look, we could be wrong, but certainly we don't think there is 10 outlets -- or 100 outlets in 10 years. Not a chance, we don't see it that way.

Okay, well, I guess, maybe how would you view it, your total opportunity for development?

Look, I think there will be a handful, but I don't see 100 outlets in 10 years, not a chance.

Okay, and turning to the malls. What are you guys seeing in terms of traffic trends for the last quarter?

Traffic has been relatively flat to up a little in all the platforms.

Okay, thanks a lot guys.

Christy McElroy, UBS.

Sorry for all the outlet questions, I just have a follow-up. Given the pipeline in the US with competing projects and quite a few private developers in the fray, I am wondering how influential the core group of outlet retailers are in a center actually getting built?

And while demand for space is obviously very strong today, how are the deciding factors for retailers signing a lease in a new project different compared to what they were 5 to 7 years ago?

Well, look, we are living this every day. I would say to you it is still quite a challenge to convince outlet retailers, whether they're manufacturers or full-priced retailers -- at least this is our experience and we have a pretty good portfolio, pretty big one -- I think it is still quite a challenge to convince them to go to new centers.

That is why this -- all of this talk about this unbelievable demand and all of this -- these hundred centers and this, that and the other, I got to tell you, we work our tails off to convince retailers that this is worthy of an outlet center. So I don't think it is by any stretch of the imagination simple and easy to do.

When we do it we have confidence we will do it, but it is not like you can plop these anywhere by anybody and it will be successful. It is just not going to happen. And I think the retailers that have a high understanding of this business, whether they're manufacturers or full-priced retailers, understand that and will also govern their open to buy very seriously.

The only thing I would add is I think we would hope that the retailers have a high regard for the consistency of what we produce. David and I were just up in New Hampshire and visited Merrimack. That is an incredibly well-executed, well-leased, well-marketed project. And hopefully we have that going for us when we approach retailers about our new projects. They have confidence that we will -- they know what we will deliver and know that it will produce.

Okay, and then on your property operating expenses they seem to have run a little bit lower than normal again this quarter. I know in Q1 there were some favorable comps, given weather and such. I'm wondering if there was anything specific in Q2 that you could point to, any trends that favorably impacted OpEx this quarter? And is there a way for you to break out your same-store and NOI between revenue growth and expense growth?

Well, there is a way to do it, but we don't. I assume we know what drives our business. Look, where size and scale -- you know, when we talked about this company 15 years ago, or 17 years ago, or 18 years ago, we thought size and scale mattered for a couple of different points -- retail relationships, ability to run efficiently, ability to cover our overhead at the executive level over a huge asset base more efficiently than our peer groups. That is what it takes to generate comp NOI growth and that is what we do.

Nothing jumps out as we are reviewing it right now that is worthy of mention, but we are very focused on our operating margins. And our size and scale and quality of assets allow us to do that.

Alright, thanks guys.

Tayo Okusanya, Jefferies.

Just a quick question in regards to any early indications about what back-to-school may look like this year?

It is really too early to say at this point.

Got it, okay. And then, David, any other markets -- I mean, you guys have your fingers in many key markets, but any other markets internationally that you might be interested in?

Let's see. Not -- look, we have a big investment in Klepierre, and I think internationally that is the big focus. We have got to make sure that turns out to be a profitable investment. We are -- that is the number one priority.

The outlet business in Asia continues to progress. I explained that in detail to you, but that is really the focus. I mean, Brazil, Latin America, I do think will present more and more opportunities, not just Brazil but all of South America, for the company. And so I think you'll see us hopefully do some smart things down there over time.

And Steve is whispering to me, but you can certainly jump in there. But we do have -- we are building in Canada -- Toronto. I mean, Toronto, there was a lot of talk about it. There is not a lot of talk about it now. We are under construction. We are going to have a great outlet there. We've got a great partner. We are looking at another deal in Canada, but hopefully that will be a market that will possess -- present a few more opportunities for us.

Got it. And just a last question in regards to the supplemental line of credit, the additional $2 billion, should we be reading something into that in regards to you guys are seeing something out there that you need that additional source of capital for?

I would just say it is consistent with our philosophy to be as prudent and opportunistic as we possibly can be. You are always trying to balance prudence against opportunity; they tend to conflict each other.

When you should be prudent there are a lot of opportunities, and we try -- so you try to get that right balance. And the world -- let's face it, the world is going to continue to be uncertain for, I think a few years to come, if not -- that is just the world we live in. So there is no reason not to be -- not to have the ability to be both prudent and opportunistic, and then based on how we read the tea leaves figure out where the primary -- who wins, prudence or opportunity.

Got it. Thank you very much.

John Kim, CLSA.

I had a question on the Main Street Fairness Act. Do you view this initiative as ultimately a revenue booster for your centers or is this more of a defense mechanism?

Look, I think it is -- it helps -- I think it is going to help our merchants. Anything that helps our merchants ultimately helps us. And look, Congress should not -- look, this is a states' rights issue. I think most people in this country believe in state rights. So that is one aspect of it.

But, also, the government and Congress should not be picking -- creating winners and losers. And this certainly has helped fuel the online against the bricks and mortar. It is certainly -- we are not -- all of this is going to mean X million of revenues. But if it helps our merchants, it is bound to trickle down to us in some way, shape or form.

So for the states that have already begun collecting tax on the Internet companies you haven't really seen a noticeable difference in sales?

It is so early in that effort that I would -- certainly we haven't seen anything, but it is just beginning.

Okay. On Klepierre I don't see the second-quarter numbers out yet, but on the first-quarter retail sales in Spain were down 6%, Italy was down 2%. What is the bull case for the company to potentially turn these markets around?

Well, look, I think the bull case is that it is supply and demand will be in their favor once demand picks up, because you cannot expand. It is very hard to get the right to build there.

And the other point is they have got a great portfolio in Northern Europe, which is somewhat insulated from what is going on in the Scandinavian area, somewhat insulated from what is going on in Continental Europe.

I think operationally there are things that we can do to help the company increase its cash flow. And an operational focus from the company we think will increase cash flow. So I think that is the bull case.

The negative is, look, it is going to -- they're going to have to weather a tough environment. The one country there that continues to be difficult for them is Spain. And again it is not all Spain it is certain assets in Spain. And we will weather that storm, and I think it is being stabilized. We will get back to being able to generate cash flow growth from those assets.

Sure. And maybe just to follow-up to David Harris question. If the euro continues to decline, how would that impact your decision to potentially acquire the remaining part of the company?

We really -- at this point we are pleased with our investment and that is the focus. I can't really speculate on that going forward.

Great, okay, thank you.

It certainly makes it cheaper, right?

Yes, well that is the potential outcome.

Sure.

Thanks.

Nathan Isbee, Stifel Nicolaus.

Just going back to the same-store growth, I assume a good portion of that is coming from the 3.7% average base rent growth. Can you give us some detail on where the 3.7% growth is coming from, especially given your spreads are right around 10%?

We are basically in a position of, one, increasing occupancy. Two, we are adding a considerable number of anchors that are generating revenue. But too it is just releasing our space at higher rents. And when you look at our expiring rents and look at what our average rent is we have got a nice spread in there. And as our product gets better we are able to take advantage of that and generate the higher rental revenues.

But the 3.7% is in your small shop, correct?

Correct.

And the 10% spreads, like I assume about across maybe 10% to 13%.

This is Steve. I think -- we have had this discussion before on calls. But one of the things, we calculate our spread in the most conservative way possible, which is what is the ending cash rent that a tenant was paying compared to the beginning cash rent that the new tenant or the same tenant on the new lease is paying. And that is a much more conservative approach than the GAAP method of which you are preparing financials, which would include the straightlining about the old lease and the new lease. So that is going to have some impact on it.

Yes, I understand. Even on a cash basis, the delta between let's take 1.3% to 1.5%, let's say from your spreads to 3.7% across a very large portfolio is still pretty wide.

Well, you have overage -- you have got lots of things that you're --.

You are taking overage rent and you are capturing it in the new base rent.

You have got a lot of things going on.

Okay. And then one final question, a follow-up on St. Louis. Can you give us some insight on how the tenants are viewing the two projects? Are there any tenants that you're aware of it have said no to you because they were going next-door?

Yes. Yes, there are a handful of tenants that said no to us, absolutely.

And are there any tenants that have signed in both?

There are some that have expressed that they are prepared to do both.

Okay, so is it safe to say you are not putting in normal radius restrictions, or you're not having the success putting them in?

I think it is a tenant by tenant discussion. I don't think there is any -- it as a tenant by tenant -- we are going to tend to get that for the people that commit just last to us, like we do for every other outlet center.

Just then the other thing to say is we have announced, as David said, we are now 62% leased and committed. So that is certainly consistent with the kind of leasing progress we have had on all of our new projects.

Okay, thanks.

Ki Bin Kim, Macquarie.

Thanks, guys, just a couple of quick follow-ups. First on leasing, could you comment on -- I know you said you were releasing spreads that you quote are on a cash basis. What would that look like on a straightline basis for that 10% number?

We don't calculate it on a straight line basis. As David has said I think gazillions of times on these calls, the laser focus is cash flow, and so that is the way we look at the spread.

It would be higher though.

It would be higher.

That is all I was trying to get at.

We are still getting steps in all of our leases.

And if it is possible, could you comment on what is the average vintage of the leases that have been expiring this year? Are they like seven years old?

And the second part of that question is if you could calculate what would -- on a like-for-like basis the sales per square foot be back then versus today?

I want to caution you on two things. One, and Steve has touched it on earlier, when we roll over we have done a very good job over the years getting much more focused on our breakpoints and our overage rents. So when you look at the relationship between the spreads and our comp NOI growth, there is a comp NOI being generated from sources other than just our spreads.

And David just said, we also build in all of our bumps over the course of the leases. So the ending rent has already been impacted by our ability to raise the base rent over the existing term.

But if you look at 2004, 2005 sales per square foot, they were in the 400s.

Yes.

And we are rolling leases over. Our expiration are not in front of me, but it is the mid to high 30s. That is -- so now we are at 550 and we are getting --

Yes, 50.

In the 50s. So that gives you a sense of what has happened on that. I think that is what you asked.

Yes, yes. So if I can clarify that. So you're saying roughly on a like-for-like basis you don't (multiple speakers)?

In other words we were -- if you look at the leases we did six, seven years ago, are rolling off today. These are rough, rough numbers, but they were $38 -- $37, $38. That probably was just under 9% -- probably under 10%, probably 9% of sales. And if you look at where we are today we are 550, and we are probably -- that relationship is probably still pretty the same. But therein lies the spread differential, if that is what you're thinking about.

Yes, yes. Thank you. And just a last quick question. In respect to your comps, 1.5%, 1.4% treasury rates. And maybe risk premiums offsetting some of that decline, how has that impacted the mall pricing and have you seen any additional activity on that front?

Well, look, I think -- and I think this applies, which is great, this is what PIMCO -- this is what Bill Gross said. The fact of the matter is unless the real estate is going out of business, okay, the fact is people are going to need cash flow growth, right? And that is what -- that is the world that we live in. In a slow environment rates are going to stay low, cash flow is going to be stable.

If we have proved anything to you over the years, it is that this real estate is relative -- it doesn't mean certain things don't turn against us, and they have, okay. We have had centers that we lost to -- for whatever reason. But these things are sticky. Cash flow is stable. And yield is there, and you are seeing it by opportunistic investors.

You are seeing it -- I mean, in Europe you're seeing it. The stuff that Klepierre selling is to yield-hungry investors. Why would they want to buy the German Bund, when they can get a 6% yield on a -- a 5.5%, 6% yield on a stable asset? I think that is great for us to be in -- not just us but all real estate companies. And that is a very attractive feature -- one of the reasons why we are increasing our dividend.

But, I guess, maybe do you expect any kind of reignition of the transaction market for B malls in the second half, and maybe specific to you too?

Look, with those -- with the outlook the way it is, the answer is yes. And it is happening slowly. You are starting to see the market pickup.

Okay, thank you very much.

Quentin Velleley, Citi.

It is Michael Bilerman. David, I just wanted to come back to the unit purchase from jcpenney. And I think most would agree with your comment that units, think of them as 1 for 1 common stock equivalents. So being able to buy something back and create $60 million of shareholder value is impressive given the fact that there is still another 61 million units outstanding.

So was there something particular about this OP agreement with jcpenney that -- whether it was restrictions or something that would have caused the value of that state to be 20% less than what the market is? (multiple speakers).

No, there is only one operating partnership and all the unitholders are treated the same. These are preferred units, but we are getting rid of that soon. But all of the unitholders -- there is no separate different agreements. They're all the same.

Right, so then going back to the question of getting a 20% discount, was there a time lapse effectively if they came to you and said -- okay, I'm going to exercise -- I'm going to put my notice in to redeem my units. And now you have the option of delivering them stock or cash, was there a time that they saved on that?

The time actually is very quick, but put that aside. We actually didn't get notice technically, but there was a discussion about the -- relatively simple here. You know, they -- if they give us -- they did not give us notice. If they give us notice they get the stock and then they can market it. We actually -- Shelly, correct me -- but they actually have to register the stock, I think, right?

(inaudible).

So it is freely tradable. We register it, boom, done. It was in the discussion that obviously, you know, it turned to cash. And we part -- believe it or not, we part with our cash -- you know, we're very tough. Whatever we write a check out of this building, we are very focused on parting with our cash. We like cash and that is what happened.

But if they were to take stock, how quickly could they have monetized that stock to see (multiple speakers)?

2 million shares, I assume, it is pretty quick.

You got closed.

So why would someone leave $55 million on the table? I mean, it is not like small potatoes, right?

Well, look, I'm not going to get into that. Let's move on, Michael.

Okay. Is there other opportunities that you have with -- you still have 61 million units. I recognize a lot of them are family -- there is a bunch of family units in there. But is there other opportunities where you can buy back stock at such an accretive discount?

You know, look, there is nothing that I can really add to that other than what I've already said.

Okay. And then just curious what the Board's course of action has been since the proxy and the shareholder vote?

Well, look, it is -- the Board obviously has taken the vote to heart. They are very focused in talking to shareholders about it. The good news -- look, the fact of the matter is we are putting this -- our focus, our number one focus -- and that is me, Rick, Steve, the other members of our team -- is on the business.

And, obviously, our performance over this year and last year, for as long as we have all been together it is pretty good and it speaks for itself. And we have all the confidence in the world that we will continue to deliver very good performance to our shareholders. There's no guarantees, but that is the focus.

The vote -- given our performance was extremely disappointing. And we didn't understand the vote. And there is enough precedence out there to suggest it was -- we just didn't understand the vote. But we will be talking to our shareholders about it, trying to understand the way they voted it. And I will say that we have had some discussions. It is not -- there is not a clear consensus as to why we voted -- they voted against it. We have had a number of shareholders that were supportive of it. But the board will take it job very seriously.

We welcome any shareholder comments. They will -- we have had discussions with shareholders. We expect to have more, and we will take it from there. But the number one focus, obviously, even though we are disappointed because we have been such stewards of capital and performance continues to be how do we make this company better, and we do it every day. But we have had discussions and we will continue to have more discussions with shareholders.

Okay, and then just lastly, and hopefully this is okay on jcpenney, but should we expect any other announcements between you and jcpenney in regards to maybe buying anchor boxes or other sort of ventures with them in the future?

No, this thing was just really focused on the transaction that we did. We will talk to them like we talk to all of our retail partners, but nothing -- I wouldn't expect anything out of the normal course of business.

Okay, thank you.

Mike Mueller, JPMorgan.

Most have been answered, but just one question. David, in the past you cut up the US portfolio based on sales just to show how concentrated it was. You know, X percent of our NOI comes from over 800, over 500 a foot in sales. When you look at the Klepierre portfolio, how concentrated is it on that basis?

You know, it is really not up for me to do that. But I'm sure they will come the question. I will say this, they do a very sophisticated analysis of their portfolio -- buys, hold, redevelopment. But it is really not up for me to do it. But I do think the quality is there. The opportunities for enhancing the operations are there. But it is really not up for me to do that. I will tell you though they're very sophisticated in how they slice and dice the portfolio and what they want to do with the assets.

Okay, that was it, thanks.

Thank you for your questions. Sir, you have no further questions at this time. I would like to turn the call over to Mr. David Simon.

Thank you. Thanks for your questions and we look forward to answering anything else you might need over the next few days. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a very good day.