西蒙地產 (SPG) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Simon Property Group earnings conference call. My name is Allison 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 now like to turn the call over to Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed, ma'am.

Thank you. Good morning, everyone, and welcome to Simon Property Group's second-quarter 2013 earnings conference call. I'm Liz Zale, Senior Vice President of Corporate Affairs. Joining me on today's call is David Simon, our Chairman and Chief Executive Officer; Rick Sokolov, our President and Chief Operating Officer; and Steve Sterrett, our Chief Financial Officer.

Before we begin I would like to remind everyone that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer investors to today's earnings press release and our SEC filings for a detailed discussion of forward-looking statements.

Please note that this call does include information that may be accurate only as of today's date, July 29, 2013. And reconciliations of our non-GAAP financial measures to the most directly comparable GAAP measures are included within the earnings release or the Company's supplemental information, including this morning's Form 8-K filing. The supplemental document is available on Simon.com in the Investors section.

With that, I would like to now introduce David Simon.

Good morning. It was another productive quarter. FFO was $2.11 per share, up 11.6% from the second quarter of '12. Our FFO exceeded the First Call consensus by $0.04.

For Malls and Outlets, comparable property NOI growth was 5.9%, driven by occupancy up 90 basis points to 95.1%; a growth in re-leasing spread to $7.49 per square foot or 14.1%; base minimum rent per square foot 3.6% higher than the year-ago period; and our tenant sales were up 4.2% to $577 per square foot.

Now, let me turn to just some deal activity. On May 30, we acquired a 390,000 square foot outlet center in Portland, Oregon for $147 million. This is a very productive center with sales in excess of $600 per square foot. It is 99% leased, has a great tenant lineup, and fits terrific with our Outlet portfolio.

It has been rebranded Woodburn Premium Outlets. And as you would expect, it is immediately accretive to FFO.

On June 3, we announced our JV with McArthurGlen to invest in certain of their designer outlets and become a partner in their property management development companies. They have a terrific and one of the best-performing portfolios of high-quality retail real estate in Europe and a good, strong team of professionals.

The transaction supports and extends our International Premium Outlet strategy. We completed the initial phase of this transaction and are now 50-50 partners in the management and development companies. We also will become a partner in their new designer outlet project in Vancouver and are working to close our investment in several of their existing centers.

On May 7, we sold Laguna Hills Mall for $110 million.

Now let me turn to new development. Phoenix and Shisui opened in April, both 100% leased, both strong openings, and we are pleased with the performance.

This third quarter we have three new Premium Outlet Centers that will open. Toronto, this week, August 1, you are all welcome. St. Louis, which is 100% leased on August 22; you are all welcome. Busan, Korea, may be a little bit out of your way, but it is 99% leased and opens on August 29.

Construction started during the second quarter at our Premium Outlets Montreal, which is our second Premium Outlet Center in Canada. Vancouver will be our third.

And let me just turn to redevelopment activity. A lot going on; I won't go through everything, but some highlights. In April we completed the redevelopment of an existing Limited building at Dadeland Mall. It is great; go look at it.

The redevelopment of Walt Whitman opens this September with the addition of retailers and restaurants on the exterior of the building. The Shops at Nanuet in suburban New York City opens in October. At this project we actually demolished the existing mall and created a new open air center.

The redevelopment of Lenox Square continues, as does the transformation of Del Amo Fashion Center among several other centers that are all listed in the 8-K.

On the Premium Outlet front, we completed expansions at Paju in Seattle during the second quarter. Expansions are underway at Orlando Premium Outlets in Vineland and Jahor, Malaysia. Both of these projects will open in the fourth quarter.

The significant expansion of Desert Hills continues, will open in April of next year. And finally on that front, we started this quarter the $170 million redevelopment expansion of Woodbury Commons in New York.

The Mills, Sawgrass Mills, we opened the expansion and the Colonnade Outlets during the second quarter, as well as the redevelopment of the former Wannadoo space. Macy's opened at Gurnee Mills last week.

In addition we have significant box activity throughout The Mills and Mall portfolio, with numerous stores under construction. Our pipeline of new development and redevelopment projects is significant and growing. Stuff is coming online.

We are also under constructions with several projects. We expect this to continue at least $1 billion annually through 2016. And I will remind you that we are funding this primarily with $1 billion of our free annual cash flow generated by the Company.

Just quickly on financing, we are pleased with the Standard & Poor's upgrade in May, with -- our corporate credit rating and senior unsecured debt ratings were increased to A level. We believe this reflects our conservative balance sheet strategy, the quality of our portfolio, and the ongoing focus of being a good steward of capital.

We continue to be active in the debt markets. So far year-to-date we did 17 new loans, approximately $2.4 billion, of which our share is $1.7 billion. The average interest rate on the loans is 2.9% and the average term is 8.1 years.

Klepierre reported solid first-half results. I won't go through them in detail. They are available.

Shopping center gross rents, which represent 94.4% of total rents, were up 4.1% or 2.5% on a like-for-like basis. They increased their 2013 guidance for net current cash flow per share. And they continue to upgrade the portfolio through development, redevelopment, as well as the disposition of non-core assets.

Today, we increased the top and the bottom of our 2013 FFO guidance once again to a new range of $8.60 to $8.70 of FFO per share. This is an increase of $0.20 from our initial guidance, or over $70 million.

And as always we are extremely focused on the successful execution of our plan for '13, from the effective leasing and management of our high-quality existing portfolio, to the successful delivery of our new and redevelopment pipeline, and the achievement of the returns that we have outlined. We are now ready for any questions.

(Operator Instructions) Craig Schmidt of New York.

Thanks for not reporting on Wednesday afternoon. I look at the supplemental, and it says the openings projected for 2015 and it lists Del Amo and Roosevelt Field but it doesn't list Copley Place and Houston Galleria.

Is this just because those projects are starting later? Or is there a change in plan for those assets?

No change at all. We are -- actually, once they are formally approved within our internal process, they go on the schedule. Copley we're actually going through just a little bit more permitting approvals, which we expect to have by the end of the year. And then the Galleria we have an announcement coming shortly; stay tuned. We approve it internally.

They will both be on our list. No real change of plans on either one.

Okay. I also noticed in the anchor section you are adding a Wegmans to the Montgomery Mall. May you be adding supermarkets to other centers? And was there any change that you made in terms of parking or access to make Wegmans work with the rest of the mall?

Hi, Craig. It's Rick. The Wegmans is being built on the site of a former Boscov which we demolished, and the land was suitable to be able to have all their parking accommodated. We are putting several outside uses in Montgomery just to be accommodant to that.

So we will have we are having some uses we think will work well with the supermarket. And we are also adding a Fairway market at Nanuet. So these types of high-profile, high-volume users are, we think, very additive to the properties.

Craig, I remember you used to ask about Nanuet all the time, so now --

It's happening.

It's opening in October, and we are basically virtually leased. Not everybody will open by this year; but by spring of next year all 100% will be opened.

I was actually by that site a couple weeks ago. It looks like it is pretty transformative.

Yes, it should be. We are excited about it.

One last thing. Are you able to give a cap rate on the Laguna Hills Mall that you sold in May?

Well, I will let you do the math. The NOI, if I remember correctly, was around 6.5 or something in that range, $6.5 million.

Great. Thanks a lot.

Quentin Velleley, Citigroup.

Hey, good morning. Just on the McArthurGlen acquisition, can you just talk broadly about the opportunity in Europe with outlets and how involved Simon's senior management will be with the management and growth of that business?

Well, I think there is a significant opportunity both within their existing portfolio and the ability to add extensions to them, as well as continue to upgrade the tenant offerings and add to the footfall of those centers through tourism efforts and the like. In addition, McArthurGlen does have a significant pipeline of additional opportunities in terms of new development.

So when you couple those, as well as we do think there will be acquisition opportunities within their portfolio and others, we think it is going to end up being a significant platform for our growth over the next several years. It is a complicated deal not only because it is in Europe and you are in different countries, but also the ownership of the assets are owned not by just one individual but by various partners and funds.

I think over time, as we solidify the platform, bring our expertise to the table along with their assets and their people, it should be a very, very good deal for us. So, we are excited about it.

The sales productivity of these centers is very high, and there is not a lot of them. They are very well accepted, and there is not that many players in Europe that do it at such a high level. So, we think ultimately it is going to be a good transaction for us.

I think you still own a stake in Value Retail, the other outlet developer and owner in Europe. Are you now a seller of that stake?

Do you have an offer for me?

I don't have the money.

Okay. No, we are happy with that stake; but, you know, we are always interested in whatever we can do to benefit our shareholders.

But that investment has been good for us. We anticipate continuing in it.

As you might know, that was kind of an investment that the former Chelsea made. We have added to it over the years. We have got a significant embedded gain compared to our book value of it, and they do a very good job in terms of operating their centers as well.

So we think we are a long-term owner of it, but I never rule anything out.

Okay. Then just lastly, there has been a lot of media speculation on the Colonial investment management platform in Australia. I know you guys are constantly looking at global opportunities. Is the Australian mall industry one that interests you?

Well, maybe. Haven't ruled it out. But, you know, we will look at anything.

Westhill does such a good job we have always been a little bit reluctant to enter that market. On the other hand, it is an interesting market. It is very stable; we like the people there; and the mall there do very well.

So I wouldn't rule anything out. Just like we monitored Brazil for years, haven't found the right transaction, we wouldn't rule any one particular place out.

The one place we continue to be the most concerned about as we look internationally is China, just because it is a tough place to figure out who is on first. Australia to some extent has a lot of benefits that it is a very transparent market.

Thank you.

Christy McElroy, UBS.

Hi, good morning, guys. Just a quick follow-up on McArthurGlen. With regard to the property management development partnership, will there be any immediate impact to cash flows, just thinking about any fees? Or is that further down the road?

Well, it is a profitable management company, so our investment will have a return associated with it. Now, that will just end up flowing through our JV line, so it is not going to be in our management company. So it will be hard for you to see.

But they are profitable, and we expect to have a pretty good return on our investment in the management company.

What was the investment?

Well, it is really separated into two pieces. But both for the management and the development it was GBP25 million.

Okay. Are you able to disclose the Q2 '13 only year-over-year change in sales?

Say it again?

Just the quarter change in sales. So if I were just to isolate the second-quarter sales and look at it on a year-over-year basis.

We don't do that, but it was up about 1%.

Okay. Then just lastly, regarding some of the new in-store customer tracking technology that some retailers are using today, are you having to do any upgrades to the technological infrastructure of your malls, such as increasing bandwidth or other changes?

And are you using any new technologies to collect any of your own data on customers or analyze shopper traffic patterns?

Well, look, that whole area we are treading very, very carefully, because it is lots of privacy concerns. So we have not -- we have looked at it all, but the fact of the matter is until the folks in Washington feel good about it, we are watching it and we are not really playing in any of that stuff. Because we really don't know what kind of privacy violations it may generate.

So I would tell you that we are treading very, very carefully and have done nothing along the lines that would be able to track anything like that. Period, end of story.

Now with respect to -- I think the big effort generally in the mall industry is we are all investing in Wi-Fi networks throughout our malls. We are doing that as well.

We are starting at the bigger ones first, and that's really primarily for the benefit of our consumer. But to the extent that it can help facilitate our retailers, we are happy to participate.

But again, I would tell you on the privacy front we are not doing anything. We are treading very, very carefully.

From a CapEx perspective, what are the per-mall costs associated with adding the Wi-Fi?

It depends. I would say generally it is around $150,000 a mall, but it really depends. Somewhere in that range.

Okay, thank you.

Alexander Goldfarb, Sandler O'Neill.

Hi, good morning. Steve, you have been a little quiet so far, so maybe I will lead off with you.

As far as the A rating, is this a blessing or a bit of a curse? In any way does is limit your ability, whether it is on the redevelopment front on the overseas investment front, does being an A student, does that hinder your guys' flexibility? Or would you rather be A-?

It does not hinder it at all, Alex. In fact, one of the additions that we made to the 8-K this quarter was to give you some look at some credit metrics over a five-year look-back period, and you can see how the metrics had improved. The coverage has gotten better, leverage went down, debt-to-EBITDA went down.

So I think if anything it is just a reflection of the continued strengthening of the balance sheet. And to the extent that we can absolutely borrow at cheaper rates than anyone else in our sector, I think that's absolutely a good thing.

And I will just add, S&P -- they are pretty smart folks. They have seen what we have done historically both in redevelopment and M&A activity, so they have every expectation that that will continue. And they don't necessarily just rate you based upon being a status business; they rate you on what you have done and what they expect for you to do going forward.

Our redevelopment pipeline of $5 billion, thereabouts, as well as our continual activity in finding smart external investments is part of our history of our Company, and they actually like that stuff, because it's obviously increased our return on equity and increased our cash flow and made us a better Company. So that is all factored into how they look at us going forward.

Okay. Then the second question is, going on to the McArthurGlen and Klepierre, the first part is just -- when you were talking, David, earlier about buying out in McArthurGlen, presumably that was buying out some of those individual ownership stakes so that it would be JVs that you would own McArthurGlen assets, with McArthurGlen and Simon as the ownership structure.

Correct.

That's correct.

Okay. Then separate is, it is early on but down the road, do you see synergies between Klepierre and McArthurGlen? Or in your view, these are two totally separate platforms; they'd each have to stand on their own?

Well, I think initially they are definitely two separate platforms and definitely will stand on their own. I mean, they both have very successful operating platforms and they have obviously dedicated management for both, and they are both big businesses.

But I do think with time there certainly could be cooperation between the two. But it is not necessary.

But I would expect the two to cooperate over time and especially in France, where McArthurGlen has at least three in the pipe of new potential developments. Given the history of Klepierre and developing in France, there is no reason why some sort of cooperation wouldn't make sense for both companies, and we will certainly encourage that.

I happen know both guys who run it, so it will make it a little bit easier.

Okay. Listen, thank you.

Cedrik Lachance, Green Street Advisors.

Thank you. David, when I look at some of the recent acquisitions, they always seem to be largely strategic. You think about the big picture; you look at adding Outlets to Europe, where you obviously have the full-priced presence. That has got similarities with what you've done in the US. The approach always seems to be primarily strategic.

Do you also look at plays where you would find more distressed real estate, where you would find big discounts to any of your asset value? Or is this on a back burner and you keep looking for strategic acquisitions?

I can't tell you -- there is nothing more than buying something cheap that excites me and the team here. So, we love to buy things really cheap. And if that can be done on a distressed basis, we like it as long as -- ultimately, we've got to believe in the real estate.

Because we are not -- I wouldn't say we are traders. So at the end of the day we have got to have a long-term view that we like the cash flow that is being generated from the real estate.

But to some extent if you go back to the Klepierre deal -- and look, Europe is still squishy, to put it mildly. That was a -- I wouldn't call it a distressed situation, but it was certainly at a pretty decent discount to NAV and an uncertain future.

Not many people are investing in Europe. When we talk about McArthurGlen, there are not many people that are at this point taking the position that Europe is a good place to invest in. So to some extent both of those transactions are somewhat contrarian.

If we see those as capital ebbs and flows throughout the world, I would hope that we would be able to take advantage of it. So we certainly love to try and do that.

It is not what we do every day. We have got to believe in the real estate, at the end of the day.

But I would tell you that we have done it historically. So we would hope to continue to find those kind of opportunities.

When you look at it currently, are those investment possibilities primarily outside of the US? Or do you see potential distressed here, distressed properties, or even companies that might be at prices that are more interesting in the United States?

I would say, Cedrik, generally those kind of opportunities are outside the US.

Okay. Would you be able to share the cap rate on Woodburn?

You won't believe it, but it was 10.5%, only because we had a long-term option to buy it at 10.5% cap rate. So it is not a reflection of market value. But it just goes -- it is a long history there, but it is a pretty good deal for us.

How did that option -- how was it put together?

It was really by the Outlet guys, with Craig over a number of years' history of that whole relationship. It is not really all that material how it got there, but it's a good deal for us. And importantly, it is a very good center.

Okay, great. Thank you.

Steve Sakwa, ISI Group.

Thanks, good morning, David. I was hoping that you guys could focus a little bit on the core portfolio, since that is the primary driver of, I think, growth here. You guys are now 95% occupied. The business is really hitting on all cylinders. When I look at the re-leasing spreads and look at where ending rents are for next year, they actually are lower in '14 than they are for the balance of this year.

I am just curious. How are you and Rick thinking about the leasing, the discussions with tenants? What are you guys doing differently today given where you are sitting with the portfolio as well leased as it is?

It's Rick. Basically, we are spending a lot of time just focusing on our mix, focusing on getting the right tenants in the right space to maximize the productivity, to maximize the rent that they can pay. And I will tell you that a lot of the calls that David and I receive are tenants worried about whether they are going to be renewed in their spaces as opposed to having to solicit interest in the space. So we are still in a pretty dynamic market.

All of the improvements we are making to this portfolio in the renovations, the redevelopments -- I think over the last four years, we have probably added 200 different anchors to these portfolios. We're just taking market share and making them better.

I think that the thing you can focus on is the fact that our occupancy cost is 11.3%. And as you see with our spreads and you see with the momentum we have, we're going to be able to continue to grow that NOI because all of those reasons.

But, Steve, I would just say, look, the fact is supply and demand is a little bit better. But our philosophy on how we operate the business is not all that different.

We have seen cycles ebb and flow. At the end of the day, what is best for the business, creating the win-win with the retailer, and we have done that. We don't get to where we are today if we hadn't taken that philosophy over the last 50 years. So it is not all that different.

Sure, it is better to be in this kind of environment where supply and demand is in the owner's favor. But that changes, too. So at the end of the day it is all about just trying to create a win-win, which I think the history of our Company suggests we know how to do.

Okay. Maybe a quick question for Steve. On page 22 of the supplemental, you've obviously got a fairly large decline in the Other Income. And even if you strip out some of the things like gain on land sales, the Other was down about $10 million, and it is down about $12 million for the year.

Can you just talk about that? How do we think about that business in the back half of the year and into next year?

Sure, Steve. There are a couple of things that were in Other Income in 2012 that aren't there in 2013. If you remember we talked from time to time on prior calls that we were owners of some mortgages, so there was some income flowing through from that debt. That debt has all been paid off.

Likewise, we were the mezz lender to The Mills. That debt was obviously retired as part of the transaction in 2012.

And then we have had, as you mentioned, both lower land sales as well as on a year-to-date basis much lower lease settlement income.

Yes, just to reinforce there, because I saw your -- well, just to reinforce. The core business of what is in the Other Income -- sponsorship, all the ancillary things that are generated from the ball business is up this year compared to last year. There is no change there.

That category does represent a lot of our other activity, whether it is loaning folks, buying mortgages, sometimes we loan developers money where we get an option to buy. As Steve said, we bought mortgages. Last year we sold our investment in The Domain Residential. So that also category represents the other activity that the Company does that is not what I will call its operating business, and it is a little bit lumpy.

No big deal, but the important point is it is Other Income, which is good. It is not Other Losses. That is point one.

Point two is that the core business sponsorship, etc., is all trending up this year compared to Q2 of last year and year-to-date. Now, I don't have exactly that number, what it is up, but we can certainly get it to you pretty quick -- unless you have it. What is it?

I don't know; we don't have the core business number. But we can do that for you. No big deal.

Okay, thanks. Then lastly, David, just talk maybe a little bit about the Brazil situation, your relationship with BR Malls, and what is going on in terms of looking for deals down there. And the weakness in Brazil, and how do you think that plays out over the next year or two?

Well, look, the joint venture that we have with BR, the first deal we were looking to build an outlet center in was in Sao Paulo. And as you know it ran into right-to-build issues. Those still to this day have not been satisfied, at least to our comfort level.

So at this point it is a no-go deal until that gets satisfied. And if it does get satisfied then we will have a decision to make, and we will have to assess the climate, both short-term and medium-term, in deciding whether or not to go forward.

But the condition precedent to that decision is not yet there, and that is the right-to-build issue. There's a couple of other sites that our team went to down to look at that may be in the pipe in the future. So, let's put that aside.

The macro stuff there is concerning. All the supply in the market is concerning.

That is why we liked the Outlet business, because it was different. It was new. It was going to get ahead of a lot of the supply that that came on, on the full-price.

Obviously, you have got to weigh the macro in. But long-term, Brazil is a great, great country with a lot of dynamic growth to it.

But we are very cautious on a market like that. We haven't found the right deal; and thankfully, in hindsight our decision not to invest aggressively there has been the appropriate one.

So we will wait to see. I have always worried about the cash flows from the buildings that have been built there and whether that was sustainable with all the new supply, the fact that a lot of the cash flow comes from parking. There is a whole host of things.

The cost of the goods down there is significant. The high-end malls there, whether they are profitable for the retailers or not still is a question mark.

So there is a lot there to underwrite and essentially that is -- you should assume that those questions have been factored into the fact that we have not made an investment in Brazil.

Okay, thanks.

Caitlin Burrows, Goldman Sachs.

Hi, just a question on sales growth with regards to the increase from $575 a square foot reported in the first quarter to $577 reported now. Do you think the sequential increase of 35 basis points is a sign for concern, as it is somewhat weaker than the other recent quarters?

No.

No? Okay. Then can you comment on which areas of retail seem to be doing especially well versus the ones that are keeping that number from increasing as much as it had been the previous few quarters?

Yes, I will that Rick talk about that, but I will say this. The ups and downs of retailers and retail sales is a historical fact. But the increasing of our cash flow year after year is also a historical fact. So we don't get overexcited, whether sales go up 5% or down 5%, because we know that the cash flow that we generate from our buildings has a long history of increasing, given that we have got tenants in there that are very profitable and we have leases that are below market.

So when we look at -- we give you this information. I have never pulled my hair out based upon -- or jumped up for joy when sales have increased. We are just giving you the facts. The fact of the matter is our comp NOI is going to grow because our market rents are well below what leases are rolling over, as someone pointed out earlier.

So, I just want to reinforce that point, and then Rick can go ahead and answer your question.

Just to add a little more color to that, the stronger regions for us were New England, the Mountain states, Southwest, and South Atlantic. A little weaker were the Plains, Mid-Atlantic, Great Lakes.

The stronger categories were juniors, womens, specialty, accessories, mens shoes, and womens better. And the weaker areas were womens popular, home furniture, and womens special sizes.

Okay, great. Thank you.

Ki Bin Kim, SunTrust Robinson Humphrey.

Thanks, just a couple of quick follow-ups. Could you guys talk about a yield expectation for your investment in McArthurGlen?

Well, we are going to -- when the whole deal closes we will give that to you. But as we said initially when we announced it in May it will be accretive and we believe it is going to be a profitable transaction. But until all the elements of it close, we are not going to get into those details.

Okay. You guys made investments in six [Intresinger] malls. They own I think about 20 or more. Was it just because of the structure of the individual malls, or was it more selective?

Well, again, we haven't closed on four of the six yet, but when those close, some of those interests are held outside of [MGE], which again over time I think we'll have the opportunity -- to the extent that we want to -- to buy interest in some of those assets. But they are not really, at this point, owned by MGE other than a couple which we collectively both agreed that we didn't want to buy at this particular point.

So again, this is a long-term transaction that we feel we will be able to increase our investment in, but in a methodical, thoughtful way. We are just focused on finishing the first deal, and then we will be able to look at other opportunities going forward, not just with some of the assets they manage but don't own, or own very little, but also other opportunities out there.

Okay. The 5.9% same-store NOI growth, could you help us? Could you break it out a little bit? Maybe how much of it was on the revenue front versus expenses.

And it looks like your tenant reimbursement has increased pretty significantly. How much of that was driven by that as well?

Ki Bin, this is Steve. You hit the three components.

Minimum rent was over half of it; a contributor was also the net increase in recoveries, if you will; and then percentage rents. If you look at our overage rent line on both the consolidated financials, but then also our share of the JV income, overage rent was a contributor as well.

And is that -- the increasing recoveries, what brought about that? It seems this is higher than it has been before on a year-over-year basis.

I don't think it is higher than it has been year-before, but it is -- we are 90-plus-% converted to fixed CAM. We have annual escalators of that fixed charge, and that annual escalator has been at a higher rate than expenses have been growing. And in fact we've done a really good job of holding expenses relatively flat, so that has been additive.

Okay. Last question; I will leave it open ended. Surprised that you guys didn't include the Outlet development in Philadelphia with Penn REIT in your -- I guess in a way it's too new -- in your development pages or disclosures. Like I said I will leave it open ended. Maybe you could comment a little bit about that.

Yes, I mean it's -- once we approve it internally it will go on our schedule. We expect it to go forward.

It is still finalizing the permit. We are actually rushing, I hope, to start this year so we could open next year. That is going to be touch and go, just because we have to go through some permitting stuff.

Once we do it and approve it, it will be there. We expect it to be a good deal. Penn REIT approached us with the site, I don't know, a year and a half, two years ago, Rick, probably?

About a year.

We looked at it. We did a little bit of tentative pre-leasing with the retailers. They expressed an interest.

We're going to build it once we get permitted. Not overly complicated.

And then hopefully if we do jump through the hoops that we need to jump through, we could actually start this year and then have a chance of opening next year. But like I said, that is right on the bubble. If not, it will be a '15 opening.

Is that a 50-50 JV?

No, we own 75% and they own 25%, and we have a small partner in our piece. So I think our effective, if I remember, is around 65%. Our effective ownership is 65%.

Okay. Thank you, guys.

Paul Adornato, BMO Capital Markets.

Thanks. Good morning. I guess this morning, Hudson's Bay was talking about spinning off their real estate into a Canadian REIT. So the question is not on Hudson's Bay or Canadian REITS, but really just the longer-term trend of the anchors trying to capture the real estate value for their own shareholders. Was wondering if you had any thoughts or comments on that dynamic and how you might see it playing out going forward.

Well, I will tell you that the attractiveness of a company like ours versus a captive REIT are a completely different set of institutional investors. What people look to in our investment is the growth, rising dividends, the dynamic nature of our Company. And by investing with us, they have been well rewarded by our ability to increase our earnings, our dividend, and obviously the resulting stock price increase.

In those captive REITs, they are basically a different set of investors. They are bond-like investors. So it is a whole different thing.

And if a retailer wants to do it, God bless him. If it makes him ultimately a better retailer and they can use that capital to reinvest in their business, it is no big deal from our standpoint.

So, there are some that are also trying to redevelop some of their boxes. I think they have found that to be really difficult. And I think what they would rather end up doing is trying to figure out what the fair market value is and then look for the developer -- i.e., us -- to make the profit.

That has been the nature of the development business for years, is that the developer tends to get the development profit because they know what they are doing. So, I don't think any of this is really all that different.

I think it is potentially an attractive way for them to raise the capital to fund Saks. And if they can do that and make the combination a better, more profitable business, we are all for it.

Okay. Thanks very much.

David Harris, Imperial Capital.

Good morning, all. Hey, it looks as if we ended the 30-year decline in long-term interest rates in the first half of this year. So, if rates are to be going up, what do you think Simon might have to do differently over the next three to five years in order to generate returns as attractive as the returns you have been able to generate over the last couple of decades, David?

Well, look, I think the plan has been put in place, David, which is -- for us to generate the kind of returns that we want to generate, that we have done historically, it is really the redevelopment/new development pipe that we have produced. And that is bigger than it has ever been.

A lot of the returns that we generated historically was because we bought a lot of stuff at good prices, and the values went up, and we added value through increasing the cash flow. The arbitrage that we have in the redevelopment and new development business, and as large as it is, is actually higher even with higher interest rates.

So as long as we can execute -- and that is assessing retailer demand and making sure the costs are right -- I think we can still do what we have done as we have shifted more toward redevelopment and new development as opposed to acquisition in terms of how we look at all the capital that we are plowing back into the business. So I don't think we have to do anything extraordinary other than -- and it is extraordinary -- other than execute our pipe, which is huge and complicated. But if we can do that I think we are in good stead.

David, I would also remind you, as I think David mentioned in his opening remarks, we fund that pipeline with free cash flow. So in theory the cost of that capital is zero, so the arbitrage is very good.

But I would also remind you we have $2.9 billion of debt coming due next year. The weighted average interest rate is 6%. We've got $2.9 billion coming due the following year at a weighted average interest rate of about 5.25%.

So even with the spike in interest rates that we have seen, today our bonds trade in the 3.75% range for 10-year. So there still should be a very positive pickup as we refinance that debt over the next couple years.

Steve, you read my note that I put out a month ago or so. I made six suggestions that REITs might adopt by way of strategy and tactics to generate performance in a rising rate environment. Would you just care to expand on why you think that managing leverage over the cycle would perhaps not be the right way to go?

Well, David, listen -- I think one of the things we should have all learned coming out of '08, '09 is that the world changes. It is a volatile place. The price we pay for being a REIT is that we don't self-fund our debt from cash flow, so we should all run with a fair bit of liquidity.

And I think we should all run with relatively conservative balance sheets. So you and I might disagree on that particular point.

Okay. Then just a point of detail on the McArthurGlen deal. If we think about the return expectations you underwrote there, on the existing assets do you think those assets are going to produce higher returns than dollars invested in the existing Outlet Centers in the US? So we are looking at really this transaction that it was offering the better returns from development as we go forward?

Or would you think it is going to be -- you are going to get attractive returns out of the existing assets as well?

Well, look, I think the returns that we are able to generate out of the US outlet business are pretty damn good. So there is not much out there that we are going to do that is going to rival the returns that we get from new development and extending our existing US Premium Outlet business.

But that doesn't mean that that should eliminate us making other good investments, and we are as busy as we have ever been in the US Premium Outlet business. We are not doing every deal. There's lots of other outlet developers doing lots of new business in that space, both redevelopment and new development.

So we are focused on what we can do, and that is great. And we are piling a lot of capital, and that is evidenced by the new development and the extensions at Woodbury and Seattle and Desert Hills and Orlando and Vegas, etc. But that doesn't mean that the stuff that we are doing in Europe is not going to be attractive over both the medium and the long run.

Having seen a couple of --

But it is not quite as good as the US.

Right. Having seen a couple of those McArthur assets over the years I think they have been pretty well managed. I am not suggesting that you couldn't squeeze some more out of them, but it is not like there is a huge amount being left on the table, I don't think.

Well, people have said that about other stuff that we bought, and we figure out how to do that. So I am hopeful we can do the same thing here as well.

Okay, good luck. Thank you.

John Kim, CLSA.

Thank you and good morning. I wanted to follow up on your potential interest in CFS Retail in Australia. Internationally your acquisitions have primarily been through joint ventures. But regarding CFX I was wondering if your preference was again to go this route. Or would you entertain the idea of fully owning and managing the assets, given the high quality of the portfolio and given the fact that the management rights are for sale?

Well, we didn't say any of that. I think someone asked a big-picture question about Australia. That's all I said was that we haven't ruled it out. So I don't -- I really can't add anything more to that than what I just said.

Okay, then maybe I could just clarify. Is the Commonwealth Bank's potential sale of its management rights and interest in CFX, is that something that heightens your interest in Australia, than a normal investment?

Well, again, we haven't ruled -- we look at opportunities worldwide. And that would -- to the extent that that surfaces, we would look at it just like anything else. I can't really expound on it. There is nothing really to add at this point.

Okay. Just turning to another Aussie company, there are market reports that Lend Lease, who you have transacted with in the past, is looking to sell its ownership stake in management rights of Bluewater in the UK. Would a single acquisition like this be appealing to you in complementing your European investment? Or do you still prefer a platform in entering a new market?

I would say, one individual asset would have -- this is a generic statement. It would have to be a unique, individual asset in a market that we are familiar with for us to do it, to do that as opposed to just -- I'd prefer a platform.

Certainly an asset like Bluewater is unique and it is a very good asset. But generally, it would have to just -- this is a generic statement. For us to enter into a market that we don't -- we are not -- we don't have any presence, it would have to be the best of the best in terms of an asset.

I would prefer a platform, and that is basically a generic statement. Outside of it being kind of the best asset in that market.

Can you comment on whether or not the UK is within Klepierre's domain? Or is it sort of an open market for either one of you to invest in?

Well, first of all, there are no restrictions that we have vis-a-vis Klepierre, other than I'm Chairman of the Supervisory Board and I have got to obviously act accordingly. They are not in the UK. I don't -- there has never been any discussion that they'd have any interest in the UK, and I don't foresee that at all.

Great. Thank you.

Jeff Donnelly, Wells Fargo.

Good morning. Maybe a follow-up to an earlier question for both David and Steve. What sort of interest rate environment are you guys managing the business towards over the next few years? Are you expecting higher rates in, say, the next two to three years?

Well, you know, are we? Sure. I wish I could tell you what the rate is; then I would also be trading treasuries, I guess.

But the fact of the matter is we are being as aggressive on refinancing our business as we can. We are not all that excited doing -- trading dollars, which essentially is -- to some extent our secured debt has got obviously make-whole provisions in all of it or most of it. But as soon as they are open to prepay, we are refinancing that.

We don't necessarily believe in funding the make-whole premium. It is basically trading present value dollars, creates lumpiness in the earnings, blah, blah, blah.

I am not a big fan of it. We may do it in one particular context on one deal. But we are as active as we can, Steve, on refinancing.

We are. And not only that, Jeff, we have -- despite the fact that LIBOR is at 20 bps and hasn't moved and there would be a temptation to float, the fact is 90-plus-% of our debt is fixed-rate debt and we have done the match with long-lived assets and long-term fixed-rate debt.

Jeff, I think David is right. I think rates are likely to rise.

Having said that, they have already moved to 75 to 100 bps, and we don't have a lot of robust economic growth in the economy today. But I do think it is probably likely that we will see a higher rate environment going forward.

Have you guys seen already any demonstrable impact on asset pricing, either deals being re-traded, or do you expect a better acquisition environment ahead?

No. I mean I don't think there has been a really reaction on the transaction side because of rising rates at all. I have not seen that at all.

Maybe this one is for Rick, just on occupancy costs. I am curious. The pace of sales growth is decelerating, but re-leasing spreads have been fairly healthy.

Why haven't we seen an increase in occupancy costs? Do you think that is going to ratchet up in the next 12 months?

Well, one of the components of occupancy costs are sales and the rents. Frankly, we are only rolling in a relatively small percentage of our square footage every year, and our sales have been growing pretty aggressively, and our spreads have been growing right along with that. So as we pointed out earlier, given that we're 11.3% we think we still have considerable room to grow our rent, even in a moderating sales environment.

That's helpful. Then just maybe in understanding percentage rents, I know overall the portfolio is about $577 a square foot. But when you guys look at who actually pays percentage rents, does the sales productivity of those tenants vary much from the portfolio average? I am just curious if the productivity of the percentage rent payers is higher or lower than the portfolio as a whole?

It is all over the block. We have got over 1,200 tenants that pay as a percentage rent, so we have a very wide and diverse base. And really there is no particular corollary between how you would say sales productivity and the payment of percentage rent.

To amplify Rick's point about 1,200, a lot of our percentage rent payers are actually department stores that pay a 1% or 2% or 3% depending on the vintage of the original deal. And I would tell you that that is a big component of our percentage rent. As you might imagine, it has been kind of static over the last several years, and in some cases, down when you're talking about a penny.

Just one last question, actually for you, David. I recall that I think Simon or Chelsea had bought in Craig's interest in their Carlsbad outlets years ago for I think around a 10 cap. Are there any more of those purchase options still lingering with Craig?

We are looking. I would like to find a few more, but I don't believe so. But if I stumble upon it I will let you know.

Thanks. Have a good one.

Nathan Isbee, Stifel.

Hi, good afternoon. Just focusing on the same-store growth, you are in the mid-5s through the first half of the year against some pretty tough comps in '12. You had mentioned earlier in the year that some of the redevelopment might weigh on the '13 growth.

Would you say you have navigated through that better than expected? Or should we expect some of that to rear its head in the second half of the year?

Well, I think our -- I have been very, very pleased and it is above our own internal budgets on our comp NOI growth. So we have -- the team, the folks, the leasing, the management folks, have done a fantastic job year to date and beaten my own internal expectations. So they have done a great job.

Okay. So looking ahead to the second half of the year, you do have some pretty easy comps from last year. Is there anything out there in the redevelopment that should make us think that you would not continue what you have been doing here in the first half?

Well, again, redevelopment, we exclude. So it is really -- that is not in that number, so let's put that aside.

Look, there are unknowns in the business environment, right? Sales. I hate blaming the weather; I will never blame the weather. Even if we miss one quarter because of the weather you will not hear the weather excuse here.

Will you take credit for it, though?

We won't take credit. We will not blame an early Easter, a late Easter, an early Halloween or a late Halloween. But there are lots of things, Nate, out of our control. Tenant bankruptcies, lousy sales, lousy weather, whatever, international politics, US politics, whatever changes the consumer mindset.

So we are still in an uncertain environment. That is why we try to be very cautious in how we look at things.

And I have been, as I said to you, I wish I could give you a number. I won't. You know we don't.

But I have been very, very happy with the way the team has executed operationally. They have done a great job thus far.

All right. Thanks.

Vincent Chao, Deutsche Bank.

Hey, everyone create. Just wanted to clarify just on the McArthurGlen deal. I know you're going to provide more details when it finally closes. In terms of the guidance update though, is there anything baked in for accretion for McArthurGlen and also any transaction costs baked in?

No. Not at all. It is not in our numbers. Correct.

Okay, thanks. Then just going back to the interest rate commentary, I appreciate the color on not wanting to prepay some of the mortgages. But just curious if you are thinking about pre-funding some of the unsecured debt that is coming due, given where rates are today, how they have backed up, in light of your rating increase or improvement there.

Yes, that is a distinct possibility as we look out in the third and fourth quarter. I would -- Steve can add to this, but we always are trying -- we always get ahead of that schedule. So it wouldn't surprise -- shouldn't surprise you if we do that sometime this year.

Yes, Vince, the bonds are like mortgages in that there is the equivalent of a yield maintenance; there is a make-whole. So to some extent you are trading dollars.

But having said that, much like we did in December of '12 we went to the bond market to pre-fund, if you will, our '13 maturities because we knew what they were. If you look at our debt maturity schedule, we have got about $900 million of bonds coming due in 2014. So as David mentioned, we do look at the market, we monitor the market.

One of the great things about the bond market is that you can go relatively quickly. So we do have that option to pre-fund that at some point in time.

Okay. Thanks, guys.

Michael Mueller, JPMorgan.

Hi, just two quick questions on McArthurGlen. Sorry about this. But the EUR435 million is an equity investment. Can you let us know what the associated debt is that goes along with that?

We were outline all of that when we are closed on the transaction.

Okay.

But there is nothing extraordinary about the leverage amount on these assets, so -- but we will lay it all out with all the facts once all of the elements get closed.

Okay. Do you think that is Q3 or is that Q4?

Let's see, when? I would think that it should be completed by the end of this quarter.

Okay, great. Then a last question. What was the trigger to sell the Laguna Hills Mall?

It's very interesting. We have a redevelopment plan. Even after that redevelopment plan, given all of what the assets are -- if you have been to Laguna and you know what we own in Orange County, what the spectrum does, and what the spectrum is -- our Mission Viejo and Brea Mall. Even with the redevelopment, even though it is well located it was never going to be a really good core asset like Brea or Mission or Orange, The Outlets at Orange.

So we said -- you know what? We can take that capital and reinvest it in what we think will be a core opportunity at the end of the day. And it was really that kind of thinking.

Got it. Okay. Thanks.

Ben Yang, Evercore.

Hi, thanks. David, you mentioned having no additional purchase options with Craig Realty. But I do recall you did have some prior agreements with Prime when you ended up buying Livermore and Grand Prairie. So maybe based on your comments, is it fair to assume that you have no prior agreement option or other with any other private outlet owners at this time?

I'm just trying to think. Don't put me on the spot like that. I can't remember everything.

You know, we will do -- we are about to do another deal with Prime that actually we'll probably sign up this week. And they have announced; it is no secret. It is in the Minneapolis-St. Paul area, which we think is going to be a terrific investment for us.

So you are putting me on the spot, I mean, but we have got a couple other opportunities. I just want to be careful how you characterize that, but there's other stuff that we are working on that we will have options to get in on. So I shouldn't unilaterally say -- yes, you're right. I think there are other stuff out there.

All right. Sorry for putting you on the spot.

Don't worry.

But maybe for that deal with Prime in Minneapolis, can you talk about the pricing and the cap rate on that potential deal? And are you going to buy out the entire center outright at this point?

In that case, there is no option to buy it, frankly. But it is -- we are a development partner, so we are just going in on the development side. So the returns are consistent with what we have developed over the years in the Outlet business.

Okay, but you are going to be an owner of that project, right?

Correct, correct.

Okay. I'm just curious. Why is the expansion at Woodbury Premium Outlet so expensive given the relatively modest expansion of physical space there? Is there anything unusual going on with that, that would lead to that $170 million investment that you are making?

Well, we are upgrade -- first of all, parking is really expensive because we have to deck the parking to create the additional space. We have a tight site to start with and we have got a lot of infrastructure work in terms of the parking. And a lot of it -- we are redoing all of the ingress, egress, all the roads around it.

And then as much as we love the center, it is long in the tooth so we are also bringing it -- keeping it consistently -- with consistent theming. But it does need to be renovated.

But at the end of the day, even with that said -- so you have the parking, you've got all the roadwork, it is going to make it better for the consumer to get in and out of. We are renovating the mall. We have got to demolishing a couple of buildings.

You put it all together, New York ain't cheap. It is not like building in the Midwest.

You put it all together, I had the same reaction, frankly. But I still like the returns.

And it is the world's best outlet center, so if we are going to spend money anywhere it ought to be in the world's best outlet center. So you put it all together, it is a good return, and it is what it is.

We are actually very excited. It is progressing. We actually originally were going to do it over a three-year period; I told the guys to go back, figure out how to get it done in '15, and they have come up with a plan. So we are going to -- this thing is going to be hot and heavy for a year and a half.

But I think afterwards, it will reinforce its position as the world's best outlet center. So we couldn't be more excited about a project than that one.

Okay, but a lot of non-income-producing work that you are doing there. So a good return to you, but below the 12% that you are getting on some of the other redevelopments in the Outlet space?

Correct. Correct.

Then just a final one, I know it is a small potential investment but can you maybe comment on your intentions at that land at Oyster Bay that you are trying to buy with some of your partners?

Nothing really to say other than, to the extent it moves forward, us and our partners will look at it and come up with a plan that has got -- that is subject to zoning. And we would expect to come up with a responsible development plan, but it is all going to be something that is going to be subject to getting zoning approvals.

But we hope to benefit the community there and work with the community there to come up with the appropriate plan. But it is going to be driven not just by us but our two highly regarded partners.

Is the goal to build a regional mall at that site, longer term?

No, no, no. I don't see that at all.

Okay, thank you.

Rich Moore, RBC Capital Markets.

Hi, good afternoon, guys. Back, way back to the recovery ratio questions, Steve. The JV recovery ratio is up pretty extensively in the first and second quarter of this year.

Is that going to continue at that kind of rate, you think? Are we level at 2Q for a recovery ratio in the joint-venture platform?

Well, Rich, it is just -- ultimately it is math. It is a function of where the expenses go relative to the contractual increases that we have built into our leases. Give me your view on where you think inflation is headed and where costs are headed.

So far, over a period of several years now, we have been having expenses grow at a slower rate than the escalators in the leases, so it has been additive to the comp NOI growth. In any event, Rich, I would say that the pace of the additiveness will probably slow down.

Okay, good; that's fair. Then you commented, David, on what is going on in Brazil as far as outlet centers go. What do you think for North America in terms of how many you can build annually, or some number that addresses that sort of concept over the next five years?

Well, I can't put a number on them. There is a big pipeline out there.

We're going to do a handful. Lots of other guys are involved in trying to do a number of them.

And we will see. Not clear to me that they will all get built, but obviously it is the flavor of the month.

Any center that is out there that is not meeting its performance expectations turns into an outlet center. They are all harder to do than what people think. But there is a lot obviously very capable, competent developers out there trying to build outlets.

The important thing is what we built is good, and I can't worry about what others build. I can only worry about what we build.

And it is every intention on our front to only build what we can lease and generate a positive return on. And, thankfully, Rick, we haven't really screwed up yet in the new development side. So hopefully that will continue.

The only thing that I would emphasize, and David touched on it earlier, is in addition to new development, these expansions that we are doing are at some of the best outlet centers in the world. And they are not small.

Desert Hills is 147,000 feet. Las Vegas North is 147,000 feet. Seattle is 90,000 feet. These are big, substantial expansions that we're bringing great retailers, making some of the best in the world even better, and that shouldn't be lost sight of.

Okay. While you're on that, Rick, I have a question for you on Desert Hills. I just was in the area and saw that one. It's always been a great center, and I am curious; I didn't quite get exactly what you are doing there. It looks like you might be building a golf course in the middle or something.

Even though Steve wanted us to, we turned that down.

I thought it was finally time to have a golf course in an outlet center.

Just a par three.

What is going on now is there is really three things going on simultaneously. We are -- as David alluded to at Woodbury, we are building a parking deck behind the existing larger section of Desert Hills; plus we have already built additional grade parking behind the smaller section.

And now what you are seeing in the interior of the larger section is the actual development of the retail space. It is basically going to be an inner ring.

So we're going to maintain our racetrack layout, but now instead of being single-sided with parking in the middle, it is going to be double-sided with parking in the deck.

Okay, I got you. Just how many retailers do you have there do you think?

Well, we're adding 147,000 feet and, frankly, one of the things we've been able to do to drive our NOI is to try and be a lot more disciplined on the size of the retailers and maximizing our revenues by trying to fit as many new retail concepts into the space as possible. So I would hope that it would be several dozen; but it remains to be seen because people want as large a store as they can get there.

Okay, good. Got you. Last thing, guys, do you have any updated thoughts on J.C. Penney and how they are doing I guess over the past quarter?

The only thing that I would comment on is that we are obviously in the stores; the stores look good. We know as much about their sales as you do. I will tell you that through our channel checks that that is trading at par.

I think this is just a matter of giving the management team time to position it where they want to position it. It is still a formidable retailer with considerable gross sales, and we certainly hope they can recapture market share and resume a growth profile.

Okay, great. Thank you.

Tayo Okusanya, Jefferies.

Good afternoon. Two quick ones for Steve. First, Steve, the reversal of the provision for credit losses. I am just wondering how much of that is a signal to the Street about how confident Simon is feeling about tenant credit.

Well, Tayo, it is not really a reversal of a provision. It is just the fact that there were some receivables that we had reserved for and in essence written off that in fact were subsequently collected.

I'm sorry. All right.

But I will say this, as we look at our credit profile of our tenants and as we look at our receivables every month that we do, number of outstanding receivables, number of tenants on the watchlist is pretty muted right now. And I would say the overall health of the retailers is pretty strong right now.

Other than I just -- there are a few out there that -- don't ask me to name names because I won't. But there are a few out there that still have some clouds around them. So we are focused on two or three out there that are relatively decent size for the mall business that we will have to just monitor how they ultimately turn their business around.

Okay. That's helpful. Then just the JV income, Steve. First quarter that number was about $54 million, but I think you mentioned that number was on the high side because of some mark-to-market on the Klepierre leases. But in 2Q the number comes in at $56.5 million.

Just wondering from a run rate perspective what makes sense for us to be modeling.

I would say, Tayo, the run rate is probably more in line with what we saw in the first quarter, backing out that one-time thing we talked about. So it is in the high $40 millions to about $50 million a quarter, I think.

Okay. What happened this quarter again to make it still elevated?

There was a small gain that flowed through related to Klepierre's sale of their home office headquarter building.

Okay. Thank you very much.

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

Thank you very much. Have a great rest of the summer. See you soon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and good day.