西蒙地產 (SPG) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2014 Simon Property Group Incorporated earnings conference call. My name is Katina, and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will facilitate a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Liz Zale, Senior Vice President of Corporate Affairs. Please proceed.

Thank you. Good morning, everyone. Welcome to Simon Property Group's second-quarter 2014 earnings conference call. Presenting 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. And we are also joined by Andy Juster, our current Treasurer and incoming CFO.

Before we begin, just a quick reminder 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 you to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please not that this call includes information that may be accurate only as of today's date, and reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are also available on our IR website at investors. Simon.com.

Also, due to the completion of the Washington Prime spinoff during the second quarter, we are providing operating statistics for the prior-year period to show performance on a comparable basis excluding the Washington Prime properties, which is in our supplemental 8-K.

And now for our prepared remarks, I am pleased to introduce David Simon.

Good morning. It was a very eventful and productive quarter. We completed the spinoff of Washington Prime Group. We relaunched our brand to create a whole new way to engage with consumers. And, most important, we continue to produce strong operating and financial performance.

Results in the quarter were led by FFO of $2.16 per share, exceeding the First Call consensus estimate by $0.03 per share. Excluding the operating results from the WPG properties and the transaction costs related to that spin, FFO increased 12.8% year over year for the second quarter. As a point of interest, if we exclude the transaction cost related to the spin, our FFO would have been approximately $2.26 for the quarter.

And I'd like to take a moment and put that number into perspective. I will remind you that our second-quarter 2010 FFO was $1.38 per share. So the quarterly profitability of Simon Property Group has increased by $0.88 per share, or $320 million quarter over quarter since then. Overall business conditions remain favorable, driving increases in our key operating metrics and our cash flow. We continue to see strong demand for space across our portfolio. Occupancy ended up in malls, Premium Outlets and the Mills. The malls and Premium Outlets recorded increased leasing spreads to $11.06 per square foot. The Mills recorded leasing spreads of $12.74 per square foot. And for those of you who are interested, comparable property sales were up 90 basis points for the quarter, and the movement from sales per square foot of $6.12 -- I'm sorry, $612 a year ago to $608 is solely related to bringing on several new projects totaling 2.16 million square feet. Comp NOI, of course, which I'm more interested, increased 5.6% in the second quarter and is up 5.5% year to date, and over 95% of our domestic NOI is included in our comp NOI calculations. And as a reminder, our comp NOI in 2013 Q2 was over 5%. So that's 5.6% over 5%.

These results are a testament to the strength of our assets, the desirability of our locations, and our ability to execute.

So let's look a little forward. Charlotte Premium Outlets is opening on July 31 and is fully leased. Twin Cities Premium Outlets in Minneapolis will open August 14 and is fully leased. Construction continues on new Premium Outlet developments in Montreal and Vancouver, both high-quality major markets. And Montreal will open in the fourth quarter. Formal groundbreaking at Gloucester Premium Outlets, a new 375,000-square-foot center in Southern New Jersey that serves the greater Philadelphia area is scheduled for August 7. Other new outlets projects in our development pipeline are moving forward, but we are being very selective and focused on major markets where there is clear demand from the retailers and manufacturers that matter.

Now, in the quarter, just turning to redevelopment and expansion, we did open successfully 147,000-square-foot expansion at Desert Hill Premium Outlets, making it one of the 10 largest outlet centers in the world. Lenox had its re-grand opening, including a renovation of the exterior and the fashion cafes and the addition of several new restaurants including True Foods. Redevelopment expansions are ongoing at 32 properties across all of our three platforms in the US, Asia, and Mexico, which will continue to expand, enhance some of our most productive properties.

As a reminder, construction is ongoing at some of our most productive properties including Del Amo, Roosevelt Field, Woodbury Common Premium Outlets, Houston Galleria, Stanford Shopping Center, and St. John's Town Center. We also started construction on a significant mall redevelopment at Fashion Center, Pentagon City, which will add 50,000 square feet of small shop space including restaurants. And as you have seen recently, we have started construction of the expansion of the Chicago Premium Outlets, which will add 260,000 square feet as well as a Shisusi Premium Outlet in Japan that will add 130,000 square feet. So put it altogether, as we said, it's over $1 billion through 2016, and it's affecting some of the most reductive assets not only in this country but in the world.

Now, capital markets, just briefly -- we did amend and extend our $4 billion unsecured multicurrency revolving credit facility with the June 2019 final maturity at LIBOR plus 80 basis points, which is the tightest spread in our industry. As planned, we retained $1 billion of cash proceeds from the debt placed on the WP assets prior to the spin. We also announced a dividend of $1.30 per share for this quarter, which is a 13% year-over-year increase. We will pay at least, at SPG, $5.15 per common share at SPG. And we revised our guidance that we issued May 29, 2014 to $9.01 to $9.11 from a range of $8.96 to $9.06, which raises both the top and bottom range by $0.05.

Just to turn to management, Andy is here; will be our next CFO. Steve Yalof will join as CEO of our Premium Outlets business. Andy has been instrumental in building the strength of our industry-leading balance sheet and maintain that focus. And Steve is a well-respected retail real estate executive who enhances our team and brings a unique perspective with his diverse retail background. I look forward to working closely with both of them.

So to sum it up, great first half of the year. And we are absolutely focused on enhancing the value of our real estate, which is being executed on daily and producing the results that we are hoping for.

Questions?

(Operator Instructions) Christy McElroy representing Citi.

You have been increasingly talking about potential densification of some of your assets and the possibility of adding non-retail components if it makes sense. I think (inaudible) you have talked about that you also have a 230-unit residential project at Southdale Center ongoing. Copley is fairly intuitive. But can you talk about your views on why it makes sense to add residential to a center like Southdale? What other traditional suburban regional malls of yours are you considering adding a residential component?

Well, primarily because there is demand. And we do like the interplay between high-quality residential with our high-quality retail offerings. And it's an opportunity to continue to add value to the Company. So Southdale -- and we've had very good success in places like Firewheel and Domain, to name a few. We've got both a hotel and residential going on at Phipps. We are in discussions with a well-known developer in Lenox. And then obviously the big mama is in Copley, which all -- our intents and purposes for that is to start construction within nine months, which will be a landmark for the Back Bay of Boston. We are very comfortable with demand. The quality of what we are going to build will have a -- we think will be terrific. And it's got the right kind of IRR for us to take that risk. And then we think it will add to the value of that retail.

So it's not going to overwhelm us, but it's part of our strategy to continue to make our shopping centers the place to be both from shopping, entertainment, leisure, eating, and then eventually living and spending time on - with respect to the hotel business. So these are great real estate. Why not take advantage of it?

And then in terms of the larger projects that you have in the mall pipeline with meaningful small shop expansions -- David, you mentioned Del Amo, Pentagon City, Roosevelt Field, Stanford, Houston Galleria. As you think about adding traditional small shop space to your better malls, what is the composition of new stores that you are putting in these expansions that you didn't previously have room for at the mall where you are seeing new demand? So how much is restaurants versus fast fashion versus luxury versus traditional mall retailers?

Well, the simple answer really depends on where we are adding the space, what that center lacks, what the demand is. But I would simply say, Christy, it's all of the above. In Pentagon, to take a simple example, in that case it's really restaurants because it's out in the exterior of the center. If you have been there, the porte cochere is really Humpty Dumpty; it's really terrible, frankly. And we think, given its location and the ability to - if you have been to Atlanta recently, you've seen what we did with Lenox. Just opening up these centers, creating a sense of this is where you ought to enter - it's great for the restaurants, and we have seen a lot of synergy there.

So in that case - and it will be a little bit of fast fashion there as well because of the customer base. But in Del Amo, it's upgrading the mix and bringing in not the super luxury but bringing up the better retailers and more aspirational brands because we think that's what's missing. So it depends a little bit on everything. In Galleria, the demand for luxury is immense. So having the ability to take some of the existing retailers, move them toward the Saks existing store, which will be the new added small shop space, will allow us to continue to upgrade the true luxury players in kind of the Neiman Marcus wing. So, again, it's a little bit of everything, and it really, really depends on where and what the demand is.

Jeff Spector representing Bank of America.

Now that Washington Prime has been spun out, David, can you talk to us a little bit more about your main goals, what you're going to be focusing on for the next six to 18 months? Is it really the redevs and the branding effort?

Well, we do everything here, Jeff, and that's why our FFO increased. And again, we didn't do it by smoke and mirrors, by high leverage. But our FFO increased from 2010 to 2014, just for the quarter, $320 million. You don't do that by a little bit of this and a little bit of that; you do it by everything. So at this point, we are going to continue to do everything. We are going to redevelop; we are going to re-lease. We don't have industry top leading numbers quarter after quarter, year after year. We don't outperform over the last 12 years, over a decade, continually beating First Call consensus estimates year after year after year -- not several years, but over a decade -- without being able to do just about everything. And so we are going to continue to do just about everything.

And I don't want to limit by redev or that. If you have a good idea, I will take advantage of it. Tell me what I should do.

But obviously I mentioned, and I want to underline it, what we have got going on at some of our big mamas. I've used that twice. Liz just frowned on me. But what we've got going on at the Field and the Galleria and Del Amo - it's pretty big stuff. So that's hugely important. That's why we've added some people to help us manage that. But we will continue to do everything we can to drive this business forward.

Okay, and then just one follow-up before Craig has a question. Is it too soon to talk about any response or feedback on the Simon branding effort?

Well, I can tell you that we have been - the complements we have received have been fantastic. And I think from a retail point of view, the retailers that think of themselves as brands, it has been very, very positive. And at the end of the day, if you don't think of your company as a brand going forward, you are going to miss out on opportunities. But this is a going to - this is not a -- it's an evolution. We will try to revolutionize parts of it, but it's going to continue to be something that we will reinforce with the consumer day in and day out. And our people in the field will reinforce it as well.

But we are in early days on it, Jeff. But we are very excited about the prospects of continuing to upgrade the quality of our presentations and the quality of our service levels to our properties. And that's very important in today's world.

Thank you. I think Craig had one question.

Yes, I just wondered if we could get some comments on your involvement with digital, and then possibly Deliv of the extent of your involvement with Holiday 2014, if you are adding malls or markets.

Well, we are focused on making strategic VC-like investments in opportunities that we think will add value to our Company, both helping our retailers as well as helping our consumers. So as you know, we heard somebody, Skyler Fernandez. He has been here for three months. We've made some investments. And Deliv, we will be bringing to Woodfield. And we are part of that group. We are not leading that group, which is fine. We don't have to lead everything we do, though I like leading everything we do. But sometimes we don't lead. And it's one of many things that we will continue to experiment with, and we will see where it goes.

We've got some expertise now. We are looking around corners for opportunities. Skyler is uncovering a lot. We are in the deal flow. We are doing it smartly, though; we don't have 100 people running around doing it. I think the way we are doing it is smart. And like I said, we've made some small investments; we will continue to make them. And I like the prospects of what we are trying to accomplish.

Thank you.

Ki Bin Kim representing SunTrust.

Could you just quickly talk about the Mills lease spreads? It seems like the $12.74 equals 47% of a percent change standpoint. Could you talk about how you are achieving that? I guess it's not really driven by sales per square foot changes, so maybe a little more color on that.

Well, therein lies - again, first of all, I noticed - and sales don't necessarily - as I have mentioned to you in the past, the fact that sales growth does not necessarily correlate to spread growth. So - and the fact is you can see that from the results that our Mills portfolio posted. I don't know how else I can describe that to you other than producing the results that we did. So that's how I would answer that question. We've got an under-rented, under-market portfolio in the Mills. We are upgrading the mix and we are charging more rent, simple as that.

Okay. Thank you.

Ross Nussbaum representing UBS.

Can you talk a little bit about the outlet sector versus the malls, just in terms of how would you describe the strength of demand you are seeing for outlets today versus the strength of the demand for malls? And maybe how is that manifesting itself in terms of pricing power for each of those segments?

I'll let Rick comment, but I'd say there's no huge or material difference like -- when we were coming out of the recession, there clearly - there was more trepidation with respect to the full price than there was the outlet. The outlets didn't see the big dip in demand. But I would say today it's pretty consistent. The only difference is that in the outlet sector you do have a number of the people that have not participated in it wanting to. But I would say the demand is not all that much different at all. And the gap between the demand, given that there has been no new supply and the regional mall business is basically on top of each other - Rick, I don't know if you want to add anything to it.

I just want to emphasize David's point. In the outlets, there just happens to be a number of the mall tenants that, frankly, back when we got into this sector, we had started talking to them about the outlet as a desirable channel for their business. And now they are experiencing that, and they are experiencing great results. So a company like Express is now rapidly expanding. And the only other thing in the outlets is that the center sections, for the most part, are a little smaller and the spaces are smaller. So even with the same amount of demand, the supply is more constrained, and that gives you a little bit more pricing power.

Okay. Second question, David. If we look at Washington Prime, I'm curious; the stock is around $19, little under today. Where do you think the stock was going to be when you decided to do this thing?

Well, you know, look, I think the advice that we got was right in that range. And I'm not here to talk about WP. WP will be providing an update in the next few weeks about what they are doing. But I think it's right on. This is a -- we've been a public Company for 20-some-odd years. It takes time for companies to develop what they are doing. I'm very pleased with WP from a director point of view and as a shareholder. It's very early days. It has been trading for, what, six weeks; maybe two - six weeks. So I think it's right where we think it's going to be, and I think they've got a lot of opportunities. But they are much better equipped - and frankly, just from a fiduciary point of view, it's better that they do it than I do it. But no great surprises on that whatsoever.

Thanks.

Alexander Goldfarb representing Sandler O'Neill. Please proceed.

David, two questions here. The first - we will go back to the branding question. You are definitely a numbers guy, and advertising tends to be a softer metric as far as being able to gauge. How are you gauging the effectiveness on a dollars-and-cents basis? And have you - in order to fund this, are you cutting back other advertising that you used to do? Or in total this represents an entirely new effort as far as - presumably, you are advertising at the local level. So just curious, have you pulled back from that and focused more nationally? Or is this incremental, too?

Well, look, I think that the - your comment about numbers reminds me of people - a lot of people said I'm not a real estate got yet. And I go back to this quarter-over-quarter thing. Somebody figured out how to grow the business $320 million. That's not for the year, that's just for the quarter over quarter.

So, look, the fact is we did reallocate spend to get away from outdoor, put it more toward digital and TV, less from radio. We did that kind of stuff that we tweak every year, where we are getting that. So the answer - and there is a little bit of extra cost associated with the stuff that we've done. But it's going to be a test-and-measure business. But ultimately it's going to be managed within our typical budget every year that we do for marketing spend.

But by having branded and consistency across the portfolio, you do get economies of scale. So we will be able to take advantage of it.

So is there a way that you are measuring the spend, or it's just something that you assume as long as you are getting positive feedback from tenants and customers?

I think you certainly have that ability. I think the initial phase is more what's the feedback. But as we get - as this progresses, we are going to measure our results.

Okay. And the second question is you are re-leasing spreads have been accelerating. Can you just give some color, whether either by mall or outlet? Or if this is more new tenants coming in or this is more driven by we remerchandising tenants, moving guys from the 50 down and moving new guys to the 50-yard line?

Well, I will let Rick and Steve, if he wants to chime in - I would just point out to you that we are under-market rented. That's why we are able to grow our comp NOI every quarter where our occupancy cost, for better or worse, if you want to focus on that - you know how I feel on some of these numbers - is low, is very low. Look at it compared to our peer group. So it's low. That allows us to increase our rents, at the same time doing it in a way that our retailers can continue to be profitable in our portfolio, which is important.

So that's - but it's continuing to upgrade, and it's marking leases to market. And that's what it is.

Rick, do you want to add anything?

The one thing I would, again, reemphasize something David has talked about - we keep talking about our redevelopment program. I don't think people appreciate how much better our properties are getting as places where retailers want to do business. We've talked in the past how there are a number of new entrants that want more square footage. It's a supply-and-demand business. And as our properties are getting more desirable, we have more demand, limited supply; we are able to drive rent.

Alex, this is Steve. I'd just add one comment because you asked about the difference between new leases and releasing. And interestingly enough, we have the ability to parse the data and look at it and componentize it. And the spread is pretty much on top of each other, whether it's a new lease or a re-lease. So - which I think echoes David's comment about the portfolio is just under-market. And whether it's the existing tenant and us reaching an agreement with them to stay in the space or whether it's remarketing it to another tenant, we are getting market rent for that space now.

Okay. Listen, thank you.

Jeff Donnelly representing Wells Fargo.

Congratulations to Eddie and Steve. David, just building on an earlier question and looking longer -

One guy is not here. So until he posts, you never know.

(Laughs) That's true. I'm just curious; to build on an earlier question, looking longer than 18 months out, on top of honing the portfolio and maybe executing on the pipeline, do you think there's a role or a need for something larger to be done in real estate or perhaps even assisting brands of omnichannel retailing?

Maybe I'm dense. I didn't - can you restate your question? I think I missed it. Sorry, Jeff. Can you just -

No, no, no problem at all. I was curious if on top of your, I guess, the blocking and tackling on the portfolio, if you feel - there's a need or a role for Simon to do something larger in real estate or perhaps assisting brands of omnichannel retailing in the next few years.

Well, look, I think we are always trying to assist the retailers while, at the same time, grow our business. So there is this natural tension between the two of us. But I think we've got to continue to upgrade the portfolio and drive traffic, if that's your question. Yes, so yes, we certainly have a responsibility to retailers to make our environments as productive and as exciting as possible. That's the biggest focus we have.

Rick - I think we feel like we have that obligation. We have it to the consumer, too. So I think that's what - the amount that we've done within the portfolio just upgrading little stuff from restrooms to play areas to seating areas to exterior improvements to doing the - we have done a hell of a lot over the last several years. We were able to shut down when the world was ending and start back up. We were able to shut down better than anybody else. We were able to start up better than anybody else. All of that is proven because all of that is in our numbers.

So we had -- forget - I hate losing WP because now I got -- I lost $1 FFO. But we would have been at $10, roughly. Right? You are going to do the - excuse me if I'm rounding here or there. So everybody is going to do the calculation -- What does that mean? What does that mean? But we were going to be at $10 per share; $6 in dividends. Where were we in 2006 and 2007? Where was everybody else? So those are big numbers.

That's, I guess, the root of my question is I think you have certainly done well in strengthening the balance sheet, and you spun off Washington Prime and there's a big pipeline today. I guess I'm wondering if, going forward, you see more of your capital allocation going to things outside of malls and outlets and maybe into other areas.

No, we are going to always stick to retail real estate. And we will densify here and there. And we think we can do that appropriately and not get over our skis. But no, we are always going to be a retail real estate Company. That won't change.

And then I guess for Rick, just a few questions - did you guys see much of a sales impact in outlets in Japan, just because they did a big increase in their VAT tax in the second quarter? Did you see anything there?

Well, let me - that really should go here as opposed to Rick.

I don't believe the domestic chores.

The fact of the matter is - or actually, I'm glad you brought that up because the answer is no, believe it or not. There was a little bit of a spike ahead of that. And our Japanese partner is actually coming at - the weather here is bad, so I assume he will still get here. But they are actually coming here for the next couple of days.

But it's actually, surprisingly, held its own. I don't have it right in front of me, but the simple answer is no, it has actually done very, very well, even with the increase in VAT.

And I think this one is for Rick because he and I were exchanging phone calls. Can you talk about the replacement you have lined up for the Nordstrom space at Florida Mall, and a maybe a little bit why Nordstrom opted to leave that market? And does that foreshadow anything for that property?

Well, the property is, frankly, growing extraordinarily well. And in fact right now we are in the process of adding a new flagship Zara, American Girl. We are adding a completely new food (inaudible) with other restaurants. And I will let Nordstrom's statement speak for itself. But we are very excited about our replacement strategy for that box. And in fact there will probably be announcements forthcoming in the very near future that will show you what we have in mind there, and we believe it's going to be a substantially positive addition to the property.

Yes; it's absolutely, unequivocally not a reflection of the mall at all. So let me make that clear. The mall does $1000 a foot, and it has grown its NOI every year. So it's a great mall. No issues.

Thanks, guys.

Haendel St. Juste representing Morgan Stanley.

First a question on Klepierre. I know that you do not include it in your core same-store numbers. But we noticed a large drop in your share of NOI from Klepierre, NOI, page 21 of the 2Q sup, down to $53 million from it looks like $67 million last quarter. Can you perhaps give us a bit of color on what caused such a big drop? Where there one-timers in either number?

Yes, Q over Q there were one-timers last year. And they also -

I'm speaking to - sorry, to first sequentially last quarter.

Oh. Part of that is dilution that occurred with their sales. They sold Carrefour assets. Okay?

Anything else there? Or it was just -

They reported their numbers. So, no; the answer is no. They are in very good shape. Our investment - we are plus $900 million, almost $1 billion.

Up 52%.

As Adam [Shandler] would say, not too shabby. And they are doing a good job. And I have yet to learn one word in French, which is quite pleasing to me.

Okay, thanks for that. One more, if I may. Understanding your views, David, on sales per square foot, I was just curious, though, on your thoughts on -

Let me just stop here. What my -- I just don't think it's the - again, I'm not trying to tell you that it's not unimportant. The question is whether we should obsess over it or not. And what I'm trying to explain to the market, I obsess over my revenues. I obsess over my comp NOI. I don't obsess over what the retailers do in my properties unless I'm doing a bad job. Then I obsess over it.

So what happens in our industry is retailers - they get hot, they have great sales. They don't, it changes. We've got to develop the right mix. Sometimes that's our fault. Sometimes it's the retailers' fault. The important thing is where is our leases vis-a-vis market? What's demand? And can we increase our cash flow? That's what I obsess over.

So I've never had a headline saying sales are up when they are my tenant sales, because my headline is what are my sales up. And in fact I think this quarter, up 9%. Right? Roughly? Looking at my team, they are shaking their heads. So that's what I obsess over. That's the difference that I'm trying to communicate. And as you know, other retail REITs in the universe of 30 of us - more than half of them don't even report what their tenant sales are.

So we are just trying to say, yes, I hear you. It's interesting, but it's not what's going to drive our ability to increase our cash flow because, remember, we can take the space back.

Got you, got you. And I understand. I appreciate your views. Again, we understand why you think what you think. But I was just curious on your thoughts on potentially creating a new category of sales productivity recording to perhaps capture the larger in-line tenants, the H&M, the [UNIQLOs], that pay you rent more like in-line tenants but whose results are not included in your reported core numbers, especially given how well they have been faring lately.

Well, look, we track total sales. And I think, year to date, if you included everything that - we don't get - everybody doesn't report. We have the department stores that - some don't, some do. Rick, what - our total number is up -

Almost 3.5%.

3.5%. So that's - you are right. Now, I'm not going to do that on a per-foot basis because it includes department stores. But it does show you what is going on with the market share of our properties. So they are up 3. - the total sales that we get reported are up 3.3%. Now, is that a number we should report? I don't know. When the strip center guys do it, call me and I'll do it. Okay?

(Laughs) Fair enough. Thank you.

Tayo Okusanya representing Jefferies.

Just along the lines of just the retail outlook, I was wondering if we could get some sense from you how you are feeling about things like mall traffic and just a general sense of what the mall feels like today and also in July.

Well, the fact is the consumer generally is still very cautious. And we see that across the board. There's no denying that. From, as you know, a number of retailers, both low-end, medium, and even high-end are all seeing somewhat of a cautious consumer. And that certainly is affecting retail sales in our property. So that continues to be the case. We have our work cut out for us with respect to that issue. We think it's - we don't think it's a shift issue going from - we've done a lot of research here. We don't think it's a shift to online from physical. It's really more of an indicator that the consumer right now is pretty cautious. And I think a lot of that is just all the macro stuff that's out there.

We've seen it before. We certainly have some retailers that have their issues, which will put some focus on us to re-lease their space. But again, those things ebb and flow. But we've got our work cut out for us with regard to just the consumer that's cautious right now.

So would you hazard a guess that mall traffic is down slightly or down low double digits or anything of that sort?

No, it's not down double digits. Okay? I don't know where you get that data, either. No, it's not. I would say mall traffic is generally flat. The summer months are not big until late July and August because of back to school. June is not an important month. Early part of July is not. So we will see what happens.

Okay, that's helpful. And then just one more from me on the outlet side of the business. During ICSC, there was general commentary coming out of the Company about some additional development that could be done in 2015-2016, like half a dozen potential locations that were mentioned. Just wondering if there is any update on that.

Yes. We do it - you mean from our Company?

Yes, correct.

Yes, we do intend to - as you know, as I mentioned in my remarks, we are starting Gloucester, which is August. Okay, that ground breaking - that will open basically a year from August. And we do have one other that we will hope to start this year. And then we still have three or four that are in the pipe for next year. So yes, nothing has really changed on that. Again, I don't want to bore the on in my comments. But we are being very selective in where we want to go and where demand is. And we are - let's - not that we are always going to bat 1,000, meaning we may pass up an opportunity that turns out good or may build one that's not great. But those are the two options that can happen. But generally I would say we are experts in understanding where the manufacturers and where the retailers that matter want to build the next outlet. Okay? Doesn't mean we are going to bat 1,000, but it's going to be pretty damn close.

Sounds good to me. Thank you.

Andrew Rosivach representing Goldman Sachs.

Don't shoot the messenger, but clients just keep asking me about sales, so I have to shoot a couple in. You mentioned earlier that the redevs were impacting sales, which kind of makes sense because you are going to have lower sales going on. Do you have any idea of what the quantity of that was?

Well, we would go property by property. But the fact of the matter is, look, sales were - I will just say this. We added more space. So when you look at the $6.12 to $6.08, that's the primary issue there. And also we added some centers that are not quite up to the core average yet. But that's nothing new and out of the ordinary. It does take time for centers to develop their trade area and everything else.

So in the movement that's - I don't want to call it the decrease because it didn't really decrease. The movement from $6.12 to $6.08 was really a function of adding additional space. And as I mentioned to you, the comp sales were actually up 90 basis points, which would ignore that impact. We give you total sales, but the comp sales were up 90 basis points. And the total sales just volume-wise, not on a per-square-foot basis, was up 3.3%. And that's as much as I really want to talk about sales.

I know. By the way, nobody is going to report 5.6% NOI growth amongst your peer group. But this is what I do for a living. So the 90 was actually trailing 12 months, not just the second quarter?

It was Q over Q.

Yes, second quarter.

Second quarter.

Second quarter over second quarter, true comp. Okay. And let me ask you a sales question that actually does matter. I'm assuming, as part of the Washington Prime spend, you spent some time thinking about what the growth could be on a multi-year basis because, let's face it, if sales really are flat or they are even negative for three years or five years, that actually does matter. And maybe if you could share a multi-year view, I think it would be really helpful to the market.

Well, you see where - I guess the simple way is just look at where our rent, our expiring rents are versus what - we are bringing in new rents at today's sales level. And if that's what you are focused on, you can see that embedded growth is pretty significant.

Well, no; that's easy. Right? Just even if sales stays flat, you can see where it's going to go. But do you have any thought of where sales are going to go? Any thoughts on looking at the last 12 months not being representative of where you really think that the tenants can drive their sales going forward in the next two or three years?

Look, I'm not going to give you a number, if that's what you are after. But I do think that the consumer has been cautious, and for all sorts of reasons. The sense on the macro side is that - and part of that was a move toward durable stuff. But the fact of the matter is I do think there's a wall here, and I don't view it as a long-term wall. I do think the economy sounds, feels like it's getting better. And with that, the consumer will move forward. But as I said, the economy, the GDP of last quarter was down 3%. I had nothing to do with that. I did my fair share. I built; I redeveloped; I hired people; I gave raises. I did everything I can to juice the economy, so don't look at me. Okay?

So we'll think - we feel good about our business.

Thank you, sir.

Paul Morgan representing MLV.

On occupancy - so you are getting up to pretty high numbers already. And based on your typical seasonality and another 100 basis points higher at year end or more, do you think you are at the frictional maximum? It's a little harder for you guys because the outlets have always run higher to comp you against the rest of the peer group. But if you just think of the malls, is this where we will end this year? Do you think there's much more upside? Is it good to push for that upside or to leave some frictional wiggle room?

Well, look, I'm always of the view make the deal and lease the space. But look, I think, Paul, at the end of the day there's going to be a little volatility. There are some bankrupt - we have low bit more bankruptcies this year than we did the last couple. So we're -- when you get the space back, you don't have it immediately leased. It takes time. So there's going to be some of that volatility. But I think we will maintain that level of occupancy, give or take a little bit here and there.

The only other point I would make, Paul, is that we spend a great deal of time asset managing our space to get the highest yield we can out of that space in terms of rent and sales production. So much of our discussions with our tenants are getting them right sized, which in a lot of instances is increasing the amount of space they are in so we can create additional rooms out of the same square footage, which drives our sales and drives our rent. So there's a lot of levers still left that we can pull to generate productivity even at these higher occupancy rates.

Sure, yes, that makes sense. Okay, so my other question just on development - you got about $1.6 billion, $1.7 billion, your share in your [shop] listed for activity that's under construction. And so that's basically over the next two years, I guess. And what should we think in terms of annual completions based on what's in your pipeline for starts over the next 12 months? Is that number going to stay about the same? DO you have some big projects that are going to come in?

I think the best way to do it is we think on average we are going to, as we said, spend about $1 billion plus a year. So it will spike up in that. But if you - and that's just more or less domestic. But we've got - that might spike up when we put Copley in and a couple of others. So we're going to -- there is lumpiness to it because some of the stuff that we are finally doing is big stuff, the Fields of the world, the Del Amos. So you are going to have some spiky -- but on average when you look back on 2016-2017, it's going to be $1.2 billion or so per average, more or less.

And do you think that 8% mall redevelopment yield is going to be consistent even when you add some of those bigger projects?

Yes. Look, the answer is yes because we also have new development in there that will be at higher yields than that. So when you put it all together it's a pretty good number that we feel good about.

Okay, great. Thanks.

Michael Mueller representing J.P. Morgan.

Following up on the last question, if you go out past 2016 and think about the next three years, five years or so, does it seem like you can maintain that roughly $1 billion a year spend based on what you think is in the shadow pipeline at this point?

It's so hard to really tell you one way or another. I don't -- the simple answer is I don't know. I think it certainly could extend a couple years, you know. But we have a very disciplined philosophy about adding because - and over-improving a center because at the end of the day you know what's -- if I go back to this $320 million, you know what drives our earnings is that we think about return on equity better than a lot of folks. And that's what drives the business. So if you over improve stuff and you don't get the right return on equity, you get - you have done it and it's great and the architects can slap themselves on the back. But the question is, where is the cash flow?

So I don't know. We are so focused on the handful of the big things that we have that that's the key. But Copley is a four or five - unfortunately, because I would rather have it much quicker -- but that's a four- or five-year project. So I think the simple answer is that, yes, that $1 billion to $1.2 billion stretches from 2016 and goes to 2017 and 2018, and then after that it's hard to really tell you one way or another.

The only thing I would add to that is are we looking for other opportunities within the portfolio? Absolutely. Do we have a number of things that we hopefully believe we can do to create incremental opportunities? We do. But it's going to be approached with the same discipline and the same rigor of analysis so we don't do something that's stupid.

Yes, and we are actually not in the - we are starting to see a little bit of new development, not outlets, that we are thinking about. We are close to one deal. And Liz brought up Oyster Bay. So we've got two deals, thank you, two deals that are out there to do new development that will not be outlets that aren't in. So if the economy gets better or stronger, maybe there's a little bit more new development going on. So it's a tough question to really give you any comfort in other than the philosophy of return on equity is what's really going to drive us. So we won't waver from that.

Got it. Okay. Thank you.

Jeremy Roane representing Hilliard Lyons.

We notice that tenant reimbursements as a percentage of operating expenses were higher than in the previous quarters before the spinoff of Washington Prime. Is the current quarter a good run rate for tenant reimbursements going forward? And also what led to the increase in home and original office costs?

Jeremy, this is Steve Sterrett. A couple of things. Because the income statement has been reclassified and the Washington Prime assets are all in discontinued operations, I do think the P&L for the quarter reflects a good run rate for the existing Simon portfolio. So I would say that's fine.

The one caveat - David mentioned it earlier - is we did spend incremental dollars in the second quarter related to the rollout of our branding campaign. And that lumpiness won't occur quite the same way in the future.

Home and - do you want to -

Yes, I'll go ahead. The home office and regional costs, the variance both year over year and sequentially with the first quarter is all one-time stuff. Some of it is related to the Washington Prime transaction where we vested some equity and recorded the cost for people who are now Washington Prime employees. Some of it was incentive compensation, some bonuses that were paid for mid-level people here in the organization who worked very hard on the Washington Prime transaction.

But no executive officers.

That's why I use the term mid-level. And some of it is retirement-related costs relative to the change in leadership at the Premium Outlet group that David mentioned.

Excellent. Thank you very much.

Ben Yang representing Evercore.

I'm sorry if I missed this. But did you update your same-store NOI guidance excluding Washington Prime? Just curious if you think growth can accelerate during the second half of the year.

The one thing that we did back when we announced Washington Prime - we told you that it would accelerate our same-store NOI by 30 bips. But that's the extent of the update. We have not given a forecast for comp NOI for the rest of the year.

But if your prior guidance was 4% and now it's 4.3%, should we assume that growth will decelerate during the second half of 2014?

I wouldn't necessarily assume that, no. Because we are a little bit ahead of our plan year to date.

Okay, got it. And then maybe switching gears, can you talk about why you guys didn't consolidate your ownership of St. John's Town Center when your partner was looking to sell? And if it was price, which I believe it was a 4% cap rate, was there an opportunity or consideration to maybe selling your stake along with your partner for that asset?

Well, the answer is primarily the reason we didn't buy it was primarily price, just to cut to the chase, even though we think it's a great asset long-term. Why would we sell it? It's a great asset. We built it. We leased it. We managed it. We are adding Nordstrom. We don't need the capital. That's the business we are in: owning real estate. So why would I sell a mall that's - we are the managing partner; we run it day to day. We had a partner in it, so it was no harm, no foul. I didn't see any - we don't need the capital, and I don't see any reason to sell it.

Got it. That makes sense. If it was a 4% cap rate for what I believe is a $700-per-square-foot mall, is that a good comp for trophy assets? Or I believe there's some near-term lease roles that could be potentially pushing that cap rate lower. And if that is the good comp, does that have any - do you have any thoughts on what that means for the value of your stock?

Well, let me just - you've put a lot in there. I don't want to tell you what - I'm not going to sit here and say to you that - what the cap rate was. We don't do that. That's a private transaction. So it is what it is. The reason we didn't buy it - we owned it, we controlled it. We didn't see that, with all the capital that we are putting back in the portfolio, it wasn't really -- it wasn't going to - we didn't say that - the real need to do it from our standpoint. From a going forward - look, if you look at the value in the private markets and what's being paid and look at where our stock is trading, I think you could certainly make the argument that the private market is certainly more expensive than public stocks. And assuming we don't decrete from value but create value, you ought to get a little, maybe $0.20 a share for that.

But Ben, I would say to you clearly that the private-market value clearly is more expensive than the public market value, when you put it altogether. But that ebbs and flows.

Got it. Thank you. That's helpful.

Rich Moore represent RBC marketing. Please proceed.

On occupancy costs, you guys give that in the supplemental at 11.6%. But of course, that's a mix of existing leases and new leases. And I'm curious what would that number be, do you think, for new and renewal leases you put in place today?

It's going to -- our leasing trend right now is continuing unabated. And David pointed out, if you look, we are signing new leases at $66. We've got expiring leases at $41. It's going to be around - you are talking about the spread?

Yes. I'm thinking, Rick, the actual occupancy costs numbers. So that new ramp that you are getting at $60 plus, as a percent of sales.

Overall, for the body of work we are doing, that is going to basically be right around the same number and maybe moving up a touch based on the -

I think what Rich is asking is, when we look at new deals, what is our occupancy cost. I would say it's probably in the 14% to 15% range, in that range. But again, it's all over the board. But again, if you look at our peer group, we've got very low occupancy cost. And the ability to drive that will continue to drive our comp NOI in a stable economy.

Right. I got you, David. Yes, that's a significant number. I appreciate that. Then the other thing is you didn't spend a lot of time on your European investments on the call here.

Yes, we did that deliberately. Not that we don't love them, okay, and not that they are not doing well. We are trying to make our remarks shorter and shorter. So -

No, I hear you, I hear you. I'm curious how you see that actually going at this point, if there's -

It's doing great.

- And how the relationship, I guess, is progressing. And then also I'm a little curious. Is there anything coming back this way? So are you finding new tenants? Are you finding any changes in organizational thoughts, anything like that that comes in the other direction?

Well, just to name two great retailers that are from Europe coming here, Primark and Topshop. And just to name - forget H&M and Zara, who have been here. But those relationships are certainly enhanced by our presence in internationally. But Rich, I would say simply this. We are batting 1,000 in Europe and in international. So everything - and that's - it's (inaudible), it's great. The McArthurGlen deal is going to be very good. We think we got in at a very good value, and there's growth opportunities. And the outlets business in Malaysia, Korea, Japan, Mexico, Canada - thank you, Steve - is good, all good.

So we just figured we don't -- we are trying to shorten the presentation up. And Liz wrote it, and I took it out. Don't read anything into it.

I got you. On that, on Europe, is it steady as we go at this point, you think? Or will there be possibly new announcements coming out of the European venture?

I'm open to any ideas anybody has. Okay? No, but I - look, I think McArthurGlen's development pipeline is very active. But as you know, that takes time. And Klepierre - we give strategic guidance and all that stuff. But they've got a good pipeline, too, in terms of extensions and the like. So Japan we've got - yes, so we are going to continue to build on those businesses. Is there going to be anything earth shattering? It depends what you consider earth shattering.

All right, I got you. Great. Thank you, guys. I appreciate it.

Dan Oppenheimer representing Credit Suisse.

Hi, this is Chris for Dan. Occupancy in 1Q and 2Q has been among the highest in the last 10 years for those quarters. And understanding that you have achieved strong rent growth in those quarters, just wondering, though, that given those occupancy rates is so much higher than typical for those quarters, is that a situation where you may have pushed even harder on those rents? Or do you feel that you have struck a pretty good balance between occupancy and rental rate growth?

Well, I think we are -- look, it's an art, not a science. I think we are pretty good at it. And I think historically, philosophically, we have always erred on making the deal. So we are not as - I'm sure people complain on the other side sometimes. But - so I think we are always trying to lease our properties up.

I do think, if you are looking historically, you've probably got a big compositional change in the portfolio, depending on how far out you are looking, that has occurred over the last decade. So that's probably what is maybe causing that, to some extent. So I would - that's probably the biggest issue.

And it's interesting. In the Q1, we used to have a lot of fallout every holiday season because of - let's talk 10 years ago. That has become less and less of a typical event. So you may be seeing a little bit of that on the margin.

That's really helpful. Yes, that's true. I went back 10 years, just looking at those. And I think, yes, there's definitely some composition changes.

Yes.

Second, you mentioned before that you will continue to bring the portfolio, as you have always done even after the spinoff. But with the free cash flow spending most of the development and the redevelopment pipeline, do you see much in the way of dispositions for the remainder of 2014? And I guess just generally, do you have the regional mall portfolio where you want it after the spinoff, or is there still some work to do there?

I would say there's always going to be assets that we are going to prune and sell. Frankly, it hasn't been a huge focus, given the spinoff. We spent most of our effort of any free time on that. So I think that's something that we will think about for 2014-2015. I'm still depressed that I lost $1 of FFO, so I've got to get over that. I hate losing cash flow. So I've got to come to grips with that. But yes, we will continue to sell, but probably nothing the rest of this year of any material nature.

Great. Thanks, David.

Christy McElroy representing Citi. Please proceed.

It's Michael Bilerman. I just had a couple questions, the first for Sterrett. And I guess - I don't know if Andy is in the room. But as I think about the balance sheet, which is an unbelievable shape, the one thing that we haven't talked about is that you have about $7.5 billion of debt coming due in the next 2 1/2 years at like 5.5%, 30% of your debt, a big chunk of that being unsecured bonds, a bunch of that secured debt on balance sheet, and the bunch of the JVs. I guess how aggressive can you be to pull any of that forward without paying huge charges or make wholes to bring that cash flow because -- David, I know you love cash flow -- to bring that cash flow forward?

Did your liability management people prompt you to ask that question? Are you allowed to talk to them?

There's a big Chinese wall.

Okay, just checking. Well, Michael, it's fair. And I do think if you look at the expiration, the debt maturity schedule, one of the things you see is that the next couple of years out we've got the opportunity to continue to roll down rates. It is something that we look at on a regular basis. But listen, it's essentially trading dollars because there are make-wholes or yield maintenance in virtually every debt instrument that we have. So - but there are other ways that you can potentially hedge your bets in this, whether it's going out and doing treasury locks or whatever. So we do look at it, and we are as aggressive as we can be. Andy would tell you that we pay every debt instrument at its open-to-par date, and we are managing that as aggressive as we can.

Understanding that there's a curve aspect to this, but what is your contemplated, as you think about the next 2 1/2 years and this debt rolling, where do you want to move that in your schedule? Because obviously it's like 100 basis point is over $0.20 a share. Right? And clearly, where you are on a 10-year basis today, you would be at probably 3.2%, 3.3%. So how should we think about how you want to roll that debt? What is that average term? Five-year, seven, 10, 15? I'm just trying to get -

The simple answer - it will be across the spectrum. You know?

But I would also say, Michael, one of the things that we focus on a lot is the asset and liability match. And ours is primarily a 10-year lease business, so 10-year debt is primarily the sweet spot of where we are going to do most of our financing. But I would also tell you go back and look at our weighted average cost of debt over the last four years. It has come down 15-20 basis points a year. That opportunity is certainly still out there for the next couple of years. The markets are in really good shape right now.

And I would also tell you that one of the reasons that you are hesitant to do a large liability management trade is that the forward curve tends to overestimate where rates end up about 90% of the time. And David mentioned in his remarks the fragility of the consumer and the economy. It's hard to envision a scenario in the near term where rates are going to run crazy because I don't think the economy would we continue to grow in a substantial rising -

Michael - and I will just say this. One of the things that's interesting, our floating-rate debt percentage is absolutely well below our peer group. It is 7%, if that, 5%, somewhere in that range. So we are really not juicing our FFO by playing the floating-rate debt game.

Well, your debt also is materially lower as a percentage of your enterprise value. So it's even a lower percentage. And you are sitting on $2 billion of cash.

So what do you want me to do?

And you've got $1 billion of free cash flow a year. So what are you going to do?

I don't know.

I don't know.

Come talk to me, I'm lonely.

You know, we saw that Apple has still got $120 billion of cash, so we've got a ways to go.

So questions, David, on Klepierre. BNP had to pay the US government, I don't know, a $9 billion fine. They are still sitting with a big stake in Klepierre and I'm just curious whether you as Simon, you as Klepierre, or you in conjunction with a third-party investor have gone to them and said, hey, you are sitting here with $1.5 billion in this company. We can provide you some liquidity to pay your fine.

You know, look, they have been a terrific partner with us. We have a very good relationship. That have been very helpful on our involvement with Klepierre. So beyond that I can't really say, Michael, anything more than that, other than they have been a pleasure to work with. And I have absolutely no indication at all that - it has been a good investment for them, they like the investment. Other than that, I can't really say one thing or another on that front.

Should we expect status quo out of your ownership? And how should we - it was clearly a good investment. Europe has recovered. You are able to manage through their sales process, focus them, Simonize them a little bit.

Well, I do want to learn French. I think right now that's status quo. So -

You've got to learn French to go up to Quebec.

That's true, but that's a different kind of French (laughter). Look, I think just from that company -- and they really are better off to speak for themselves -- but they have done a great job turning around. They are starting to get the mojo on the property level. The balance sheet is in good shape. So the focus for them clearly will be on external activity going forward. I'm there to help them in any way I can. But that's the focus. Things are going well there, and they've done a good job.

And just a clarification - on the 3.3% total sales number you threw out, that's a quarter-over-quarter or trailing 12 number?

Trailing 12. Trailing 12.

Do you have that number of what it was quarter over quarter, by any chance, total sales?

We could, but I don't have it.

Don't have it in front of me but I can get it.

We have it, but call Liz. She will give it to you.

All right, thanks. Bye.

With no further questions at this time, I would now like to turn the call back to Mr. David Simon for closing remarks.

All right. Thank you for your interest and your questions and have a good rest of the summer.

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