Simon Property Group Q3 2007 Earnings Call Transcript

Simon Property Group, Inc. (SPG)

Q3 2007 Earnings Call

October 29, 2007 11:00 am ET

Executives

Shelly Doran - Vice President, Investor Relations

David Simon - Chief Executive Officer and Director

Richard S. Sokolov - President, Chief Operating Officer and Director

Stephen E. Sterrett - Chief Financial Officer, Executive Vice President

Analysts

Jonathan Habermann - Goldman Sachs

Christy McElroy - Banc of America Securities

Jeffrey Spector - UBS Securities

Craig Schmidt - Merrill Lynch

Jonathan Litt - Citigroup

Paul Morgan - Friedman Billings Ramsey

Jeff Donnelly - Wachovia Securities

Matthew Ostrower - Morgan Stanley

Michael Gorman - Credit Suisse

Michael Mueller - J.P. Morgan

Louis Taylor - Deutsche Bank

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2007 Simon Property Group earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed, Madam.

Shelly Doran

Welcome to the Simon Property Group third quarter 2007 earnings conference call. Please be aware that statements made during this call that are not historical may be deemed forward-looking statements. Actual results may differ materially from those indicated by forward-looking statements due to a variety of risks and uncertainties. Please refer to our filings with the Securities and Exchange Commission for a detailed discussion of these risks and uncertainties.

Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that today’s call includes time-sensitive information that may be accurate only as of today’s date, October 29, 2007.

The company’s quarterly supplemental information package was filed earlier this morning as a Form 8-K. This filing is available via mail or e-mail and it is posted on the Simon website in the investor relations section under financial information, quarterly supplemental packages.

Participating in today’s call will be David Simon, Chairman and Chief Executive Officer; Rick Sokolov, President and Chief Operating Officer; and Stephen Sterrett, Chief Financial Officer. Now I will turn the call over to Mr. Simon.

David Simon

Good morning and thank you for joining us today. I will just take a few moments at this time to provide comments on the results for the quarter and recent activities, and then we will open the call up for your questions. Third quarter diluted FFO was up 12.3% over the prior year to $1.46 per share. Positive factors contributing to the quarter include strong portfolio operating metrics in all our domestic platforms, strong operating results from our European investments and our premium outlet centers in Japan, and the accretive impact of our acquisition of the Mills.

You should also note that our 12.3% FFO growth was achieved despite the fact that our share of land sale gains was $7.8 million lower than last year at this time and our share of the provision for credit losses was actually $5 million higher in the third quarter of ’07 compared to the third quarter of ’06. In addition, during the third quarter of ’06, we recognized a one-time, $3.7 million gain related to the sale of our holding in a technology venture by Chelsea.

Comparable sales were up 3.6% to $491 per square foot in our domestic regional mall portfolio. Sales increased 8% to $499 per square foot in our U.S. premium outlet center portfolio. Comparable regional NOI, mall NOI was 5.6% up for the quarter, higher than both the first and second quarters of 2007. This is primarily the result of strong operating results.

Comparable NOI growth for our premium outlet portfolio continues to be strong at 9.4% for the quarter and the nine months. Occupancy in the mall portfolio increased 20 basis points over the year earlier period to 92.7%. Our premium outlet portfolio remains effectively fully occupied at 99.6%. Releasing spreads remain very strong. The mall portfolio is $8.85 per square foot, representing a 23% increase. Releasing spreads for the premium outlet portfolio was $7.53, representing a 31.8% increase and we are well into dealing with our 2008 expirations.

The general economic health of our tenants remains strong through the end of the quarter. We lost only 53,000 square feet of occupancy to bankruptcy for the first nine months of 2007 versus 612,000 square feet lost in the year earlier period.

We opened three new international centers during the quarter, Kobe-Sanda premium outlets in Japan on July 5th; Porta di Roma, the largest shopping mall in Italy, opened in Rome on July 26th; and Cinisello shopping center opened in Milan on September 27th. Construction continues on six new U.S. projects, two community lifestyle centers, three premium outlet centers, and a 950,000 square foot open air regional center, as well as two shopping centers in Italy and five in China.

On July 5th, we completed the sale of a portfolio of five non-core assets in Poland. Our share that we repatriated back to the U.S. from the sale exceeded $121 million. We would calculate an IRR for you for the transaction, but since we had no equity in those centers, we can’t come up with a number. I think this is a great example of the value we have created through our international development activities.

I just want to make a note on the mall numbers, they don’t include any impact from the Mills. So that’s just strictly the mall portfolio without the Mills malls as well.

As we have grown our business, we have maintained the integrity of our balance sheet, as evidenced by our A-minus A3 ratings, the highest investment grade ratings among U.S. [retes].

We believe it is critical to be positioned at all times to access capital in multiple forms. In these challenging credit markets, the strategy continues to pay off, as evidenced by our ability to execute two significant capital market transactions at favorable terms.

On August 22nd, we syndicated a senior loan facility for the Mills Limited Partnership. The facility was initially closed for $925 million in June of 2007 but due to strong demand, the facility was increased to $1.025 billion, including a $50 million revolving credit facility. The facility interest rate is LIBOR plus 125.

And on October 4th, we implemented the $500 million accordion feature of our revolving corporate credit facility, increasing capacity of our revolver at our credit facility up to $3.5 billion. The base rate on this facility is currently LIBOR plus 37.5 basis points.

As a result of our strong performance and confidence in our business strategy, today we announced that we expect to achieve at least the high-end of our previously updated guidance of $5.83 to $5.88 per share for 2007 diluted FFO. I remind you that our original 2007 guidance issued back in January was a range of $5.70 to $5.80 per share.

With that said, we’re now ready to open the call up for questions, Operator, so we are pleased to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Jay Habermann of Goldman Sachs. Please proceed.

Jonathan Habermann - Goldman Sachs

Good morning, everyone. I guess David or Rick here, can you give us some thoughts just on Mills in terms of your leasing to date? And I guess the strategy, especially as you head into the end of the year?

David Simon

I think it’s safe to say that we’ve had some impact on Mills. Not a huge impact, because we took it over, as you know, in the spring. So we’re optimistic we’re going to have a significant impact in the future. But I think the results of ’07 from Mills ultimately will have marginal impact but not a material impact, just given the nature of how long it takes to lease and open up space.

I think we’ve had a relatively big impact on charting the future strategy of a number of the centers and the redevelopment opportunities, outlining those, coming up with a game plan. But I would think that ’08 really is going to be the year where we are going to see the impact that we’ll have on a number of the assets. Some will take longer but it’s safe to say that ’07, we’ve had marginal positive impact but not a lot.

Jonathan Habermann - Goldman Sachs

Okay, and you mentioned I guess 53,000 square feet in terms of bankruptcies year-to-date. Any sense of how you anticipate the upcoming holiday shopping season and implications for next year?

David Simon

Well, look, I think in our last call, we threw a little bit caution to the wind and we continue to throw a little bit of that. There’s a lot of economic uncertainty out there. We’ll have to see. Our properties are well-positioned. They are high quality, high quality tenants, but it would be naïve for us to suggest that we won’t have some -- there won’t be some impact in terms of what’s going on in the economy for us.

Now remember, percentage rents aren’t a huge part of our business. They are a little bit higher at the Chelsea level because they have a number of the anchors that do straight, percentage rent deals. But look, there is caution to the wind economically.

We actually embrace these kinds of economic changes. That’s when we’ve done some of our best work, so we’ll just have to see how the next few months transpires.

Jonathan Habermann - Goldman Sachs

Okay, last question for me; in terms of just expenditures internationally, can you give us a sense of just how much you are thinking about spending over the next several years in terms of new development overseas, whether it’s China or Europe?

David Simon

Very hard to quantify, other than what’s in the hopper that’s laid out in our 8-K, primarily because China, we are going to build the five and take kind of a step back and see how those are resulting. Japan and South Korea, just on the outlet side, I think we have a good handle that we think over the next few years, we’ll add more, two or three more to South Korea, perhaps two or three more to Japan, but that’s still -- there’s still nothing imminent in terms of what’s going to happen on the construction side.

And then in Europe, primarily through Simon Ivanhoe, we’re still awaiting various approvals to construct some great high quality product but the approval system in France is taking a little bit longer.

I think we’ve laid out a pretty good plan in Italy. We’ve got a great franchise in Italy. We have a handful of projects through 10. We’re also looking at a handful of other projects.

So we expect development to continue but beyond what we put in the 8-K, we’ll just have to wait and see how those transpire as well.

Jonathan Habermann - Goldman Sachs

Thank you.

Operator

And your next question comes from the line of Christy McElroy with Banc of America Securities. Please proceed.

Christy McElroy - Banc of America Securities

Good morning, guys. Just following up on Jay’s question, do you see the potential for closing that 400 basis point occupancy gap between your portfolio and the Mills regional malls?

David Simon

Between the malls and the outlet business?

Christy McElroy - Banc of America Securities

No, between your mall portfolio and the Mills regional mall portfolio, in terms of what you see as the frictional occupancy in the Mills portfolio.

David Simon

I would hope so.

Christy McElroy - Banc of America Securities

And do you see that next year? You talked about some progress being made next year.

David Simon

I think like anything, it will take a little bit longer than you want it to take. I think we should make progress next year but I don’t remember exactly where we had budgeted. We’ve gone through the budgets on those. I don’t remember exactly where we budgeted for the malls that the Mills owned. But I think we’ll bridge at least half the gap is my gut.

We also have a couple that are in the midst of major redevelopments, so let’s take Southdale as an example. We expect over ’08 to create a major redevelopment vision for that property, so there may be some leasing that we won’t be doing because we’re in the process of coming up with that plan. Del Amo is another example, might fall into that category.

So there are a couple there that may make it look a little bit lower than really what it is, just because we are going through the redevelopment process. But I would think over the long haul, there is no reason not to anticipate that we would get it up to where we are. The centers do $450 a foot on average, so we don’t see any reason why we can’t get it up to that level.

Christy McElroy - Banc of America Securities

Okay, great. That’s helpful. And then just quickly, what was the average price on the shares that you bought back during the quarter? And have you repurchased any additional shares in October?

Stephen E. Sterrett

The shares we bought were at $86.25, and we’ve not bought any since the end of the quarter.

Christy McElroy - Banc of America Securities

Great. Thank you.

Operator

And your next question comes from the line of Jeffrey Spector of UBS. Please proceed.

Jeffrey Spector - UBS Securities

Good morning. Can you comment on ’08 at this point?

David Simon

Well, we expect it to be a good year. We will work our tails off to make it a good year. But we intend to -- you know, we’re in the midst of our finalizing our budget. We spent really November fine-tuning it, and we normally announce it, what our internal budget is, some time in January. We’ll stay with that program.

Jeffrey Spector - UBS Securities

What are some of the latest comments that tenants are making?

David Simon

Well, I don’t -- look, I think September and October have been slow sales months for sure overall. Some of it in terms of our retailers attribute it to the warm weather, some of it may be the economic uncertainty that exists in our country today. But so far, it’s safe to say the vast majority of our retailers have not changed their plans in terms of store openings for ’08 and their view on their future performance.

So it’s business as usual across the board. There’s always a couple of retailers that have a tough business model that they are working through, but I would say generally it’s business as usual, even though sales for September and October have not met their expectations.

Jeffrey Spector - UBS Securities

Okay, and just last question; can you provide an update on Domain and any latest thoughts on mixed used projects?

Richard S. Sokolov

Frankly, we were just down in Domain, and when you walk through there, it is very vibrant. The addition of the residential component and there will be a hotel component, an office component, provides a much more vibrant environment. The restaurants are all open at Domain and on a Wednesday night, were fully filled with people extending our shopping hours and to the extent that we can bring in these kinds of elements on a basis that makes sense economically and complete the environment that we are creating, it’s something we’re continuing to look at and we have a number of others in the pipeline.

The ones that have opened so far for occupancy, which are Domain and Firewheel and South Park in Charlotte, are all leasing up in accordance with their pro forma and in most cases, at higher rents than we budgeted because they really are presenting a relatively unique environment in each of those markets.

Jeffrey Spector - UBS Securities

Great. Thank you.

David Simon

I’ll just -- Shelly had this in and I took it out, but in Austin, you know, it’s kind of unique because we did have our board meeting down there last week. You can see the breadth of the company in Austin.

For instance, we did the high-end Domain, wonderfully executed development anchored by Neiman Marcus, as Rick mentioned, with office and apartments and the high-end tenants. We have Barton Creek, a traditional, fantastic enclosed regional mall. Lakeline, which is a nice suburban mall, we did a higher end power center up in Georgetown, North Austin on I-35, which is anchored by Kohl’s and Target, and we did our outlet center there as well. We own some other property that we’ve -- as well and it kind of gives you the depth and breadth of the organization to be able to execute all reasonably well all the various different products.

And on Domain, we’ll be starting in early ’08, Domain II, which will be about another 500,000 square feet of shops. We’ll be finishing Building P in ’08, which is a pad associated with Domain I, and we also anticipate expanding the premium outlet center in Round Rock.

Jeffrey Spector - UBS Securities

Thank you.

Operator

And your next question comes from the line of Craig Schmidt with Merrill Lynch. Please proceed.

Craig Schmidt - Merrill Lynch

Thank you. The focus on the international outlets, will that remain in Asia or do you see any other opportunities for some premium outlet businesses?

David Simon

Craig, I think long-term, I don’t know what that means anymore, but we would anticipate having at some point a presence in Europe. We still are sorting through exactly how we are going to execute that but I think it’s an objective that we have. Obviously we are going to do it on a basis where we think we can add value, and if we can’t do that, we won’t. But it’s clearly an objective that we have, is to have a premium outlet presence in Europe over the longer term, medium term to longer term.

Craig Schmidt - Merrill Lynch

Is zoning the primary hurdle, or --

David Simon

I think it’s more organizationally, you know, just dedicating the resources. I would put that -- to get the right to build in Europe is a real headache. We’re not even at that point where we can use that as an excuse. We had that problem in Simon Ivanhoe. I’m hopeful we’re going to make some progress there. So we are not at that point where we can blame it on the zoning.

I’m sure it’s a challenge, but we have a great presence in Italy that we think we can take advantage of with our premium outlet product. I think Central Europe is another example, as ultimately there being a time and place for the outlet business. So I think it’s a matter of time. We have to address it organizationally, but hopefully we’ll be able to do that.

Craig Schmidt - Merrill Lynch

Great. Do you have a cap rate for the two non-core malls you sold in the U.S.?

David Simon

No.

Craig Schmidt - Merrill Lynch

Okay, thanks.

Operator

And your next question comes from the line of Jonathan Litt of Citigroup. Please proceed.

Jonathan Litt - Citigroup

Hi, this is [Ambika] with John. Is the upside in Mills more on the traditional mall side? And on the landmark assets, is it more on the occupancy side or is there also some upside in rent?

David Simon

I’ll let Rick answer too, but I would say I think the upside is going to be across the board. It’s going to be in development, redevelopment, boxes, marketing, the operational side, leasing, increasing the occupancy, so I would view it across the board.

The portfolio is not perfect, as you know. The good news, the less perfect assets don’t contribute a lot of material NOI to our venture, or FFO. But I would say the upside should be across the board in each and every aspect of the business that we are in.

Richard S. Sokolov

And I would just pick up on something David mentioned earlier; we have put together for the entire venture portfolio, both malls and Mills, very detailed strategic and tactical things to be done at each of these properties. And one easy example at Esplanade in New Orleans, we’ve been operating with a vacant Macy’s. Well, Macy’s has announced they are reopening in the Fall of next year. We are adding several other anchors there and that is going to substantially reposition that asset and drive occupancy and rent.

Each of our groups have put together their plans for integrating these properties into the programs we have already in Simon and those things are ongoing. And we would expect and we have seen the beginnings of a contribution from all those efforts.

Jonathan Litt - Citigroup

And then on the management income side, it basically doubled from 2Q to 3Q. Should we think of 3Q as the run-rate or were there one-time items in 3Q?

Richard S. Sokolov

No, Ambika, you should think of 3Q as the run-rate.

Jonathan Litt - Citigroup

Okay, and then on the expense recovery rate, that also ticked up as you previously had guided in the first half of the year, that it was going to come up in the back half. Will it remain at this level for the fourth quarter and also into 2008?

Richard S. Sokolov

I would expect it to remain at that level for the fourth quarter. As you know, as we talked about on the call last quarter, some of the variability in the recovery ratio is because of the timing of key capital. As we get into ’08, clearly within quarters, we could see some variability again. But I suspect as you look at the full year ’07, we’d expect ’08 to be at least comparable on a full-year basis with where we ended ’07.

Jonathan Litt - Citigroup

Okay, great. And my last question -- do you have any guidance on gift card revenues in the fourth quarter, now that the timing of revenue recognition has changed?

Richard S. Sokolov

Well, the timing hasn’t changed relative to where we were last year. The timing changed as a result of our change in the program, which was back in I think late ’05, early ’06. We expect the card sales to be up double-digits this year. I think we did about $515 million last year and we’ll be in the high 500s, maybe to as high as $600 million this year. So I think you’d see a corresponding increase in the revenue growth in that 10% to 15% range.

Jonathan Litt - Citigroup

Thank you.

Operator

And your next question comes from the line of Paul Morgan of FBR. Please proceed.

Paul Morgan - Friedman Billings Ramsey

Good morning. In terms of -- you’ve been in the market, whether selling some of your non-core properties or with the Mills properties, and I’m interested in what you are seeing since July, August, in terms of the number of bidders for B and C type properties and the spread between cap rates on those types of properties and at least what you think they might be for A’s still.

David Simon

Let me go back to Craig’s question a little bit. We have -- I think it’s safe to say on a quality project, the cap rates haven’t moved in any material way, whether that’s an enclosed mall or a community center or anything else.

And I think we are very close to selling two Mills malls, as you know. Westfield disclosed the cap rates associated with those, which were -- I don’t know, five-and-a-half or something, maybe a little less than that.

The ones that we sold just -- these aren’t perfect cap rates but it will give you a sense. I mean, like Boardman Plaza we sold was -- you know, it’s not pretty real estate but I think we sold it around a seven cap rate. University Mall, we were losing money and we sold it and Alton Square was -- it’s been a tough project for a number of years but my guess is at around a nine cap rate. Now, that’s a very small mall, so it did like $1.8 million of NOI or $1.4 million, $1.5 million, somewhere in that range.

So that gives you a sense of -- you know, trades were happening but I think it’s safe to say that if it’s quality asset like Westland and Broward, they’re quality assets. I think in the mall side, you’re still at the five to five-and-a-half cap rates.

Paul Morgan - Friedman Billings Ramsey

Are you less likely to go for more of those nines, or just keep them, or do you think this is actually sort of a return to what might be a more reasonable spread between A and C, and there’s no reason to expect -- no reason to wait?

David Simon

Well, I think Alton Square, I hate to say it, was going to be a nine today or a nine a year ago. We’re one of the few companies that admits that sometimes we don’t have perfect real estate, and I don’t think the change in the credit markets or anything else really affected the -- we’ve been trying to sell Alton for -- maybe this if the reverse think about it. We’ve been trying to sell Alton for two years and in the height of the real estate market, we couldn’t get anybody to buy it. We finally found somebody that will buy it. I hope they do well. I’m sure they will.

So what does that tell you about cap rates? I don’t know.

Paul Morgan - Friedman Billings Ramsey

My other question was there’s been a lot of talk over the past couple of years with lifestyle developments in terms of some of the lenient leases for a lot of kick-outs, or co-tenancies, and some people have speculated than when sales slow, you might see the ramifications of that and opportunity for -- to get retailers back into malls who might have left for these projects, or to see a lifestyle center, a new one, completely unwind.

Do you think we’ve gotten to the point where you might start to see that, or has it just not been a long enough period of soft sales?

David Simon

My gut is to tell you that the new stuff on the drawing board, I don’t have -- this is just my gut, but I would tell you that the new stuff on the drawing board I think is going to be very hard to execute. And without naming names or retailers, but the four or five retailers that are involved in most every one of these, they are not like having really high comps -- in fact, [negative] comps, so the bargains they are going -- I mean, the deals that they are going to drive to do those are going to be tougher and tougher in a very tough comp environment, and in some cases even in a negative comp environment. I would think that construction lending will be a much higher standard because there’s not the immediate CMBS take-off for the construction lender.

So I think the good news for us and other mall owners is that the hypothetical let’s get four tenants and give them a bunch of great deals and we’ll do a lifestyle center are probably currently -- are probably going to go by the wayside, if I had to guess, just because I think it’s going to be very tough to execute. So I think that gives us some opportunities, maybe they’ll partner with some people.

Some of the ones that have been built may come undone and maybe you can buy those at a decent price. We haven’t seen much of that yet but I think that’s coming, so I think that world has changed significantly.

Richard S. Sokolov

The only other thing I would add is that the biggest constraint we have on adding those retailers to our properties is inventory, so when we are -- basically we took back all these Macy’s stores and are knocking them down and adding square footage expansions on our existing properties, every one of those retailers is saying let’s come and in fact, they are opening now and you can see that in the 8-K. We’ve got four or five of those projects opening over the next literally two months. We just opened an expansion of St. John’s that opened last Friday, so one, when we have the inventory that’s well-located, the retailers want to come into those projects.

Paul Morgan - Friedman Billings Ramsey

Thanks.

Operator

And your next question comes from the line of Jeff Donnelly with Wachovia Securities. Please proceed.

Jeff Donnelly - Wachovia Securities

Good morning, guys. A question I guess for Rick and for Steve. Are you guys seeing a change in the pace or tenor of either financing or pending lease discussions around A and B properties? Can you break that down, if possible, I guess either by segment or geography?

Stephen E. Sterrett

You mean, Jeff, is it taking longer to get leases done?

Jeff Donnelly - Wachovia Securities

Yeah, or conversely, or -- exactly. Are tenants showing more hesitancy?

Stephen E. Sterrett

We have not seen, in the stable properties, the tenant demand is consistent. Obviously in the best properties, we could add substantially more square footage and have more demand, but it is not a slacking of demand and the other in the B stable properties.

Jeff Donnelly - Wachovia Securities

Steve, what about on the financing side? Are you seeing spreads widening much more aggressively there in the B assets?

Stephen E. Sterrett

Well, the C and B market, as you know, has been really pretty much shut down for the last 60, 90 days. It’s interesting because we are seeing more activity from the life companies now, which I think is just a function of them having always been at the same pricing level and the market kind of have come back to them, if you will.

I mean, there’s no question that it is at wider spreads to get a refinancing done on a property. There is a little bit of differentiation in quality but I would say most of what we are seeing now is just a reaction to the repricing of risk in general and less specific to differences in quality of assets.

David Simon

I think, Jeff, the issue for A and B is not spread -- it’s loan to value. The days of having a big, huge, over-refinance, at least currently, is probably tougher to come by, obviously dependent upon how much debt you have on the existing property.

But the big issue, whether it’s A and/or B, is really loan to value right now.

Jeff Donnelly - Wachovia Securities

I guess maybe a follow-up question on --

David Simon

Jeff, but let me just finish. I mean, that is what puts us at a competitive advantage because we don’t just rely on that market.

Jeff Donnelly - Wachovia Securities

Okay. Rick, to follow up on one of your comments then, do you expect maybe the timeframe for projects and design or planning could be pushed back as a result of less robust retail interest there at the margin?

Richard S. Sokolov

We would certainly expect that some of the new projects that are in various stages of pipeline are going to be delayed in their execution.

Jeff Donnelly - Wachovia Securities

Particularly ones under construction today or just ones that are more in the design stage?

Richard S. Sokolov

Once you’re under construction, the people have to deal with it. Frankly, we have been more conservative in our approach to new ground up stuff and happily, our pipeline is pretty much being delivered over the next six months and is substantially leased. But to the extent we were in construction today for a brand new ground up project, I think that that would be a much more conservative approach to that underwriting than would have been the case a year ago.

David Simon

Let me just give you -- maybe I could encapsulate our strategy, Jeff, if I could, to take the moment. We are full steam ahead on our redevelopment pipeline, because as you know, it’s very easy to underwrite. You know what you are trying to accomplish, you know what tenant demand is going to be, and not only do you add value from the redevelopment but you add value from the existing asset. And that’s a huge program. It’s $3 billion to $4 billion. It will increase with the Mills, both the Mills and the malls from the Mills as we sort through those opportunities out.

Nothing from our point of view has really changed as we look out in the future. Our new development on Chelsea, same thing and we are -- demand is great, returns are fantastic, and we are on an extreme mission to continue to find new Chelsea outlets, domestic as well as in Asia. And hopefully one day in Europe.

From new development in the U.S. though, I do think it’s safe to say that all of the projects that we’ve had --now, none of this is material because the stuff that we were looking may have been in 10, nine, 10, 11. We are making sure that that stuff that we want to do that can be executed and an appropriate return, some of which will change and some of which may be deferred and/or dropped.

Jeff Donnelly - Wachovia Securities

Well, if you guys are becoming more stringent, say underwriting future ground-up development, is it fair to say you’re concerned, or are you concerned, maybe, that any of the domestic markets could be oversupplied, either due to sheer construction or just rooftops that are failing to materialize out there?

David Simon

I think that is certainly part of it. You also have the general economic malaise. You have high land prices, construction costs haven’t come down a little bit, so you need a little bit of -- if you are going to go into a tougher economic environment, I think you want to see some flexibility from land, pricing and construction costs.

Now look, the fact of the matter is we all think about these things as five, ten-year horizons, so that’s not going to deter us completely. On the other hand, we have plenty to do and plenty of opportunities, so for us to chase any new development that we are going to have to work our you-know-whats off to whether that, we’ll take our resources and plow them back into our existing portfolio, plow them back internationally, plow them back with Chelsea. I just think we are taking -- it’s not so much the economy. This was really brewing, but just make sure that the new stuff that we have really is going to meet future demand.

And you know, look, a lot of new stuff has been built -- not by us, thankfully -- but a lot of new stuff has been built and is still taking a long time to meet the demand. And certainly meeting the demand is going to, given the rooftop situation, is going to take longer to accomplish.

Jeff Donnelly - Wachovia Securities

One last question for you, David, is I think you guys sold Alton Square during the quarter. Was that something specific with that asset or more of a call in your view of St. Louis? And might you have had a different --

David Simon

It’s across the river. The people in St. Louis I’m sure don’t consider it part of St. Louis.

Jeff Donnelly - Wachovia Securities

But would you have had a different view if you guys had acquired the asset from Westfield that we saw CBL take?

David Simon

Let me just finish Alton. We certainly tried to sell it as St. Louis, but that river is a boundary that we couldn’t overcome. So I’m sorry, what was your question?

Jeff Donnelly - Wachovia Securities

I wasn’t sure if you would have a different view on that asset to the extent that you guys have acquired the assets from Westfield that we saw CBL take?

David Simon

No, no.

Jeff Donnelly - Wachovia Securities

Thanks.

Operator

And your next question comes from the line of Matt Ostrower of Morgan Stanley. Please proceed.

Matthew Ostrower - Morgan Stanley

Good morning. Just to follow-up on the fee question, was that increase in fees, was that basically attributable to Mills?

Stephen E. Sterrett

Primarily, Matt, it was the, as we talked about I think before, starting July 1, we did receive all the benefit of the fee stream in the Mills properties and incurred all the costs associated with managing those.

Matthew Ostrower - Morgan Stanley

And is there a specific cost to offset this item here, or is it just part of overall operating costs?

Stephen E. Sterrett

Part of it would be in the property operating cost line, and then part of it would also be in the home and regional office.

Matthew Ostrower - Morgan Stanley

Okay, and I know you had talked about, I think you had talked about giving more disclosure on this whole issue. Obviously you’ve given us more numbers here on the income statement. Is there more to come here in terms of either an increase before some specified time period, or is there a promote that will come in down the road here? Can you give any more specificity about that?

David Simon

I’ll just answer that, Matt. We have a -- and I hope you’ll respect this -- we have a -- our relationship with Farallon is a private partnership and we would -- obviously whatever benefits we get are going to flow through our income statement, our balance sheet. But the terms of that and the nature of that will remain private.

Matthew Ostrower - Morgan Stanley

Okay, and then on Mills, it just strikes me -- and I don’t know, I don’t have any specific statement I can point to, but it seems to me that you guys were a bit more optimistic about getting NOI up a little bit faster when you first bought this thing. Is that a misstatement on my part? And if it’s not, what’s changed here to slow things down?

David Simon

I think it’s a misstatement. We’ve done a lot on the operational side but I think it’s -- the leasing side takes time, so I really think the response to the earlier question was what impact do you have on leasing and we’ve done a tremendous amount on the operational side. Our view hasn’t changed at all, just trying to be realistic that it does take some time to get the leasing repositioned in the appropriate way. Our view on the properties and the potential hasn’t changed at all.

Matthew Ostrower - Morgan Stanley

Thank you.

Operator

And your next question comes from the line of Michael Gorman of Credit Suisse. Please proceed.

Michael Gorman - Credit Suisse

Good morning. David, if we could just go back to Mills for a second, looking more I guess on the productivity side, can you look out and see over the mid to long-term, I mean, how productive can these assets be? Are we talking something in line with your current portfolio average? Or are they always going to sort of be at a discount, productive-wise to the --

David Simon

I would think it would clearly -- we’d be able to clearly improve the average, and I would anticipate -- it’s hard to say exactly where they’ll end up, but I don’t see any reason why it will have any material difference from what we have.

Michael Gorman - Credit Suisse

Okay, and that includes --

David Simon

Like Rick said, Esplanade’s a great example. We are adding a Macy’s. We haven’t been able to really lease that part of the center because of that. It’s got low productivity associated with that. We are adding another anchor and a movie theater on the outside, so you can imagine a year from now when all that’s done, sales are going to pop and be much higher than they are.

So that, as you go through the list, we would anticipate the ability to increase the sales per square foot.

Michael Gorman - Credit Suisse

And then I guess just turning to your own portfolio, looking amongst the property types, this is the second quarter in a row where the outlets have been more productive than the regional mall portfolio on a sales per square foot basis. Is this a long-term shift that we are seeing or is it a quirk in current market conditions that is making these properties have better sales?

David Simon

I think one of the big reasons for that is because they do have, as you know, or we do have, a number of tourist-oriented outlet centers and the impact of the weak dollar, certainly helping the mall portfolio but given the smaller number of centers, it’s having a bigger, larger impact at the Chelsea level, i.e. Woodberry, Orlando, Las Vegas, just to name a few.

Michael Gorman - Credit Suisse

I guess just looking out over the long-term, assuming that the currency situation doesn’t last forever --

David Simon

That’s a big assumption, though.

Michael Gorman - Credit Suisse

I guess it is, but I mean over multiple years here, are these portfolios going to be essentially at parity?

David Simon

Well, look, I think the great thing about Chelsea is that the reason they are not at parity is because the occupancy costs are 8% and ours are at whatever they are -- 13%, so we do anticipate -- I think we’ve said consistently we do anticipate having a little bit higher NOI growth because of the low occupancy cost. And I think you are seeing that over the last year or so.

Sales, you know, look, it’s hard to really know how that all shakes out but you know, they are both -- the good news is they are both very high quality portfolio. They are both generating very high good rent spreads. Chelsea’s got a little more immediate upside because of the low occupancy cost. On the other hand, the redevelopment opportunities in our mall portfolio are immense.

Richard S. Sokolov

And the only other thing I would add to the Chelsea productivity is that as we have worked with the Chelsea leasing team and our leasing team, there are now a number of incremental full price concepts through our intercession and pitching that portfolio that are now looking to expand within the Chelsea portfolio and these are operators that are also going to drive sales at a higher percentage.

Michael Gorman - Credit Suisse

Okay, great. And just one last one, if I could, Steve, I guess this would be for you; I noticed that the mezz loan to Mills picked up during the quarter. Is that due to redevelopment spending or was there just -- is that just normal fluctuations?

Stephen E. Sterrett

It was due to the cash component of the limited partners of the Mills. We cashed a number of them out. We also redeemed some of the preferred stock of the Mills.

Michael Gorman - Credit Suisse

Did they have an option to stay in the partnership, or no?

Stephen E. Sterrett

It was dependent upon the number of units in the Mills that you held to begin with.

Michael Gorman - Credit Suisse

Okay, great. Thank you.

Operator

And your next question comes from the line of Michael Mueller of J.P. Morgan. Please proceed.

Michael Mueller - J.P. Morgan

I know you already talked about the tenant demand a little bit, but do you worry at all about the industry as a whole, the ability to lease out the space that’s slated to come online in ’08 - ‘09 if times are still tough? I mean, you just have, industry-wide, it looks like a lot more development and redevelopment going on than say five or six years ago.

David Simon

I don’t think from our standpoint we’re concerned at all. We have a lot of work to do but we don’t anticipate opening projects that aren’t leased, so I don’t think that’s a relevant concern.

I do think you’ve got to be careful about pushing new development. A couple of years ago, maybe a new development where it was easier to push today, but the stuff that we’re building, we don’t anticipate having any lease-up issues.

Richard S. Sokolov

And on the redevelopments that are opening in ’08, they are leased. In fact, Burlington, Nordstrom is opening next March. We’re opening some small shops yet this quarter because the small shops are ready to open and the space is available for them, so that really is not an issue.

Michael Mueller - J.P. Morgan

And you mentioned the impact on Mills leasing; has most of that to date been on the landmark side or on the traditional mall side?

David Simon

Well, the impact for us has been relatively the same. We kept a lot of the existing landmark people together so that the downtime associated with that was not as great. Whereas the malls, we basically had to put a new team together that we did here in Indianapolis, and that has had a little bit more of a transitional nature to it. But again -- and it’s easier. I mean, you have to remember, as you know, if you walk a Mills, it’s easier to get a tenant in there because the build-out is not like a mall build-out. So you can make a deal in April and get them open in October, where in the mall, you can do that but you have to, depending on the mall, it’s going to be a little bit tougher to get done.

Michael Mueller - J.P. Morgan

And last question, I know it’s not exactly apples-to-apples, but the leasing spreads on your malls, up over 20%, outlets about 30%. When you look at the landmark Mills, can you give us any color as to where the spreads are there?

Stephen E. Sterrett

Mike, I think it’s really too soon to say. I mean, one of the -- you’ll notice in the 8-K, we didn’t provide you any historical information and there’s a reason for that and that’s our lack of comfort with the integrity of that historical information.

I mean I’d suffice it to say, there’s leasing activity going on. We think we’re getting market rents. We think we can both grow the occupancy and the rent at both the legacy Mills portfolio but also their mall portfolio. But I think it will be another quarter or two before we’ll be in a position to give you much color on what the leasing spreads are, just because we need to get that data in our system and make sure we are comparing a good apple to a good apple.

Michael Mueller - J.P. Morgan

Okay, great. Thanks.

Operator

And your next question comes from the line of Louis Taylor of Deutsche Bank. Please proceed.

Louis Taylor - Deutsche Bank

Thanks. Good morning. David, could you talk a little bit about the tourism impact and especially if you can talk --

David Simon

Lou? Hello? Lou, we lost you. Lou?

Richard S. Sokolov

Operator?

Shelly Doran

Operator?

Operator

Yes, I’m here.

Shelly Doran

Did we just lose him?

Operator

Yes, one moment. Your line is open, sir.

Louis Taylor - Deutsche Bank

Okay, sorry. David, could you talk a little bit more about tourism and especially the impact on Florida? I mean, is it offsetting some of the weakness that may be occurring due to the weaker residential market there?

David Simon

Well, I think it’s -- put Chelsea aside, for the mall business, yeah, we are seeing a sales -- the tourist malls that we have, and we have a number of them, like Florida Mall, Miami International, Boca, et cetera, are still doing great in sale increases. I think the malls that are catering more to the particular marketplaces are relatively flat, and so I think we are seeing a little bit of a bifurcation between the tourist centers there than you are a traditional enclosed mall that basically caters to the marketplace.

Louis Taylor - Deutsche Bank

Okay, and second question, could you talk a little bit about your expanded credit line? Given your just vast financial resources anyway, what kind of opportunities do you see out there that would necessitate the larger line?

David Simon

Well, you know, we did this initially -- we always had the accordion feature. I think, as we all know, August was a volatile month. We decided we wanted to be aggressive in this kind of marketplace with respect to allocating capital. We continue to have that view of the world and so we thought it was best to go ahead and implement that. It’s not so much for any liquidity issue here at the company but really just so we can be ready and able to take advantage of whatever else is out there.

I mean, if you look at some of the best deals that we’ve done, we have always been -- it has always been a little bit contrarian. We were contrarian with Chelsea, to some extent. We were contrarian with [Rodanko] after 9/11 to some extent. We were ahead of our time at CPI and I’ll let Rick decide how he wants to classify [inaudible].

So that’s what we’re about, so we just figured it’s there, we don’t have to really pay much for it, and it’s always nice to have that kind of corporate flexibility.

Louis Taylor - Deutsche Bank

Could you just give us a little bit of color? I mean, are you seeing opportunities to either buy debt, buy assets, buy land? I mean, is anything percolating to the surface in any of those categories that is particularly interesting?

David Simon

I tell you, not yet, to be overly simplistic on it. But I think it’s coming.

Louis Taylor - Deutsche Bank

Okay. Thank you.

Operator

And there are no more questions at this time. I would like to turn the presentation back over to Mr. Simon. Please proceed, sir.

David Simon

Okay. Thanks for everybody’s interest. We’re proud of the quarter and I think our business is well-positioned to prosper going forward. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.

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