Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Simon Property Group, Inc. (NYSE:SPG)

Q1 2008 Earnings Call

April 29, 2008 11:00 am ET

Executives

Shelly Doran – Vice President Investor Relations

David Simon – Chairman, Chief Executive Officer

Steve Sterrett – Chief Financial Officer

Analysts

Jonathan Habermann – Goldman Sachs

[Unknown Analyst] – Goldman Sachs

Paul Morgan – Friedman Billings Ramsey

Craig Schmidt – Merrill Lynch

Michael Bilerman – Citigroup

Ambika Goel – Citigroup

Michael Mueller – J.P. Morgan

Christy McElroy – Banc of America

David [Tooty] – Lehman Brothers

Louis Taylor – Deutsche Bank

Carroll [Kimble] – Hilliard Lyons

Ben Yang – Green Street Advisors

Jeff Donnelly – Wachovia

Jeff Spector – UBS

Nate Isbee – Stifel Nicolaus

Rich Moore – RBC Capital Markets

Operator

Good day ladies and gentlemen and welcome to the first quarter 2008 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.

Shelly Doran

Welcome to the Simon Property Group first quarter 2008 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, April 29, 2008. 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 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 and Steve Sterrett, Chief Financial Officer. Rick Sokolov our President and Chief Operating Officer is unable to be here with us today as we his recuperating from unexpected shoulder surgery. And now I will turn the call over to Mr. Simon.

David Simon

Thank you, good morning everyone. I will just take a few moments at this time to provide comments on the quarter and then we’ll open the call up for your questions. We’re pleased to report first quarter FFO of $1.46 per share which is up 6.6% over the prior year. Positive factors contributing to the quarter include solid operating results for all five of our property platforms and decreasing LIBOR rates.

You should note that this growth in FFO was achieved despite the fact that our share of lease termination settlements was more than $9 million lower in the first quarter of 2008 than in 2007. You may recall that we received some large department store termination income in 2007. FFO was also negatively impacted as a result of a $12 million decrease in fee and interest income primarily related to an SPG provided mezzanine loan to the mills. These two items together impacted our FFO growth from 2007 to 2008 by over $0.07 per share.

Occupancy was essentially flat and our mall portfolio, square footage loss to bankruptcy during the most recent quarter totaled 133,000 square feet as compared to 24,000 square feet during the first quarter of 2007. Even with this our occupancy at the end of the first quarter is still higher than Q1 of 2006.

The decline in the premium outlet occupancy is primarily due to lease terminations or bankruptcy of four tenants comprising about a dozen spaces and the late March 2008 openings of Houston premium outlets which was 86% leased at 3/31/08 and phase two of Rio Grande premium outlets which had total center occupancy of 85% at quarter end.

Today at Houston and Rio Grande, we are 92% and 94% leased respectively and we expect the occupancy in the premium outlet portfolio to return to previous levels by year end due to lease up. We experienced a continued moderation of sales growth in the mall portfolio. Comparable sales were $491.00 per square foot, up nearly 1% as compared to the year earlier period. Sales have been impacted by the general economic weakening of the US economy as well as our portfolio’s higher exposure to Florida which has obviously been impacted by the residential market there.

Excluding our Florida portfolio, sales would have been up 2% on a comp basis. And going to the premium outlet portfolio, sales increased 5.4% to $511.00 per square foot driven by our centers with substantial international tourist exposure that continue to see double digit sales growth.

Comparable regional mall NOI was up 2.8% for the quarter which was negatively impacted by the higher debt expenses compared to last year. Comparable NOI growth for our premium outlet portfolio was 4.1%. The re-leasing spread of our mall portfolio was above historical levels. For the quarter due to the mix of leases involved, we expect the spread to return to a more historical normalized level by year end.

And the re-leasing spread for the premium outlet portfolio was $7.06 for the quarter representing a strong 29% increase. Effective cost control in the field and the continue conversion of tenants to fixed CAM resulted in higher recovery of common area maintenance expenses during the period and currently approximately 70% of our regional mall tenants have been converted to the fixed CAM billing methodology.

Our development and redevelopment pipeline remains intact. We will deliver significant value the upcoming years. We are primarily focused on the redevelopment and expansion of franchise assets in the US and new premium outlet development in the US and in Asia.

Capital is a precious resource, we remain very diligent in the allocation of that capital to only those projects that meet our return requirements. Our balance sheet continues to be one of the strongest in the real estate industry as evidence by our A minus A three ratings and the recent affirmation of such ratings.

We build our balance sheet to be positioned at all times to access capital in multiple forms and I believe that this balance sheet strength was evidenced by a financing transaction that we completed during the first quarter which was a $705 million secured recourse term loan on six existing lowly leveled high quality SPG assets, tapping into their significant imbedded equity value of these assets.

The facility which will be or can be increased to $850 million during its term will mature in March of 2010, contains two one year extensions at the company’s sole option and the base rate on this facility is at a very favorable LIBOR plus 70 basis points. Our remaining 2008 debt maturities consist of $350 million of corporate bonds and approximately $660 million of mortgage debt, excluding the mills.

We are the process of refinancing the existing $660 million of mortgage debt at amounts equal to or greater than our existing mortgages. And we currently have over $1 billion 7 of available capacity on our corporate credit facility as well as $400 million of cash in the bank. It has now been on year since the acquisition of the mills, the transaction is exceeding our expectations. I believe the portfolio is significantly benefitting from leasing and operational synergies with our other real estate platforms.

We are now ready to take advantage of several redevelopment projects within this portfolio and the re-tenanting of certain anchors. Based upon our solid first quarter results, projected activity for the rest of the year and our view of market conditions, today we gave 2008 FFO guidance of $6.35 to $6.45 per share, which is approximately $1 billion 9 of earnings which you know is very significant in today’s environment and which also increases the lower end of our previously provided range by $0.10.

We’re the largest landlord to most national mall based retailers, many tenants generate 10-20% of their total sales from stores located in our malls. We’re also the largest owner of high quality outlet centers and retailers highly value this very profitable distribution channel. The depth of these relations coupled with our high quality mall and outlet portfolio and our below market leases should also allow us to lessen the negative impact in the time when retailers are closing stores and reducing their growth plans.

This concludes our prepare comments today and we are ready to open the call up for your questions.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of J. Habermann with Goldman Sachs, please proceed.

Jonathan Habermann – Goldman Sachs

Question for David, with regard to banks pulling back credit lines to major retailers, we saw it recently with one of the largest department stores as well as a women’s retailer. Can you just give us some thoughts there as to will this impact store closings through the year in your assumptions?

David Simon

Well what we’ve heard is that there’s one lender in particular that is not renewing certain lines of credit. The retailers that have been involved, we have talked to them and it has had absolutely no impact on their view or their focus on store closings or store expansions. So at this point we have not had any impact and we have been told it will not impact what they’re doing.

Jonathan Habermann – Goldman Sachs

Okay and David you mentioned the four tenants closing stores obviously in the Chelsea division, can you mention those specifically and also I think The Gap closed a bunch of stores as well, any further thoughts there?

David Simon

Well The Gap has closed no stores in the outlet centers. And the store closings in the outlet side have been [Micasa] and Bombay and it’s all been very, that’s very beneficial for us. Those leases are under market and essentially they’ve all been re-leased. You know as you know, you know it does take, once a store closes, it does take some time to re-lease it. We’re fully confident we’ll get the outlet center back up to north of 99%. It also included some Springmaid and West Point closings as well. So most of that we view as a positive.

Jonathan Habermann – Goldman Sachs

Okay I think Tom has a question as well.

[Unknown Analyst] – Goldman Sachs

Hey guys, on the Houston and Rio Grande outlet openings, did those open a little bit below pro forma in terms of occupancy?

David Simon

Nope. In fact, Houston is ending up being about a 17% return on cost. Again you have to understand it opened literally March 28 and we’re good but we can’t get 100% of every tenant open and as I said Houston is now at 94%. There’s some stragglers coming in that are opening. Houston is going gangbusters. Rio Grande is phase two. The opening of that and again that opened basically at the end of the quarter and we’re actually doing phase three now. So no issue.

[Unknown Analyst] – Goldman Sachs

Okay, thank you.

Operator

Your next question comes from the line of Paul Morgan with FBR.

Paul Morgan – Friedman Billings Ramsey

On the international side you’ve talked a lot about your intentions to grow that share of your portfolio. I’m wondering, mostly that has been through the development so far are you looking harder at any acquisition opportunities given the difference between the health of the US economy right now and some of the other markets.

David Simon

I mean we’re looking at a few deals. Still of the belief that the US economy will have an impact on the global economy. And I don’t think that that’s permeated yet, so last thing we want to do is jump in there and not have that impacted on how people might view the valuation of that. So I think, we’ve looked at a few more deals, there’s one through Simon Ivanhoe that looks maybe a little bit more opportunistic than we have been in the past. But at this point I don’t expect any material change to our strategy there.

Paul Morgan – Friedman Billings Ramsey

Okay. And when you look at the environment for construction lending in the US, are you seeing a lot of fallout from the lifestyle and mixed use kind of projects that were percolating everywhere over the past couple of years. Do you either see anything that is interesting from an opportunistic investment perspective or alternatively do you see a lot of projects either not happening or getting pushed back?

David Simon

I think it’s actually, there’s a trend here that’s actually very interesting that I think will be extremely beneficial to us. You know if you think about the recent development, if you go back to the real estate recession in the late 80’s to the early 90’s, there was a lot of development that occurred during that period of time that took a long time to stabilize. And the decade of the 90’s obviously was not a decade of new development.

And new development really only began to occur at least in retail in earnest in kind of the early after we suffered through the ramifications of 9/11, new development in retail again only really picked up its pace in the mid 2000 decade. So frankly I see a decade, you think about retail development as basically until 2003, 4, 5, 6, I see a decade, I do think the current economy and environment, I see a decade of perhaps that retail development is going to be very slow.

I think that’s obviously fabulous for us. That’s not to say there won’t be certain developments, but we could be talking, you know if you look at the historical trend, I mean it was 15 years essentially before development picked its pace up again. So I don’t think it’ll be that long because I do think things happen faster, things get worse faster, things get better faster, but I do think we could have a decade of little retail development which in the long run is great for us.

Second point I’d make, I mean I’ve heard other people talk about talking to developers, I think there’s enough carnage out there that I’m questioning why they would talk to the developers, they ought to be talking to the lenders. And the answer is there’s a lot of broken projects out there. I don’t think a lot has been recognized that may present some opportunity for us.

You know there’s a reason why on the other hand that they’re broken, but net-net, if we are looking, we’re bypassing the developer, you know we’re going to go straight to the lender. And I think the bottom line is that we could have a decade of slow retail development which I think bodes very well for us and other major owners of retail real estate.

Paul Morgan – Friedman Billings Ramsey

Does that include redevelopment, you’ve actually had a lot of that yourself.

David Simon

Well I think redevelopment really hasn’t changed that much and I don’t think it’ll change from the big stable companies. So our view on that is you know it’s not going to change at all. Now demand on a few projects may get a little squishy but you know from that standpoint I still think franchise assets are so much easier to underwrite, so much easier for the tenant to understand and to the extent that financing is an issue, it’s so much easier for the financing sources to understand.

So I don’t sense currently that that’s really going to have a material impact. There may be a couple projects here and there that get delayed or reconfigured, but I would think that that would be a big push for us and our peer group.

Paul Morgan – Friedman Billings Ramsey

Thanks.

Operator

Your next question comes from the line of Craig Schmidt with Merrill Lynch.

Craig Schmidt – Merrill Lynch

The operating metrics that we’re looking at I guess the first quarter for the most part were probably negotiated months ago. I’m wondering what your leasing team is telling you what the environment right now looks for deals they’re negotiating.

David Simon

You know it’s interesting I think there has been little serious retrenchment on commitments or new stores. You know there’s been again on the margin a few people not wanting to do a few deals. I think the big issue for us for the rest of this year and into early 09 is going to be with store closings. So the focus on us is not so much on “oh boy the guy committed to this store and he’s not going to do that.” That’s been on the margin.

You know we are going to get more space back because there are tenants that are closing stores, either through Chapter 11 or an out of Chapter 11 re-org. And so that’s going to put some space on the table for us that we’re going to be in the process of re-leasing. And that’s again, I wouldn’t be overdramatic, we’ve seen it before. But that’s the bigger issue to me than a guy going from store openings of 35 down to 30.

Craig Schmidt – Merrill Lynch

And would that explain the provision for credit losses kind of ramping up in the first quarter?

Steve Sterrett

I think that partially explains it. We’re not really seeing a significant pickup in receivables themselves. But the composition of its changed a little bit as we’ve had tenants who have either filed or have announced restructurings. There’s probably a little more receivables that we would view at risk. Having said that, I think the amount of the provision that you saw in the first quarter and certainly the year over year change is not reflective of what we’d expect to see the rest of the year. I think we’ve probably taken most of the pain on that line item in the first quarter.

Craig Schmidt – Merrill Lynch

Okay and do you have a sense of where same store NOI might be for the outlet sector by the year end?

David Simon

I think it would be very similar, I mean look, that’s a little bit more dependent on sales than say the mall portfolio. So it’s a little harder to predict with accuracy. But I think we feel confident that we’ll be able to maintain that kind of range. And the same thing with the mall portfolio, even though we’re still somewhat under, we gave guidance in the 3-4 range, still feel we’ll be able to hit that.

You know we’ll end up having a little bit more unexpected stores coming back but I think we’ll make that up through other means including temporary tenants and the like. So we still stand by our comp NOI for both portfolios. It’s just going to be a little harder to get there, a little more work, a little more elbow grease.

Craig Schmidt – Merrill Lynch

Thanks a lot.

Operator

Your next question comes from the line of Ambika Goel with Citigroup.

Michael Bilerman – Citigroup

Hi it’s Michael Bilerman here with Ambika. David you talked a little bit about our confidence going out and buying some debt, whether it be CMBS or some unsecured and then you talked more about maybe going out and buying through lease broken development deals and going to the lenders, where are you on that today?

David Simon

Not a lot’s trading on the CMBS side, it’s very interesting. At this point it’s just very hard to find the paper. We do expect that log jam to loosen up. And I think the construction loan side, I was going to be more graphic than I should be, so let’s see how I can word this. I think the beginning, I think we’re going to see the beginning of the recent developments starting to hit the fan.

Because if you think about it, a lot of these were built, they’re going to have part of the lease up because of the economy, they’re have a harder take out because of where the secured market is. And so the combination of those, they’re going to be harder to sell because people aren’t being that aggressive in valuations. So as those mature or they tell the lender exactly what the story is, there’s going to be a lot of pressure. I think that part of the game is just beginning.

The question is do we like the real estate. You know there’s more lifestyle centers as an example, going back to an earlier question, there’s more lifestyle centers out there for sale than we’ve seen in the past. I think the floodgate of that is just going to begin to open. The question is do we like the real estate, the productivity and some of these we’re going to end up dealing with the construction lender.

Michael Bilerman – Citigroup

And how far are you in those discussions already?

David Simon

It’s early. Because they may have an interest carry for a year, you know lower LIBOR rate to help them somewhat, but judgment day is coming.

Michael Bilerman – Citigroup

And Steve you talked about not like where your sort of unsecured debt is trading, you know north of 300 over, not wanting to issue into this environment, are you actively trying to buy back some of your own debt?

Steve Sterrett

We have not seen any of our unsecured debt to speak of in the market Michael. We actually saw a couple of B pieces of some of our malls that we were very interest in, but the seller opted not to sell. You know having said that, we have seen a fair bit of improvement in bond spreads over the course of the last two or three weeks. You know and our bonds are probably trading 75 basis points inside of where they were as the market has opened up a little bit. So over the long term I view that as a pretty good sign.

Michael Bilerman – Citigroup

Are you an issuer at these levels?

Steve Sterrett

I don’t think at these levels Michael but I would tell you that we like the trend.

Michael Bilerman – Citigroup

Ambika has a couple questions.

Ambika Goel – Citigroup

How does store closures being more pushback later in the year in 2008 impact the 4Q seasonality ramp that the business usually experiences?

Steve Sterrett

It could make the fourth quarter actually a tad bit more seasonal Ambika, but that would just be at the margin. And you may have a little bit of pressure on occupancy here in the second and the third quarter as Dave mentioned as we get more space back and it just may mean that we’ve got larger occupancy gains in Q4 as we re-lease that space and get people open for Christmas. I think it would very much be at the margin.

Ambika Goel – Citigroup

And then is there any specific reason that you’re seeing that the closures are more pushed back later in the year?

David Simon

No it’s really dependent upon the status of the retailer and what’s going on there. There are a handful of retailers that are basically in work out mode and not knowing exactly what’s going to happen with that work out. Are they going to go Chapter 11 or are they going to reorganize out of the proceedings basis or are they going to liquidate.

You know we don’t control the space so there are some, again on the margin, there’s going to be some variability out there depending on again and this is two, three, four tenants that are out there that are in the midst of that process.

Ambika Goel – Citigroup

Okay and then some of the retailers that have announced closures this year, they’ve announced closures that are occurring in 2009, do you have visibility on which locations those will be in 2009 or have you yet to get to that point in your discussions?

David Simon

Pretty much we know it and we’re pretty much negotiating. I mean it would depend, you know we have a pretty good handle of the companies that have either retrenches or announced some store closings, like the Talbots, the Ann Taylors, the Gaps of the world. We have a pretty good handle.

The ones that create a certain amount of uncertainty are the ones that are not, they don’t have that kind of financial wherewithal so we’re trying to weigh that. So I think generally I would say we have pretty good clarity other than I said two or three or four that are in the midst of thinking about whether or not they can re-org.

Ambika Goel – Citigroup

Okay, great, thank you.

Operator

Your next question comes from the line of Michael Mueller with J.P. Morgan, please proceed.

Michael Mueller – J.P. Morgan

First of all looking at the new and redevelopment delivery schedule, a lot of the projects there are 08 obviously, I was just wondering if you could give us a sense as to what the pipeline looks like as you move into 2009 and 2010 for deliveries?

David Simon

We really haven’t backed off anything material in terms of 9 and 10. I mean we’re still very close to announcing a new outlet center I would say in the next 30 days that we will be able to deliver in 09. We’re delivering New Jersey premium outlet at the end of 08. We’re going to deliver Merrimac in 10. And we’ll deliver one more, this one that I talked about at the end of 9.

International pipeline is pretty status quo, moving along as expected. We think there’s a couple more South Korean opportunities and even a couple more in Japan that we’re working toward. Those could be added to the pipeline. And on the redevelopment side of the equation, the big projects are moving. Ross Park, South Shore, North Shore, Burlington just opened with that, so most of the 08, 9 stuff, North Shore is 9, South Shore is 10. You know we’ve got some big expansions with Orlando premium which is 9.

So it’s pretty much status quo just jumping out at it and obviously we’re looking to add that. I mean the big one that we’re going through approvals which will take about a year is the [Coply] and we’re still all systems go trying to get the approvals there, but that’s going to take a year process.

Michael Mueller – J.P. Morgan

Okay and then switching gears for a second you said Mills was running ahead of expectations, can you give us a little more color and maybe talk about occupancy trends at the regional mall portfolio, the Mills portfolio and just how closing the gap is trending in just remerchandising?

David Simon

Well I would say that the actual Mills side you know is, we’ve got a lot of redevelopment that we’re focused on, we have some real interest on kind of re-tenanting some of the anchors. So that’s, and we’re actually making a significant amount of deals in the Mills with the likes of Nike and Adidas and those kind of players. So the Mills side is actually, we’re very, very positive in terms of what’s going on there.

Part of that is because demand on the outlet side from specialty retailer and the Neiman Marcus and the Sachs of the world continues to be very, very strong and unabated and that’s what obviously having a positive impact on the outlet on the premium outlet side as well.

With respect to the malls, I mean we have a couple, you know I’d say by and large they’re doing as expected. There are a couple that are in major redevelopment mode that were holding onto space as an example, Southdale in St. Paul is a great example of that where we’re still awaiting terms, so we’re not making as much progress there as we would like and primarily because we’re still sorting through development there.

Del Amo we’re making progress there but again we want to create some optionality with future redevelopment opportunities. So I’d say the bigger ones are kind of in a holding pattern as we sort through the development. The stable malls are kind of all producing what we thought they’d do.

Operator

Your next question comes from Christy McElroy – Banc of America.

Christy McElroy – Banc of America

Just following up on leasing, have you seen a difference in leasing trends and store closings at your class A versus your class B malls. And just going into [ICS] Vegas, what does your retailer meeting schedule look like versus last year?

David Simon

I mean it’s still very strong, so we haven’t seen a real change in that. I would say, I don’t know that it’s so much A and B, I would say it really depends upon the retailer and where that retailer is focused. And again I think the teen sector by and large is very strong and that’s in A, B and C centers. Then you have retailers that are not as, again more broad based but.

Like for instance the Disney Stores is going through a process now where they’re going to be sold or reorganized. And you know, that’s across the board. So it really depends on the retailer. It’s obviously easier to lease up and A mall than it is a B mall. But I would say the demand isn’t all that different between an A and a B, it just depends on where the retailer situation is.

Christy McElroy – Banc of America

What about new concepts, what kind of trends are you seeing in leasing there and are there any that you’re particularly worried about?

David Simon

No, I mean I think we have a very strong group of new concepts or new retailers expanding, including you know there’s probably 30, Abercrombie with Gilly Hicks, Hollister, Adidas, area of American Eagle, Apple continues to expand, [Backaracks], Bare Essentials, [Charla Groose], Clarks, Coach, Express, Forever 21, H&M, we’re making a lot of deals with G&M, [Geocs], Godiva, Justice, Nike, I mean, so there, Puma, [Fashion Alb], so there’s plenty of new demand out there that are, we think are going to help deal with some of the guys that are retrenching.

So it’s actually in that sense, a lot of deals are being made.

Christy McElroy – Banc of America

Okay and then sorry if I missed this but Steve could you walk through what kind of gave you the comfort to raise the bottom end of your guidance range at this point?

Steve Sterrett

Well Christy it’s a couple of things. One we one quarter into the year so we’ve got three months of actual results behind us. We’ve got more visibility into leasing activity for the rest of the year, even though as David mentioned, you know there is still a bit of uncertainty with respect to store closings in the second quarter.

And then maybe most importantly you’ve got a LIBOR curve that looks very different than it did when we published our initial guidance. So put all those three together and I think that’s where we are.

Operator

Your next question comes from David [Tooty] – Lehman Brothers.

David [Tooty] – Lehman Brothers

Can you guys speak a little bit about what you’re seeing internationally? Are you seeing retailers track the US, are you seeing increased concerns about store closings. Just a little bit on that climate there would be great.

David Simon

The international business is, I mean we don’t have a huge subset to make big general statements. I will tell you Italy is very stable, even though the economy there is not, certainly that strong. So it is very stable occupancies and sales are pretty steady. Our new product there has been virtually 100% leased.

That’s very stable. Poland you know, we’re down to two assets in Poland but the sales there have been remarkable. So the economy there continues to be very strong. Japan, even though Japan’s economy is slowing, the outlet sector has an unusual niche there in terms of being able to produce sales growth. And so I think that’s very well positioned as the Japanese economy slows which we are seeing certainly globally or domestically in Japan and we expect that to continue.

But you know the outlet position there is very strong and the consumer really likes that value proposition. So I would say generally you know we haven’t seen kind of the down draft but it’s a very specific asset base that we have. You know we’re not in the UK, so I mean I would imagine sales there are probably tracking the US.

But that gives you a sense. And France you know we again have assets there but I would characterize them as very stable as well, both occupancy and sales. So you know it’s not the kind of volatility that you might expect.

David [Tooty] – Lehman Brothers

Given your limited exposure overseas right now, does the market strength increase your appetite at all for future investment from where you are now?

David Simon

Well sure I mean you know there is less retail there and that always makes the supply and demand equation interesting and certainly from a risk adjusted basis. I mean the biggest issues is the dollar and how you put capital out and planning the right opportunity where we could add value. And we’ve been working on it, we’ll continue to work on it.

I do think Asia, certainly the new developing countries in Asia do pose a risk for interesting bubble like characteristics. So, not Japan necessarily but I do think there are Asian markets that have had a lot of new supply and you know that’s why we’ve been very cautious in those kind of markets because there are bubble characteristics out there in certain parts of Asia.

Operator

Your next question comes from Louis Taylor – Deutsche Bank.

Louis Taylor – Deutsche Bank

David you had mentioned just regional differences earlier in the call with regards to comparable store sales with Florida being weak. What were some of the other regional differences of note?

David Simon

Well I’d say the Northeast generally Boston, you know pretty strong, no real issues there. Midwest is, God love the Midwest.

Steve Sterrett

We never had the boom and we’re not having the bust.

David Simon

You know and we’re pretty well positioned in the Midwest, like Indianapolis is a decent market for us. The other area that’s interesting is Southern California is it’s not quite like Florida but any markets that are really, Northern California seems to be very fine. And you know and our exposure there has increased somewhat through the Mills deal.

But that seems to have a lot more stability than Southern California where there was a lot more of the residential infrastructure in place. And so I’d say that area is soft. Texas actually is holding up well. We’re seeing softness in Nevada, Las Vegas for the first time in quite some time. So we expect that softness to continue.

Louis Taylor – Deutsche Bank

Second question just pertains to your lease expirations in 08, your average rent there is pretty high at around $44.00 a foot versus low to mid 30’s for most other years. Is it going to impact your leasing spreads this year in terms of what you’re ultimately going to get just due to mix?

Steve Sterrett

It’s a bit of an aberration that we dealt with 75-80% of our expirations already. So the stuff that’s left shows at a higher base rent. I mean David mentioned in his prepared remarks that we expect the leasing spread to return to kind of historical levels which for us has been kind of plus or minus 20%, that’s about where we’d expect to see it.

Operator

Your next question comes from Carroll [Kimble] – Hilliard Lyons.

Carroll [Kimble] – Hilliard Lyons

On your income statement I noticed that the other income line item was down, can you tell me why.

Steve Sterrett

Yeah that’s the Mills and lease terminations, we had a lower level of lease terminations in 08 versus 07.

Operator

Your next question comes from Ben Yang – Green Street Advisors.

Ben Yang – Green Street Advisors

Your outlet business is doing very well and you had previously talked about bringing some of your outlet tenants into the Mills portfolio. Have any retailers actually made this move or indicated plans to do so?

David Simon

Yeah I mean a great example is Nike you know which is a big client of the Chelsea product. We have [Katy, Urundal] Colorado, Discover, Franklin and the block all moving toward either opened or moving toward deals, just as an example.

Tommy Hilfiger the same thing. And then we’re actually getting some of the mall tenants like Ann Taylor, Victoria’s Secret Gymboree all moving toward either doing in Vicky’s case, they don’t have an outlet concept doing a Vicky’s full price or with Ann Taylor doing their outlet stores. So and that’s what is good about the Mills right now in this environment. I mean the outlet side of the equation is very interesting to a number of retailers.

The Neiman Marcus last call, the Sachs Fifth Avenue all fit lots of new deals are the in the works there as well. So we’re working, we’re seeing what we thought we would be there. Now what we’re also working on which we’re very close to bringing a full line department store in one property and then maybe even building a whole lifestyle component to another property that’s full line anchored. So you know on the Mills, I would say generally all are moving you know pretty positively.

Ben Yang – Green Street Advisors

Is it fair to say that the Mills assets are somewhat defensive in a tough economy similar to what we’re seeing for the outlet centers?

David Simon

It appears to be. There’s a more interesting value proposition for the consumer. You know but I want to be a little cautious because I think we’re still at the beginning of a down economy or I’m not smart enough to know whether what inning we’re in. But it appears to be a little bit more defensive. And most importantly the demand seems to be on the outlet side is high and it seems to be, we seem to be seeing the benefit of that with the Mills portfolio.

Ben Yang – Green Street Advisors

You previously also mentioned that you were still refining some of the Mills data, have you guys found any more surprises either good or bad in the past few months or so?

David Simon

Pretty much that’s behind us.

Operator

Your next question comes from Jeff Donnelly – Wachovia.

Jeff Donnelly – Wachovia

Just building on one of Christy’s earlier questions regarding ICSE, David what is the tenor of your meeting schedule there versus prior years? I mean are you seeing more meetings on the books I guess addressing things like store closing or just renewals versus say filling vacancies or new projects or is it just kind of more of the same?

David Simon

Well I would say it’s more of the same. You know I did live through and Rick’s not on the call to commiserate with this, but there was several years where, 93, 4, 5, etc, where all we did was essential workouts. I don’t sense that at all at this upcoming convention. There’ll be a few I’m sure but I don’t sense anywhere near what we had to deal with in the mid 90’s.

Jeff Donnelly – Wachovia

Steve if I heard you correctly in an earlier response, is it fair to say that you’ll see the most significant level of lease expirations in Q2 08 for you guys?

Steve Sterrett

No. Most of the leases expire, a good portion of the leases expired in the first quarter. Jeff what I did say, I think, is that we still have some variability with potential store closings and we will see probably more space come back to us in the second quarter.

Jeff Donnelly – Wachovia

I guess I’m curious if mall occupancy was down I think 10 basis points in Q1 and I think initially you guys projected flat to 100 basis point decline in guidance for 2008 at least at the start of the year. I guess I’m wondering if you have a positive experience say by the end of Q2, do you think you might reconsider the magnitude of the occupancy decline you gave at the start of the year for your full year guidance.

Steve Sterrett

I do think there’s another 50 plus basis points of risk on the downside to occupancy Q2 from store closings that are, as David mentioned, are people who are either in work out mode or we would expect to get space back. You know demand for space is still decent. We’re pushing very hard and the visibility would be can we get back to flat by year end. That would certainly be the objective. If we miss it, I don’t think we miss it by 100 basis points.

Jeff Donnelly – Wachovia

And I’m curious on occupancy, is it also, am I stretching too far to say that any further declines in occupancy will probably come more from expirations than terminations as opposed to bankruptcies? And I guess for that reason do you think your termination revenues could actually be above norm in the next few quarters?

David Simon

Well again, the guys that are, we’re hedging here because there are a couple of guys that are somewhat on, deciding what they’re going to do in terms of how they want to restructure. And I would say the variability is really with that sector of two, three, four tenants as opposed to the guys that we kind of know what’s happening with. So some of that may produce lease termination income, but it is still in process.

So the bottom line for us is we still think we’re going to grow our NOI 3-4%. Composition may change somewhat because of the variability of again these handful of tenants that I’ve talked about.

Jeff Donnelly – Wachovia

David are they more in like the home goods area or a particular theme to what [tear] they operate in?

David Simon

Well it’s really across the board I mean Disney is a great example, the Sidney store situation. You know we’re negotiating with them right now. As you know they were owned by Children’s Place, there’s a movement toward Disney buying them back which is actually very positive for us. But they don’t want to operate the 350 store chain that they had, they want to operate a smaller chain. We’re going to have some closings associated with that. And you know we’re negotiating.

So it would be great to say here’s what’s exactly going to happen but we’re still in that process of working through that. And that’s really, a couple of those guys that are like that, like a Disney, like a Wilson’s that we’re still trying to get a handle on. You know we’re working obviously closely with the tenants but that’s creating the variability.

Operator

Your next question comes from Jeff Spector – UBS.

Jeff Spector – UBS

Does your guidance still assume a soft landing in the economy?

David Simon

The guidance makes no, I would tell you that our guidance is really not dependent upon the economy. You know I don’t know that we can sit there and say, forecast GDP growth and that’s going to spit out exactly what comp NOI is going to be. You know we have, it’s a judgment call. We know kind of what our lease up is, we know you know we have variability in sales, we have variability in interest rates, you put it all in, we make some judgment calls, that’s how we get to our numbers.

And that’s why we have a range. That’s also why I’d love not to give guidance. But you know, we’re fine. And you know if it does become less or more severe then I think there’ll be more opportunities for us. So, I’m good with that too.

Jeff Spector – UBS

With the year to date rebound in REIT stock prices, if they remain level for a period of time, do you think we’ll see a pickup in M&A, public to public?

David Simon

I don’t know. I guess maybe. M&A is such an emotional framework. Let me put it this way, I do think running a company in a tough economic environment is very difficult and I think it will wear down a lot of people. Not us, but it’s going to wear down a lot. And usually when you’re worn out is when you want to get out.

So I guess, I don’t know if it’s stock price so much but more of kind of where the mindset it. And I think it’s tough running any company in a tougher environment. And that could lead to more M&A, more than stock price charts.

Operator

Your next question comes from Nate Isbee with Stifel Nicolaus, please proceed.

Nate Isbee – Stifel Nicolaus

I’m here with David as well. What are the leasing spreads you’re generating in the traditional Mills portfolio?

David Simon

I would say they’re consistent with the mall business, especially stores. We’re very anxious to see David when he tours the portfolio. We’re going to want a next quarter tour though.

Nate Isbee – Stifel Nicolaus

How is Del Amo looking these days David?

David Simon

Del Amo is still in lease up phase. It’s a unique asset with lots of opportunities.

Nate Isbee – Stifel Nicolaus

Any movement there on a fashion anchor. I mean the fashion anchors been discussed for five years, I know it wasn’t you, but any progress there?

David Simon

We’ve only discussed it for a few months. So you know we still have some time there. It may be harder to achieve than you know what Mills, I still think there’s a possibility but it may be harder to achieve and the time period may be longer than what the market was originally told by the earlier group. We’re still working on it in other words.

Operator

(Operator instructions) Your final question comes from Rich Moore – RBC Capital Markets.

Rich Moore – RBC Capital Markets

What are you seeing on the concession front? Are you offering more concessions in this environment being that it’s a bit tougher for tenants?

David Simon

No, the only thing I’d say is that to the extent that we have a tenant in the work out mode, we do a thorough, and I mean that’s really when they have leverage on, you know okay if you don’t make a deal we’re going to put in Chapter 11 and you know, put that aside because in that case we have to decide, we do a pretty thorough analysis, whether we’re better off recouping our lease value through what the estate would get versus what kind of retailer they are, what kind of company it is.

You know and whether it’s in our best interest to keep them going. Put that aside, I would say generally if it’s just a straight up deal, there hasn’t been a big change in much higher [key a] or much lower rents. I mean everything is on the margin. So I would say that trend is pretty consistent. We are giving some rent relief to tenants that are in this workout phase that I’d say.

Rich Moore – RBC Capital Markets

And then on the specialty retailing side, that’s an area you might think would run into difficulty in a weaker environment. Do you have any thoughts on specialty retailing at this point?

David Simon

Well again it depends on the tenant and the sector. You know lots of teen retailers are doing very fine. You know the H&Ms and the Other Worlds and the Forever 21s are doing extremely well. So it really depends on the retailer. I would tell you that it’s not, it’s tough but it’s not a disaster in a lot of cases.

Rich Moore – RBC Capital Markets

And then how about like the carts and kiosks, Dave is that an area that’s.

David Simon

You know it’s surprisingly, we’re okay there. I would think that, I would tell you that I would have thought that that business would obviously be impacted by the economy. But we’re going to happen to ride up with the guy that runs it today in the elevator. I grilled him to make sure because I knew I was going to get this question. I’m kidding, but we seem to be fine. There may be a little bit of receivable issues on some of them but demand is holding up and he thinks we’ll be okay for what we’re thinking about this year.

Rich Moore – RBC Capital Markets

And then the last thing Steve, what are you thinking for LIBOR, how did you come about a LIBOR assumption I guess when you were working on your guidance for 2008?

Steve Sterrett

Rich, whether it was the original guidance, all we do is take the forward curve. I don’t pretend to be any smarter than what the forward curve is.

Operator

Ladies and gentlemen that concludes our Q&A session, I’d like to turn the call back over to management for closing remarks.

David Simon

Thank you everybody. We’re disappointed we didn’t get a question about Rick’s shoulder, but he’s recuperating fine. We wish him well. So in any event, thank you, I’m sure we’ll see some of you in the next month, but we appreciate your support.

Operator

Thank you for your participation in today’s conference, this concludes the presentation, you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Simon Property Group, Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts