Simon Property Group - Earnings Call - Q1 2011

Transcript

Speaker 0

Ladies and gentlemen, welcome to the first quarter 2011 Simon Property Group earnings conference call. My name is Kathy, and I'll be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question and answer session toward the end of this conference today. If at any time during this call you require operator assistance, please press star followed by zero, and an operator will be more than happy to assist you. I would now like to turn the conference over to your host for today's call, Ms. Shelly Doran, Vice President of Investor Relations. Please proceed.

Speaker 4

Hello. Good morning, and welcome to Simon Property Group's first quarter 2011 earnings conference call. Please be aware that statements made during this call may be deemed forward-looking statements, and actual results may differ materially from those indicated by forward-looking statements due to a variety of risks, uncertainties, and other factors. Please refer to our annual and quarterly periodic reports filed with the SEC for a detailed discussion. Acknowledging the fact that this call may be webcast for some time to come, we believe it is important to note that our call includes time-sensitive information that may be accurate only as of today's date, April 29, 2011. During today's call, we will discuss certain non-GAAP financial measures as defined by the SEC's Regulation G.

Reconciliations of these measures to the most directly comparable GAAP measures are included within the earnings release or the company's supplemental information package that was included in this morning's Form 8K. This package is also available on the Simon website in the investor section under Financial Information Quarterly Supplemental Packages. Participating in today's call will be David Simon, Chairman and Chief Executive Officer, Richard Sokolov, President and Chief Operating Officer, and Stephen Sterrett, Chief Financial Officer. I will now turn the call over to Mr. Simon.

Speaker 6

Okay. Good morning, everybody. Welcome. We're glad you took time away from watching a royal wedding. We're pleased to report FFO of $1.61 per share for the quarter, an increase of 14.2% over the first quarter of 2010. In comparing that, that takes into account the loss on extinguishment of debt that we had in the first quarter of 2010. Our quarterly results exceeded the First Call consensus by $0.07 per share. Total sales on a rolling 12-month basis were $500 per square foot, up 8.2% as compared to $462 per square foot as of 3/31/2010. Please note that this $500 per square foot is on more than 52 million square feet of GLA. As of 3/31, occupancy was 92.9%, 70 basis points higher than the year earlier period. The releasing spread for the rolling 12 months was a positive $5.11 per foot.

Beginning in 2011, we changed our reporting of spreads comparing opening and closing rents on a same-space basis. The statistic is now also based on total base rent, which is minimum rent plus the common area maintenance charge, or CAM. We believe this new methodology will help give investors a better economic picture of certain of our leasing activity. Our releasing spreads always have been and will be under the new methodology, will include all inline space, including spaces larger than 10,000 square feet. It's all inline space that's compared to. Comparable property NOI growth was 2.3%. We believe, just to highlight a few things, first of all, the growth in the quarter was a virtually 100% increase driven by rents.

In addition, just to compare the Q, not to get overly worried too much from one quarter to the next, but when you compare Q1 2010 to Q1 2011, I would just keep in mind that in 2011, we had the significantly higher snow removal expense in the first quarter of this year, as well as, as you recall, last year, our credit loss was actually a recovery, and this year we actually had bad debt expense. When you put the two together and normalize those, our comp NOI growth would be over 100 basis points higher than the 2.3% that was reported. Capital markets, we've been busy as always. We closed a lock rate on nine new mortgages, totaling $962 million. Our share of that was $543 million. The weighted average rate on the loans is 5.3%, and the weighted average term is 9.4 years.

During the quarter, we also paid off $282 million of unsecured debt with our cash. We end the quarter with $937 million of cash on hand, including our share of JV cash. Our credit availability on our facility is $3 billion for a total liquidity position of nearly $4 billion. As you know, in 2011, we expect to generate more than $1 billion of cash after dividends. Development activity, we're pleased with this on a number of fronts. First of all, we opened our second premium outlet in South Korea, Paju Premium Outlets, located approximately 50 minutes northwest of downtown Seoul. Early reports have been extremely favorable, and the center is 99% leased at opening. Just to put it in perspective, our Yeoju Premium Outlet in South Korea continues to perform exceedingly well. It is 100% leased and generates sales of $875 per square foot, in U.S. dollars.

We also completed the expansion renovation of Las Vegas Outlet Center. In conjunction with that, we rebranded it Las Vegas Premium Outlets South, and it's located on Las Vegas Strip near McCarran International Airport. We have two new developments under construction, both premium outlets: Johor in Malaysia, which will open in November of this year, and Merrimack in New Hampshire, which will open in the summer of 2012. I'm really pushing for the spring of 2012, but that's another story. During the first quarter, we started construction on nine renovation projects and now have a total of 10 under construction. In 2011, we've been obviously very busy. We plan to open 32 new anchors and big boxes, including Herberger's, Kohl's, Carson Pirie Scott, Target, Dick's, Ulta, Marshalls, and H.H. Gregg, just to name a few, which I did.

We currently have eight anchor or box deals scheduled to open in 2012. Details on costs, returns, and timing for these projects are provided in our supplemental reporting package. Now, let me turn to Japan for a moment. Obviously, we're very concerned about the people and what's happening there. To give you some perspective, our portfolio is comprised of eight properties: four in the south, three in the Tokyo market, and one in the north. You will recall that we own a 40% interest in these assets with our well-known and esteemed colleague and partner, Mitsubishi Estate. Sendai, the smallest of our Japanese assets, was damaged by the earthquake and has been closed since the earthquake. Fortunately, repairs are currently underway, and we expect a reopening in mid-June of this year. Costs to repair the center after the payment of our deductible are covered by insurance.

Since the earthquake, three of our properties outside of Tokyo, Gatemba, Sanyo, and Ami have been allowed to operate only eight hours per day due to the rationing of electricity. This ended yesterday, and the centers have reverted to their regular 10-hour operating schedule. However, given the environment there, this could be subject to change. It is too early to gauge the short-term impact of the earthquake, tsunami, and damaged nuclear facilities to our business. Sales of the centers near Tokyo have been below year-ago levels since the quake. As things settle down in Japan, we expect these highly productive, high-quality premium outlets to revert back to historical trends. However, we anticipate that softness will continue for the remainder of 2011. Not to be undone by that earthquake, on the good news, I will talk a minute about Opry Mills.

As you know, we had a historical flood that ravaged Nashville and submerged Opry Mills, and flooded it with several feet of water in the mall. The good news is we've reached an agreement with our lenders to finance the restoration of the mall. Opry Mills and its lenders will continue the litigation to have our insurers comply with their obligation to pay all the amounts they agree to in the event of a flood loss. Repairs and rebuilding the landmark property have begun and is expected to open in the spring of 2012. Most of the previous anchor tenants have committed to be part of the reopening, and many of the previous inline stores have committed to the restored Opry Mills. In addition, many new tenants have agreed to come to open stores at the property.

We expect, on a stabilized basis, to exceed the NOI that was in place prior to the flood. Based upon our results for the quarter and expectations for the balance of the year, today we increased the low end of our 2011 FFO guidance by $0.10 per share and raised the top end by $0.05. This increase in guidance reflects the improving business conditions we are seeing in the U.S., our ability to execute our game plan. However, it is partially offset by the uncertainty in Japan and the continued closure of Opry Mills. Finally, let me just mention some management additions. You know, we have recognized that we are very focused in maintaining our leadership position and our desire to execute on many fronts so that we can continue to deliver sector-leading growth. We can and should add to our executive team.

Accordingly, we welcome two new additions to the ranks of executives: David Contis and Steve Feibel. David will lead our regional mall platform, working with me and Rick and assisted by John Rulli. His first day on the job is next Monday. I'll be out of town, by the way, just to so. Steve Feibel has been here since March, and he's assisting Jim Barkley, our General Counsel, in all the areas he oversees. We've all known David and Steve for many years, and we're very happy to add them to our team to continue our contributions that we expect them to do. In summary, we had a very good quarter, another one in our long string of successful quarters, and we're ready for questions and answers.

Speaker 0

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star followed by one. If your question has been answered or you wish to withdraw your question, press star two. Questions will be taken in the order received. As a reminder, press star one to begin. Our first question comes from the line of Michael Muller of JPMorgan. Please proceed.

Speaker 1

Yeah. A couple of things. First of all, looking at the leasing spreads, they picked up considerably from the year-end mark, up from about 4% to 10%. If we're thinking about that, is that more driven by, say, the fourth quarter of 2009, just the dropping out of the mix of low rent openings? Is it more driven by you had a good second half of the year 2010 in terms of sales, good 2011 so far? Really, the opening rent levels are kind of picking up there more.

Speaker 6

Yeah. I would say it's more of that. You know, it's a 12-month period of time, so it's, you know, it's representative of what's going on. Look, demand is better. We're able to generate, you know, better rents. It's still, you know, it's still a very difficult process in doing that. We've got a good group of people and a very good portfolio. When you put the two together, we're able to drive rents.

Speaker 1

Got it. Okay. Over the last couple of quarters, you put some money to work in terms of mortgage investments. Can you talk a little bit about that? Is that more investments that we should think of as short-term, putting capital to work, and you're getting a nice return on it, and at some point, you get the money back? Or is it more along the lines of there's a shot at getting to the real estate?

Speaker 6

Given, you know, we did it initially with both in mind, but the odds are, based upon, you know, what's happening in the capital markets, that we'll probably just get paid and pull it.

Speaker 1

Okay. Last question. I mean, sales growth has obviously been pretty good over the past year or so. I mean, how far away do you think we are from new development on the traditional mall side? You've been active, obviously, on the outlet side, but is that something that you're thinking about more these days?

Speaker 6

I don't see it. You know, I think it was in 2007, maybe it was early 2008. I'd said a decade away back then, so I may have been a little overdramatic. Rick, you can comment on this. We just don't see new full-price retail being built anytime in the near future.

Speaker 3

I think that one of the other companion trends to that is that the retailers, as their demand for space picks up, are being accommodated by redevelopments and expansions of the existing square footage and properties. The existing properties are getting a lot stronger. That, in turn, is going to make it even more problematic to institute new development going forward.

Speaker 1

Got it. Okay. Thank you.

Speaker 6

All right. Thanks.

Speaker 0

Our next question comes from the line of Jim Sullivan of Cohen. Please proceed.

Speaker 2

Thank you. Good morning. David, one of your peers this quarter talked about buying anchor boxes. I'm just curious if that's something, you know, I'm sure you've been doing it all along, but I'm just curious if you see more opportunity to do that now or if you're being more aggressive if the opportunities arise.

Speaker 6

You know, I will tell you, Jim, that it's standard operating procedure here to reclaim the anchor boxes that some of our tenants might have owned that closed. The strategy is not all that different. You know, we like to have tenants kind of secured. We like to drive a tough bargain on it. It's not, we don't call it kind of newsworthy events. It's just kind of standard operating procedure that if we have the ability to buy every tenant that we will, if it makes economic sense. Rick, you can add to that. We've done a lot of it over the years.

Speaker 3

Yeah. To that point, if you think about our portfolio in the industry, over the years, we've had the May Macy merger. We had Lord & Taylor abandoning substantial stores. We had Montgomery Mall abandoning expansion, many stores. Parisian, over the years, we've redone about 75 department stores. You can go back in all of our 10-Ks, and all that activity is tracked. In virtually every instance, we have ended up with a replacement that is stronger. To David's point, we'd like to know what we're going to do with the box before we acquire the box. We want to make sure that we're getting an appropriate return on that capital investment.

Speaker 6

Yeah, you know, Jim, just to, and you can see this in our AKs over the period of time, we're doing 32 box deals in 2011. Some of those were purchased boxes, some were lease expirations, some were lease buyouts. That's just standard operating procedure here.

Speaker 2

Okay. A related follow-up question on this point. You've talked on several calls now for a long time about the double-digit returns you get from this kind of box redevelopment activity that you've done. Rick, you've talked about it in detail over the years. If I connect that, trying to connect the dots, if you will, to the culling of the portfolio issue, this was talked about in the last call in reference to cap rate movement. I think you, David, indicated that you saw cap rates becoming attractive on potential sales opportunities. Of course, you're in the market with a couple of assets today.

Is there much opportunity, or do you ever connect the two, i.e., you look at doing a big box renovation with the intention of generating a double-digit yield with the intention of selling that asset when completed to a buyer that likes that type of property? Is it?

Speaker 6

Let's just talk an example. If we have, in theory, a mall that you could sell at an 8% cap rate and we redevelop the box at a 6%, you know, we've lost value. If we redevelop that box at a 10% and we think it's an 8% cap asset, then we've created value. We'd always take a difficult economic review of the redevelopment opportunity. The simple answer is absolutely. Sometimes you want the ability to redevelop the box to sell the asset. That just factors into what we're trying to do.

Speaker 2

Okay, good. Thank you.

Speaker 6

Thank you.

Speaker 0

Our next question comes from the line of Kai Ben Kim of BMO Capital Markets. Please proceed.

Speaker 7

Hi. Thank you. Lately, there's been a lot of talk about big box retailers downsizing their square footage. I think you guys have a great perspective on this because you own both types of retail properties. On the margin, do you see some of that culling into the malls going forward, minus, you know, the Best Buy Mobile retailer?

Speaker 6

There are some that are, you know, that are playing around with the size of their, you know, their store. You know, Old Navy is a good example of that. They went through a pretty significant period where they started at one size, grew to another size, and I think they're reverting back to kind of their original roots. I think, you know, some of the bigger, you know, category killer types, the Best Buys of the world, are all looking at their footprint. We expect that some of the bigger stores ultimately will try to increase their efficiency. You know, we're very aware of that. I'd say, sure, there are a number of retailers that are looking at the size of their box and what it needs to be going forward. Rick, I don't know if you want to add anything.

Speaker 3

Yeah. I would just say on the specialty store side, there's no consistent pattern for every one tenant that says, "Well, I was 8,000. I think I want to be 6,500 in my new prototype." We have others that are saying, "We were at 6,000. We need to be 10,000." It's really a function of the momentum in that particular business, the number of lines that they're introducing that they want to incorporate into their stores, and the way they want to configure their store. I don't think that it is a broad-based trend across the retail space.

Speaker 7

Okay. Second question. You know, as you're sitting down with tenants during these negotiations, have tenants started to already start to show some level of concern regarding commodity price increases? Not just gas prices from the retail sales standpoint, but maybe on the commodity input front, like cotton prices, which have doubled in the past year. You know, putting that, putting more pressure on margins and maybe your ability to keep occupancy costs up.

Speaker 6

I think their attitude right now is they believe they can pass that on. I think this year, we'll get a good sense of whether they're capable of doing that. If that's the case, then I think it's business as usual. If they're unable to pass that on, they're going to naturally look at other areas to reduce their operating expenses. It may come after the landlord community. Up to this point, we have not seen it. Our defense to that is that we have great assets and good people, and we can hold our own in that kind of discussion. At this point, they seem to think, not universal, but they seem to think that they can pass it on and the consumer is willing to pay for the good as long as the consumer sees value in that good.

Speaker 3

I would just add that historically, the tenants will bring forth any fact that they can put on the table to try and argue for lower rent. We will, as David said, do what we can to argue for what we think is fair rent. This is nothing new. Today, it could be raw materials. Three years ago, it could have been healthcare. It could have been gas prices. Whatever the external circumstances that can broaden the discussion, they will do. I think our results show, as David has said, we can hold our own in those conversations.

Speaker 7

Okay. Last quick question. Your lease spreads did increase pretty significantly. I was wondering if you could give just the first quarter of 2011 lease spread itself without doing 12 to 20 months?

Speaker 6

Quarter? No, we look at it on a yearly basis.

Speaker 7

Okay. Fair enough. Thank you.

Speaker 0

Our next question comes from the line of Jay Hamilton of Goldman Sachs. Please proceed.

Speaker 7

Good morning, guys.

Speaker 6

Hey.

Speaker 7

You know, with sales up as much as they are now year over year, and obviously, occupancy trending up 70 basis points, what do you think you are now in terms of your ability to push rent versus retailers? I guess, how are they responding, just given your sort of focus on top assets?

Speaker 6

I don't like to talk about our negotiations with our clients in the public domain. We're trying to create a fair deal for us and for them. As I said earlier, it is still a challenge. The retailers are very focused. The impact of the Great Recession is not that far from their mind, and we've got to deal with that fact. We're trying to create a win-win. The good news is the environment's better. We're able to increase our rents, and we're trying to find that right deal. The good news is our occupancy cost for the outlets and malls together is at 12.2% for the first quarter, and that's pretty good. We're in good shape. In a lot of cases, we're under-rented, and in those cases, we think we can still be able to increase rents and create profitability for the tenants.

Speaker 7

Okay. With David Contis joining next week, any sort of changes you anticipate in strategy, or is this really continued focus on your platform?

Speaker 6

I think we have so much to do that we wanted another aggressive, thoughtful, energetic real estate guy on the team to do what we want to do. We look at it as another experienced set of hands to get the job done. Beyond that, he'll be a great fit. He'll work a lot with Rick. You know, between the way those two talk, I'll hopefully be able to get a word in edgewise. That's why I'm leaving the first couple of days next week. He'll be great. Other than that, I just think we got a lot to do. The other thing for David, he has had good experience internationally. That's like a gift with purchase in terms of him coming on board. It wouldn't surprise me if he or we find an opportunity internationally because of his involvement.

He just loves this business, and you want to have guys that love this business on the team.

Speaker 7

Actually, just on that point, I mean, your stock's up now almost 20% since mid-January, obviously outpacing the RMC. How are you guys thinking about external growth apart from the redevelopment that you've announced? I mean, sort of is M&A still on the table?

Speaker 6

Right now, you know, M&A is always something that we look at. Dave, at this point, we don't see much out there, in terms of big, big M&A. We're active, and we continue to look at a lot of different things.

Speaker 7

Okay, thank you.

Speaker 6

Thanks.

Speaker 0

Our next question comes from the line of Christy McElroy of UBS. Please proceed.

Speaker 5

Hey, good morning.

Speaker 7

Hey.

Speaker 5

Just to follow up on a prior comment, I see what you're saying about expansions, redevelopment, creating more space, and better-performing malls to accommodate retailer growth. If you're a retailer like Abercrombie or Ann Taylor, and you're already in all the better malls in the country, and you're actually closing stores in underperforming malls, how do you grow from here? Is it new concepts? Is it street retail?

Speaker 6

I think, you know, for Abercrombie, it's obviously international. I mean, we're doing a lot of business with Ann Taylor, so they obviously feel like there's places for them to go in existing portfolios. A number of these retailers are also, you know, looking to get in the outlet sector, to grow. I mean, Bloomingdale's is a great example of that. I think we have three out of the first seven or eight, right, Rick?

Speaker 7

Yeah.

Speaker 6

You know, some are looking international. It's interesting. When we first invested internationally, we did it in 1998. The theory was, you know, our U.S. retailers would go abroad. We didn't realize it would take them 12 years to do it. Thankfully, even though it took them 12 years to get there, we made a lot of money in our pursuit of international expansion. They're finding avenues to grow. I still don't think, though, Christy, I still don't think the demand is so great that it will foster new full-price ground-up redevelopment. When I say it won't, I mean there's always going to be maybe a deal here or there that gets done. In order to get that done, you're going to have to have economics.

From our standpoint, those economics probably, to motivate the retailers to take a risk, would be something for us that would be very hard for us to underwrite vis-à-vis the other areas that we can invest our capital. That could change, and I expect it to change. I don't think it'll change in the next year or two.

Speaker 3

In response to that question in terms of how they grow, and David alluded to this, most of our retailers are now very engaged in brand extensions. So Gymboree is growing with Crazy 8. J.Crew is growing with Madewell and Crewcuts. We've got American Eagle that is working with us on 77kids. Those are just a couple of examples. When they are rolling out brand extensions, they are using the metric of their existing stores' performance. They are going to want to open their new brands where their existing brands are already successful. That is obviously playing right into our strength.

Speaker 5

Okay. Just to follow up on your outlet comments, aside from Merrimack, have you guys announced any other projects in the U.S. in the pipeline? Can you just generally comment on the uptick in potential supply growth for outlets in the U.S. as more developers are targeting sites and starting new projects?

Speaker 6

We have not announced the construction of any new outlet. I know it's mostly public knowledge. We are looking and working in Galveston, Texas, and we think ultimately there'll probably be a market there that can only really support one outlet. You've got that in process. We'll see what happens there. We're working on other sites, but we really don't have anything at this point. When I say other markets, we really don't have anything at this point to announce. We're confident that we'll be able to find some other avenues to build ground up. I think in that market, in that sector, there is more demand to build some, but it's not, there's not going to be a lot of these built because, even with outlets in mind, the retailers are very disciplined in where they want to go and on what basis they want to go.

You've got competent developers, like us and Tanger and others, that understand that dynamic.

Speaker 5

Okay. Just lastly, can you talk about how you're approaching shorter-term one to three-year leasing versus a couple of years ago? What percentage of your leasing in the quarter was three years or less, excluding temp tenants?

Speaker 3

In our leases that were signed in the first quarter, the two years or less was 19%, which is the same % that we've been reporting historically. We are doing it, so it hasn't really changed. What we are doing is when we determine our term in our negotiations with our tenants, we're looking at whether we think it's the right use, the right rent, the right tenant in that space. Do we have space next to it that's maturing in the next year or so? There are a lot of factors that go into that term discussion, and it's something that we're very focused on. There has not been a material increase in our short-term leasing in the last several years, so we're pretty much normalized going into this part of the cycle.

Speaker 5

Thank you.

Speaker 6

Sure. Thanks.

Speaker 0

Our next question comes from the line of Cedric Lechance of Green Street. Please proceed.

Speaker 2

Just looking at the Mills portfolio, as you look back to that transaction, can you give us, effectively, a report card of how progress has been made? What would you want to do, or what do you want to do with the Mills portfolio going forward?

Speaker 6

I would tell you that, you know, I think the Mills, there are 17 Mills. We only show 16 because one doesn't exist, you know, is under construction. That's being operated. It's exactly, you know, the underwriting is exactly what we thought it would be. There's a couple that we knew going into that deal that were very difficult. The way, as you remember, Cedric, Mills didn't have much equity, if at all, in those couple that were tough. We're making progress on those couple that are tough, but the fact is they contribute very little cash flow to us, and they're on our books for essentially nothing. The others have gone very well, and we've done a great job of improving them. You know, we feel very good about the concept. We've added full price. We've added outlets. We've added boxes.

We're close to announcing a full-line department store in one or two or three of them, Sawgrass Mills. You know, we've done a great job of executing the outdoor, high-end outlets there. You'll notice a decrease in the occupancy that's really associated with getting back the one anchor there, the Wannado in Sawgrass, which we've got great development plans that will increase the cash flow. We think of that center by $4 to $5 million just on redeveloping that box. Aside from the two that we always thought were tough, that were not great locations, we've actually been pleased with it. Farallon has been a very good partner with it, and it's gone essentially according to plan. The good news on the mall side is that we have, I guess I can't—we have a big redevelopment that's going to be announced, I think, next week.

We can announce it this week on one of the malls. We've also started major work in Southdale. We are making really good progress on the malls. We've been pleased with it, and it's gone according to what we thought, with the major markets, you know, Potomac, Gurney, all of those kind of going somewhat better than initially expected. Frankly, surviving relatively unscathed, you know, a great real estate recession.

Speaker 2

Okay. In terms of the 16 Mills themselves, do you want to move even further towards outlets for those properties over time?

Speaker 6

Yeah. We think we're adding more outlets there. They're usually in such great, dominant, super regional mall locations that we're going to do both full price and outlets in some of them. In others, we think we can move even more with the outlet concept.

Speaker 2

Okay. Great. Thank you.

Speaker 6

Thanks.

Speaker 0

Our next question comes from the line of Craig Mailman of Citi. Please proceed.

Speaker 7

Yeah. Quentin Ville is here with me as well. Rick, just a question on the leasing spreads and appreciate the new detail. I guess when you look at total leasing, how much of that was in the quarter? I guess moving now to same space, but increasing to above 10,000 reduced the square footage that's being shown on the page. I'm just curious, when you look at the totality of it, what sort of the trends were like in opening and closings?

Speaker 3

Michael, it's Steve. Part of your question is correct. The premise is correct. We did move to same space. We have always disclosed all GLA, all small shop GLA in our leasing statistics. To answer your question, the $5.8 million that we included on a same-space basis is about 75% of our total leasing activity over the trailing 12 months.

Speaker 7

When you look at the totalities of that 8 million square feet opening and closing, would the spread increase or decrease from that up 10%? Just to get a perspective of same space is very important, but I'm wondering if we can get perhaps both of them so that we can really understand the impact it is to the bottom line on the totality of the portfolio.

Speaker 3

Michael, if we had included a cut at 10,000 feet or 15,000 feet, the smaller spaces you get.

Speaker 6

Us.

Speaker 3

I thought it was.

Speaker 6

The question is if you included all of them. Yeah, that's the question.

Speaker 3

It still would be substantially higher spread.

Speaker 6

It would still be higher spread.

Speaker 7

I was thinking if it was higher than 10%, or, you know, how much meaningful if you include all the leasing that you had completed.

Speaker 3

It’s 75% of the total population, so it’s not going to move it a ton, but it would be higher.

Speaker 7

Okay.

Speaker 6

I think you see that in where the average base rent has gone to, right? That gives you, you know, that's why, you know, that number is still out there because we want people to see what's happening with our average base rent. That takes everything into account, renewals, extensions, new deals, you know, at all. That's why that number is still, you know, out there to be shown.

Speaker 7

When you think about the Mills platform and the benefits that you've been able to do since you bought it, you do have a partner. Anytime you have a partner rather than owning it, and a partner who's not going to be a long-term owner of retail real estate like you are, it does set it up for, you know, you eventually have to pay for all the improvements that you did, obviously in a fair and negotiated way, I guess. How will that venture eventually be resolved, and the timing of doing that? Do you envision buying it? Do you envision bringing in another partner for Farallon's stake, and how should we expect that to go?

Speaker 6

All fair questions, all good questions, but very difficult for me to answer, obviously, because of the confidential nature of our partnership. I will say this. They've been a very good partner. They're very supportive. They've been very excited about what we've done with the portfolio. They've been more than willing to reinvest in the assets. The partnership couldn't be better. Are they a natural long-term owner like we are? No. Clearly, will that resolve itself in a win-win, at the right time? More very, very highly likely. Beyond that, Michael, it's very tough for me to venture further.

Speaker 7

When you say the right time, is that like a 12-month or, you know, should we be thinking, you know, two, three to five years?

Speaker 6

I'd like your advice. What would you like, you know, tell me?

Speaker 7

I want the lowest possible price for the most efficient.

Speaker 6

Me too. Me too. Okay.

Speaker 7

As soon as possible. I'm curious. Last quarter, you gave me the Bunny movie version of the capital shopping centers and how that ended. Why don't you give me the same thing on the outlet center and all the other guys who are out there trying to develop and how you think that's going to end, at the end of the day, with so much increased competition in the space?

Speaker 6

I don't have a Bunny reference today, but I will say this. There's a lot that can be spilt between the cup and the lip, right? My view of it is this: until somebody starts construction on whatever project that is—full price, redevelopment, outlet—all we are is yammering. We try to keep our yammering—we're not perfect. We yammer with the best of them. We try to have the lower yammering quotient. We try to be leaders in yammering. In the meantime, until it starts construction, to me, it's just a lot of talk.

Speaker 7

Hi. It's Quentin here. Just a question in terms of currency. You commented on additional potential offshore expansion, and just with the move in the U.S. dollar, I'm just curious how you think about investing offshore, and whether you might change the way that you structure some of your potential offshore acquisitions.

Speaker 6

I mean, the interesting thing is you've got a couple, it's twofold. One is very tough to complicate or consider a major outside of the U.S. investment right now if you have to use your currency to buy something, right? On the other hand, you could argue, if we're in a further decline, are we not better off having some of our assets outside the U.S.? We have about 5% of our assets outside the U.S., so naturally, we get some marginal benefit on it. For us to do a major thing outside of the U.S., unless there was the ability to use currency-denominated financing, and in some markets, you're able to, in some, you're not, it's a tall order right now given how weak the dollar is. I think at the end of the day, when you factor it all in, it probably curtails our investment.

Our greatest advantage right now should be our cost of capital. If we can't use that, besides all the ability to make assets better and all that stuff, that's true. If we can't export our cost of capital because the dollar is so weak, it's a challenge to do further major international expansions. We can build, we're building in South Korea. We're building in Malaysia. We're looking at other Asian markets and actually building stuff, and making things happen there. To do a major deal, if we can't finance it, and we don't get the benefit of our cost of capital here, and have to convert dollar investment into that currency, you can make a great real estate deal, but if the dollar does strengthen down the road, you could get whacked and lose your value. It's a natural constraint that we've got to deal with.

Speaker 7

On the flip side with the currency, are you seeing more interest from offshore investors into some of your assets, maybe some of the weaker assets, or potential for joint ventures? Does that give you some kind of opportunity to maybe sell more U.S. assets?

Speaker 6

I definitely think there is a—I wouldn't call them weaker assets, but there's clearly the trend from a number of the international institutional investors, who have a tendency to gravitate toward the highest quality in the major metropolitan markets, is clearly moving away from that, looking to want to be in the U.S. for all sorts of reasons, yield one, maybe their view of the dollar, ultimately, all sorts of safety, whatever it is that they factor in. They are going down the quality spectrum-defined investment opportunity. I do think that that seems to be a trend that will continue at this point.

Speaker 7

That's great. Thank you.

Speaker 6

All right.

Speaker 0

Our next question comes from the line of Alexander Goldfarb of Scotiabank. Please proceed.

Speaker 7

Yes. Hi. Good morning. I just want to go to the topic of B malls. You know, you guys are marketing some stuff, and it seems like every other retail company out there is marketing, you know, whether they call it Bs or non-core. How much of this stuff do you actually think will trade? For the buyers, do you think the buyers will predominantly be financial buyers, or do you think that we'll see, like, real real estate buyers?

Speaker 6

I think it's too early to tell what's going to happen out there that will trade and at what pricing. I think actually you're going to see probably an entrepreneur with equity, either from opportunity funds or from other kind of institutional investors that are going to see the yield opportunity, maybe the ability to make the property better. When they put it all together compared to where they are on buying A-plus, they see that risk-adjusted return worthy of taking that investment. I would say to you, though, the market's better, the financing market's better. The fact that we're selling four malls is not a big deal. We have sold 100 assets as we've been public. This is kind of a normal strategy.

Alex, we clearly stopped that effort in 2008, 2009, and 2010, certainly for a period of time, even though we did sell something in 2010 at a huge gain for us in Europe. We're always looking to recycle capital. It's not a transformational deal like some of the others that might be out there. Long story short is, we'll have to wait and see. It's going to be a combination of operators, maybe even others, some other major real estate companies. We're just going to have to wait and see how it shakes out.

Speaker 7

Okay. If I understand what you're saying, it sounds like you're a little less optimistic that there's going to be a lot trading. There'll be some trading, but it doesn't sound like you're expecting a huge amount. Is that fair?

Speaker 6

I think the market's better, and I think trades will happen. I'm just not going to quote what I think cap rates are going to be.

Speaker 7

Okay.

Speaker 6

Because I honestly don't know yet. I do think there's going to be more velocity in, you know, you use the term the B assets. I do think there'll be more velocity. I think it's too early to speculate from our standpoint where the cap rates will be.

Speaker 7

Okay. My second question is for Steve. I think it was last call, you commented on the pile of pitch books for converts that's in your office. Curious what the latest pile is, and what are your thoughts on doing some more 30-year, or if you have a view of the 30 non-call 5s, if that's attractive to you?

Speaker 3

You know, the piles are growing, Alex. The convert pile, obviously, the capital markets are very robust right now. Unsecured debt markets are very attractive. One of the things that we need to take into consideration is one of the things David said in his opening comment. We're sitting here with $4 billion of liquidity right now. We certainly don't have the need to go to the capital markets. Having said that, given the attractiveness of the all-in right now, certainly on the bond side, it is something that we monitor and we will continue to monitor. Right now, I would tell you we are not as enthralled with the convert markets. I think it's not something that we would look at to put in the capital stack right now.

Speaker 6

Yeah. Look, I would just say that, just to add to what Steve said, one of the bigger decisions we'll have to make this year is whether we want to warehouse capital, given that capital, you know, we don't need it necessarily, but it is relatively cheap. We do think, I mean, I think, I may be completely wrong, but I do think rates are going to go up at some point. One of the bigger decisions we'll have to make at some point this year is whether we go ahead and warehouse capital. It's not equity capital, but whether we warehouse, you know, other forms of capital, on the theory that rates are going to go up at some point here. You know, that's a decision that we think about all the time.

It is tough because, you know, you haven't seen it, but usually, we don't want to be in the case where we react. Real estate guys tend to react, you know, while rates are going up as opposed to when rates are low. We'd like to be a little, at least, we don't have to be perfectly smart, but we'd like to be less stupid.

Speaker 7

This sounds like a good, good strategy. Thank you.

Speaker 6

Thanks.

Speaker 0

Our next question comes from the line of Nathan Isby of Citi. Please proceed.

Speaker 7

Hi. Good morning. Just focusing on Prime for a second, you clearly have had some good success leasing up some of the vacancy. Can you talk about your success there in terms of driving rents and perhaps put a number to that?

Speaker 6

I know we won't put a number to it, but,

Speaker 7

I kind of expected that.

Speaker 6

Sorry. Look, I think we feel really good about the deal we did, you know, obviously going in. We're glad to have, you know, David as an OP holder. He's been a great OP holder as well, and it's just been a good win-win deal for everybody involved. It's a good portfolio. We expect to do some good stuff with it. Nate, tough for me to give you numbers. I probably won't. I know I won't. Rick, do you want to add anything to it?

Speaker 3

The only thing I would say to you, Nate, is that what we've been able to do is as the new tenants enter the outlet sphere, we now have an additional portfolio of properties that they can immediately open stores in. We're getting the benefit of that. We see it with tenants that we've had relationships with or like Coach's opening Coach Men, you know, Bare Essentials, Vera Bradley. I mean, we're just taking these tenants now across a broader portfolio of properties, and that's really providing incremental momentum both in rents but also in sales because we're bringing in higher productivity tenants into the portfolio.

Speaker 6

I just want to reinforce what Rick said. I mean, the greatest opportunity there is to increase the mix, which drives sales, and obviously, you know, that's the focus.

Speaker 7

What's the occupancy cost currently?

Speaker 6

We don't separate that out. It wouldn't, it's not all that different than what you'd see from the outlets, etc.

Speaker 7

Okay. Thanks. In terms of your increased guidance, can you just quantify the change in your same-store NOI assumption?

Speaker 6

We didn't do it this year. We didn't give a NOI, a comp NOI in our original guidance, but right now, we expect to beat our own internal budget.

Speaker 7

Okay.

Speaker 6

That didn't answer your question.

Speaker 7

No.

Speaker 6

I'm sorry. I'm not purposely frustrating you. What?

Speaker 7

I was thinking the wedding was going to put you in a good mood.

Speaker 6

You did get two kisses in, which, you know, we're proud of. The fact is, you didn't give specific guidance there. You have our own internal budget, and we hope to beat our own internal budget.

Speaker 7

All right, thanks.

Speaker 0

Our next question comes from the line of David Harris of Gleacher & Company. Please proceed.

Speaker 2

Thank you. I told Buckingham Palace that I couldn't possibly make it because I had a prior engagement to listen to this first time in telephone conference calls. Hey, David.

Speaker 6

We're glad you took time away from your festivities.

Speaker 2

I couldn't afford my wife's ambitions around the hat. I think that's really the deciding factor. Listen, I was reading your annual review and on the international, and I know you fielded a couple of questions on this today, but you make a reference to, "We are proven to be valuable exporters of our know-how." I kind of read that and thought it was sort of a little imbalanced in the sense that I would have thought you would have learned a lot or could learn a lot from operating in overseas markets and taking best practices and exporting them around the globe. I'm thinking in particular too, overseas tenants have really sort of enlivened the U.S. retail scene in the last few years as well. Any comments around that?

Speaker 6

Our know-how, if you look at what we built, I mean, the outlets that we built in Asia are essentially our outlets here in the U.S., and they didn't exist prior to that. I think if you saw the product that we built in Poland and the product that we built in France were actually highly U.S. influenced. We certainly learn every day here, abroad, and everything else. I think that the fact of the matter is we've had a profound and positive impact on what we've done, and that's really what my comment was meant to be. If you look at Getemba in Japan, it's really modeled after what we did in Woodbury. If you look at what we did in Yoju in South Korea, it's very similar to what we did in other parts of the U.S.

I think we've, in fact, if you go to Dubai and you look at what they've built, they've taken the best of Forum Shops and other malls in the U.S. and replicated that. That's not to denigrate the international marketplace. We've certainly seen a lot of wow stuff over there, but we certainly contributed to all of the activities we've done overseas.

Speaker 3

I think touching on the other side of your point in terms of the international tenants coming into our domestic portfolios, we've done a very good job of implementing them into our portfolio. We just opened the flagship H&M store at Forum Shops. We're doing a lot of business with them, have a very close relationship with them, but it's not just them. It's Tampolina from Spain, Inglot from Poland, Diva from Australia, Aritzia from Canada. There is a lot of international tenants that we are doing business with across all three of our platforms, the Mills, the outlet centers, and the malls.

Speaker 2

I'm curious, Rick. Are there any ideas coming out of Asia? All of the international stuff, the fresh international ideas, seem to be coming out of Europe. Is there anything out of your Asian context?

Speaker 3

What we are anticipating is that Uniqlo is going to be a major player here, and they're building their flagship right on Fifth Avenue. We expect that we're going to have a similar type of expansion that we've seen with H&M. They started in the major cities, and now they're throughout the country, growing very rapidly and doing very well in their stores.

Speaker 6

What we understand about the Asians is that they love to come to the U.S. and shop. One of the great things that we provide them, you know, in their current possible.

Speaker 4

The fact is that we have great places to shop, so marketing to them is really, really important.

Speaker 0

Okay. Just on the Asia and thinking a bit more on Japan, I know you made your comments there, is that, as we sit here today, would you be inclined to try and step up your investments in Japan, notwithstanding those comments you had to make about currency?

Speaker 4

We have always, we're actually expanding Ami right now, which is right now somewhat affected by what's going on with the nuclear facilities. We have not looked at the full-price market there. We've had great success in the outlet market. Cracking the code on full price in Asia has been a struggle for us. The values, the cost to develop full price there, the size of the deals, the ability to get the land in the right location, that's been the tougher one. That's been the tougher code for us to crack. We do think our outlet business in Asia can grow, and we're excited about that. Ultimately, can we crack the full price thing in Asia? I don't know yet, David. It's tough because, first of all, it's not devoid of a lot of full price to begin with.

Second, where you want the locations, the land cost, the infrastructure cost, and the competition are all challenges that we'd have to deal with.

Speaker 0

You may not want to respond to this, but I mean, surely a relationship with Mitsubishi Estate would open a few doors for you on the full price, wouldn't it?

Speaker 4

They are good partners.

Speaker 0

Okay. All right. I heard the message. Thanks, guys.

Speaker 4

Thank you.

Speaker 6

Our next question comes on the line of Caitlin Burrows of Bank of America. Please proceed.

Speaker 1

Morning guys.

Speaker 4

Hey, Jeff.

Speaker 1

I just want to follow up on the comments about rates going up here sometime. I guess, can you be a little bit more specific on your thoughts when you say sometime?

Speaker 4

I wish I knew, you know.

Speaker 1

At least what you're thinking.

Speaker 4

I think it's conceivable that, you know, anything that we can refinance today, we're refinancing. We have certain mortgages that are obviously locked out to prepayment penalties. We don't think it's cost effective, you know, trading dollars essentially, and it's not cost effective to do that. The big issue for us, if we do think rates are going to go up, is whether or not we would do some kind of bond deal and warehouse the capital. Right now, we don't have, you know, if you remember what we did in 2009 and 2010, or in 2010, I'm sorry, 2010 essentially, is we refinanced bonds and we bought them back. It ended up being, at least in today's world, an okay trade. The question is whether we want to do something like that again or just hold on to the capital and wait for maturing debt to come due.

Speaker 1

Jeff, this is Steve. Just to kind of amplify on David's comments, if you look at, as an example, where the benchmark 10-year treasury is today and you track it back over any length of time, whether it's 10 years, 20 years, 30 years, it's clearly at historically low levels and at levels where, over a long period of time, they have not been for a very large percentage of that measurement period. I think anytime you're in an environment where rates are at historically low levels, it does give you pause to reflect about do you want to go get more capital because history would tell you that the probability is those rates aren't going to be at that level forever. I think David framed it pretty well. We've got a lot of liquidity.

We don't have an immediate use for the capital, but if your view is that it may be more expensive down the road, it may make sense to go access that capital now. Okay. I'm not sure if you'll answer this question. Do you think that the market is properly pricing in higher rates when we think about today's current stock prices, thoughts on cap rates, implied cap rate on the group?

Speaker 4

I think the market's probably anticipating a recovery in a stable interest rate environment.

Speaker 1

Lack of yield in the rest of the world.

Speaker 4

I think the fact of the matter is that's been the reality. You know, our view is recovery. You're seeing a recovery. We've been at it for a few quarters now. Clearly, interest rate markets have been very stable. You know, at some point, that might change. I'm not so much worried about the recovery as opposed to the interest rate environment.

Speaker 1

Okay. Turning to leasing, I know you said earlier on a public call it's tough to answer questions. I guess, can I just ask in general, in your negotiations, are you focusing on sales the next 12 months, or are you still negotiating on trailing 12? When we're negotiating with the tenants, it is a very individualized negotiation. We're looking at their growth in the last six months, but we're looking at the use, the space, the size of the space, the quality of the mall, the space in the mall. There are a lot of factors that go into how we price our rent, and certainly, sales growth is one of them, but it is not the only one.

Speaker 4

Yeah. I'd just say it's really the biggest focus is the market value of that space, right? You could have a retailer in that space that's not performing, and I wouldn't want to tie the rent to that sales performance when in fact, you know, the market value is higher and would indicate a higher rent. You know, leasing is an art. We try to make it as scientific as we can. You know, we have, we're leaders in data generation here in terms of all of the tools available to us to assess that. We assign market value for each space. We use it sometimes. We ignore it others. At the end of the day, we have relationships that factor into it. At the end of the day, we kind of all put it together. The best thing going for us is our judgment. You know, it's an art.

It's not a science. It's not order-taking. It's what does it do for the center, merchandise mix, where do we want to take the center? All those factor in. Certainly, having positive sales history, positive, which is positive traffic, all go into the blender and all makes the job somewhat easier than it was a year or two ago. It's all those things that factor into what we're trying to accomplish and what the right rent is.

Speaker 1

Okay. Turning to international, we know David Contis has experience in Brazil. We just did a tour there. Do you think that it's too late at this point? Do you think you missed the opportunity on full price in Brazil?

Speaker 4

Not necessarily. You know, David, the research we've done, the biggest constraint that I see in Brazil is the currency issue as opposed to the real estate issue, and the cost of the financing there. You don't get, we wouldn't get much of any advantage on our lower cost of capital here to put money to work. I think that story on the real estate front doesn't seem to have changed at all. The problem is you really do have a dollar currency issue that makes it a little more challenging to conceptualize a transaction there.

Speaker 1

Okay. And then last question, where do you stand on 2011 leasing and what are your, some of your goals heading into ICSC?

Speaker 4

'11 leasing is, for all intents and purposes, on our renewal done. We're well into 2012. For us, frankly, ICSC is much less important. In fact, the month of April and the month of May prior to ICSC are our peak periods of tenants coming to Indianapolis to meet with us because the volume of activity we have, they'll come for two days in order to go over all the opportunities in the portfolio, whereas at ICSC, you're really limited to half an hour or an hour sound bites. We're doing a lot of leasing. We're focusing on our '12 renewals and leasing up the vacant space. So far, we're seeing good momentum. I'd say this, Jeff, the biggest focus that we'll have is on some of our major redevelopments.

Included in that are, like Nanuet Mall, we are finally at the point now where we're going to start demolishing that center. We have Quaker Bridge, Del Amo, Dadeland, La Plaza, Plaza Carolina, Southdale, Southridge, Acople. What we're doing on the island, Laguna Hill, Stanford, we hope to push along a potential expansion of that center. We've got some things in the outlet side as well, potential new projects that we could start talking about there. That would be the, and Rick's right. '11's essentially done, '12 renewals. I'd say the focus really for us is going to be on the major redos that we've got, we're on the cusp of doing.

Speaker 1

Great. Thanks, you guys.

Speaker 4

Thanks.

Speaker 6

Our next question comes on the line of Hal Temple of Hewitt-Weiss. Please proceed.

Speaker 3

Good morning, guys. Congratulations on a nice quarter.

Speaker 4

Thank you.

Speaker 3

Thank you. What led to the decline in other income from the year-ago period?

Speaker 1

Yeah. We had big lease settlement income in the first quarter of 2010, Carol.

Speaker 3

Okay. This question's probably for Rick. Are you seeing any new and exciting retail concepts coming to the malls?

Speaker 4

Okay. Hold your breath.

Speaker 1

Thank you for asking. You know, we are. What's interesting is that they're coming from all different places. For example, we're doing deals with Fiat dealers because they're not opening their new dealerships. They're reintroducing the concept to the U.S., and they want to be where the people are. We've just, we're signing leases with Tesla Motors, the new electric car maker, because they want to have their demonstrations where the people are. We're doing deals with Microsoft, the biggest internet-based company. They need to open stores where the people are, and that's our malls. I could go on, but David will.

Speaker 4

No, no, no.

Speaker 1

David will give me the hook. I'll stop when David gives me the hook. Love Culture is growing very substantially. Francesca's is filed for a public offering, a relatively new concept. Charming Charlie's, Pandora just went public. There is just a lot of activity going on in our portfolio and, happily, throughout the portfolio. These are not just concepts that want to be in the top 100 malls. These are concepts that have broader price points and want to have 400, 800 stores in their ultimate build-out. It's very exciting.

Speaker 3

Okay. Great. Thank you.

Speaker 4

Thank you.

Speaker 6

Our next question comes from Ben Yang of Keefe, Bruyette & Woods. Please proceed.

Speaker 2

Yeah. Hi. Good morning. Thanks. Just one quick one from me. Maybe, David, do you have any thoughts on potentially teaming up with a partner to do outlet center development in Canada, maybe starting in Toronto, just a few miles away from another potential site? I'm just curious if you've had any discussions with Callaway to potentially start a partnership there.

Speaker 4

You know, we are looking into Canada, Ben. I can't really, you know, put any more meat on the bones there. You know, we do think it's a pretty good market for, you know, for a handful of centers. I can't really say anything more than that. We are looking into that marketplace.

Speaker 2

I mean, hypothetically, if you were to form some type of partnership, do you envision yourself as just maybe like a capital partner, or would there be some type of development, management, leasing that you would share with your hypothetical partner?

Speaker 4

If we get a venture in the, I mean, this goes for any outlet venture, whether it's U.S., Canada, Mexico, Malaysia, Japan, Singapore, China, we would definitely add operational expertise. We would not just, it just wouldn't be our capital. That clearly would be the case.

Speaker 2

Okay. Great. Thank you.

Speaker 4

Thanks.

Speaker 6

Our next question comes on the line of Omotayo Okusanya from Jefferies. Please proceed.

Speaker 7

Hi. Yes, good afternoon. Congratulations on a solid quarter.

Speaker 4

Thank you.

Speaker 7

Quick question. When I look closely at results for the quarter, I mean, you guys beat consensus roughly by about $0.08. The midpoint of your new guidance is up about $0.08 versus your old guidance. It sounds like operationally, things are getting better. You know, leasing spreads are getting better. Leasing velocity is getting better. I'm just surprised guidance wasn't upped more. Is there anything unique in the first quarter in regards to the $0.08 beat that you expect will not be repeated in the back half of the year?

Speaker 4

Not really. Look, we're a little cautious on Japan. We have a very robust international outlet business. Some people forget about it, but it's not inconsequential. It's a great business. We're being somewhat conservative on what the outcome of that is. It's sales dependent, and we just don't have enough history yet on what's happening there. The South is actually pretty good in Japan. Sales have bounced back pretty reasonably, but we just don't know. We like to be generally conservative in setting expectations. You put that together, we still have to execute our game plan. We're good, but we're not infallible. You put it all together, and it's where guidance came out.

Speaker 7

All right. Thank you very much.

Speaker 4

Thank you.

Speaker 7

Thank you.

Speaker 6

With no further questions at this time, I'll now like to turn the conference back over to Mr. Simon for closing remarks.

Speaker 4

Okay, thanks, everybody, for your time and your interest. We look forward to talking to you in the near future.

Speaker 6

Ladies and gentlemen, that concludes today's conference. Thank you.