Simon Property Group Inc. Earnings Call Nuggets: Sears, Brazil

On Friday, Simon Property Group Inc (NYSE:SPG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what the C-suite revealed.

Sears

Christy McElroy – UBS: Given GGP’s recent deal with Sears to buy back some boxes and leases, I am wondering if you are having any discussions with the retailer to do the same? And of the 119 Sears boxes at your malls, are there any that you would specifically point to where you would say we could unlock pretty significant value at that malls we got the box back?

David Simon – Chairman and CEO: Well, look, we’re not going to get into discussions that we have with our individual retailers. We have a good relationship with Sears. We expect over time for a number of those properties to be reclaimed or redeveloped, but nothing really to report beyond that. Look, we do think there is value there. We’ll be conservative in how we value the real estate and how we look at it, but I think over time it will provide an opportunity for the Company.

Simon Property Earnings Cheat Sheet>>

Christy McElroy – UBS: We’ve heard recently from some specialty retailers that lease negotiations for Class B malls have started to move in favour of your landlords again. Can you discuss your ability to raise rents and B and B minus types of assets, and if I think about your rent spreads being 10% across the portfolio, how would that break out between sort of the Class A stuff and the Class B stuff?

David Simon – Chairman and CEO: Yeah, now, one thing we don’t like to do is go through Class A and Class B. We are very focused on increasing the cash flow in all of our assets. Obviously, the ones that have higher sales per square foot, you are able to drive a little bit better bargain. We look to win wins for the retailers. We’re doing a lot of business with retailers throughout the portfolio. Our rent spreads, our averages mean a lot because they’re not with the portfolio of our size. We can’t have one particular centre rollover or one centre doing so much more business that it’s driving the statistics of every other of the portfolio. The business is firmed up. We’re pleased with where it’ headed and where it’s going. Retailers are looking for growth. So, I’d say things are all pretty good. Rick, do you want to add anything?

Richard S. Sokolov – President and COO: I would just underline David’s point, that if you look in our 8-K and see where our renovations are, and we’re adding anchors and department stores, it’s throughout the portfolio, and we’re increasing market share across the board, and that is enabling us to drive that pricing and it’s an underlying quantifying David’s point on the square footage. When you look at our sales and our statistics, that’s on a base of almost 60 million square feet, so there is no way for outliers to influence that it’s a broad operational trend that we’re reflecting.

Christy McElroy – UBS: And then just lastly, how much capital do you envision investing in outlets in China and Brazil over the next five years and what kind of projected returns are you forecasting?

David Simon – Chairman and CEO: Well, look, it’s safe to say that we would – every international development that we’ve done in the outlet business has had double-digits return in the 15% on average range. We would expect that that’s kind of the hurdle we’re shooting for. In any events we would expect those to be at least double-digits. Brazil, generally, we think the market can support in the 10 to 14 opportunities initially. Cost of those will – on average be in the $100A million plus range. As you know we are partners 50-50 with BR malls. That gives you the scope of the situation. In China right now our focus is on one particular development and we’re going through the numbers on that and it’s a little bit early to give you kind of the scope of magnitude of that, but we think it’s a great site having visited personally. It’s a great opportunity for the Company. The demand from the retailers is very strong. China you’ve got to be extra cautious there. We’ve had an experience where we learned a lot in China, but generally I think it will be consistent with the build and what we’ve done in Korea and what we’ve done in Japan, cost of construction, land values, are all kind of the same there, but I don’t want to pin those numbers down just yet.

Brazil

Jeffery Spector – Bank of America Merrill Lynch: Just a couple follow-up questions on Brazil. David, did I hear you say 10 to 14 potential sites?

David Simon – Chairman and CEO: Yes, over a period of time, correct.

Jeffery Spector – Bank of America Merrill Lynch: And I’m not as familiar with all of the different markets in Brazil. Is there any change in the site criteria or are you saying in your first analysis you feel that there are 10 to 14 sites that really fit that premium outlet type criteria density wise.

David Simon – Chairman and CEO: Correct, that’s correct and we’ve got currently – so that’s over an extended period of time we’ve got one site identified in Sao Paulo. We’re not in a position to disclose that yet. If all goes according to plan, we have a chance of opening that in the late ’13, but more likely early ’14 and then we’re currently evaluating another four additional sites. So the 10 to 4 is over on an extended period of time, but we’ve got one we’re very close to moving forward on and then another four that are further along than that.

Jeffery Spector – Bank of America Merrill Lynch: For now in Brazil, just sticking with the outlets, are you still looking at Mall opportunities, full price?

David Simon – Chairman and CEO: This is the primary focus right now.

Jeffery Spector – Bank of America Merrill Lynch: Then switching to your investment in Klepierre, I think you carefully said that right now you are actively involved on the balance sheet divestitures. You didn’t talk about operations at all?

David Simon – Chairman and CEO: Well, I did mention that, you may have not picked it up. I mean we’ve had some very good beginning discussions with the senior team there. We’ve owned the stock for six weeks, so you have to put it in perspective that their senior management team is actually coming here next week, but we’re going to coordinate certain retail leasing at the shopping center convention coming up in May, and the U.S. shopping center convention. So, it’s early days on that front, but it’s safe to say that there are three or four areas of focus for us; operational synergies, leasing synergies, cash flow enhancement, all of that in one category. Capital allocation in another category. Along with that is what assets should they be involved in, where should the focus be, what countries are long-term holds, then balance sheet management, and then investment divestiture decisions. So, all of those are kind of the three or four buckets where we’re focused on both as directors and as shareholders and the cooperation has been excellent. There is nothing so far in our short involvement that has caused any concern for us. Look, Europe has got some macro headwinds. We knew that going in. The fact of the matter is these opportunities surface when the going is tough, but we’re in this for the long haul, and we think it’s a very good platform that we can help continue to move in the right direction, and actually have bottom line impact improvement on it. But that’s going to take time.

Jeffery Spector – Bank of America Merrill Lynch: And are you personally spending a lot of the time on that investment…?

David Simon – Chairman and CEO: Yes.

Jeffery Spector – Bank of America Merrill Lynch: …going forward? Okay.

David Simon – Chairman and CEO: Yeah.

Jeffery Spector – Bank of America Merrill Lynch: Then my last…I’m sorry?

David Simon – Chairman and CEO: No, sure. I mean I am Chairman of the Board, and you know, like I said, yes, we’re very involved; not just me, but my team as well.

Jeffery Spector – Bank of America Merrill Lynch: Then my last question on development. Anything – any new potential sites on the full-price side; mall side, the lifestyle centre side for you in U.S.?

David Simon – Chairman and CEO: No. I’m looking at Rick, and the answer, we’re just making sure we are both saying no. The answer is no, not really. We think the returns in order to really induce the full-price guys with the cost of development are just too skinny still. Demand is still not quite there. And the fact of the matter is, with our redevelopment pipeline, we got great stuff going on. I mean really good stuff going on. And with our premium outlet development, we are under construction. Let me just reinforce this. We are under construction in Phoenix. We are under construction in Toronto. We are under construction in Korea and Japan. We are looking at a couple of other areas. We are busy. These are all very good returns that we are building (new too). So, at this point, why chase full-price retail at lower returns when we’ve got our plate full (in that sense).