Simon Property Group Earnings Call NUGGETS: JCPenney, Department Store Dynamics

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On Tuesday, Simon Property Group Inc (NYSE:SPG) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

JCPenney

Alexander Goldfarb – Sandler O’Neill: David, just going to the JCPenney for a second. ($1.24) is certainly below where you guys are trading just want to get a little more color on; one, who approached to first; and two, just want to try and understand why someone would take ($1.24) versus where your stock is trading in the open market?

A Closer Look: Simon Property Earnings Cheat Sheet>>

David Simon – Chairman and CEO: Let’s just say, we have a strong relationship with Penney, they are a very important retail partner of ours. Rick and I know Mr. Johnson and we also know very well members of the board. So, I’m not going to get into the particulars, but just so you understand, I mean, the unitholders have the ability to convert their units on a one-for-one basis for common shares and we view it essentially as common stock equivalents because obviously they can convert it on a one-for-one basis. When they do that then they – we have the option to give them fully diluted stock or cash, and it was through that discussion that we negotiated the deal, and I’m very convinced, it’s a great opportunity for the company and I think it met Penney’s strategic goals in terms of their focus on what they are trying to do with their business. So we’re pleased with the transaction and beyond that there’s not much to add to it Alexander.

Alexander Goldfarb – Sandler O’Neill: Then on Brazil, Equity International solid their stake in BR Malls. Just curious if you guys took a look at buying their stake or if there is any discussion around that?

David Simon – Chairman and CEO: Well, we have looked at a lot of thing at BR, with BR Malls, we have looked at a lot of things in Brazil. The good news is we’re very close to approving our first outlet there and which will start construction here potentially within the next 30 to 60 days, and open – it’s outside of San Paulo and open late next year, that’s not in this list that I described to you, but it is moving apace and I expect that to happen and I think we’ll get our first outlet center built and opened next year. So we are pleased, we’re making very good progress on that.

Alexander Goldfarb – Sandler O’Neill: Just final question. Just with the recent economic data. Has there been any change in the conversations with tenants or they are still full steam ahead in terms of leasing space in their program this year and next year and further out?

Richard S. Sokolov – President and COO: Alex, this is Rick. There really has not been any change they are still coming in and aggressively looking for new opportunities across all the platforms.

Department Store Dynamics

Ross Nussbaum – UBS Securities: Can you guys talk about the dynamics that you’re seeing in the department store sector as you look ahead to next year, obviously you’ve got one big transformation going on at JCPenney and then you’ve got another different type of situation over Sears. At what point do you guys – or do you believe there still needs to be some rationalization in terms of the number of boxes that are out there?

David Simon – Chairman and CEO: I’ll put Penney in a completely different category than Sears. I mean, Penney is very focused on delivering value to their customer. They have a very talented management team. We expect, obviously, they are going through a transformation, but we expect Penney to be a viable mall anchors in a fashion that they have been historically. Sears is a little bit different, I mean, the fact of the matter is, Sears needs less space, I think we touched on this last time. Sears needs less space than what they currently have and I think there’ll be ongoing discussions with us and Sears and the other mall people that will rationalize that space, creating opportunities for both of the landlord and Sears. I really, really would not lump them in together, they are two different companies on two different paths and at the end of the day, it looked it’s going to be Sears will be a lot of work but we feel confident as they probably reduce some of their space that will ultimately benefit us in the long run. Rick, anything you want to add?

Richard S. Sokolov – President and COO: I would just add, if you look at today’s landscape in the department store universe their equity, their balance sheets, their credit profiles are all dramatically better than they were just a few short years ago. You have Lord & Taylor that’s been recreating into a very viable and aggressive growth vehicle; Dillard is very well situated; Macy’s is well situated; Carson’s has a new leadership and great financial upward trajectory. So, candidly, we are in a better position now than we have been and with no new development these stores are maintaining their existing stores because they want to really enhance their top line.

Ross Nussbaum – UBS Securities: Second question is – I have gotten this question over the past couple of days from some of your investors. Does the hiring of Matt reflect in any way a signal that you intend to accelerate your international expansion or is it more of a reflection that you just needed another body or two in the door given everything you’ve got going on?

David Simon – Chairman and CEO: It is really a function of what we’ve got going on. Believe it or not, this is a big company and just like I am never satisfied with the portfolio and where we’ve taken the company I am always going to try and add talent to the organization. I’ve known Matt a long time. We talked on and off. We wanted to fill this position, (loss) probably in late ’08 and then the world ended, so we put it on a backburner, because we said well we’re going to hunker down. I just think there are so many opportunities for this company, it’s very important to continue to add talent, another pair of hands, another deep thinker. He fits in great with the team. So, for me it was a no brainer and we’ll take it wherever it goes, wherever we think we should invest. Who would have thought we would have bought our stock at ($124) three months ago, but you know we saw opportunity. Who would’ve thought we would have invested internationally four months ago, get paid – I am getting paid, most people pay for options. I’m getting paid as I think about that company as optionality. What I mean by that if you look at the cash flow that we’ll get from their dividend against the cost that it took both on equity and debt, we’re going to get paid 55 million plus or minus million a year to decide, what we want to do with that stake, that’s a good spot to be in. There is not many malls you can build, that can generate $55 billion of cash flow. So having another guy to think these things with our team, I think is exciting. I also think with David and Steve we hired Larry Krema to run our HR Group. I think it also demonstrates that this Company is a neat place to work and to be part of.

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