BEHIND THE NEWS: Smooth sailing for Simon, despite economic squall?

November 5, 2007

Retail pundits are trotting out all the downbeat analogies these days, as they fret that high gas prices and the slumping housing market will crimp consumer spending the rest of the year. As Carl Steidtmann, chief economist at Deloitte Research, put it, "The holiday season will be somewhat Grinch-like."

So it may come as a surprise that some analysts are almost gushing about the prospects for Simon Property Group Inc., the nation's largest mall owner.

As Rich Moore, managing director of RBC Capital Markets put it, "The outlook for Simon is fantastic."

How can that be? Won't the Indianapolis-based real estate investment trust suffer along with its tenants?

Not really, analysts say, because little of the company's profit is tied to tenants' sales. As long as tenants stay in business-and continue to jockey against one another for new locations-Simon will be able to ratchet up rents, upgrade or expand existing shopping centers, and build new ones.

Long term, Simon is far from invincible, of course. But so far, the number of retailer bankruptcies has been minuscule. And because Simon focuses on posh properties, like the Fashion Mall at Keystone, it's less vulnerable to economic ups and downs than are mall owners with a more middle-income focus.

Then there's the company's robust development pipeline. Simon has 22 U.S. projects ongoing, at a cost of $805 million, and is plotting others costing billions more.

"Simon's high-end mall portfolio shows no ill effects so far from the housing implosion and associated macro-economic uncertainty," David Fick, an analyst with Stifel Nicolaus, said in a report. "Leasing for 2008 ... is well under way at very wide spreads, and we think the nearterm earnings growth is essentially locked in."

Fick and other analysts found plenty to support their optimism in the company's third-quarter earnings report, released Oct. 29. Funds from operations-a key performance measure for REITs-beat expectations, reaching $1.46 a share, up from $1.30 a year earlier.

In a conference call later that day, CEO David Simon acknowledged these are tumultuous times.

"It would be naive for us to suggest there won't be some impact in terms of what's going on in the economy for us," he said.

At the same time, he said, "The vast majority of our retailers have not changed their plans in terms of store openings for '08 and their future plans." And he said the company expects to report 2007 funds from operations of "at least the high end" of the $5.83-to-$5.88 forecast the company provided in July. Funds from operations a year ago were $5.39.

Simon shares have seesawed in 2007, and now trade for about $102, up just 1 percent for the year. Longer term, they've performed spectacularly, advancing 330 percent since the start of 2000.

While there are no guarantees where the stock goes from here, Moore thinks the recent underperformance creates a big buying opportunity. He calls his price target for the next 12 months of $120 "pretty conservative." He said the stock might climb as high as $140.

Emmis, CBS Radio settle

When Emmis Communications Corp. Chief Financial Officer Walter Berger bolted in early 2006 for the same post at CBS Radio, Emmis executives were peeved.

So peeved, in fact, that Emmis sued the New York-based broadcaster, charging tortious interference with Berger's contract.

Now, the companies are putting down their gloves. A newly filed court document says they have reached a settlement, though it doesn't reveal terms and neither side is commenting.

According to Emmis' lawsuit, filed in the summer of 2006 in U.S. District Court in Indianapolis, CBS Radio approached Berger in the second half of 2005 about taking its CFO post. After receiving an offer, Berger alerted Emmis, which immediately contacted Joel Hollander, then CBS Radio's CEO.

"Emmis specifically reminded [Hollander] that it had an agreement with Mr. Berger and that Emmis did not consent to Berger breaching his contract with Emmis," according to the lawsuit.

CBS Radio had denied wrongdoing. In a court filing, it said that after Berger apprised Emmis of the CBS offer, the company advised "Berger that it would not stand in the way of Berger's opportunities."
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