* Q2 FFO $1.38/share vs Street view $1.34

* Sales at mall and outlet tenants' stores up 4.9 pct

* Maintains 2010 forecast

* Shares rise 1.7 percent

(Adds CEO comments, updates stock price)

By Ilaina Jonas

NEW YORK (Reuters) - Simon Property Group Inc
reported higher-than-expected quarterly funds from
operations Friday, citing lower expenses and higher
occupancy at its malls and outlet centers.

The largest U.S. mall owner is rebounding from the economic
downturn, although it is still dealing with the bankruptcies of
some of its tenants, store closings and rent breaks it gave to
help some retailers to survive.

"We are in a recovery mode," David Simon, chairman and
chief executive, told analysts on a conference call. "The mood
is much better. It's not in the period that we were in in the
'06-07 period. It may take a little more time, but it is moving
in that direction."

The company also is cautiously spending more of its
multibillion-dollar cash pile by paying down debt, developing
new outlet centers at home and abroad, and redeveloping and
expanding certain U.S. malls, following its failed attempt to
buy rival General Growth Properties Inc.

"We are going to continue to de-lever if there are not the
acquisitions opportunities to pursue," Simon said.

The company also has dusted off plans for about 15 to 20
redevelopment projects shelved during the credit crisis, and it
plans to double its development budget to $200 million this
year. Yet Simon also said acquisition opportunities may return,
given the uncertainty of the U.S. economy.

Simon reported that second-quarter funds from operations,
or FFO, rose 55 percent to $487.7 million, or $1.38 per share,
from $313.1 million or 96 cents per share a year earlier when
it recorded a noncash charge of 42 cents a share.

Analysts on average expected $1.34 per share, according to
Thomson Reuters I/B/E/S.

FFO, a measure of performance for real estate investment
trusts, removes the profit-reducing effect of depreciation of
the company's malls and shopping centers.

Simon maintained its forecast for full-year FFO of $5.30 to
$5.40, including an earlier debt-related charge. Analysts
estimate $5.37 per share. But the original forecast anticipated
that its Prime Outlet acquisitions already occurred. David
Simon said it would be revised once that deal closes.

Quarterly net operating income, which measures the net
amount of cash properties generate, rose 1.9 percent from a
year earlier, a sign that business is improving after the
downturn.

The Indianapolis-based company owns or has an interest in
373 properties comprising 256 million square feet of leasable
space in North America, Europe and Asia. It owns such
well-trafficked malls as Roosevelt Field on New York's Long
Island and Sawgrass Mills Circle near Fort Lauderdale, Florida,
as well as outlet centers such as Woodbury Commons north of New
York City.

Simon recently lost its battle to buy General Growth, the
No. 2 U.S. mall owner. It dropped out of the bidding after
another suitor, a group lead by Brookfield Asset Management,
agreed to bankroll General Growth's exit from bankruptcy in
exchange for most of the company and more than 100 million
warrants.

As of the end of June, Simon was sitting on $2.6 billion of
cash and had access to $3.3 billion under its revolving credit
line.

"One of the great lessons of the credit crisis is having
extra cash is good thing," Sandler O'Neill analyst Alex
Goldfarb said.

The company said on Friday it expects to record a gain of
$280 million in the third quarter on the sale of Simon Ivanhoe,
which owns seven shopping centers in France and Poland, to
Unibail-Rodamco.

In the second quarter, sales at its mall and outlet
tenants' stores rose 4.9 percent to $474 per square foot from
$456 a year earlier. Mall owners receive a percentage of their
tenants' sales above a certain threshold. Higher sales also
generally allow a landlord to charge more rent.

Second-quarter occupancy increased to 93.1 percent from
92.3 percent. Average rent rose slightly, to $38.62 per square
foot from $38.49 a year earlier.

Shares of Simon were up 1.7 percent at $89.42 in late trade
on the New York Stock Exchange.
(Reporting by Ilaina Jonas; Editing by John Wallace and Steve
Orlofsky and Matthew Lewis)