西蒙地產 (SPG) 2015 Q2 法說會逐字稿

Hello, everyone, and welcome to the second-quarter 2015 Simon Property Group, Incorporated, earnings conference call. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to the Vice President, Investor Relations, Tom Ward.

Thank you, Lauren. Good morning and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer.

Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at Investors. Simon.com.

For our prepared remarks, I am pleased to introduce David Simon.

Morning. We had a productive quarter. We completed several significant redevelopment projects, started construction on others, announced even more that will further enhance the value of our real estate. We identified additional avenues for growth through our two new retail partner joint ventures. And most importantly, we continue to produce strong operating and financial performance.

Results in the quarter were highlighted by FFO of $2.63 per share, which included a $0.22 gain on a sale of marketable securities. Excluding the investment gain, FFO per share was $2.41, which exceeded First Call consensus again by $0.06. These results were achieved even with the negative impact of $0.04 for the quarter compared to the prior year quarter due to a strong dollar against the euro and yen.

On a comparable basis excluding the contribution from WP properties in the prior year period and again the investment gain, our FFO per diluted share increased 14.2% or over $0.30 year-over-year. Occupancy was 96.1%. Leasing activity remains healthy.

We recorded spreads of $10.87, an increase of 18.4%. Comp NOI for the quarter increased 3.6%, which was coming off a 5.6% comp increase in the second quarter of 2014. And for those of you that are interested, we do not include lease settlement income in our comp NOI or new deals such as Jersey Garden or our recent joint venture activity, and we also do not include the impact of recently developed or expanded centers. And finally, we continue to produce strong comp NOI increases year after year as well as continue to operate at the highest margins in our industry.

Total sales across the portfolio increased 2.2% for the trailing 12 months, even with the loss of bankrupt tenants. On a comparable basis, the sales per square foot increase for the 12 months ending June 30 was 4.2%. And as a reminder, our sales per square foot metric is not adjusted to remove any tenants who have vacated their spaces and includes tenant sales activity for all months a tenant is open during the trailing 12-month period.

Redevelopment is ongoing at 28 properties across all three platforms for a total spend of $1.7 billion. We opened significant expansion activities at Las Vegas North and Shisui Premium Outlets in Japan.

Started construction on several new and strategic projects during the quarter. Construction continues on some iconic properties including Roosevelt Field, The Galleria in Houston, Stanford Shopping Center, King of Prussia, Del Amo, and our Premium Outlets are expanding in Chicago, San Francisco, and Woodbury. This is my opportunity to develop my list, as opposed to Rick's.

Our Chicago and San Francisco outlets open -- expansion open in August. And the rest of those expanding of those iconic centers open in the next 12 months.

We also announced plans for further expansions in Sawgrass, The Mills at Jersey Gardens, La Plaza Mall, and The Shops at Riverside. We expect our redevelopment investment to be at least $1 billion annually through 2017, substantially funded with our annual free cash flow, which will continue to contribute incremental growth in our NOI and reinforce the positions of those assets in their respective marketplaces.

Now let's turn to new development, construction. It continues on three new outlets, all in very major markets, and they are scheduled to open in the next three months. Gloucester in Southern Jersey and Philadelphia in fact opens in two weeks, August 13. Tampa and Tucson open in October. And finally, we opened Vancouver on July 9 with traffic that exceeded expectations.

Construction continued -- or in fact started in Columbus with our partner Tanger, and we are slated to begin construction on one new domestic Premium Outlet which will be announced before year end. We also started construction at The Shops at Clearfork, our new full-price development in Fort Worth anchored by Neiman Marcus which will open in early 2017.

And we were pleased to partner with Swire and the Whitman Family on the retail component of Brickell City Centre, which will open in the fall of 2016. We own 25% of this project and will manage this center upon completion.

Klepierre continues to progress according to plan. Their integration of Corio is proceeding well. They continue to recycle their assets and in fact announced a deal to sell a portfolio of Netherland assets for EUR770 million, which will continue to delever their company.

We also purchased 2% of Klepierre from the BNP offering. We're now over -- we're at 20.3%. We purchased those, and the stock is obviously trading higher than where we purchased that additional 2%.

Balance sheet activity continues strong. We did several secured financings in the quarter, continue to lower our borrowing cost, increase our debt maturity.

Our liquidity is $5.5 billion. Our industry-leading balance sheet continues to get reinforced and separates us from our peer group.

Our unencumbered cash flow is well over $2.5 billion -- as Andy shakes his head affirmatively. And finally on the balance sheet we, as you know, announced our $2 billion share repurchase; we in fact in the quarter bought $505 million during the quarter of both common and units, which is disclosed.

Now the dividend -- and let's not lose sight of the dividend. We have announced yet another increase sequentially of 3% to $1.55, and a year-over-year increase of 19%. We will pay at least $6.00 in 2015, which is an increase of at least 17% from 2014 and well above where we were in the Great Recession at the height of $3.60 in 2008.

So finally guidance has been increased again up to $10.02 to $10.07. And we are now ready for your questions.

Ross Nussbaum.

Hey, thanks. Good morning, guys. Here with Jeremy Metz. Hey, David, with the repurchase from the OP unitholders, who were the sellers of those units? Did you approach them? Did they approach you? How did that work?

A little bit of both. It was associated with the Prime transaction, Ross, that we completed in 2010; and they were the sellers.

Okay. So no members of the Simon family sold (multiple speakers)?

That's correct. That's correct.

Okay. Okay, and then on the buyback as well, how should we think about it from a balance sheet perspective? If I look at your funding needs against your after-dividend free cash flow, my math is basically you can fund your entire development program with, call it $1 billion of free cash flow a year.

So if you continue to buy back stock at this rate, obviously, the leverage of the Company would tick higher. So how should we all think about continued buyback versus balance sheet?

Well, that's a very good question. I think the first -- we want that in our arsenal. We are sensitive to -- it's part of our capital allocation strategy.

I think you should look at this first step as a trade from one, from our other marketable securities that we had held. With no reason to hold those, we basically took that capital and reinvested in our business because we wanted to signal to the market that we believe in the continual growth of our enterprise.

I think it should also signal we're out of the big deal business. I think no one's picked that up, but we don't see any big deals on the horizon for us, so we are obviously very focused on the development, redevelopment.

As you know -- I mean, I stumble; I'm not a very good reader of a text, but you look at our activity in the redevelopment and new development, it's astronomical. It's industry-leading. Lots of great stuff going on, and I think that's the way to look at it.

We are price-sensitive. We want it there. REIT stocks have been very volatile, but I think it's a signal that we took one investment and reinforced that. We're out of the big deal business.

That's not to say we might find a deal here or there, but the balance sheet is sacrosanct to us. We haven't worked 22 years to do it. We survived the last Great Recession with flying colors; we've quadrupled our dividend and earnings per share and all the other stuff that I won't go through it all.

But I think it's more of a signal in the belief in our business and also a signal to the market that we're out of the big deal business. Did I stump you, Ross?

Michael Bilerman.

Great. Hey, David, good morning. Just continuing in terms of the buyback, you talk about your business and having confidence in your business. You didn't talk a little bit about discount to NAV and the arbitrage that exists between public and private. I take your comment exactly in terms of flipping out of Macerich that $450 million, putting it into your own stock, which I think has great prospects.

But would you think about accelerating or selling interest in any assets to go further into your stock and the narrow that discount that exists between public and private?

Well, look, I think the reason -- it's more than just NAV. It's what your enterprise can do in terms of growing your earnings and cash flow, and then ultimately increasing your dividend. As you know, if you strip out the gain in that WPR, our quarter-over-quarter growth was 14.2% which, as you know, a lot of people have criticized our size yet we continue to be industry-leading earnings growth.

So you've got to look at, whenever you invest in something, what's that yield going to get you? And as our earnings grows that's not a bad investment.

So it's more than just the NAV analysis. We also -- we will continue to sell what I'd call lower-quality, nonimportant assets to us. We don't publicize it until after it's done, but we'll continue to prune the portfolio.

But we're not a big believer in selling our top assets to reinforce the value of our Company for external purposes. I mean, we know what we're worth and we operate -- I mean, that's why we're in this job. We'll operate accordingly.

But selling the top assets, at the end of the day those top assets tend to grow the most. And I'd rather have our shareholders own more of it than less of it.

We have the free cash flow to take advantage of the arb that may exist between private and public values, and it's just another tool that we have available to us to take advantage as we look for investment opportunities.

Great. Just one quick one for Rick. The popular press wants to focus a lot on shrinking retailers and closing stores. Can you just give us an update in terms of who are the fastest-growing retailers, the most exciting retailers that you're seeing pick up stores? And maybe just break it up between a larger format and a smaller format store base.

Well, thank you for the opportunity to talk about my list. I think there's four categories of retailers that we're really seeing a lot of business with.

International retailers; the e-tailers that are looking for a presence in our properties. We recently just announced and have opened Blue Nile and Bauble Bar, and we're working with a number of others that want to come into the properties.

Our existing retailers that are looking to grow through brand extension. Maybe you just saw Dick's announce the Chelsea Collective this fall. L Brands is rolling out White Barn Candle.

And the last are just the new retailers that are coming online and just to -- we've done deals recently with Mont Blanc, Frye Boots, Jo Malone's, Suitsupply, [Aritskina]. All of these are really exciting concepts that are relatively unique in the number of stores, and that's going to separate our properties.

Great. Thank you.

And I would just say this, Michael, what's exciting -- yes, we have had bankruptcies this year; it does take time to replace them. But the amount of new concepts and new entrepreneurs coming into our environment, whether it's restaurants, the e-commerce going to physical, brand extensions, it's really at a high.

And our leasing folks -- if you've seen what we're going to do at Roosevelt Field, both with some of the new food operators as well as some of the e-commerce with physical, it's good stuff. So in that sense it's comforting to see that there's a whole host of new entrepreneurs that want to be in our environments.

Yes, thanks.

Paul Morgan.

Hi, good morning. You talked about how your same-store numbers don't include your redevelopments. I'm just wondering. At this point right now it seems like you have a very large share of some of your top centers in redevelopment. Is that a drag, having that excluded, given the strength of some of those?

Well, yes, first of all, we don't consider it a drag. You have to put comp numbers in a historical perspective, and you've got to look -- you can't look at it one quarter over a quarter. You've got to look at it over three- to five-year period of time.

If you look at our comp NOI increases over that three- to five-year period of time, there clearly you would conclude that we have significant outperformance. I don't -- as much as everyone wants to focus on a quarter here and quarter there, I want to reinforce: we do have the highest operating margins in the business.

We also have the lowest overhead in terms of however you want to do it -- enterprise value, EBIT, percent of EBITDA, percent of revenues -- in the business. That's why we have the best balance sheet in the business, and that's why we're able to grow our dividend 15%, 20% a year.

So again, certainly there are -- yes, we are remerchandising Houston Galleria, and Copley, and Stanford, and Roosevelt Field, and King of Prussia. And we're moving tenants left and right. We encourage everybody to go see the properties.

And, yes, from a quarter perspective it's going to -- it's not going to impress some. But I will tell you, what we're doing I am really impressed with internally. But I would encourage you and others to look at comp NOI over more of an extended period of time than comp quarter-to-quarter.

So, I mean if I do that --?

But again, long story short, yes, we are having some impact on all the remerchandising going on in our portfolio.

So if I take that longer view and look back over the past, say, two or three years in your numbers, is there any reason to think as I look forward two or three years that you wouldn't be able to do the same type of numbers, I guess deeper into the economic cycle?

Well, listen, history is a good indicator of what you might be able to do in the future. Look, we would hope that all this stuff that we're doing will accelerate the growth profile of those assets.

We have to execute. Believe me, we are not out of the execution phase. But I would think, Paul, at the end of the day that these assets are going to grow very, very nicely and will increase our comp NOI growth and meet our historical growth.

Now the fact is we're subject to economic cycles. We're subject to tenants going bankrupt. We're subject to downtime. We're subject to sales of our retailers, volatility.

So we don't control everything, but we've had a pretty good track record. I would hope that that would continue. But it's not -- you don't fall off the log for this stuff; you've got to do it each and every day, and our team is pretty good at it.

Thanks. Then just my follow-up on the Sears joint venture, how far you into the process of going through and saying: well, here's what we're going to do near-term, here's what we would like to do longer-term?

And kind of how -- the size of the potential redevelopments and the timing, and when we might get some of those details.

Hi, it's Rick. We are very far along in that process. We have already had multiple meetings with Seritage. We have developed redevelopment plans for each of the assets.

They are in the process right now of being priced. And as they become mature, we will announce them and proceed forward.

But they include the addition of specialty stores, mall expansions, adding restaurants, adding boxes, and appropriately sizing Sears. Bear in mind, in our venture it's almost 850,000 square feet of additional space that we are going to be able to redeploy along with those TBA auto centers. So it's a great opportunity, and we're well into it.

Great. Thanks.

Jeff Spector.

I just wanted to focus a little bit more on the redevelopment pipeline. David, I believe you said that $1 billion through 2017, and I know it's been going on for a number of years now.

What are your thoughts I guess at this point beyond 2017? Is that -- by 2017 you are really at this point touching those top-producing assets? Or do you think you can expand that program beyond?

Well, I think, as Rick mentioned, I do think Sears gives us a whole host of additional redevelopment opportunities. We've got -- we are closer and closer to starting -- in fact we're actually starting the southwest corridor in Copley, which is not in those numbers yet.

We are -- absent something really out of the expected -- we are going to start Copley very, very shortly. We've got failsafes in that investment, but we are moving with speed to deliver that. We think that's great.

Sears presents a lot of opportunities. We've got outlets that -- we've done the big ones. We're doing a bunch of small ones that we need to look at. Rick, you want to add to it?

I would also tell you, we've already announced the expansion of Jersey Gardens; that's going to be a major redevelopment. We have announced the expansion of Sawgrass. Right now we're finalizing an expansion of Colonnade, but we are redeveloping the Oasis.

And I can tell you we are continuing to mine this portfolio, and I believe we will have a continuing series of pretty substantial value-add opportunities across all three of our platforms in the out years.

Okay, thanks. Then one of the other focuses that Craig and I have been paying attention to, of course, on the technology front, the winners in the Simon Launch and in particular the SKU IQ.

From where we sit I guess it's just been hard over the last year to really keep track of exactly what's going on here on these different initiatives. Can you discuss either the winners or SKU IQ in particular and where you think this may go?

Well, yes, look, I don't want to -- we are -- don't get mad at me, Jeff, but I believe -- we're happy to do -- I think we are close to putting together with Skyler and Michael an investor -- I don't know what you call them -- an investor, not roadshow but investor meeting to lay out all the investment we made. And maybe with not exactly you, maybe we somebody else than you, but a well-respected peer of yours, and we'll lay it out to the investment community all the different investments we've made and why.

So I think we're shooting for sometime in October, but there's a lot of neat stuff here. These are little -- in the scheme of things, little investments; but they run from creating energy efficiency with all of our LED lighting to helping retailers to actually new e-commerce ideas that may go to the mall. So it's a lot of different categories, different levels of investment, in the A, B, C rounds.

We're happy to share that data. It's a lot, though, to do it on a call like this. But we will be sharing a lot of that stuff with our investors.

Okay, thanks.

Ki Bin Kim.

Thank you. A quick follow-up first. Have you bought any more shares post the quarter end?

We operated -- if you are familiar, you have to operate under a 10b-15 rule once your quarter is completed. We gave guidelines because you can't be in the market during that period of time, and the guidelines that we gave to the broker were not met. So the answer is, we have not purchased any further.

Okay. The second question, is there any incremental change in trends you're noticing in the outlet business? Maybe not the premium, at more infill outlets, but maybe more secondary, where maybe the pricing gap between full-line mall retailers and outlet businesses or retailers are maybe narrowing?

You've seen like T.J. Maxx and Ross doing better. Have the secondary type of outlets -- do you notice any less importance or less traffic or any kind of incremental trends?

Not really. I think -- not really at all. I think our outlet retailers are very focused on finding the right balance between full price and outlet. That's why they are very focused on not overexposing the brand.

There have been certain retailers that have had disappointing sales both in full-price and in outlet. Outlet's no different than full price in that if a retailer is not hitting it, it will affect their sales in full-price and in outlet.

But no trend in that at all. We have outlets in Cincinnati, Columbus, Indiana, St. Louis, that are all doing just fine. They are affected by retailers that may not be doing as well as they were a year ago, but that's similar to the full-price mall business as well.

Okay, thank you.

Alexander Goldfarb.

Hey, good morning out there. Just a few questions here, David. First, just going back to the dividend and stock buyback, certainly as you guys outlined where you want to put your money, redevelopment and development seems to be the first and foremost. Then when you move down from there, once you've solved for paying out appropriate with the taxable income, it sounds like your bias is still towards increasing the dividend versus buybacks.

So I just want to see if that's the proper interpretation from your comments, or if you're thinking that any excess cash may now go more towards buybacks versus the strong dividend growth.

Well, the dividend -- listen, this sounds weird, but we're highly profitable, right? So as our earnings increase our taxable income increases, and therefore our dividend increases.

It's very simple. That's the REIT model. We're great believers in the REIT model. That's why we're all here.

So our dividend is going to increase. There's just no two ways about it because we have created a very nice earnings machine. As long as we don't make mistakes about where we invest capital, we'll be in good shape.

I always like increasing the dividend more than stock buybacks. We had this unusual situation where we basically took one investment and felt the most immediate and interesting return would be buying our stock back. I think having the flexibility to buy it in a volatile market when there's a big disconnect is what we'll be focused on.

But I would continue to expect, knock on wood that our earnings continue to move up, we're going to be focused on increasing our dividend. It's underappreciated in the REIT sector, but if you look at our dividend yield compared to our peer group, and you look at our dividend growth in the expectations of a higher dividend growth, we look like a cheap stock.

So, do what you want with that, I guess. I don't know.

Well, which as an analyst we can't do anything with it because we can't own it. But obviously it's good to cash dividend checks.

Moving over to Europe, you guys announced the JV with HBC in Germany, and it involves a lot of High Street retail. In the US you've shied away from doing High Street retail. You've stuck to the malls and outlets.

So I'm just curious. Do you have a different view with High Street retail in Europe that you don't share in the US? Or it's really again just a pure credit play when focusing on retailers, and you are not trying to do something as far as potential to get at High Street retail in Europe?

No, look, I think the market in the US with respect to High Street retail is sophisticated. It's expensive. There are a lot of guys that have been at it for a long time.

We think Europe is a little bit different in that maybe there's more opportunity for us to do that. Just like the opportunity that we saw with Klepierre at the outset a few years ago.

So that's not to say we're -- the HBC thing is a little bit of credit play, it's a little bit of creating a growth vehicle. It's betting on, I think, an extremely talented CEO and team in HBC. These guys are entrepreneurs, they are smart, they are sophisticated, they want to grow their business. We're happy and pleased to be their partner.

And I think that entity ultimately will look to create a broader portfolio. High Street in Europe is a little more interesting maybe from a valuation point of view. US is a little more pricey, got a lot more sophisticated players.

But we'll see how it evolves. But it's -- we're making, I think, a good bet where we've got a very strong partner, strong assets, strong credit. And between the two of us, that have the nose and instinct for good deals, we should find some opportunities.

Okay, okay. That's helpful. Listen, thank you.

Vincent Chao.

Hey, good morning, everyone. Just want to go back to the Sears JV. Just curious in the context of investment opportunities, there's a lot of chatter about different retailers doing something with their real estate. Just curious if you are having more conversations with others on structures like the Sears or the HBC deals that you have.

Well, I think there's got to be more than just marking or financing retailers' real estate. For instance, I can just contrast -- the reason we did Sears is because -- partnered with them is because it's all about redeveloping over time those boxes. Sears' store of the future may be part of it; they may not be; but that's basically a redevelopment play.

HBC, to contrast it, was -- yes, they got a mark out of the real estate. But to me, we created -- if HBC only wanted to just mark the real estate and do credit, we wouldn't have played. We saw an opportunity to bet on a very accomplished entrepreneur, great brands. And lo and behold, we did the deal and we're -- they are buying the German department store, but we're entering in German real estate in a big way.

If it's just marking real estate or just a credit, that's not really exciting for us. So we're happy to talk strategically with our retailers about it, but there's got to be more to it than just that.

So I think this world will present opportunities, but there's got to be more than just marking the real estate. Whether it's redevelopment or creating a growth vehicle to go do something, it's got to be -- there's got to be more to it than what I just said.

That makes sense. But I guess I would just -- it seems like there would be plenty of redevelopment opportunities beyond just Sears, although Sears offers plenty of opportunity in and of itself, I guess.

But maybe just thinking about other areas, can you just comment on the McArthurGlen pipeline? I think there's one project that you were expecting to start here this year. But how does the rest of the pipeline look like for potential additional developments there?

Sure. There is -- in Provence, we are -- in fact, we just bought the land (technical difficulty). We are starting construction in September after the growing season, believe it or not, is finished. And that's an all-systems-go deal.

We are in the final throes of expand -- about to start the expansion in Roermond, which we'll be a partner in with other partners in that project. We have a pipeline in Normandy, in Spain where we're partnering with [Sonai].

And we've got -- we're looking -- we're not quite there, but we're looking seriously expanding Venice. So I would say it's a very active pipe in terms of new development.

And obviously, to be able to build starting in September in south of France is very, very exciting. Very pleasing.

Okay. Just one last, one cleanup question in terms of the guidance. Assuming that does not include any future buybacks, just what's closed already?

Well, look, Tom and I had this philosophical discussion today. We're a pretty large Company. We're going to earn $10.00 a share this year, thereabouts. We have so many ins and outs, it's just -- we're just not a portfolio of us.

We've got so many things going on, that's our best guess. We put it all in a blender; we give it to you. And every -- it's all subject to change quarter over quarter.

The good news is we've hit our numbers. Knock on wood, hopefully we'll continue. We don't isolate one particular thing over another, and we'll see where it shakes out.

Got it; okay. Thanks a lot.

Carol Kemple.

Good morning. At this point with your other department store tenants are you seeing any of them want to right-size space like Sears?

Not really. We are constantly in conversations with them, and we are doing a number of other potential things involving relocationing department stores.

For example, at Stanford we had a Bloomingdale's that was oversized. We worked with them. They built a brand-new store, and now we're redeveloping the old Bloomingdale's into small shops. Did the same thing with Saks at Houston Galleria.

So it's a very dynamic process. We're constantly in conversation with them, and we're doing a lot of things as a result of that. But there is not another store out there that has the kind of focused, programmatic approach to decreasing their footprint size.

Okay, thanks.

Michael Mueller.

Yes, hi. Just going back to Sears again, what's a rough idea of the dollars that could be invested in those 10 or 11 boxes over time?

I think we're going to do that on a project-by-project basis. But obviously, as we've articulated, it's a substantial opportunity and it would certainly be in a larger amount as opposed to a lesser amount. But it depends on the scope of the individual projects; but that is to come.

Got it. Okay. So it sounds like it could be in the couple -- in the hundreds of millions of dollars.

Potentially, yes.

Got it. Then I guess, how does it work? If you demolish a Sears box and do a major expansion well beyond the footprint, do they participate in that? Or is it just to the scope of the footprint?

Each project is differently. But in the Sears venture, they own a part of the Seritage; our venture owns a parcel of land. So the venture would be focusing its redevelopment efforts on the parcel of land that is owned in the venture. And that would be the extent of the activity in the venture.

Got it. Okay. Thank you.

Caitlin Burrows.

Hi, good morning. Just quick question on occupancy and the impact of bankruptcies from earlier in the year. I think we were pretty happily surprised to see that your second-quarter occupancy and same-store NOI were actually somewhat stronger than the first quarter. I was just wondering if you could go through some of the progress on re-leasing that space and when you expect to have made up for the lost occupancy and NOI.

Yes. I'll just say our goal, we're going to -- we still think we will come close to our year-end occupancy of last year. But it's going to be -- it's not a no-brainer. It could slip what I'd say immaterially, but others may have a different view of that; so I respect that.

But we're trending up. We're making progress, and I think we've got momentum. But it takes time.

So our goal is still try to get back to last year. But we lost, what, Rick?

940,000 feet.

Yes, 940,000 feet, so that's a lot of work. So we're a little bit on the treadmill, but we're a fit athlete and we're running.

David is speaking for himself.

I wish, I wish.

I would just add one thing, that we're making very good progress going through it, and it is an opportunity. It's hard work, it has a short-term impact, but the tenants that we are bringing in are certainly higher-productivity tenants from a sales perspective.

And so far the rents that we've been able to generate are in excess of the rents that were being paid by the former tenants that went bankrupt.

Got it. Then just also is there anything you could say on the difference you're seeing in re-leasing the space at, say, your trophy properties versus whatever you would call the next tier, and the next tier of your properties?

Look, it's axiomatic that the higher-productivity properties have a broader band of interest. But that's what we do. And happily we're also blessed with a portfolio that is predominantly those strong properties.

Great. Okay, thank you.

Linda Tsai.

Hi. I'm not sure if this is something you could comment on deeply, but when you look at your redevelopment plans for Sears, do you think you're approaching your plans any differently from GGP or Macerich? Or is it relatively straightforward in terms of figuring out what the property is missing and splitting boxes and adding entertainment?

Look, I think they are both very competent developers, re-developers, so at the end of the day my guess is it's not going to be all that crazily different. But so much of that is dependent upon the location and the local market.

But they are both competent developers. I would probably venture to say it will be similar. But if they are better than us, we intend to copy immediately, okay?

Then retail is cyclical and while there's been a recent wave of closures you also noted that there's also a lot of entrepreneurial concepts popping up. Do you think there's anything different about the cycle time around as it relates to maybe omnichannel selling or bifurcation amongst brands catering to high-end or low-end consumers?

Well, look, I would just say generally there's obviously the whole movement toward value on one hand and luxury on the other continues. The general -- the good news about that is we're positioned in both of those barbells extremely well.

But that's not to say where people lose sight of that -- that's not to say the middle American mall isn't doing well. It's part of the community; it gets ignored from a media point of view; there's assumptions made about those assets.

There's extrapolation, because one mall went out of business, that all malls are going out of business. But I would say to you that the solid middle malls throughout America continue to do well, serve their purpose.

But you clearly see a movement in a lot of retailers from either aspirational, higher-end goods or value. There's no question about that.

The one comment I would make to you on the new retailers we are dealing with is that they are substantially more sophisticated than the crop of new retailers we dealt with say 10 years ago. Better financed, much more focused on their niche.

And it's been much easier to deal with this new crop of entrepreneurs than might've been the case (technical difficulty) last [play].

And look, in today's world, we all have to be better. We all have to be on our game better.

So that's just -- that comes with -- I don't care what industry it's in, I mean everybody. The rapid changes in the world is putting pressure on every industry, every operator.

And that's why you've got to have strong people, strong assets, and a strong balance sheet to deal with it all.

Thanks.

Steve Sakwa.

Thanks. Just a couple quick questions. Rick, if you look at the sales and leasing trends, is there anything that you can talk about regionally? Any big differences that you see?

You know, look, there are a couple of differences across the thing in our business. The Great Lakes, southeast and Pacific are stronger; mountain and New England were a little weaker. The better categories were home furniture, food, personal care, jewelry, and athletic shoes.

Okay.

I mean I'd say, Steve, you're clearly -- the stronger dollar and the economic upheavals in growing markets but with wealthy people -- Brazil, what's going on with China, and their focus on obviously Europe with the stronger dollar -- I mean it has impacted sales in the high tourist centers. And we've got them.

There's no question. We've got them in South Florida. We've got them in Orlando.

We don't have New York City; we have Woodbury, which has been relatively flat. And that's usually a center that grows every year. And I think that's more of all the stuff going on with the center than the tourism.

But the tourism centers have had a little softness. You see it in the hotel industry, so we're not immune to that.

I presume that's not having much of an impact on leasing, just given their long-term nature. Or do you actually think it's impacting leasing at all?

I'd say it's had no impact on leasing.

Okay. Then, David, any just update on the Copley residential project?

Well, I mentioned it briefly earlier which is -- look, we're doing the southwest corridor. We're finalizing the permits there, which is more administrative.

So it is all shaping up to -- we start to dig down to support the foundation going up. That's all moving. The southwest corridor should start in the next month.

So we have certain failsafe. The way the building is being constructed, we have failsafes.

For instance, we're going to do the southwest corridor first, which is because we've got to create a new entrance to create the way to build. We've got to go down into the Turnpike, so we have to create the new entrance first.

That's happening. That's been approved by us.

Then we go down into the Turnpike. Then we go up to support the steel going up. So we will be making that incremental decision; but once we do the southwest, we will do that.

Then building the podium is where it's really guts poker. That's a year decision from now.

But all systems are go and we are cranking. We don't see any reason to stop.

The nice thing about this is that we can stop, look, and listen to the market a year from now. And yes, we would have an investment in it, but we'll always be able to go up. I don't see any reason why we wouldn't go up.

But we're certainly going to go down and build our way up to create the platform to build the tower.

Okay, and then just last question. Anything on Deliv? That system just seems to have taken a backseat. Haven't heard much about it. Any thoughts about that or how it's working or --?

I would comment on Deliv that Macy's just recently announced that they are expanding the footprint of stores in which Deliv is going to be working with them. So that is certainly a positive sign, and we continue to believe that there is a significant role for all of our properties to play in the fulfillment aspect of an omnichannel retail business, and it's moving apace.

So, Rick, do you think it's more a function of just consumers not really realizing it exists, to get more critical mass?

I think it's just a function of getting the systems right, getting the retailers to the point where they're ready to fulfill from their store. There's a big systems upgrade that's going on right now across the entire industry, and ultimately it is going to be a seamless, integrated experience for our consumers. And certainly fulfilling from the store to their home is going to be part of that, and Deliv can be part of that solution.

Okay, thanks.

DJ Busch.

Thank you. Just one quick follow-up on Sears. Given the potential size of the capital spend for some of the Sears projects that you were talking about earlier, if Seritage can't meet its share of the capital requirements, is there an opportunity for you to put up a disproportionate amount of the capital to potentially grow your interest in the joint venture?

Well, that would have to be a negotiated part of the deal. But it seems to me they've got the balance sheet to be able to do that. But I'm sure we could figure it out if they didn't.

But is it correct to assume you guys are controlling the process and the strategies at each of the center?

Well, we're joint venture partners. It's both. It's approval on both sides.

I'd say we're taking the lead on coming up with the plans and the redevelopment and the different uses. But they're riding copilot with us.

I would also say to you that we have significant -- another number of Sears stores that are not in our venture that are in Seritage. And when we meet with Seritage we are actively working with them, as we have done in the past, to help them redeploy those spaces in a productive way.

An example of that is King of Prussia where Dick's now opened and Primark is opening this fall. And between the two of them they will 100% occupy the former Sears store.

Just to follow up on that, Rick. With Seritage taking control of the Sears space and the talks of other department stores potentially monetizing the real estate, do you see any difference in the operations? I know it's early, but do you see any potential impact to the way you negotiate or lease or deal with the anchors if the landlord is no longer the retailer?

No.

Okay, thank you.

Yes, they don't have the infrastructure to get stuff done like we do. So I don't see the dynamics changing.

Thank you.

Ki Bin Kim.

Thank you. Just a quick follow-up. I know most of the conversations are always circling around upgrading quality and reinvesting in your better assets. But given that you do have some of your walls tied into WPG and the history there, and just because the stock price has gotten cheaper over the past year, is there a certain point where a lower-quality portfolio might look interesting just because it's so cheap? Or should we just basically consider this like a permanent divorce?

I don't know even how to interpret your question. We spun off WPG well over a year ago. They are a separate, independent company.

They are focused on the strip center and the B mall business. You can hear that directly from them.

We do services for them that ultimately will go away mid next year. And their growth opportunities are better discussed with them.

I think our focus, as you have seen over the years, is to buy the bigger assets or assets that we feel we can improve upon. But the primary focus is on our redevelopment or finding different vehicles for growth, whether it's Europe, whether it's HBC, etc., and continuing to grow our business.

I don't -- I said to you, I'm out of the big deal business. We're not going to buy B assets. I think that's better for others to do, given what's on our plate.

But -- I'm not sure I answered the question, but I tried.

Yes, you kind of did. I was just basically asking if there's a certain price where something like that would be interesting again.

I think that business is better for others to do. But that's -- I'm not -- that's not up to me to decide.

All right. Thank you.

Rich Moore.

Hey, guys. Good morning. My question, David, was kind of on the flip side of that. You have 200 assets. If you rank them all, does it make sense to get rid of 190 through 200? That kind of thing?

Well, we're always doing that. We just do it; we don't do it ahead of that.

So we are -- we have a deal that's closing mid-August that was a lot of work, and we just didn't want to deal with it. We're close on another deal.

So yes, we do that. Rich, I know, if you looked at our history, we sold a bunch of stuff. So yes, we'll always sell assets. Always part of our --

Okay, so are you marketing things actively, or is it just sort of an opportunistic? Yes? Okay.

Yes. We market. We've marketed -- the two that I am referring to were marketed, yes.

Got it. Okay. Then on the lease term income you guys got this quarter, it was kind of big. I'm curious; I know you can't tell each quarter what's going to happen. But is that something that's going to pick up here you think in the last two quarters of the year? Are there more discussions you're having on this kind of thing?

There could be a few deals here there. But if you look at it year-over-year, year-to-date it's not all that different than 2014.

So it's lumpy. Sure, it's lumpy, but I don't think it's going to be all that different, Steve, right? From --

No, about the same as 2014.

Same as 2014. That's a business that's lumpy in terms of quarter to quarter. Quarter to quarter -- it's actually relatively consistent year-over-year.

Okay, great. Thanks, guys.

I would now like to turn the call over to David for closing remarks.

Okay, thank you. Have a wonderful last few weeks of summer. Sorry to have ruined your Friday on a summer Friday. Enjoy.

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a great day.