西蒙地產 (SPG) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2016 Simon Property Group earnings conference call.

(Operator Instructions)

As a reminder, this call will be recorded.

I would now like to introduce your host for today's conference, Mr. Tom Ward, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Catherine.

Good morning, everyone, 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.

Okay, thank you.

We had a productive quarter. We are pleased with our strong financial results. We started, completed, opened several significant redevelopments and new development projects that will further enhance the value of our portfolio. We completed the acquisition of the shops at Crystals and we continued to achieve strong operating and financial results and raised our dividend yet again.

Result in the quarter are highlighted by FFO of $2.63 per share on a comparable basis, excluding a gain on the sale of marketable securities. In the prior-year period FFO per diluted share increased 9.1%, or $0.22 year over year for the quarter. And for the first six months our comparable FFO per diluted share is up 12.1% compared to the prior-year period.

Our operating metrics were strong, as well as our cash flow. Our mall and premium outlets occupancy was 95.9%; the 20-basis point decrease in occupancy from the prior-year period is a direct result due to the new developments and expansions we opened recently.

Leasing activity remains healthy. The malls and premium outlets recorded releasing spreads of $8.88 per square foot, an increase of 14.8%. And our base minimum rent was $50.43, which was up 4.9% compared to last year, reflecting the strong retail demand for our locations.

And as a reminder, we provided additional new metrics, summarizing the composition of our total portfolio NOI. Please see this in the supplemental and the release. And for the second quarter of 2016, our total portfolio NOI increased 7.4% and has increased 7.6% year to date.

Our comp NOI increased 3.2% for the quarter and is up 4.1% year to date. Total reported retail sales per square foot at our mall and outlets were $6.07 compared to $6 20 in the prior-year period.

Let me put a couple of things in perspective. Reported retailer sales continued to be negatively impacted by the strong dollar at some of our tourist-oriented malls and outlets.

Reported sales per square foot for the malls was down slightly compared to the prior-year period, primarily due to a retailer in a state with no sales tax implementing sales restrictions. We mentioned this previously and it is important to reiterate.

And excluding this anomaly, our mall sales per square foot increased for the period. Lower tourism spending continues to impact retail sales at some of our premium outlets. Excluding the negative impact of these high-performing tourist-oriented centers, retail reported sales per square foot for the premium outlets was flat. In fact our traffic in our outlet business thus far is up 2.65% for the year.

And finally, the second quarter I would like to point out that retail sales trends improved progressively, with June recording the strongest monthly sales performance, with total sales volume at comparable properties increasing across all of our property types. At the end of the quarter, redevelopment expansion projects were ongoing at 33 properties across the platforms. Our share is $1.4 billion. We continue to expand, transform, enhance our properties.

We completed Stanford Shopping Center, and over the next several weeks we will complete a number of other transformative and redevelopments, including the completion of the connector at King of Prussia that will link the court and the plaza, creating 50 new specialty stores. A comprehensive redevelopment expansion to The Fashion Centre at Pentagon City, the densification of Phipps Plaza with the completion of AC Hotel by Marriott and multi-family residential units.

We're also underway with the transformation of La Plaza in McAllen, Texas where we demolished a former Sears box. We're under construction on an expansion wing that will accommodate up to 50 specialty stores, four junior anchors and exciting new dining plaza. All of these are at accretive returns.

We'll continue to flow and fuel our profitability. And construction includes, among others but not exhaustive list, Woodbury Commons, Sawgrass Mills, the Gallery at Houston and on.

Our new development is focused on important markets where demand is there. During the quarter we opened a new Tanger outlet in Columbus. It is off to a great start. It's been a great partnership with Steve.

Our construction continues on our new outlet in Clarksburg, Maryland which will open in the fourth quarter of this year. We also recently broke ground on a new outlet in Norfolk, Virginia which will open in mid-2017.

We have got exciting projects outside the US. We have an outlet under construction in Provence, France, South Korea and Canada. All will open in 2017, also fueling our growth. We also recently started construction in Kuala Lumpur in Malaysia with Genting, who is a our partner in our other Malaysia asset.

And construction is nearing completion at Brickell Center in Miami. The center is almost entirely leased, with 80 retailers and restaurants coming to the projects. And we are also continuing construction at our high-end retail projects in Fort Worth, anchored by Neiman, The Shops at Clearfork.

Acquisitions, beyond Crystals, we also bought our partner out in our Naples and Venice outlets. So we now effectively own 90% of these two great assets.

Turning to capital markets, we completed a successful euro senior offering, EUR500 million at 1.25% for nine years. Our liquidity stands at $6 billion. And we have an industry-leading balance sheet, as we hope you know. We increased our dividend, 6.5% year over year, 3% from the second quarter and will pay at least $6.50, which will be 7% over last year. We have also increased our guidance from $10.77 to $10.85. This reflects solid performance in the first half and our current view of the remainder of the year. We are very pleased with our performance.

Questions? We're available.

(Operator Instructions)

Craig Schmidt, Bank of America

Thank you. David, you referenced that there was a pickup in June relative to some of the other months. Do think that we will start to see the annualization of the international shop or pullback? And will that have less of an impact on the numbers going forward?

Well, look, I think it is hard to predict, Craig. It's good to see the June sales for our retailers were up. We are starting to see the stronger dollar anniversary, so it will have a less impact on the metrics.

But I think more importantly, we are seeing, other than the anomaly I talked about with the one state, our sales are fine. The portfolio outside the tourist centers sales are fine. We are operating pretty effectively in a very slow-growth US economy. So the anniversary impact is coming up in the next few months. We are starting to see it stabilize, but it is very hard to predict.

Okay. And then you have expanded your presence, obviously, in Las Vegas with Crystals. I wondered if there would be a differing strategies going forward where you might take Forum shops one direction and Crystals in another.

No, I think, as you know, Vegas -- there is so much tourism there, 50 million visitors a year. Each has its own distinct separate marketplace. Obviously Forum shops is bigger; it caters to not only a high-end consumer but also a broader consumer. Crystals is more luxury-oriented.

So I think they both have distinct markets. We will continue to take advantage of those great assets and continue to drive the income up in both. So I don't think there will be a huge change in strategy, but a continuation of improving operations in both assets.

Okay, thank you.

Sure.

Steve Sakwa, Evercore ISI.

Hi, good morning, David. I know a lot of metrics were fairly positive. I guess the one that jumped out was the rolling 12-month leasing spread, which had a noticeable drop from 17.5 to just under 15. Is there anything that happened in this quarter that would have pulled that number down? What do you think is a reasonable expectation for going forward?

Well, look, again, I respect that everyone loves to focus on operating metrics. You know me pretty well, Steve. What is the one operating metric that I focus on?

Total NOI growth and total sales.

No, I look at cash flow growth, my friend, okay? So the other thing that I would like to point out on that is that we put our entire bucket of activity in that number. I don't know what others do.

So if we have, as an example, lease amendments. Let's say we have a retailer that we have to restructure because we figure, well, let's keep them in and operating while we will ultimately release the space. That amendment goes into that spread.

And if there's anything -- again, I am pleased with the spread. I think we have so much outperformed on our spread that number of 15% is pretty damn good. $8.88 over ending rent for new rent is pretty damn good.

But put that aside. If you are is looking to grasp on anything, I would say it is somewhat effected by the fact that we have amendments due to some of the retailer situations that we have been dealing with over the last 12 months.

I am very pleased with the spread. $9 is a good number in a flat economy. You look at our comp NOI, which is where I am focused on cash flow growth. You look at our comp NOI, we haven't just had a couple of years of good numbers. We have had a decade of outperformance versus our peer group. As you know, when you comp over a comp over a comp, that is pretty damn good.

So we are very pleased with the number. If you want to point out something, which I know it is your job to do, I would say it is more the amendments which we view is something that we are doing in a very slow economic growth environment in the US. And we are dealing with that effectively and yet we are still producing very healthy spreads.

Okay, that is helpful. Secondly, in terms of recapturing some of the department stores and the JVs that you have got with Seritage, can you provide an update on where you stand and the opportunities that you see over the next couple of years to recapture some more boxes?

Steve, Rick Sokolov. We have continued to work with Seritage and Sears. We have got users identified for our properties in Seritage, as we mentioned last quarter. We are working with Sears on how to down-size their stores. That process is ongoing.

I will tell you, if you look over the years, we have recaptured 93 department stores. And we've done a in a very effective job of deploying them. If you look at our anchor schedule, we have them going on right now. It is an ongoing process. We have a whole team dedicated to it. And the good news is we have substantial demand identified in each of our properties, so we know how we're going to deal with any of these stores that we do get the opportunity to recapture.

David talked about La Plaza, which was a Sears store. We got a Sears store back in College Mall. It's now demolished and we're adding 365, Whole Foods, Ulta, small shops and restaurants. We are making money and making the properties better.

Okay, thanks. Appreciate it.

Sure, thank you.

Paul Morgan, Canaccord.

As you look at the development and redevelopment pipeline, you have got $2.1 billion, your share of cost for the projects there that are going now and almost out in CIP. How should we think about beyond the projects that are in place right now, what the shadow pipeline looks like?

You've talked about it is a tougher environment. Do you think that this could be a peak that would slow going forward as some of these project completions roll off, looking into next year? Or do you think you have got a shadow pipeline that's going to keep it going at around this level?

Well, let me answer it this way.

We actually had a meeting yesterday on Sawgrass Mills and Jersey Gardens, as two examples that together would be $500 million to $600 million of redevelopment. We are very comfortable and confident, Paul, that even though the retail sales have been anemic this year, that when you have properties like that, that can be expanded, we have the appropriate amount of demand to make the financial consequences very positive for the Company. In addition to making those properties even more important.

So I don't think we are backing off at all our redevelopment and expansion portfolio. The good news is we have such a good number of high-quality assets that we will continue to find opportunities to expand them.

Like I said, Jersey Gardens and Sawgrass are just two simple examples that pop to mind. But that's going to be $500 million, $600 million spread and it will be hopefully delivered in 2019-ish, maybe 2020-ish. And we will continue to enhance their marketplace position.

So we haven't really changed. I think if we have changed anything -- and I mentioned, I think, last call or the call before that, we put a lot in the system, and that is a little bit about -- you saw the 20 basis points -- again, you might react to 20 basis points decrease and occupancy, I assure you I do not. Okay? I assure you I do not.

But we put a lot in the system over the last whatever, six months, primarily in the outlet, that we have decided to spread some of those new ground-up developments out a little bit so that we don't stress the system. And we get the lease-up that we want in those. But our strategy really hasn't changed and I think we have got plenty of opportunities to continue to enhance our portfolio.

Great, thanks.

My other question, you have talked about and you provided a pretty long list of e-retailers who are looking to open stores in your malls. I wonder if you have an update on how those roll-outs are being received; whether some of these retailers might be initially opening three or four, these could become 20 or 30 or 40? Or how it has been playing out so far?

Well, I will let Rick do his list. I appreciate you giving him the opportunity because he loves to read his list.

I will say this, though. There is so much creative stuff going on with new ideas, new concepts, that it is a simple example. We did a pop-up store at Woodbury Commons with Runway where they actually sold some of their existing inventory. It had unbelievable success. I'm not going to tell you how much they sold, because I don't frankly know if I am allowed to or whatever.

But there is a lot of creativity and a lot of e-tailers that want access to the physical world. That's just a small example of a unique idea. I actually happen to meet with the CEO and said do a pop-up store at Woodbury. They did it; the had great success.

But now I will turn it over to Rick to give you the list.

The other thing I would tell you, there have been a number of them and we have listed them. Obviously we've talked about Fabletics, Birchbox, YOGASMOGA. Everyone understands what the dynamics going on with Amazon. We just made a deal with UNTUCKit.

The most important aspect of this is that all of these retailers that have internet presence understand that a bricks-and-mortar presence is an essential part of their strategy. They get much higher conversion in their store; their customer acquisition is frankly cheaper. And it is something that we are seeing more and more of. We are working with, frankly, scores of them to come to our properties. It is certainly going to be a source of growth for us going forward in the out years.

And the condition on doing that deal was at Rick could not wear the UNTUCKit shorts. Okay? So it is in the lease. (laughter)

Great, thanks.

No worries.

Jeremy Metz, UBS.

Good morning. David, earlier you mentioned lease amendments have made a bit of an impact on releasing spreads. Obviously you are taking a selective approach here. I was wondering more generally, are you seeing an increased level of tenants coming to you looking for lease amendments? Or would it more or less be consistent with the prior couple of years?

Obviously, there's some high-level news out there with certain retailers, and it is really more of that category then just the person here and a person there. So it is kind of what you have seen. We have less year-to-date bankruptcies than we did last year. So some of that is just rolling through the numbers that we had to deal with last year.

Okay. And then sticking with leasing here.

Obviously more sales moving online and not getting captured in your sales or occupancy cost figures. I'm wondering, are you exploring any changes to your lease structures at all at this point to better capture and monitor those sales?

Well, again, our view is to get the market rent that is appropriate for that space. And retail reported -- and I underscore reported retail sales -- does not necessarily, as we have had this discussion, correlate to what the market rent for that space is. It is more of a function of location, property, location in the mall, property type, position in the marketplace and so on.

So our focus is getting market rent for each and every space and doing it in a way that does not put us at risk with their sales and what we get paid for that space. And that is not changing.

There's a lot of things going on the lease in terms of getting credit if the sale -- again, this is only the case when you have overage rent. We're hopefully marketing it to market. Overage rent, they have got to really outperform to pay us overage rent.

But in order to -- in their reported sales number, we are negotiating including if something is fulfilled from the POS system and so on, that would be included in their reported sales number. But, again, our focus is more on what the market rent for that space is as opposed to necessarily what the tenant's sales are going to be out of that space.

Okay, appreciate the color.

Sure, thanks.

Caitlin Burrows, Goldman Sachs.

Hi, good morning.

You touched on it earlier, but you have two ground-up outlets in process now for being developed in Virginia and Maryland and a number of full-price mall expansions going on. So how would you describe the demand for that space, either outlet versus full-price or either one versus itself a year or two ago?

Well, I would say to you that the only -- first of all, Clarksburg is going to -- I mean, Columbus where we partnered with Tanger is 100% leased, I think. Maybe there's a couple of vacancies. So that was not impacted at all. We've got Clarksburg where I think it is going to be a great development. It opens up in Q4.

We've got, in that case we are bringing in a very, what I would call a high-end mix because we really want that to be ultimately the Woodbury -- this is an over exaggeration so don't hold me to it, but we wanted to be the fashion -- high-end fashion -- outlet for the mid-Atlantic, more or less. And so those retailers, sometimes getting them to commit to a new outlet is a little longer process because in a lot of cases they don't manufacture for it. It's a function of their full-price strategy. I won't bore you with all of the ins and outs of that.

But we are going to deliver a great mix and I think demand has been excellent. And we are going to hold a couple of spaces just to fill out the unique mix there. I would say that the outlet demand for new product is good. It really hasn't changed.

The only thing I would say for new projects is the luxury-oriented folks are taking a little bit of a breather. A lot of that because of what is going on with tourism. So that is a little bit, what I would call, softer than it might have been a year-plus ago. But not material as evidenced by the mix that we are producing at Brickell, which is going to be a great project that the three partners have worked very hard to produce.

Okay.

And then it seems like over the past couple of years some bright spots at the mall in terms of who has been opening and who has been doing well, that you and your peers have talked about include fast fashion and restaurants. I was wondering if those types of mall tenants are still generally looking to have larger stores or more stores, or just generally doing better than the other apparel-type guys.

Hi, this is Rick.

We are continuing to very much focus on the addition of restaurants and food throughout the portfolios. There is still a considerable amount of demand. Just to let you know, the last five years we have added almost 200 restaurants across our portfolio. We had 25 last year. We have another 53 scheduled to open this year and next year.

So they are also finding substantially increased productivity when they are associated with our projects as opposed to a freestanding pad. And that has certainly helped that demand. In terms of the other tenants you alluded to, certainly the international tenants are continuing to grow. We've already talked about e-tailers. We have got brand extensions. There is still considerable demand for our space and we are doing okay.

And as Rick said, the restaurant demand is great.

Yes.

Great, thank you.

Alexander Goldfarb, Sandler O'Neill.

Good morning out there.

Good morning. We are out here in the great Midwest.

An increasingly important part of the country this year.

You bet.

So just a few questions here, David. First, you guys obviously disclose your rent spreads and those sort of stats. But can you give a little bit more color on same-center ancillary income growth? As you guys have rolled out that program, is it still growing -- is the growth really coming from rolling out more and more ancillary at each mall? Or is it more that you've maxed out individual malls so that more of the growth is coming as you role out different programs to new malls and outlets too?

Well, let me give you a big-picture view. I would say it is actually in the -- when you ancillary a lot, put our SPV effort to aside, we have actually reduced it pretty significantly in our high-end portfolio. So we have cleaned out, what I will call, a lot of stuff.

Again, we think that is the right thing to do. It is clearly costing us some income, but at the end of the day, we think it through. So if you look at our high-end portfolio, we have cleaned a lot of stuff out, and we are very sensitive to creating the environment where those retailers can do the most business. So if anything, we suffered dilution and you how I love cash flow, but I've got to balance that. So we have actually reduced that and that has hurt us over the last few quarters.

In the outlet business, it has probably picked up a little bit. So again, there is an answer for everything. But I think we have done a -- we put in some, what I would call, veteran mall people to run that business over the last couple of years. They've actually done a pretty nice job increasing those ancillaries.

So up in outlet, down in high-end malls pretty significantly. And I think the rest of it is commensurate with the marketplace.

But as far as the reduction at the high-end malls, can you give a magnitude, like a percentage? Like if you -- was it a 5% reduction to overall ancillary income? 10%? When you are looking at the aggregate of what do you do.

It's enough for me to notice, but we put it all in our numbers and our numbers are our numbers. I don't want to get into what amounts, but it has been -- it could be -- let me frame this way a little bit. It could be, at a big mall, a million bucks. How's that? How's that if you really want to pinpoint on something?

A million bucks.

At a big mall, it could be a million bucks.

A million bucks going away.

At a big mall. At one big mall.

Okay, okay.

We have done it at a handful of malls. But at a big mall, it could be a million bucks.

Okay, that's helpful. The second question is, looking at your European portfolio. Obviously, a lot of unfortunate, tragic events that have occurred. What has been the impact at the retail level? Is it people are going forward and life goes on? Or have you seen any impact to either tenant openings or sales or anything like that? Or maybe just increased expenses from things that have to be done?

Well, in our ownership interest -- again, we have basically two ways we operate in Europe. We own properties primarily through MacArthurGlen and then we have our ownership interest in Klepierre. Klepierre is a public company. I think they reported today and their numbers have been pretty good. Look at retail sales.

The only country that I'd say, which is not insignificant there, that is a little bit underperforming but is still up, is in France. And I don't know that I'd necessarily equate that to what has happened, terrorist-wise. But the France general economy is a little bit behind, say, Italy, Spain, the Netherlands and Scandinavia and so on.

All of that data is out there for you. I think their business is actually pretty decent and they chug along. We see no impact whatsoever in our MacArthurGlen portfolio. Look, their assets are, in a lot of cases, tourist-oriented. So if tourism changes, you will see that impact a little bit. But we haven't seen it so far. Their numbers have been pretty impressive year to date.

Okay. Thanks a lot, David.

Sure.

Christy McElroy, Citi

Hi, good morning.

Just to follow up on the department store recapture. To what extent do you think we will continue to see department store closings? And how do you think about the economics of redeveloping a box like that in terms of the cost per square foot of the redevelopment? And looking at the rent that you can get on new tenants versus the in-place rent of the department stores currently there?

Christy, first of all, all of our recapture activity has been included in all of our development yield tables. And I think we have said that we work it out and we get comparable yields that we can get in the rest of our development projects.

There is a range from high single-digit, low double-digit. We have identified the boxes and every deal is unique as to what the costs would be for redeveloping the box. Is it a full box user, are we splitting the box, how the box is configured.

But all of those yields are in and the most important thing is that we have been able to produce our results and we have had a great deal of activity in that sector, as witnessed by all the anchors that we continue to add across the Company.

And are you closer to executing on some of the Seritage deals?

I'm sorry, could you repeat that?

Are you closer to executing on some of the Seritage projects that you've discussed?

We're, again, working with Sears on the economics and configuration of their down-sizes. As soon as we have that in place, we will be able to proceed. We have identified and have firmed up commitments for the vast majority of those boxes.

Hey, David, it's Michael Sullivan.

I had a quick question on the balance sheet. Back at our conference in March you talked about wanting to hoard more capital at this stage rather than expending a lot of capital. We look at the balance sheet today, it is the best it has ever been in your entire history.

You talk about $6 billion in liquidity, a significant amount of balance sheet capacity and unbelievable cost of capital. How should we interpret that positioning? Is it gearing up to be able to be opportunistic in the next cycle or still within this cycle? And how should we think about the capital that you have?

Well, look, I love being in the spot that we're in. We have no plans. As you know, we said it publicly, we are out of the big deal business. I reserve the right to change my mind, I guess. But if you ask me today, I am out of the big deal is less.

Eventually, as we all know, there is going to be cycles in the economic world that we live in. And Rick and I are grizzled veterans when it comes to real estate recessions and stuff. So it is always good to be in that spot. Obviously, Andy is here. We have worked very hard to be in that spot. It allows us to grow our dividend; it allows us to put capital back into the business that feeds on itself.

So I think pretty much nothing has changed, Michael. It is business as usual. We have no intention of really doing anything with that other than continuing to build it. I don't know if there will be a cycle. I have no idea. But we are out of the big deal business.

And we are going to maintain that liquidity and capital primarily to -- that's the balance sheet we want. We think that should be valued by the market. I will let you decide whether it is or isn't, I don't know. And it allows us to reinvest in our portfolio.

I think the one thing that we all talk about physical retail, we talk about physical real estate. And I don't care whether it is an office, a hotel, a mall, a strip center. If you don't have a good-looking product, your customer is not going to show up. And if you have got an apartment building, you got an office building, you got a mall, you got a strip center, you got a physical retail store, if it doesn't look good and it doesn't have the right services and it doesn't have the right tenant mix or clientele, you are going somewhere down the road. That is the competitive society that we live in.

And I think our capital allows us to try. We don't execute this the way -- I think we can continue to be much better in this, but our balance sheet allows us to have a really, really, really good-looking physical product and we have got a lot of work to continue to make it even better, better, better. And I would encourage anybody that owns physical real estate or leases physical real estate.

That is our goal. That is our job. You've got to have -- just like if you are Boeing and you manufacture airplanes, you go to their manufacturing facility. I guarantee it is state of the art beautiful. And that is what they do with their capital.

Right. And you are still earning very good returns on that incremental investment, so it's creating a lot of underlying value overall.

And that is why we have the balance sheet that we have got today.

Right. Then the question is whether you think there's going to be something bigger from an investment perspective at your assets that you want to position for, right? So being able -- Christy asked about the department stores, whether you'd become much more aggressive at putting a lot of capital in being very aggressive in the near term to attack that.

So it is not being out of the big deal business, buying someone else. But you can certainly produce something internally with your own space that may require above average capital spend for a period of time.

Yes, look, I think with all of the activity there I think we see that continuing at the pace that it has been. We have been obviously very active the last few years doing that. A lot of this good stuff is coming online.

So I think if outlet new development slows, that is more capital that we can dedicate to getting the box money back. So I see that as a steady-state, likely. But we are not warehousing capital to do some big transaction. It is basically to continue to be an appropriately-rated Company and continuing to have the capital to invest in our product. That is the goal.

Okay, thanks, David.

Sure.

Paul Adornato, BMO Capital Markets.

Thanks, good morning. I was wondering if you could provide an update on what you are seeing in terms of traffic at your properties. Appreciate your comments on the tourist visits, but what else are you seeing in terms of traffic?

You may have missed this. In the outlet business, our traffic is up 2.65% year to date, even though spend is down in some of the tourist-oriented centers.

On the malls, what we are finding is that the traffic is stable. Interestingly, I know a lot of retailers have reported decreased traffic. What we are seeing is at the consumers are still in our properties, but they are visiting less stores on each visit.

And it gets back to David's point about the physical presentation. Our retailers need to have stores that present compelling reasons for these consumers to visit them as they are walking our properties. So there will be less traffic because they are stopping in less stores. But the measures that we look at, the traffic in our properties overall, is stable.

And so as a follow-up, whose problem is that when it comes to leasing? Does fall back on the retailer? Or ultimately -- you need to attract that retailer as well?

Well, listen, we are going to take responsibility as well. The retailer needs to. I think we are all in this together kind of deal. So we have got to have the right retail mix. We've also got to be able to introduce technology in the mall that gets people to visit.

I think what Rick was really saying is that with all of the research that's done by consumers, when they go to the mall, they are not probably doing as much window shopping as they have probably have done historically. They are more on a mission. They know they want to go to these three stores.

It is our goal -- and obviously the retailer's goal -- but is our goal to get them to spend more time. More time means more spend and visit more stores. We have to take some of that responsibility as well. We are certainly not shirking that. I think that is where technology can help us do that.

Great. So what specifically are you rolling out and how's that going in terms of (multiple speakers)?

Well, we have much too long of a conversation to do that. But there is a lot of communication that we are doing directly with the consumer that we will hope that it will get the consumer to stay longer as well as visit more stores. The communication helps visit more stores. Staying longer, I think, is an ambience, diverse, more mix, restaurants, entertainment, et cetera, that will help the net cause.

Great, thank you.

Sure.

Vincent Chao, Deutsche Bank.

Hi, good morning, everyone. I know we've talked about the rent spreads earlier, but curious on the context of the commentary about the overall economy being soft. That has been your commentary for quite some time, as well as (multiple speakers).

By the way, if I have been accurate in that, I just want to know.

You have been accurate, no question there. The question is around pricing power with your tenants. However you want to define it, if rent spread is not necessarily the best metric, curious if there's been a change there.

I said rent spreads, somebody asked me a question. I explained to you that we put amendments in our rent spreads. And if I had to isolate -- again, I think the $8.88 is pretty damn good. But if you had to isolate why wasn't it 17%, it is because of certain amendments where we're taking a decision either to work with the retailer or do it more of on a temporary fashion where we release the space which makes economic sense.

And again, I would also point out that year to date our comp NOI is up 4%, 4.1%. The economy is growing at 1%, I don't know, you tell me what it is. You have got a bunch of people on your payroll that will tell you what the economy is growing. Maybe not on your payroll, but on the bank's payroll. And we are outperforming 300 basis point, which is not -- you got to put in perspective. So what is your question?

The question was, regardless of the spread, how are you thinking about pricing power with your tenants today versus six months ago or a year ago?

I think every -- we don't have a cookie-cutter commodity product. So every deal is different. In some cases we have pricing power and, frankly, in some cases we don't. Because of whatever, competitive situation, bad space, mediocre asset. In some cases we have great space, great asset, high demand. We put it all in the blender, we produce the results that we produce.

I don't have a cookie-cutter answer for you, it is deal by deal. We are driven deal by deal, space by space, lease by lease. We have been doing it for a lot of years and that is what we continue to do. There is just no easy answer I can give to you, other than all of that dynamics of what I just described, funnel into our numbers that funnel into the results. And then we declare our results.

Okay, that's fair enough.

Another question, turning to the investment side of things. I know you're out the big deal business here. And you also said that you're not really seeing any real impacts in Europe as of yet. But I'm just curious if you expect to see some opportunities open up over there particularly in the UK? Obviously the dollar is strong right now, so it would help the investment case although I know that is not your focus. Curious how you're thinking about the investment opportunity over there.

I think all of those transactions are very difficult. Here's my short answer on the UK. I offered a company who bought an asset, diluted the company's shareholders down by 25%. I offered 4.25p. They told me the company was worth 6.50p and the stock today is trading at a 2.70p, okay?

So I'm not enthralled with -- I think the UK -- it is impossible to make deals happen unless somebody wants something to happen. So I am out of the big deal business. The UK, I have no interest in the UK, other than I have an affinity to a football club there that I really love. But beyond that, I doubt that there will be any great opportunities in those markets.

Okay, thanks a lot.

Yes, no worries.

Rich Moore, RBC Capital Markets.

Hi, good morning, guys. If I could, to the Seritage stuff that a couple people have asked about.

The first thing, Rick, I'm curious. I thought when these were all set up originally, each of the boxes, there was a specific plan laid out for which part Sears would get and which part Seritage would get. Are you guys negotiating to try to change that or try to take more of the space that Sears had?

The primary discussion is on the cost of implementing the agreed-upon down-sizes. In a couple of instances, the way that we've been able to procure users would make it more efficient for both Sears and us if there were slight reconfigurations. But that is not the issue, it's just the process of you talk about loading docks and separating air-conditioning systems and vertical escalation systems and entrances. Is just a complicated process that we are going through.

Okay. Then I thought also that on that you had to -- at some point the landlord has to provide Sears with a six-month notice to vacate and then they have six months to actually leave the property. Have you guys given -- or has Seritage given -- or the joint venture given notice to Sears yet to vacate those various assets?

We have not. And we will not until we have a firm understanding of what our capital requirements are and what our returns are going to be. And we can't do that until we finalize these discussions.

Okay. So none of the stores have been given that six-month notice.

No.

Okay. And the last thing is do you still own the Seritage stock that you got as part of this whole transaction?

Yes.

Okay. And you plan to keep that? Is that the idea?

Plan. Plan is a funny word, right? Hard to say, Rich. No real -- just hard to say.

Okay. All right, good. Thank you. Appreciate it.

Yes, no worries.

Ki Bin Kim, SunTrust.

Thank you.

A broader question about market rent for A malls. If I look back at a couple, two years of leasing activities you have roughly signed rents at $68 to $70 a square foot. I would think over that two-year period or more, the noise of good spaces versus bad spaces probably get averaged away with the law of large numbers. So I was curious, do you think market rents on average for your product has grown recently? And what do you think will happen going forward?

We give you every year our earnings estimate, our top NOI estimate. That is made up of a lot of things, including our view of what certain spaces are worth and what we think the rents are. So I don't know what else I can tell you, other than what I've already said earlier. We haven't backed off our -- if anything, we have increased our guidance. We haven't backed up our comp or portfolio NOI. We've actually performed so far.

All of that is ultimately shows itself, our view. And again, we are not a hotel so even if our market rent view changed up or down, I don't control -- they have a lease there. So, again, it is only going to impact 8% of the portfolio per year.

Take an example. Let's say we got nervous and we cut all these bad deals. It wouldn't really impact us at the end of the day because it is only 8% of the portfolio per annum. If you did it several years in a row, it would catch up with you.

So again, market rents, I don't mark my portfolio up or down every day like I do a hotel business. That is why we have stability of cash flow. That is why we can withstand cycles. That is why we have had this history of comp NOI increases. I don't know what else I can do other than answer it in that fashion.

Yes.

The reason I ask is how to gauge the difference between the NOI growth from stemming from favorable vintage releasing, which is at any real estate company versus market rent growth. That is why I asked that question.

But my second question is more on leverage. You've always had a little mix of European-denominated debt -- or euro-denominated debt -- versus US. I'm assuming that's spread has gotten more favorable towards the euro. Any change in larger plans of how to refinance on the debt coming due? Maybe more geared toward Europe versus here?

No, we are pretty much hedged on the margin so we are not going to get over-allocated to Europe. We're only going to finance what our investment base there is and we are pretty much hedged. So even though there may be a rate differential, we would have to swap it back to US dollars because otherwise we would be over-allocated and we are, as I said, we are hedged.

That could be something we would look at. But to me it is a little too cute. I would rather finance my US assets in US dollars and my European assets in European dollars and my Japanese assets in yen. The currency fluctuations are the currency fluctuations. And we have the natural hedge with their investment base. That has been the strategy; I don't think it will change.

Okay, thank you.

Sure.

Michael Mueller, JPMorgan.

Thanks, hi. I just have a couple of quick numbers questions.

One, are there any material Crystals acquisition costs in the quarter? And then secondly, your occupancy cost was 12.7 in the quarter. How does that compare to the combined levels that you had in, say, 2007, 2008?

The answer is no, the first one. And then Tom will get back to you on what our occupancy costs in 2007 and 2008 is. I don't recall, frankly.

Got it, okay, thank you.

No worries.

Richard Hill, Morgan Stanley.

Hey, good morning. Two quick questions from me. I'm sorry if I missed this previously. But you mentioned about the anomaly with some sales restrictions in a particular state. Again, I'm sorry if I missed it. But could you elaborate on that?

No.

Okay, thank you. And secondly, and I know you've said you're out of the big deal business. And you said that there is not necessarily opportunities in Europe. But I look at Klepierre and it does look like it's performing well, as you mentioned. Would you consider increasing your stake there?

I think we are very pleased with the position that we are in.

Okay, thank you. No more questions from me.

No worries, thank you.

Tayo Okusanya, Jefferies.

Good morning. Just a quick question around the lease amendments that you talked about earlier on that had some impact on releasing spreads. Is there any other detail you can share about those amendments? How they come up, why the decision was made to actually do them?

Well, it is a lease-by-lease, store-by-store, mall-by-mall analysis. And we make a judgment call. That is what we do every day. Do we want to release it? What is the downtime? Does it give us time to release it? And on and on and on. So it is 50 years of experience that goes into that.

And is the mix of tenants, like large national and local? And it's like a whole mix of people that are impacted by that?

It is just the nature of our business for many, many years. What the right thing to do is with that retailer and that specific space.

Got it. Okay, thank you.

Yes, no worries.

Floris van Dijkum, Boenning.

Great, thank you.

I will keep it very short because the I know there's some other calls coming up. David and Rick, quick question.

Your vision of the mall in five years. How is the tenant composition today going to change in your view in terms of the percentage of, for example, entertainment as a percentage of the overall mall tenant base?

The simple answer is there is no cookie-cutter answer and it is all going to be -- you know, the mall business and the retail business, you can have these big overriding themes. But the reality is how it gets executed really focuses on trade area by trade area, layout by layout, physical configuration by physical configuration.

So therefore, there is no overall answer to that other than simplistically, I think the mix will be more diverse. There will be more entertainment, more food services, more other services. And there will be technology in it to enhance the shopping experiences. There'll be more services.

But how that all gets computed into one particular scenario will depend differently on the north side of Indianapolis versus the south side of Indianapolis. So that is just the nature of our projects. And the good news is we have got an organization that can figure out -- I hope -- the north side of Indianapolis versus the south side of Indianapolis. And what is right for that trade area. That's the simple answer.

Okay. What is your favorite football team?

Crystal Palace.

Okay, great. Thanks.

No worries.

Thank you, and I'm showing no further questions at this time. I'd like to turn the call back over to Mr. David Simon for any closing remarks.

Thank you and have a good rest of the summer.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.