西蒙地產 (SPG) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Simon Property Group Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference call over to Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Abigail. Good morning, everyone, 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 the risk factors relating to those 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'm pleased to introduce, David Simon.

We had a very productive quarter, and are pleased with our impressive financial results. We started, completed and opened several significant new development and redevelopment projects that will further enhance our portfolio. We successfully executed several capital market transactions, extending our average term and reducing our weighted average interest cost and, most importantly, we continued to achieve impressive operating and financial results.

Results in the quarter were highlighted by funds from operation of $2.47 per share, which included a $0.36 charge for the early redemption of our 5.65% notes. On a comparable basis, excluding the debt charge, FFO per share was $2.83 and increased 7.6% year-over-year. We continue to report solid operating metrics and grow our cash flow. Our Mall and Premium Outlets occupancy ended the quarter at 95.2%, a decrease of 40 basis points compared to occupancy at the end of the first quarter. Tenant bankruptcies processed during the second quarter for retailers, including, but not limited to rue21, Payless, BCBG and Bebe impacted our occupancy by approximately 100 basis points.

Leasing activity remained solid. Average base rent was $52.10, up 3.3% compared to last year, reflecting strong retailer demand. And for our locations, the Malls and the Premium Outlets recorded leasing spreads of $8.13 per square foot, which was an increase of 12.9%. Reported retailer sales per square foot for our malls and outlets was $618 compared to $607 in the prior year period, an increase of 1.8%. And for those of you interested in how our international centers are performing, we reported retailer sales were up across the portfolio.

Total portfolio NOI increased 5% or more than $70 million for the second quarter and more than $150 million year-to-date. Comp NOI increased 4.4% for the quarter and, as a reminder, we do not include lease settlement income in our comp NOI.

On an NOI-weighted basis, our operating metrics were as follows: reported retailer sales on an NOI-weighted basis was $770, average base minimum rent was $68, leasing spreads would've been 14.1%. These metrics demonstrate the health of our portfolio. The type of operating metrics and returns, I mentioned, are a result of disciplined investments and focus on our operations. At the end of the second quarter, redevelopment expansion projects were ongoing at 25 properties across all 3 of our platforms, with our share of net costs at approximately $1 billion. We completed The Galleria in Houston in the second quarter and opened up the former Saks space for small-shop tenants and restaurants. Construction continues on several major redevelopment expansion projects at some of our most productive projects, including La Plaza, The Shops at Riverside, Aventura, Allen Premium Outlets. We expect most of these to open within the next 12 months.

On new development, we had another busy quarter, opening 4 new outlets, 3 international: Provence, France; Siheung, Seoul, South Korea; Kuala Lumpur in Malaysia; and of course, we love the U.S., 1 in Norfolk, Virginia.

Construction continues in our mixed-use development in Fort Worth at The Shops at Clearfork, which will open in the fall of this year. We also commenced construction on a new Premium Outlet Center on the north side of Denver, scheduled to open September of 2018.

Klépierre, as you know, reported strong financial results last week. They're positioned well to continue to capitalize on the strengthening in Europe, improving economic conditions and increasing consumer spending.

Now quickly, on the balance sheet. Another active quarter. We completed a dual tranche senior offering that totaled $1.35 billion, with a weighted average coupon of just over 3% and weighted average term of 7.8 years. We completed the 2 early redemptions of our senior notes totaling $1.85 billion. And during the quarter, we closed 6 mortgage loans totaling $1.1 billion, of which our share is 575 -- $573 million, with a weighted average interest rate of approximately 3.5% and a term of 8 years. And during the quarter, we repurchased 1.5 million shares of common stock for $244 million. Our current liquidity is more than $6.5 billion. We also increased our dividend for this quarter to $1.80 per share, a year-over-year increase of 9.1% and a 3% increase from the second quarter of 2017, we will pay at least $7.10 for the year of 2017, which is an increase of 9% compared to last year's $6.50. Last year or so, we also raised our guidance to a range of $11.14 to $11.22 of FFO per share. This -- the midpoint of this range is an increase of $0.04 from our prior year guidance after giving effect to the charge relating to the debt extinguishment of $0.36.

Finally, to conclude, while we don't like to promote, we would like to remind those investors who are interested, we produced yet another quarter of impressive results in operating metrics. There's no company in our industry that has our breadth and quality real estate, is as diversified by type of retail real estate and as active in the mixed-used development real estate, has built and operates successfully in Europe and Asia, has consistently increased earnings cash flow and dividends, has the access to capital with an A-rated balance sheet, or as innovative in terms of operations including connecting with the consumer in dealmaking from retail to entertainment to venture capital or various corporate transactions like we have.

We're now ready for questions.

(Operator Instructions) Our first question comes from Craig Schmidt with Bank of America.

Given the re-leasing you're doing in the face of this challenging retail market, are you starting to decrease your exposure to apparel?

Yes. Rick?

Let me just give you a couple of metrics. Literally, our apparel now is down to the low-40% as an allocation of our GLA. More importantly, when you look at our new deals over the years, we're literally having almost 20% less in terms of allocated to the apparel and shoes. In food services, allocated is going up substantially.

And the new tenants coming in, are they able to match or even perhaps beat the rents that the exiting apparel guys are paying?

Absolutely. As you see in our spreads and our average base rent increases, we're able to continue to drive our growth in rents.

Now I would just add, Craig, the list of the new tenants is as interesting as we've seen in quite some time. If you would like, Rick is absolutely prepared and, in fact, excited...

Enthusiastic.

To give you the list. However, that's entirely up to you. But I will...

I would love to hear the list.

Okay. I will tell you that it -- from restaurants to new retail concepts, to e-commerce, to street, to malls, there's a lot going on. Now Rick, without further ado, please list off some of the ones that we're talking to and, in fact, doing some business with.

These are all tenants that we have, in fact, executed leases with and are opening stores in both our Mall portfolio and our Premium Outlet portfolio. In the malls: Untuckit, ELOQUII, [Veda], Peloton, Juice Generation, ThredUp, Tommy John, Indochino, Flying Tiger, Calzedonia, MUJI, (inaudible), RITUALS. And these are from international -- and Shinola, Nespresso, we've got -- and frankly, I could keep going for another 15. On the premium side, we literally have Dockers, [Cody], BASLER, Hackett, Havaianas, Hickey Freeman, Karl Lagerfeld, (inaudible), Lafayette 148, [Marmot]...

I told you, once you get him started...

They never -- and frankly, I could go on for another 30 names. The important message is, these properties are vibrant, there's a lot of demand and we're able to execute leases that are growing our rents.

Okay. And just one last thing from me, just maybe some commentary on the Mills, the leasing spread of up 24.9%. What's driving that?

We frankly have done a very good job of bringing over to the Mills both our full-priced mall tenants and our Premium Outlet tenants. So the Mills now encompasses value retailers, full-priced retailers, off-price retailers and they're very vibrant environments.

Yes, the sales there have done very well. We've had a lot of restaurants. It's just been a very good, solid business for us.

Our next question comes from Christine McElroy with Citi.

David, I think your prior same-store NOI growth forecast was 3%. You've now trended well above that in the first half, so it would indicate a deceleration in the second half. Has that forecast changed at all, given the year-to-date performance above that level and in the context of the current retail environment? And to what extent did maybe expense controls contribute to that pace?

Well, Christie, we don't -- our industry gives out a lot of information, as you know, a lot of operating metrics. We have always taken the position where we don't update our comp NOI. Obviously, if we didn't feel like we could hit the number that we give at the beginning of the year, we would tell you. But we don't update it every quarter. We have -- we're not going to get into that issue, but we're always trying to outperform the guidance that we give to you. And we'll see how it goes. We are -- have a little more volatility maybe than some other folks because of our overage rent, given our tourism properties. And that's trending in the right direction. We love the dollar weakening. But we got a year to operate and we'll see where the number is. The most important thing is if we felt like we weren't going to hit the number that we told you from the start, we would tell you.

Okay. And then just given all of the list of retailers that -- there appears to be a lot of still demand for space, how are you thinking about, in this environment with more store closings but in the context that there is still demand, how are you thinking about in your conversations with retailers around store closings versus providing rent relief? How are you thinking about rent relief versus just letting those stores close?

Well, look, I think if I could take a step back and just talk about the company, in a sense. I mean, we -- Rick and I are like -- I mean, we're -- I hate to say it but we're like really experienced in tougher times, okay? We actually do our best work in tougher times. I think a lot of that is because we have the judgment of when to fish or cut bait. When to help a person restructure, when not. A lot of these are judgment calls but, as you know, I mean, we have always more or less outperformed when all boats aren't rising with the tides. So that's what we do. I will tell you it's not a very fun environment. We're working extra hard. We're pounding the pavement more than ever. We've got to go get deals. We've got to figure out -- we've got to restructure some. We've got to do all that. It all goes into a blender. We use the best judgment we can and, hopefully, we make the right decision. Some of which we do, a lot of times. But sometimes, we make the wrong decisions. We operate, historically -- and we can go through chapter and verse, but we operate, historically, when things are a little bit rocky at the very best of our industry. And that's what we're all about. So there's no set answer, every situation is case-by-case. I'd rather we weren't dealing with this environment. But we are, so we just deal with it head on, do the best we can. But I think we'll be leading the charge within our own industry.

Our next question comes from Vincent Chao with Deutsche Bank.

Just maybe a follow-up question on that and tying it into Taubman's results. I was just curious if you guys are using more short-term leases at this point in the cycle?

Well, I think that, that basically is a case-by-case basis. In this kind of environment, you do tend to do a little bit shorter-term deals because you are betting that the market or the environment will get better, but I wouldn't call it dramatically different. Less than 1% of what maybe our volume is in that category. But again, these are judgment calls. It makes all the sense in the world, frankly in a lot of cases, to do short-term deals if you feel like the environment's going to get better. I know, in my own personal view -- I could be wrong -- but I do think that our environment's going to get better. But that's just my instinct. I would not necessarily bank on it. But -- so in that case, I think doing short-term deals makes -- could make sense. But a lot of that is also -- the thing about us is it's -- we make -- unbelievably, given the size of the portfolio, but we make decisions space by space, mall by mall, retailer by retailer. We put it -- and so every -- we just don't -- it's not just like, "Okay, you stamp it out." It's every deal is a little bit different, and that's where our judgment historically has, at least, allowed us to do okay in a tough environment.

Okay. And then maybe going back to an earlier comment that you made about likening the softening dollar as it relates to tourism, I was just curious if you could comment on what, if any, benefit that had on 2Q FFO results as well as the updated outlook?

I think it stabilized some of our tourism properties, but it hasn't had what I call -- I haven't really seen it big-time yet, but we had a real benefit. We've been -- I mean, we've been -- as you know, for the last 2 years, we have -- as remarkable as our growth has been, and industry leading, we've had an Achilles heel of a strong dollar and a reduction in tourism spend. So again, you have to put that in perspective. I know we're a little bit bigger company. I know we all want to get granular to the last detail. I assure you, we do run that way. We have a lot of moving parts and we've been suffering from that. And if we get to the point of stabilization and, in fact, an increase in tourism spend, I think that's really good for us. But I think it's too early to call that yet.

Our next question comes from Steve Sakwa with Evercore ISI.

I was just curious -- obviously, you guys had a very strong comp NOI number in the quarter, and I'm just curious, the occupancy decline that you incurred sequentially, was that mostly kind of an end-of-period sort of occupancy decline? Or did that occupancy hit kind of happen throughout the quarter, and that quarterly run rate is a bit more of a normalized number? Should we look for a little bit of a step-down into Q3?

Well -- a step-down in occupancy? Or comp NOI or...

Well, a step-down in the kind of run rate of NOI going from Q2 into Q3?

We don't -- as I said to you earlier, we give you our view of what our comp NOI will be at the beginning of the year. We do not update it quarterly. I don't think we should ever get into that business. I think when you look at our business, you've got to look a little bit long term, not quarter by quarter. If for some reason we felt like we weren't going to hit what we told you at the beginning of the year, obviously, we would tell you that. We're not in that position. And the reality is that the occupancy dropped because, as I said in my prepared remarks, we flushed through various bankruptcies. We still have more to do, and some of these things are negotiated as we speak. As an example, you've got Gymboree, which is in bankruptcy. We're negotiating now. Those things have deltas. The good news about our company is the size, the different avenues of growth, the different levels of real estate, the different product type, the international exposure, the way that -- the other stuff that we're going on, we'll be able to manage that and we haven't backed off our comp NOI. But we do not, Steve, do it by quarter. I'm sorry to inform you that but, as you know, that's been our -- as far as I know, I don't think we've -- we'll update our guidance every quarter, but there's a lot that goes in that. But we don't update comp NOI guidance.

That's fine, David. I wasn't looking for an updated number. I was just trying to get a sense as to where the occupancy fell and when the shortfall kind of came, if it was end of the quarter, beginning of the quarter? But we'll...

I mean, I really don't know. But I'd say -- and Steve Broadwater's here, he's telling me throughout the quarter. Okay?

Okay. Yes. I guess, maybe a question for you or Rick. When you just sort of look at kind of your watch list, and we've obviously had a lot of tenants that have either restructured leases or filed for bankruptcy, how would you sort of characterize kind of the length of the watch list in terms of stores today versus maybe 6 months and a year ago?

Well, look, I mean, there's still others out there, but we're dealing with what I'd call that the material bigger accounts now as we speak. So I'm not ready to call it my Ben Crenshaw moment. I don't know if you play golf, do you play golf, Steve?

I do.

Okay, so remember Ben Crenshaw at the Ryder Cup? When the U.S. was down and he had that feeling, I'm not ready to call it my Ben Crenshaw moment. But look, we're dealing with some of these troubled guys. I would -- it's very interesting, a publication just wrote about kind of the biggest problem in that area. As you know, I wrote about it in my shareholder letter in '15 that I saw the handwriting on the wall from some of these leveraged retailers. Can't have too much leverage in any business, frankly, let alone the retail business. You're talking to a guy that has done workouts in the early '90s. Rick has a workout guide too. I think we're getting through most of it, but there's still some out there that may or may not hit.

Yes, and the only other point I would make, and it's really lost in a lot of the dialogue, by the by, Payless, rue, Gymboree are all restructuring. All of those lenders are converting their debt to equity and they're going to emerge with very substantial retailers with much better balance sheets. If you compare that in '09, where the creditors did not have the confidence in the sector and they were taking a liquidation bid instead of restructuring. And that seems to be missed in all the other conversation out there.

Okay. And I guess just last question, as you guys think about kind of future redevelopment opportunities, has anything really changed in terms of kind of the pace or the ability to get some of the newer, larger redevelopments kind of underway at this point?

Not really. I mean, obviously, the big potential pipe that we're -- that will happen is the big department store recapture. We're being very methodical about it. We are being very focused on paying the right price for the real estate. We're also very focused on how we manage it internally in terms of resources. But that pipeline will be big, it'll be material, it'll be beneficial to our real estate. But we're going to be reasonably methodical about it.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

So 2 questions. The first one is, in thinking about Athena and other brands like that, how often are you guys surprised about which retailers either declare bankruptcy or which -- or if a retailer just wants to close stores, which stores they actually close? Do you guys find that you generally have a pretty good read on it? Or do the retailers sometimes surprise you?

Well, if -- I don't want to comment about any 1 particular retailer. But generally, if a retailer is in bankruptcy, obviously, that gives them flexibility to basically cancel the lease. We kind of know. I mean, it's not -- sometimes, we're surprised, obviously, there's a lot of games of chicken played. They hire workout guys that are meaner and tougher than Rick. We have stare-downs, but you more or less know -- you more or less know in bankruptcy kind of what's going to shake out.

Okay. And then the second question is, on last quarter's earnings calls, your -- one of the bigger peers said they want to explore options. Obviously, if nothing happens, how do we interpret that as anything other than sort of not good for retail outlook or mall values? So if nothing happens, do we say like, hey, retail's actually going to get a lot tougher or malls aren't worth what we think they are? Or is there a way to think of it in a different way?

Well, I'm not really going to answer that question, okay? So that's -- we're very focused on what we're doing. I'm not going to really get into that debate, Alex. I'm sorry. And that question is better addressed not to us.

Our next question comes from Caitlin Burrows with Goldman Sachs.

On your same-store NOI growth rate of 4.4% in 2Q, I think this was stronger than the market was expecting, which is encouraging, especially considering GDP growth was maybe 2%. But people often talk about differences by quality. And it seems, just looking at the results and what you guys posted versus other retail peers, that portfolio mix including property type is becoming important. So I was just wondering if you could discuss to what extent you've seen levels of strength vary by mall versus outlets versus Mills or if it's by region? Or help us otherwise try to understand what could be differentiating the Simon portfolio?

Well, I do think property type plays a role into that for sure. I mean, there's no question about that. But I also think the depth and breadth of the organization plays a role in that as well. And I think we -- we're an important vendor to a lot of retailers because we have good real estate where they make money. And we do a lot of things to improve the portfolio. We're doing a lot of stuff on the marketing front to drive traffic. We're here to help our retailers with all sorts of programs. I'm always somewhat surprised on the ones that do participate and others that don't. We can help drive traffic to their store. But I think it's just part of -- I would say we pretty much outperformed year-over-year -- I'm looking at Steve and Tom, they can give you the numbers. But we pretty much always had really leading comp NOI growth, so it doesn't surprise me that we're leading the pack again this year, including the strip center guys. We're -- we've outperformed them as well. So I don't know, it's just something that we take pride in. There's no guarantee that we'll continue to do that, but it's -- that's what we've done historically in terms of strip centers, malls, retail, whatever.

Okay. And then along those lines, again, the 2Q result was pretty impressive. I was wondering though, if you look at your income statement, and I totally get that this is consolidated and it doesn't include JVs, revenues rose 3.5% year-over-year in the quarter and expenses were up 2.9%. And when you get outside of malls, other sectors regularly break out same-store NOI between revenue and expense. So just wondering if you could give any color on how the 2 lines, revenues and expenses, would look for Simon.

Well, I mean, you know that the -- I think part of the issue is that we consolidated some assets with our European outlet business. So you're seeing a little bit of that in terms of the revenue growth. Now on the other hand, expenses there, they don't operate probably at quite the margin we do. But there's no -- we are such a size that there's just nothing that you're going to point to that's that out of the ordinary. We try to run very efficiently. I mean, we kind of knew -- as you know, what we did on the corporate G&A front, we knew this was going to be a tough year. Rick and I and a few other executives have taken some reductions in comp. We just think it's the right thing to do in this environment. But the one thing that we will not do is run these properties so that they are not -- we think of our real estate as hotels, and that's not to say we perform this, but if we -- if we -- we have to have a good product, and the product has to feel good to the consumer and we're not skipping on that side as well. But you have some movement in these numbers from what's consolidated and what's in the JV; and some portfolio movement, which my guess is more the answer to your question than anything else.

Okay. And then just last one, would you say on NOI, it's fair to think that margin is continuing to expand?

We're focused on it. We're not miracle workers.

Our next question comes from Ki Bin Kim with SunTrust.

Could you talk a little bit about your views on usage of CapEx to close on deals? And more in particular, if there's any noticeable trend in the CapEx you're using per new rental value on a percentage basis, if there's any kind of noticeable trends going forward?

This is Rick. There's absolutely none. If you go back over the years, our TA per foot has been in a very tight range and it remains in that range for this quarter.

Okay. Sorry, it's hard to kind of account for the timing of when you spend the CapEx, which is why I asked that question. And...

Did you -- I think you broke up there, could you restate what you just said? I'm sorry.

I just said sometimes it's hard to triangulate and to account for the timing of when you spend the CapEx versus when you're doing lease -- doing new leases.

But again, CapEx is -- yes, we show you our tenant allowance number, okay? CapEx is basically associated with redevelopments in the portfolio or new developments. So just want you to understand it kind of -- if it's a tenant allowance, that shows up as outlined in our 8-K, okay?

Okay. And second question. In 2016, you guys capitalized internal leasing costs of about $49 million. Still a very efficient number compared to the size of your company. But just going forward, I was wondering if you had any thoughts on the new accounting rules that are coming out that might require you to expense most of that?

Yes, well, we're going to follow GAAP. So it is what it is.

So do you actually have an estimate of that $49 million, like if most of that's going to be expensed or a portion?

Not at this -- when it comes into force in '19? '19, we'll give you that number, but we don't at this point. But I'm sure our number will be comparable to anybody else's.

Our next question comes from Paul Morgan with Canaccord.

On the store openings that you talked about, Rick, at least, when you look at where some of the newer concepts are going, some of the e-commerce retailers and others, it seems a little concentrated in the kind of A-plus malls and outlet centers. And I'm wondering as you have discussions with some of these chains that are rolling out their first 20 or 30 stores, I mean, how deep do you think the pools of the malls is ultimately going to be for these concepts if they're successful? I mean, do you get conversations starting where they see themselves as potentially having 200 stores or 250 stores? Or is it maybe going to be more limited than that?

Well, in fact as we talk to them, it's not unusual for them, when they're opening their first store or their second store, they're going to want to do it in properties that they have the highest confidence in. But I will tell you that when you look at the e-tailers as a class, there are now over 280 stores in the United States from the pure play e-tailers that are opening stores. And you go through in Untuckit, Warby, Bonobos, Blue Nile, ELOQUII, Fabletics, are all raising incremental rounds of capital that is dedicated to opening stores. So it's going to be a process, but I believe they have all recognized that having a well-positioned fleet of stores is certainly necessary and optimal for them to grow their business.

Do you think we'll see kind of this next wave -- I mean, obviously, if they're raising capital for this. But in your conversations with them, they are planning for sort of a deeper wave of growth within the mall space.

We've seen it. So for example, ELOQUII opened their first store. They're now opening 3 more with us. Blue Nile opened their first store with us. They're opening 4 more with us. It's going to take time, but it's absolutely happening.

I think -- look, I think, Paul, here's what I would say, too. And Rick said it, but let me just say it as well. The retailers always will tend to go, as Rick said, to the no-brainers early on. But then, they realize the profitability they make and then they will grow. Depending on what kind of retailer they are, that could be 400 stores, 200 stores, 50 stores, 20 stores. The news that's important is that in this cluttered world of trying to get people focused, we are seeing more and more brands that want to gravitate toward where traffic is; and traffic continues to be in a number of centers. And I do think from the e-commerce folks, there is -- not all, but there is a limit to attracting eyeballs online that they can't get in the physical world. Now I mean, malls are getting a bad rap, but the reality is, we see it in media, we see it in the entertainment world, we see it on the food side, we see it with the theaters, they -- we see it with the fitness guys, like at Life Time, they all want to congregate in the best location and where the traffic is and, by and large, in communities throughout the country, that's the mall. And that has not changed. So I know the narrative might be a little bit different and I know obviously retail is under more pressure than it has been in the past. But I have my own theory on that, which I've explained to you in a few Shareholder Letters. But that's the good news here. That doesn't mean that there's -- you have to cycle some of the poor performers out with some of the better ones and, by the way, we've been doing this for quite some time. We all remember Woolworths or W.T. Grant -- or Steve Roth is on the phone doing his thing, Korvettes. I mean, you go down the list, Caldor. I mean -- that's just the way it works. But between media, virtual reality folks, they want to be where the traffic is and where people want to hang out, and that's by and large the kind of stuff that our industry has. Please don't lose sight of that.

My other question is just on the buyback. You continued to exercise it in the quarter and when it came up last quarter, it seemed like you were suggesting that it is something that we should view as an ongoing kind of part of your business, at least on a leverage-neutral basis. So is there any update to that? Is it something that maybe people should think of as just -- when they look at their models something that should be incorporated on an ongoing basis?

I still think it's in our arsenal to give back capital to shareholders. Obviously, we're more focused on our dividend growth because that is testament to the cash flow that we generate from our properties. And as you know, I mean, we're going to have at least a 9.1% increase this year, which -- and my favorite guy, and I've quoted Ben Crenshaw, now I'll move to Adam Sandler, that isn’t too shabby.

Our next question comes from Michael Mueller with JPMorgan.

I was wondering, are the batch of newer tenants on the shop side that you've been leasing space to over the past couple of years, are they taking the same size stores as a lot of the legacy retailers that they've replaced?

Totally a function of the retailer. Some of them want a larger format like MUJI, some of them want smaller formats like ELOQUII. And our -- and frankly, our job -- and we've talked about this in other calls is to basically be able to manufacture space and in our great properties, getting back space just enables us to drive our NOI by bringing in more tenants and raising revenue and raising productivity.

Okay. And I guess on the restructuring side, I think a few tenants were mentioned, I know you don't want to talk about the specific tenants. But generally speaking, when you see a restructuring and these tenants come out and they're in a better financial position, are they typically doing something different on the operating side too to drive sales? Or it's just better overhead, better ability to pay rent? I mean, what have you generally seen over the past years?

I think the biggest issue is they don't have any debt, so they can -- I mean, without the debt, they can invest in their business. And it is a self-fulfilling prophecy. You have too much debt, you obviously have to service that debt. So how do you service that debt? You reduce your investment in the stores or your investment in technology. You reduce the inventory in the store, right? Because you can't afford to have the inventory in the store, and you reduce of the service. You put it all together, and it is self-fulfilling. Without question. And unfortunately, we have seen that. And so the most important thing is, when they are restructured, they have -- they now have the cash flow to do those 3 things, hopefully invest in the store, hopefully invest in more inventory, hopefully invest in better service and to some extent, technology. So that's the model, and unfortunately, we've seen it go a different direction. But we're hopeful that, as Rick said, we're seeing some of these folks restructure, we're here to help them within reason to do that, but it's not our fault that they're in the spot they're in and let's not lose sight of that. We're, on the other hand, been investing in our product. We've been investing in our services, we've been investing in our marketing. We have not run from our responsibility to make these physical assets better and to communicate with the consumer directly to get them excited about seeing what we have to offer in our -- in the physical world.

Our next question comes from Rich Hill with Morgan Stanley.

Just wanted to drill down into the numbers a little bit, it looks like you had a nice rebound in Aero this quarter, maybe $15.2 million versus the $5 million headwind last quarter. How should we think about that going forward? And David, I know you mentioned some seasonality with Aero last quarter, is that $15 million how should we be thinking about that going forward?

You have to look at Aero -- you can't really look at Aero quarterly. You got -- for us, we look at it annually, and obviously, the first quarter was a huge transition, a big loss, which I don't think the market understood. That's why we might have been off a couple of cents, or $0.02 or $0.03 in consensus. That's very normal for a retailer to have their losses early on and then start to make it back up. So what we're seeing in Aero is exactly what we thought we would see, but we don't give quarterly guidance. I will tell you this though, they had a -- you know, I mean, knock on wood, I mean, we're seeing very good progress at Aero, and we're still comfortable with how we modeled Aero in our numbers. Our increasing guidance has nothing to do with Aero, so we're still got in the totality of the Aero results the way we saw it at the beginning of the year, but they had a good second quarter and back-to-school was percolating, a lot of work to do there. But this is a brand that hit $900 million of sales and it's got a core constituency, and I -- we think it's going to be okay.

And then maybe just one more question from me. It looks like cash NOI was up, straight-line rents were down. Could you maybe walk us through the moving parts and how those 2 buckets work within each other and how we should be thinking about that going forward?

The straight-line reduction was a function of the -- if we have any straight-line receivables on our books and somebody cancels a lease through bankruptcy, we have to write it off that quarter, and that's why you saw the -- a pretty significant decrease.

Okay, so not like -- I'm sorry, I didn't mean to cut you off, David.

No, no, no. It's basically -- the vast majority of that is essentially the write-offs of the bankruptcies that we may have had on our balance sheet.

Got it. So not like pre-written burn off that was being put into the same-store NOI pool or anything like that, primarily bankruptcies?

No, sir. All -- primarily the bankruptcies. We got to write-off that receivable right when the lease is rejected. Or they go into bankruptcy.

That's helpful. And then one other quick question, looks like interest expense went up. Is that because the buybacks went on the line of credit? Or am I thinking about that correctly?

Well yes, I mean, it's that and our cash flow, so we're not necessarily borrowing just to do our buyback. We have enough cash flow to do it out of our cash flow.

There was a timing difference.

So I just -- yes, so I just -- nothing major there other than we did -- I think we did have a write-off on our old revolver that may have gone through the second quarter, because you got some of that on the balance sheet.

We had the redemption that was 30 days’ notice...

Yes. The redemption which we had an extra 30 days, and then we also had the consolidation of the certain MGE assets as well. So nothing unusual there other than a couple consolidations and the extra time on our -- extra 30 days on our redemption.

Our next question comes from Jeff Donnelly with Wells Fargo.

David, just given your comments on the unhealthy relationship between debt and retailing, as a derivative I guess, of that business, what do you feel is the right level of debt for a retail real estate owner? And has that changed in the past year or 2?

Well, for a real estate owner, look, I think -- look, I like the spot we're in, especially if there's more volatility in the capital markets. I think we all have to be careful with too much leverage in any industry or any business, I lived through it, Rick lived through it, which is good for our shareholders to know that we've got a few spurs on our boots, right? Spurs on our boots, right? That's not on our belts, right? It's on our boots. But I don't want to give you specific numbers. I think every company needs to come to their own metric. We're kind of disciplined and in the A rating, we want to maintain that, but I think every business is -- everybody should come to their own conclusion. I would hate to give you a number that's right for the industry.

And how do you think about the acquisition of Whole Foods by Amazon? I know it's not one of your tenants. I guess, I'm wondering, do you think Amazon, or maybe another group entirely, could target a mall anchor? There's no shortage of them, considering that frankly, the enterprise value of some of these publicly traded mall anchors are really a fraction of the consideration that's being paid for Whole Foods, particularly when you look at it on a per square-foot basis?

Well, I have a lot of interesting thoughts on it, but I will provide none of them on the record. But I do think it's -- the good news for us as an industry, it does reinforce that, in my opinion, the importance of connecting with the consumer through a physical business. But beyond that, I really -- I mean, we really -- I really don't want to comment on it. I mean, I have a lot of opinions but I kind of share them with my board and some of the guys here, but I don't really want to get into that. It's not -- they're just my opinions, and who knows if they're right or wrong?

And maybe just one last question for Rick. I guess, maybe sort of a 2-parter. As far as it relates to leasing, can you talk about any themes, typically geographic themes to new leasing activity or volume of leasing activity of late? And on the renewal side, I'm just curious if you've seen any change in the rent growth or concessions compared to the past few quarters?

On the renewals side, the answer is no. Again, if you look at what we've reported, I think it shows pretty steady consistent progress for where were last year in connection with our renewals for '18. So there is nothing there. In terms of geographic, not really. We have, obviously, a very strong and focused effort to get local tenants involved in our properties, and I think we're doing a good job with that, but there is no regional geographic trend that would drive the leasing activity.

Look, and I think entrepreneurism is back. Lots of people want to start up a business. We're seeing explosion in the food area. We've, obviously seen explosion in the fitness and wellness area, cosmetic area. So all that, we've seen it in the mixed-use area, so I think that's all good. It's -- this stuff does take time. You do have downtime but -- in that sense, we're excited about having the ability to broaden our mix, which I think is very important for us to do.

Our next question comes from Linda Tsai with Barclays.

Just back to an earlier comment. Why do you think the environment's going to get better? What do you see in the broader market or maybe within your portfolio that gives you this confidence?

Well, I said I'm not ready to declare that, okay? But I'm starting to think about it. And, we'll see.

And then what's your view on dispositions right now? Would you be interested in selling any of your non-A malls?

Well, we always think about selling some assets here and there, and we'll continue that. But we're not -- we've never believed to sell assets just to sell assets. We got to get the right price. We go through a very detailed analysis to do that and if we feel like we're -- we get a fair price, we'll sell some, what I'll call noncore assets. But we're not under pressure to do it, and we'll continue to cull the portfolio, though.

Our next question comes from Omotayo Okusanya with Jefferies.

Question, could you talk a little bit about your views on the retail outlook kind of U.S. versus Europe versus Asia? And how that could influence some capital allocation decisions over the next few years?

Well, listen, I -- the great thing about real estate is it's so unique that we've operated in 3 major areas, and we could get caught up in the macro viewpoint of a country or a -- where capital's flowing. But at the end of the day, it's all about location and supply and demand. So let's take Japan as an example. Japan, from an overall macroeconomic environment, you would think to yourself, boy, the retail is going to be terrible. Okay. But yet, we've got great properties, we got a great product, we have a great partner, and we've been kicking tail for each and every year in Japan. So we look at it -- we really -- now, obviously you want to be careful about where you allocate capital if you don't have -- or if you have a concern generally about the country and property rights and stuff like that. But we've avoided those kind of countries and I would say right now, we feel good about our Asian business. We opened up in Kuala Lumpur, with Genting, it's off to a great start. We just opened in Provance, France. It's off to a great start. Another one in Seoul. So I think we can still make money selectively. It's important to know macro trends, but at the end of the day, it's all about the local business because I've kind of learned that just watching the Japan scenario play out for us. But at the end of the day, we feel really good about kind of how we've allocated where we are. We can be opportunistic outside of the U.S., but our core focus will continue and always will be the U.S.

Our next question comes from Haendel St. Juste with Mizuho.

So a question for you on your JV with Seritage. Curious if you're thinking about perhaps making more investments on that front, buying out your partner in some of the existing boxes, maybe incrementally investing in more. Saw one of your peers recently do so, I'm curious what your thinking is here?

Well, I think what -- that deal was good for both companies, good for Seritage, good for general growth. And there is possibility of win-win intersects between us and Seritage and Sears for the foreseeable future, and we will try to create that environment and I'm sure they will as well, but there's no guarantee, anything could happen. But we're always looking to create win-wins for our partners, Seritage being one of them, and Sears indirectly in that they are in a lot of our real estate. So a deal like that made sense for both of those parties, it certainly is possible as we think about things, but it's got to be a win for us as well and obviously, for the counterparty.

Got you, okay. And then I want to go back and get some incremental thoughts on leasing spreads. Last year, I think it was third quarter, you and GGP I believe, first noted the impact of leasing spreads. I believe it drove your spreads down almost 400 bps sequentially. So I'm just curious here now that you've had a couple of quarters of 13% spreads, following the 10% in 4Q last year, should we be thinking of spreads in this low double-digit range near term? And then also, I just want to confirm that the impact of these amendments are included in same-store NOI, but not in spreads?

No, if it's a -- we define it in our -- if there's a lease that's longer than a year, it's in the -- all amendments are in there, okay? And that's defined in our 8-K exactly how we do it. We don't make -- we don't give guidance on rent spreads. We give guidance on -- don't give guidance on occupancy necessarily, we tend to give you a flavor for it. We don't give guidance on tenant sales, we give guidance on FFO, we give guidance on our comp NOI, and I'm not going to make predictions of rent spreads. I will tell you that they were down from a couple of years ago, primarily because of the general retail environment and obviously, some of the tenant restructurings we've been dealing with. And we'll see how it shakes out.

Our next question comes from Floris van Dijkum from Boenning.

David, I have a question for you. You guys clearly are executing better than some of your peers. Does that make you think about your ability to add value to other portfolios? And maybe -- can you maybe give some comments broadly on how you're thinking about possible M&A, especially if there are changes to boards, et cetera. Does that make you change your big-game-hunting theory?

Well, as I said, the amount of the big deal business, and I have -- really haven't changed that point of view. If somebody wants to call and talk to me, I'm certainly going to take that call. But I think, Floris, it's -- I wouldn't overreact to 1 person's quarter here or there that we're outperforming. I will say, over a long period of time, we've tended to have really good comp NOI growth within our, if you want to call us a mall company, we've been at the top of that and we certainly have outperformed the strip center guys over the same period of time. Some of that's a function of what I said at the end of those remarks, but it's really not fair for me to, like, comment on other people's numbers, and I wouldn't react to other folks with 1 quarter here or 1 quarter there. Real estate is a long-term business, you got to invest in the product. I think we all make too much out of 1 quarter here or 1 quarter there. All these guys are good operators or they wouldn't be here today. And I think you just have to give the benefit of the doubt to people in our industry. It's easy -- I think -- well, I don't want to go there, but the fact is it's -- no one should overreact to 1 quarter or another. I think everybody's doing the best they can do.

Okay, one other thing -- one other question, as we look at the mall sector, clearly, everybody's trading at big discounts. In your opinion, where do you think is the greater mispricing? Is it in the B malls? Or is it in the A malls?

Well, look, I think our industry, certainly compared to other industry, is being mispriced, and I'll leave it at that. I think you can be successful B mall operator. I don't think you're going to 0, I will tell you that without question. I think a lot of these, what people want to call B malls, if they're in the right town and that town is stable and they're a good operator and they're focused and less worried about trying to please Wall Street, but more interested in pleasing the community, they can do fine. Their growth may not be as robust as the ones with, what I'll call, "A" properties, but they can do fine. They may never be able to satisfy Wall Street and the institutional investor wanting kind of real estate that you could put on an annual cover, but they can do fine. But it's got to be focused on the community first, what they can do for the community, and then the rest can follow. But look, having well-located real estate gives you a lot of opportunities to change it up over time and to make it better, which is what a lot of us have been doing for decades, not 5 years, 10 years, not 20 years, not 30 years, but 50 years, 60 years; Taubman, 50, 60 years; Simon, 50, 60 years, General Growth, 50, 60 years, you know, CBL, 50, 40 years, I don't know. I mean, that's a testament to those guys and a testament to their product, and we shouldn't lose sight of that.

Great. Maybe one last question on HBS. Any sort of comment based on the sort of the latest news coming from there? Or strategic plans with your stake in that company?

How -- guess how I will answer that?

No comment?

The answer is, I have no comment on that. Our joint venture continues to do exactly what we thought it was. HBC has been a great partner. I've got all the confidence in the world in that team. Richard Baker is a very creative guy, but it's -- we're not a shareholder of HBC, so it's just not -- it's not the -- there's nothing I can comment on that activity.

Our next question comes from Christy McElroy with Citi.

It's Michael Bilerman here with Christy. David, I wanted to take your comment about the sector being mispriced from a stock perspective. I'm curious, in your conversations with institutional investors, either your -- some of your current joint venture partners or prospective partners, how they're thinking about the business, both from your noncore potential asset sales or stakes in some of your high-quality assets? And how those conversations are going in trying to navigate that mismatch?

Well, we don't like selling stakes in malls. Obviously, you do it if you need the financial flexibility, but we've always looked at bringing in partners if there's a new opportunity, and we want to manage our balance sheet, that's the way we've looked at it. So -- but Michael, institutional investors aren't always right. I mean -- so sometimes they buy it -- I'll never forget, I had one of the biggest and best sovereign wealth funds, I begged them to help me buy General Growth when they were in bankruptcy and that was an 8.5% cap rate, this was before all the histrionics on the recap and all that stuff. But just let's go by it together, and the guy wanted a 9.5%. And I mean -- so they're not always right. I don't really have a comment on it. We're really not that active looking for institutional investors. Now if we had a new deal to do something, I think we'd find the capital, but we haven't been really out looking for it. I think on the B mall, the mall activity is starting to percolate. There's probably more people thinking about it a little bit more. And somebody, I believe, in rolling up the -- what is perceived as the downtrodden, whether it is or it isn't is debatable, but what is perceived as the downtrodden is going to make money. It may not be appropriate for a public company -- for public companies, but somebody's going to buy a lot of this stuff with cash flows and make a few bucks. Rick and I, maybe we're going to start a new company.

If you think about -- if I made an analogy to -- back in '09, and I hate to go back to that time, but you did a pretty big solid for the industry, right? You issued debt and equity and allowed the REIT market -- capital markets to reopen. Isn't there some sort of analogy of being able to tout some interest in an high-quality assets at remarkable cap rates to sort of prove evident in some ways about where the stocks are trading? And I don't know if whether you agree with that or not?

I think that's the silliest idea in the world. Honestly, why would I want to sell an A asset to make a print for you to be comfortable with and then you say, "Oh, it's great, but then, oh, but that's only the top of the portfolio. Oh, you have to sell B assets now and C assets and E assets and D assets." It's a short-lived -- we don't think about it like that. We think about our -- operating our business, how to make it better for the consumer, how to market better, how to lease it better, how to redevelop better, not financial engineering that will be short-lived and have no impact. Why would I want to give up growth rate of an A asset. So you'll say, "Well, that's great, but what about the rest of your portfolio?" It just makes no sense to me. We don't need to now. I understand if you need to because you need the financial flexibility, but as evidenced, our ability to raise $1.350 billion in 3 hours, thankfully, we're not in that spot. That's just not what we do. But like I said, if there was a deal that we felt was good, I think we could raise institutional capital if we wanted to. Maybe we don't. We don't need to. I am -- I just don't understand that logic. It is short-lived. I mean, others have done that and they got a one-ish -- one-day pop and now they've lost the growth. Now look, they did it because maybe they had too much exposure in 1 mall and I get -- and they're -- maybe they needed the capital for other things, so there are reasons to do it, but to do it just to print, so it makes the NAV investors happy, I don't know, forget it. Isn’t happening.

That's why I asked the question, to get your perspective on it.

Well, I hope I gave it to you.

Your answer was very clear. Last one...

You may disagree with it, but at least it's clear, right?

Well, look. And your point is, if you needed the capital, you would do it, otherwise, there's no reason to put up a print on screen, which I understand. The last one, just the overall environment with a lot of the headlines, the news media, even your retailer, public retailer conference calls. And I would say some operators, and I know you said don't look at 1 quarter, but not all of them, all brethren operate at the same level you do or are able to strike the same type of deals that you can and being able to stay ahead of the trends, that's why you are you and they are they. But how do you not let that whole perspective negatively impact the environment and become a self-fulfilling prophecy to some extent?

Well, I think we all have to be careful about that, right? So I think the retail community has been overly negative on the mall product. I don't know why they do it, but we're the -- we're just going to get up off the mat, keep doing what we do. So I'm not -- this isn't sugarcoating, we're in a tough environment, but we've seen it before. Yes, could this be different this time around, yes, but I don't necessarily -- I don't buy that. I don't buy that equation, okay. That's not how we're operating our business. Do you need to be maybe a touch more conservative? Do you have to hoard a touch more capital? Do you have to be a little more flexible with retailers? Of course. But I -- but we don't see the end of our business. I think Rick told me he went to the ICSC Meeting and it was kind of all the negativity, and I heard it from like 4 people, what did you say exactly?

I basically said, we had a board meeting and it was a close vote, but we decided to stay in business.

So I do think the narrative is a little more negative. I think a lot of that is facilitated by investors making the other side of our bet. It's interesting just like I have a lot of points of view on certain transactions out there. It's -- we have never really seen that before. It's very interesting to see how that side of the world operates, but we got to deal with it. So look, we -- after this meeting, Rick and I are going to be spending 6 hours approving capital projects to make our properties better and that's how we're thinking about the business.

I'm showing no further questions at this time. I'd like to turn the call back to David Simon for closing remarks.

Okay. Thank you, have a great rest of the summer.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day.