Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Simon Property Group Earnings Conference Call. And as a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr. Tom Ward, Senior Vice President, Investor Relations. Sir, you may begin.
Thank you, Amanda. Good morning, and thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer Andy Juster, Chief Financial Officer and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors.
We refer you to today's press release and our SEC filings for a detailed discussion of 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 ks 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.
Good morning. We're pleased to report another record quarter with strong operating and financial results. Demand from tenants for space in our highly productive centers is increasing. We continue to redevelop customer experience. We continue to identify new unique and strategic development opportunities globally that will extend our geographic reach and create a new generation of world class destinations on an accretive basis.
And let me turn to results, which were highlighted by funds from operation FFO of $1,060,000,000 or 2 point $9.8 per share, an increase of 20.6 percent compared to the prior year. We continue to grow our cash flow and report solid operating metrics. Total portfolio NOI increased 4.5% or approximately $135,000,000 year to date. Comp NOI increased 2.3% for the year to date period. Leasing activity remains solid and continues to improve.
Average base rent was $53.84 up 3.3% compared to last year. The mall and premium outlets recorded leasing spreads of $7.32 per square foot, an increase of 10.7%. We're pleased to announce that retail sales momentum continue to pick up in the 2nd quarter. Reported retailer sales per square foot for malls and outlets was $6.46 per foot compared to $6.18 in the prior year period, an increase of 4.6%, which is a large increase, largest actually over the last 4 years. Retail sales were strong across the portfolio with sales productivity increasing each month throughout the quarter.
Our mall and premium outlets occupancy ended the quarter at 94.7%, an increase of 10 basis points compared to the occupancy at the end of the quarter this year. Importantly, on an NOI weighted basis, our operating metrics were as follows: Reported retail sales on an NOI weighted basis is 8.13% compared to 6.46 Occupancy is 95.6% compared to 94.7%. Average base minimum rent is $70.77 compared to $53.84 Turning to new development, we opened the premium outlet collection in Edmonton, Canada, making our 4th outlet center in Canada. It's a terrific opening. It's the only outlet center in Edmonton.
And so far, locals and tourists have really appreciated the new project. Construction continues on several additional new outlets, Denver, Colorado, which will open September Quitero, Mexico, which will open in December Malaga, Spain, which will open in the spring of 2019. During the quarter, we also announced a new joint venture with Seemwatt, Piwatt, a world class retail and real estate developer to bring our internationally renowned premium outlet experience to Thailand. This will be our first outlet in Thailand, adding to our already successful joint ventures in Japan, Korea and Malaysia. Our center in Bangkok is projected to begin construction later this year and will be a destination of choice for the 15,000,000 metro area locals and obviously the country's very strong tourism with over 32,000,000 visitors per year.
At the end of the Q2, redevelopment expansions were all ongoing across all of our platforms in the U. S. Internationally. Just to name a few, we're expanding Vancouver in Canada, Ashford in the outside of London as well as our big transformations with Brea, Ross Park, King of Prussia, many more in the works. Capital Markets, obviously, our balance sheet continues to be industry leading.
Our net debt to EBITDA was 5.4x well below our peer group. Fixed interest coverage was 5x. We only have 5% of our debt is variable rate. We refinanced approximately $2,400,000,000 of mortgage debt, our share of that being $850,000,000 and an average rate of 3.98 percent and term of 8.9 years. Our current liquidity is $7,000,000,000 and we repurchased 514,000 shares during the quarter for approximately $80,000,000 We also announced our dividend this quarter of $2 per share, an increase over of 11.1 percent year over year.
We will pay at least $7.90 per share in dividends, an increase of more than 10% compared to the $7.15 paid last year and sometime next year we will have paid $100 per share in dividends, $100 per share in dividends throughout our public history. Finally, we're just pleased with the Supreme Court's decision. As you know, we were been very vocal about it and we do think this will help level the playing field between physical retailers and online. And hopefully, the communities that those physical retailers and those properties serve. Guidance, we raised our full year guidance from $12.05 to $12.13 per share.
This is an increase of $0.09 from our original prior guidance. It represents 7.5% to 8.2% growth compared to our FFO of $11.21 per share for 2017. Finally, we'd just like to say it was a very good quarter and we continue to grow our cash flow with our good earnings momentum. We're ready for questions now.
Our first question comes from the line of Alexander Goldfarb of
Stanley
So my first question is, I don't think you talked about the big jump in other income. But in aggregate, if you could just talk about what the drivers were in there? And then also what your thoughts are on the impact of the change in internal leasing costs to 2019? Some of the other companies are starting to provide some estimates so that the analysts can true up their numbers for 2019.
Yes. The jump in other income was basically a gain in converting our Arrow IPCO investment into shares of Authentic Brands Group. And that number was offset by a significant decrease in lease settlement income. When you net the 2, it's essentially a positive $25,000,000 roughly. The good news on that, Alex, is I know there were a lot of naysayers on the Arrow deal.
We're weighing the money. We've already converted into a significant profit and Authentic Brands Group is a great company. We're a shareholder of around 6% roughly and we continue to think that company will do great things and it's great to be a partner associated with Jamie Salter and his team as well as Lion Capital, General Atlantic and Leonard Green, obviously a very high level as well as general growth, frankly, very high level group of shareholders that will continue to accumulate brands and present opportunities for us. And then obviously, we had a pretty significant decrease in lease settlement income if you go quarter over quarter. And on the leasing, we're still finalizing it, but it will be under 1%, under 1% of our $12 plus.
So I hope I know you're smart. I hope you can do that math.
I have backup just in case. The next question is, a lot of headlines recently over Tesla, them asking for cash back from their suppliers. Clearly, it's been a big driver of mall traffic. So can you just talk a little bit about your thoughts on Tesla? And then also just what we heard last week from some of the other retail companies, it sounds like the pace of backfilling space has increased.
So maybe if you could just combine those how you're thinking about the pace of backfilling tenants?
Yes. Just Tesla is a great company, great product, no concerns. I'll let Rick talk about retailer demand. And I would say we feel pretty good, but I'll let Rick add to that.
In fact, it is accelerating and there is increasing interest. You saw in our filings, we've done a lot of new leasing. Again, I won't incur David's wrath by listing all the tenants that we're doing business with, but there are a lot of them. We came out of our meetings with a significant number of open to buys across a broad swath of tenants. As I said before, they're coming from e tailers, international, existing tenants and brand extensions from our existing tenants along with new tenants.
And that is feeding our pipeline and I think you're seeing that as you walk our properties.
Thank you. Sure.
Thank you. Our next question comes from the line of Christy McElroy of Citi. Your line is open.
Hey, it's Michael Bilerman here with Christy. Happy Monday. David, you included a new slide in the supplemental Slide 28 on the development activity summary where you sort of broke down the share of net cost of the $1,000,000,000 in the quarter pipeline between the platform and then re dev and dev. I'm wondering how you think about that densification piece at 15% today, but really each of the slices, how you think that's going to evolve over the few years, given you have a lot of projects in the pipeline that are not yet sort of in the activity summary, how you think this is going to evolve both in terms of total size, in terms of cost, how do that $1,000,000,000 in the quarter moves? And then the share between each of the slices?
Yes. I mean, I can only answer in big picture terms because as you know, we only put this we don't do our development pipe like the European companies do, but
The shadow of the shadow of the shadow.
Yes. If we did though, the general number would be over $5,000,000,000 of readily available projects. And I would say to you, Michael, the shift will be more toward the mall, the U. S. Mall and densification effort.
And so right now, if you put those 2 together, it's roughly 50%. I would think that that would tend to when we put on the King of Precious and the Breas, which are not in, but in that development pipe that reaches $5,000,000,000 You'd see more of a shift there. As an example, we don't have Phipps Plaza in yet, even though we know it's a go project. We're finalizing all of our numbers. We'll take that to our development committee here in the next I think in the next month or so.
So I think you'll see that shift in that take a bigger chunk of that. International is episodic. We've got we're obviously we're excited about what's going on in Thailand and we're looking in other areas in Southeast Asia. We're also looking in the Middle East with our premium outlet business. So and I do think we'll find continue to find a U.
S. Premium outlet new development and I think you'll see the redevelopment of that portfolio begin to pick up. But given the big nature of these projects and the densification of mall, I'd see that I would see that tend to increase generically.
And then when you guys did the Arrow deal, I remember you talked in the conference call about vertical integration, and that was the time of I think the Time Warner deal had been announced at that point and we made a big deal about how vertical integration
I didn't make a big deal. Okay. Just let me okay, let's be clear on that.
What I
was saying was you made a big deal about how other companies are given a lot of rope for vertical integration on much larger things versus a $25,000,000 $30,000,000 investment on a $100,000,000,000 company that you wanted some latitude to do those sorts of things. And a couple of years later, that investment, as you mentioned, clearly is done well and you've been able to rotate your stake into a larger brand oriented company. So going forward, how do you think about furthering those sorts of investments where you are taking some level of additional vertical integration in terms of types of experiential type real estate or other types of brands or other retailers or other things that you would be able to see to bring into your assets? Did that change the calculus at all in your head?
Well, we feel comfortable that we're not going to maybe we can replicate what we did in aero, but I mean, my goodness, we are we had essentially no investment in aero and the business I mean, we actually have a real big gain obviously because we see the GAAP financial statements. But that's a business that we have effectively from a book value, no gain or no investment, negative investment now that you've gone the gains through the P and L. And we still own just under 6 percent in ABG, which is worth more than a lot more investment. We have the operating business, which will throw off, I don't know, we own little under 50%, which will throw off in the $30,000,000 to $35,000,000 range EBITDA, pretax, blah, blah, blah. So and as you know, we got criticized on that deal and a lot of the people were concerned we bought it because that's the only way we could keep the rent payer and all this other stuff.
So hopefully, we put some of that aside. We just thought there was a this was a brand that was doing $1,200,000,000 of sales and had the it made sense to be able to save the brand. So I feel comfortable we're going to continue to find those investments. We're going to we're looking at a number of them in the retail restaurant area. We're also looking at a number of them in the venture capital area.
And then I wouldn't rule out those won't be big investments, Michael, but then I wouldn't rule out at some point a bigger investment that really aligns with what we're doing, which is we collect we're in the brand building business, the consumer facing business. And obviously, we've got all these physical properties. So I wouldn't rule it out, but nothing is in works right now. But we'll continue to make hopefully smart tactical investments in good businesses, in good brands and good retailers and good restaurants. And we're working on a number of them.
But those won't be sizable in terms of what you've seen historically. And I will add that given Arrow's success, I mean, ABG and Arrow bought the Nautica business just recently and creating a similar OpCo, IFCO structure. And we think that's another good brand to be part of that family.
Great. Thank you.
Sure. Thank
you. Our next question comes from the line of Steve Sakwa of Evercore. Your line is open.
Thanks. Good morning.
Good morning.
Hey, David. Just looking at your Page 27, the development activity, I mean, I realized that some of the numbers kind of bounce around quarter to quarter. Your overall development returns were pretty flat and unchanged from last quarter. The mall redevelopments did tick down a couple of 100 basis points. And I'm just wondering if there's anything specific that relates to mix or maybe there's more residential coming in that has lower returns.
Anything we should kind of know about that?
Not really. I would say generally in all of our all of these kind of metrics, whether they're sales, lease spreads, occupancy, development returns, We are always going to have quarter to quarter ups, downs, flatness, etcetera. So generally, it's just new stuff coming out, stuff that's open coming out, new stuff coming in. And I wouldn't say, Steve, there's any trend there other than mix changes all the time.
And maybe just a follow-up, just anything on the construction cost side, just given all the things that we're hearing about, whether it's steel, aluminum, other import prices, I mean, how do you sort of think about that as you're looking at new projects and underwriting them?
Well, that's a very good question. I do we are planning for cost increases. So we're going to obviously, we're covered in the stuff that's under construction because we generally do a guaranteed max price contract. But the new stuff is all going to be vetted with what we think is higher construction cost. And again, those returns are going to have to be generated that will be accretive to us, otherwise we won't do it.
But I do think that's a fair statement, costs are rising. And I wouldn't call it material yet or deal breaking by any stretch of the imaginations, but we are confronted with higher construction cost.
Okay. And then maybe just going back to some of the e tailer comments that you made. I know at I believe it was Roosevelt Field, you sort of created almost like an incubator space concept for these e tailers and would rotate folks through. I'm just curious how that sort of experiment's gone and sort of what your thought is about rolling that out across the portfolio?
Good question. I think we are still experienced experimenting with the edit. It is doing well. We are cycling retailers in and out, not necessarily e tailers it could be someone wanting to build their brand, take advantage of the traffic in the mall, etcetera. We do I'd say it's a little early yet to commit to this, but we do think that that's a business that once we fine tune it, we could roll it out a little bit more.
I know a number of our peers are also experimenting with similar concepts. So I do think there's a business there. We've been pleased with it. We have growing pains like anything else. We cycled brands in and out of it.
But I think we feel there's an opportunity there, hard to quantify, hard to tell you how many. But there's clearly I mean, that's no there's no difference here than anything. I mean, people I shouldn't say people brands and retailers want access to our traffic that's going through our buildings. It's up to us as owners of it to make it in a way that presents their business so that the consumer can experience it. And I think this is one of many ways that we can do it.
Rick, I don't know if you want to add anything.
The only thing I would also say is we've already had one of the tenants in there that is opening up some incremental locations with us throughout the portfolio because they were pleased with the experience they had there. So it does work as an incubator and we're seeing positive results out of it.
Okay. Maybe just last question. David, you touched on sales up a little over 4.5%. I don't know if you or Rick could just kind of maybe provide any commentary around categories or just things that did really well in the Q2 or maybe some of the areas that are lagging?
The stronger categories were home improvements, sporting goods, entertainment, home entertainment, family apparel weaker were women's moderate and special sizes and home furniture.
Okay, guys. Thanks.
Thank you.
Thank you. Our next question comes from the line of Craig Schmidt of Bank of America. Your line is open.
Great. Thanks. Maybe you could give an update on Simon's new tech initiatives to better connect its consumers with its centers?
Well, that's a long one to answer on an earnings call. I just said to you, Craig, there's a lot going on in how we're approaching that. We have a number of ideas how to do it better. So we're doing both an incremental approach to increase that connection. But I also think there are broader and bigger ideas that we have that we're considering.
So I would say if you look at some of the generic things that are out there, our visits to our app and our Web site are significant. Our gift card sales are significant increases year over year. So we're making our connection through all the various social medias are increasing and growing. So there's a lot going on that we're doing. Our showcase of deals is getting more throughput, more retailers are joining.
So there is so much going on incrementally that's showing very positive signs. But we're also in the phase of developing bigger and better ideas to scale it even at a greater extent.
The one thing I would add is we also have that we've moved online our coupon book in our VIP club at Premium Outlets and that's generating literally millions of members that are substantially enhancing our ability to track our customers and establish relationships with them. So that's been also very positive in that area.
Okay. And would you say your marketing budgets at your individual centers are moving away from traditional media and towards some of these newer emerging ways to connect?
Without question, Yes, a big shift in now listen, we all we shouldn't say all. I struggle all the time on return on investment and marketing dollars. Some others might. But clearly, the shift is toward social media away from traditional print and television. We still believe television can provide a lot of reach.
But I think we're no different than a lot of other major companies that are moving toward more social media to the extent that those platforms deliver what they say they're going to deliver. And obviously, we won't get into that whole issue.
And just lastly, are you seeing the strength on your properties on luxury retailers? We seem to be hearing from other sources.
Yes. We had very good results with our luxury category, without question.
Thanks.
Sure.
Thank you. Our next question comes from the line of Rich Hill of Morgan Stanley. Your line is open.
Hey, David. Good morning. Wanted to just follow-up with you on the expense side. You've noted previously that you've done a good job tightening the so called belt on expenses. It looks like you did another good job with that this quarter.
So wondering how much further you think you might have in terms of reducing those expenses just as we look forward over the next couple of quarters and maybe over the next year? Not looking for you to give guidance, but just in terms of your ability to continue to tighten up there, that would be helpful.
I would say to you, we're in pretty good shape. I don't expect anything dramatic. Now the one thing I would point out to you and Tom, I don't know what page it is. Our other expenses went down. This was not included in our funds from operation, but part of our other expense, what page is that Tom?
Page 21. Page 21 went down because of the increase in the stock price of WPG quarter over quarter. We elected not to put that in funds from operation, otherwise we would have generated $0.03 more And you can see that that's basically a reduction of other expense that's in footnote 3 there. So you may I don't know if you saw that or not, Rich, but I just want to point that out. But I would say the broader question is we're probably in pretty good shape on the expenses.
We're always focused on it, but I wouldn't expect anything dramatic there.
Got it. And just maybe one other question, if I can. Going back to the other income, I understand the reclassification from Arrow. I'm sorry for maybe being dense here, but I was a little bit confused by the offset by lease settlement income. Can you clarify that?
And I assume you mean that lease settlement income maybe wasn't as high this quarter versus last quarter given Teavana?
Yes. I mean, it basically I don't remember when Teavana was in, but last Q over Q, I think we had a reduction of roughly $10,000,000 plus in lease settlement income. And the net increase in other income is around $25,000,000 I wouldn't call it a reclass. It's actually not a reclass. We exchanged our interest in the ArrowIPCO, which we owned around 30% for shares in Authentic Brands Group on a value based upon where they recently made new investors came into the company.
We thought that was a good transaction for us because not only diversifies the risk, but we're then riding the growth of ABG above and beyond what happens with Arrow. So it wasn't a reclass, it was actually a transaction. But basically, those are the two differences. I hope I answered your question.
You did. Thank you very much.
Sure. That's it.
Thank you. Our next question comes from the line of Jeremy Metz of BMO Capital Markets. Your line is open.
Hey, guys. Good morning. Just given some
of the shifts we're seeing
in the retail landscape today, e commerce continuing to grow, David, I was hoping you could talk about the importance of scale today. We saw one of your mall pairs combined earlier this year. You guys obviously moved away from a portion of your lower growth assets a few years ago with the WPG spend. But obviously, you've continued to build. In your opening remarks, you mentioned expanding geographically, extending your reach.
So just wondering if you could talk about the advantages of getting bigger in today's environment.
Well, listen, I think more or less as we've seen Corporate America, I think scale is really important. And it goes beyond real estate. Look at BlackRock. I mean, what do they run, $6,000,000,000,000 that scale is important. Look at the Blackstone in terms of their private equity and real estate business.
Look at obviously, look at what's going on with the tech companies from all the things that they all have scale and believe me, they use that to their advantage in a lot of ways. So I think scale is important. The offset on scale is that our business in when you get to the fundamentals of the real estate, it's still a very local business. So you've got to be able to do both in our business, whereas some of these other companies don't have to worry necessarily about the location Maine and Maine where we do. So but scale is important, learned experiences are important.
And I think we've been able to do a lot of what we've been able to do because we've grown our business. On the other hand, you can blow it. All it takes is one big scale deal. And if you don't underwrite it appropriately or you stress the balance sheet too much and you can't weather a down cycle, I mean, you can it can go for naught. So you try to find that fine balance, very difficult in a lot of respects.
And I would just finally say that we feel the good thing about what we feel about is that we don't feel and I've been said this for a little bit of time, but we don't feel like we have to just do a deal just to do a deal. We'll find where we can add value and make some money on it.
No, I appreciate that color. And then just one last one for me. Just in terms of densifying assets, adding these other non retail uses, I mean, you've talked about enhancing the experience in terms of the live, work, play and shop. You guys have obviously increased your focus on adding these other uses. I mean, it's partially a result of simply getting more access to these anchor boxes.
Your peers have done the same. I'm just wondering, is this part of your larger development and redevelopment group? Or do you have a dedicated team looking specifically at these opportunities? And if you do, do you continue to hire for that as you add more projects? Or do you feel like the team is largely build out at this point to handle what seems like a growing pipeline of opportunities?
Yes. No, all right on spot. So here's the way we do it generally. We have a development group that will get the permit. So what I'd call the traditional mall development group.
But the actual underwriting development, construction, etcetera, is actually housed within its own separate group and we are adding resources to that group to do our hotel and our multifamily opportunities that in some cases we'll do it on our own as you know, some cases we do it with JVs. So our roles and responsibilities change on by deal, but we're the permitting process is basically that same process that we've embarked upon for year after year after year, but we are adding resources to the execution and the identification and importantly, the underwriting of that group. And I think we'll continue to add dedicated. We actually just hired someone that will continue to do hotel and the resi stuff. So without question, we'll be beefing up some internal resources.
Thanks for the time. Sure.
Thank you. Our next question is from the line of Haendel St. Juste of Mizuho. Your line is open.
Hey, good morning.
Good morning.
So David, my Mizuho counterpart in Asia recently hosted some property tours on the ground there and noted incredible growth. So I guess I'm curious why you aren't there in a bigger presence. Is your new outlet in Thailand perhaps the sign of more to come? Are you looking at more in Asia these days? And could we perhaps see Simon make an incremental shift to do more in Asia given the opportunity relative to the U.
S?
Well, it's not we've basically decided we don't want to do full price in Asia. Absent some unbelievable dislocation in the market and almost clapier like in that full price is troubled and the world's ending and you go in and you buy it at a discount to the value. So what we've found is that our Premium Outlet brand has terrific identity there. And the ability to do that is basically new development, right? So new development takes time.
And part of that is finding the we don't want to do that ourselves. So we have to find the right partner and then we have to find the right sites and then we have to develop it and then we have to lease it. It just takes time. So I'm pleased to note that our partnership in Japan is doing well. Same thing in Korea, same thing in Malaysia.
And now in Thailand, we have a great partner. And I think we're starting off there. It's going to take a couple of years to build. We have a great partner in Mexico, great partners in Canada. So that we'll grow that business, but that's why it takes the time it takes.
And yes, we are looking at other markets in Southeast Asia. But it does it's just it's a longer unless you're going to go buy something, it does development takes time.
What about China specifically?
It's a very interesting question in that we think about the outlet business in China all the time. We've looked at opportunities all the time. We have not found the right one, But we have certainly by no stretch of the imagination ruled out the outlet business in China. I mean, that could be a possibility for the company under the right circumstances. Okay.
Curious on your thoughts on stock buybacks here. It looks like you're buying back during the quarter with the stock down in the $150,000,000 stocks moved a bit here. Curious on what your appetite at these levels would be?
I think it's still to be opportunistic. We'll continue to buy stock back and we'll we try to be thoughtful when we do it and take advantage of the market when it's volatile.
Okay. Last one. On lease up progress at your recent redevelopment projects, Denver, Boca. I'm curious, are you getting the merchandise, the rates and the lease term you're seeking? And as part of that, how does the average length of term for your new deals, not renewals, but new deals compared to say 5 or 10 years ago?
Thank you.
In terms of Denver and in the expansion of Toronto, you're going to find those opening substantially leased over 90% with great collections of tenants, including luxury and really across the board. So we've been very pleased with how that has been done in our new deals. The terms are very consistent with what they have been historically.
Okay. Thank you. Sure.
Thank you. Our next question comes from the line of Linda Tsai of Barclays. Your line is open.
Hi. I know lease settlement income is not in SS NOI, but we can also assume that the Arrow gain was also excluded from SS NOI,
right? Yes. Let's it's not in comparable. It's in our FFO. I couldn't hear exactly what you said.
So restate it.
I just want to know, is Arrow in your SS NOI?
No, I'm sorry. I thought I was here in FF. No, it's not in our same store NOI, absolutely not.
Okay.
And nor is as you pointed out, nor is lease settlement income.
Okay. And then when you think about how retailers are building brands these days, what's critical or what are some of the trends? Like I've read, for example, that stores feel like they need to be and millennials like and prefer subscription services. But what do you think has changed from a real estate point of view for landlords and what are you doing to facilitate these new requirements?
Well, I think they basically want great nothing's changed in that sense. I mean, they want really good real estate with traffic and the right brands around them. It's interesting and I won't I don't want to steal Rick's thunder in this, but I would say we have at least 50, 60 retailers. We actually break them by category. And these categories, they're e commerce, pure e commerce growing and then they want stores or they want access to our consumers.
We have the growth e commerce. Other words, they've already done that and they're growing. We have the international expanders, people that are from international that are expanding. Then we have the new international tenants and they're starting to grow. We have startup or new to portfolio with national aspirations and growth categories, which are startup renewed the portfolio again with national aspirations.
When you put them together in these categories, we only have 50 names, but what they all wanted is consumers, the right co tenancy, so to speak, if I can't come up with a better word than they want to be. And they also want, I think, the who the owner of the real estate is, is important to them to some degree. I mean, so when you put it all together and that's I think that's what they want. I hope I answered your question.
Thanks. That was helpful. Just one last question on a clarification on Washington Prime. Why is there fair value change? Because I didn't think you guys still held shares.
Why? We held we had units that we had since the spin off under 3%. We've had that from the get go. And the only reason why that volatility is in and out is because of the new accounting standards. So that started at the beginning of this year.
And so each quarter, we have to mark to market in any public securities or readily marketable securities that we have. We have chosen not to include that in FFO. And again, as we said, you can see that on Page 21, you can see the financial impacts. It does go through our GAAP statements.
And what was the fair market value adjustment the result of?
Because the stock went up.
Okay.
It's better than it going down. Okay. Actually, the quarter before, it went down. So we had a loss, we had an increase in our other expense Q1. And again, we didn't that did not run through FFO at that quarter either.
Thanks. Sure.
Thank you. And our next question comes from the line of Michael Mueller of JPMorgan. Your line is open.
Thanks. Hi. David, you said the redevelopment of the premium outlet portfolio may be picking up. Curious, what's driving that? Are you just adding more GLA to meet demand?
Or are you going to be doing something different at those centers?
Well, I think in some cases, absolutely. We have gone back to kind of the take RENTHAM as an example. We have a food court that we're not sold on, that's the best use and what do we do with that box to open it up and to make it more customer friendly. And I just think it's been a matter of we've been so busy in developing new centers that that was the focus and as that's changed to some degree, we're just going back to the portfolio and mining the opportunities much like we did with the mall business. Now I will say we've got a couple of major new developments in the outlet business that we've been working on.
So stay tuned on those, but those will be exciting developments if in fact they do come to fruition. So we'll still do selective new development in the U. S, but I just think it's a matter of rededicating the resources to going back through the existing portfolio to make sure that they're doing all that they can to continue to be attractive places for the consumer.
The other thing we're doing, as David just indicated, if you visit in Clarksburg or when you see Denver, you're going to see a much higher level of amenities for our customers, fireplaces, outdoor seating areas, upgraded play areas. And as we go back and look at these properties, we're implementing those incremental amenities throughout that portfolio with very good results.
Got it. Sounds good. Thank you.
Sure.
Thank you. Our next question comes from the line of Ki Bin Kim of SunTrust. Your line is open.
Thanks. Good morning. This is Ki Bin. Good morning. Good morning.
So David, I just wanted to go back to your comment about leasing improving. Can you just talk a little bit more about what's behind that? And how much of the improvement in leasing volume or whatever you're referring to is tied to Simon improving the merchandise mix at the malls through redevelopment or just changing retailers? Or how much of it is it the older guard of retailers just doing better on improved strategy or merchandising? And lastly, how much of it is a better economy?
I mean, retail is supposed to do well in a 4% unemployment economy, right?
Well, listen, I think all of the above is the simple I can't break it down by percentage. But the reality is our portfolio, our common area or a small shop is so big that there's not there's just no way that one thing can move it one direction or another. It's just mathematically impossible. So listen, the growth in the economy is terrific. We're very pleased to have seen it.
And obviously, the consumer is spending more. That's terrific. We haven't seen that for a number of years. A number of our retailers are getting better and healthier. I think the tax cut on their business gave them more earnings to invest or replenish their merchandise.
We're working through a number of the bankruptcies and replacing them with better retailers. We're upgrading our mix. So you put it all together and I think that's what's generated at least the increase in sales. But it's just mathematically impossible for one thing to move it one way or another. And I wish I maybe I should.
I wish I knew exactly how to calibrate, which is the 3 or 4 categories you mentioned, which is driving it. But I think it's all in that number. It's all part of it. I mean, I don't think the retailers to some extent were playing defense and now they're playing a little more offense. It's impossible for me to tell you what by category, but I'd say it's all of the above.
Okay. And just last one on CapEx. I know that number can move around a little bit quarter to quarter. The CapEx offered per square foot, did that change at all trend wise over the past couple of quarters?
Not really. I mean and I do think you mentioned a good point. I mean there is quarter to quarter variance. If you look at it, you should look at it last 12 months or on an annual basis and you'll see there's not a lot of difference.
Okay. Thank you.
Sure.
Thank you. Our next question is from the line of Caitlin Burrows of Goldman Sachs. Your line is open.
Hi, good morning. Good morning. I just have 2 shorter ones. Just on the densification projects, you guys now indicate with an asterisk, which project Simon has an ownership interest in. So I was just wondering for those that do not have an asterisk, does somebody else own them?
Did you contribute the land or kind of what's going on at those other properties?
Well, in some cases, we contributed the land or sold the land. But in a lot of cases, it's just it's further validation of the location that we have that there's a lot more going on in that parcel than what we're doing. So I just I think it goes under the category of helpful information maybe, I guess. I don't get overly excited about care about what we do, but it's always good to have better neighbors.
Got it. So just looking at one that doesn't have one like Coconut Point in Estero, Florida that opened last year with a hotel. That just means that it's something that somebody else was doing, but it should help your center that's
right in
the door. Correct.
That's correct.
And we sold them the land as part of our master plan development. We had a parcel that we designated for hotel development. It was across the road from our existing projects. So it wasn't integrated and it was just a sale, but it certainly enhances our overall environment.
Got it. Okay. And then the other was just, I know it's a small portion, wondering if you could give any update on the Puerto Rico properties that you have and if they're to what extent they're back to where they were a year ago or if they still have more catch up to do?
They have continue to have a significant amount of catch up to do. And I'd say the outlet, premium outlet is in much better shape. The mall because it's easier and faster to build an outlet store than it is a mall. The mall is taking a little bit more time to get back up on its feet. We're hopeful by the end of this year, it will continue, but there's a lot of work to be done.
And more in the mall than in the outlet at this point.
Okay, thanks.
Sure.
Thank you. Our next question comes from the line of Jeff Donnelly of Wells Fargo. Your line is open.
Good morning, guys. Just curious, David, occupancy costs, they tick below about 13% for the first time, I think, since about 2016, now that tenant sales are moving more strongly forward. I know I'm asking you to predict retail sales, but I'm just curious, longer term, how do you think about occupancy cost? Do you expect they're going to return to sort of the 11% to 12% range we saw years ago that seemed to be where you stabilized or do you think you can hold the 13% peak that we've been operating at? Well,
that's a real tough one. I mean, I there's so much that goes into that beyond it's space by space, it's supply and demand, it's the model that the high end retailers have much more margin on their product. So they can pay a higher occupancy cost. I mean, I don't think there's any real generic statement that I can give to you other than I think we're pretty good at trying to price our real estate. But we have to price in a way that the retailer is profitable.
So I wish it were more science than art because then it would solve a lot of problems and be even more efficient than we already are. I could just hit an algorithm and say, here's the price for real estate. But the reality is it's not quite that simple. And I just I can't predict where that will go, though. I'm not alarmed that suddenly we're going to it's going to have to go lower and lower.
I just don't I'm not alarmed. I'm not worried about it.
And or in other
words, like you don't get the message from your retailers that they need lower occupancy costs because of more pressure on their operating margins?
Well, we certainly we get that every day. We've gotten that every day for I don't know how long. So yes, there's always a big discussion on that. And I mean, it's retailer by retailer. It's the location.
It's again, there's so much our product is so much different than what I call you can put it all together in Class A office or it's very uncommodity like because there's so much to it because of the location, the traffic, the mall, the competition, etcetera, etcetera. So it's very hard to do it the way you might see traditional real estate priced. So but we try to find that happy medium. And if we're not, we're going to not be we're going to lose deals. So in some cases we do, but we try to find the happy medium.
Just some of your peers have been increasing the penetration of their exposure to restaurants and entertainment as they sort of remerchandise the mall. How do you guys balance the relevancy of your merchandising, in this case the restaurants versus the higher cost of those deals and maybe the higher turnover risk of restaurants just so you're not effectively jumping from one risk to another because there is a lot of sort of studies out there that say maybe saying we're getting a little over restaurant. Just curious what your thoughts are?
Well, I think the most important thing is making sure you have the right brand. And like others, we've got a dedicated team that focuses on those opportunities, both entertainment and restaurants. And it's really a function of making sure you have the ability to know how they're going to do it. We have how many restaurants do we have Rick?
Gosh, we have literally worth 17.50 food users in our mall portfolio.
So I mean that gives us a lot of experiences what's going to work and what's not. And believe me, Jeff, we take risk there. We experiment and sometimes we crap out. But that's part of the job. I mean, we've got to sometimes we've got to invest in the new restaurant tour to see if this is something that will add value to that center and then maybe go beyond that center.
Now when we do that, we're very good at making sure it's lean free. We're very sure we'll get the improvements. The kitchen won't be ripped out. So if if that operator happens not to be the right operator, we can it's we don't start out. And that to me is the key on any of these new concepts is you've got to make sure that if you do take a little more risk than you do than you want to, at the end of the day, you got a restaurant or a facility that's easier to lease and you don't have to reinvest again on the you reduce your costs.
So it's you're investing in a space that you can monetize over a longer period of time.
Maybe just one last one on leasing spreads, just a housekeeping aspect. Do you have NOI weighted leasing spreads for Q1 and Q2 this year?
We do. And Tom, we don't tend to give it out, but Tom will give it out to you maybe if he's in a good mood.
Okay.
I determine whether he's in a good mood or not. I'm just kidding. Well, maybe
I'm not. All
right. Thanks. We can. I don't we haven't done that. I know why, but we might.
Okay. Thank you.
Thanks.
Thank you. Our next question is from the line of Christy McElroy of Citi. Your line is open.
Hi, good morning everyone. Good morning. It seems like with the Toys R Us liquidation, there was left a bit of a hole for some brands from a distribution standpoint. Are you seeing any residual impact from any of those brands seeking other distribution channels, maybe looking to open stores as an added direct to consumer distribution point, particularly maybe on the outlet side? And maybe it's not specific to toys, but just trying to think about the residual impact from the fallout that's occurred in the last year or so?
There is no doubt that the manufacturers are very focused on how they're going to distribute their goods. We are working with a number of potential retailers that are looking to be able to replace primarily the specialty store component that Toys R Us had in our outlet portfolio and we're optimistic we're going to be able to come up with a couple of tenants that are going to want to take advantage of that. And we're working with the manufacturers directly because they also are focused on how they're going to distribute their goods in that channel.
Yes. Christy, I would say for sure though. There is definitely going to just on the toys issue, there would shock me and maybe who knows, but it would shock me if there's not a toy retailer that reemerges from the Toys R Us debacle because I do think there is a reason to buy toys in the physical environment. So again, I mean that toys thing was a debacle of massive proportions, but there is no question and there's a number of people that are out there that are thinking about how to create the new generational toy physical toy retail experience. And in fact, I mean, I don't know if you know this, Christy, but you'll see FAO Schwarz open up, I believe Q4, maybe even earlier in Rockefeller Center with their latest version on what FAO will look like going forward.
So again, there's no question that, that will I think will happen. We'll see.
Sure. And it definitely has to be something more experiential. Just on the leasing side, in your traditional shop leasing, can you talk about any changes that you're making or looking to make to the language in the lease contracts when it comes to things like co tenancy clauses and sales calculations, just given the changes to shopping that's occurred in shopping center format?
Yes. I think all of those given the business continues to change and evolve, there's always first of all, we don't like them, but reality is we have to deal with them. And there's always modifications and changes that we have to deal with, because there's going to be, as we know, Sears, many certain other department stores. So we always have to modify those things.
Okay. And then just lastly on the guidance increase, it seemed like a majority of that increase was inherent in the gain on the Authentic Brands conversion. Is that accurate or had you included any of that? Have you anticipated that in your prior guidance? I'm just trying to think about anything changed on the core side.
Yes. That's a very good question, and I thank you for asking it. We always knew that we were going to convert that and that was always in our original guidance. So again, I mean, we're a business, we're not just we try to give this guidance and there's a lot as you know, we've got we're not just 10 more I mean, we got an ongoing living, breathing business, but that was always contemplated. Our partner had done it earlier.
I can't really remember when they did it. We were debating whether to do it or not, but we felt like it was likely to do it. So in our original guidance, we did it. And so the increase that we have today is above and beyond that because that was in our original guidance.
Okay. Any other big items like that that we should be thinking about as we look towards the second half?
Not that jumps out at me.
Okay. Thank you.
Sure.
Thank you. And our next question is from the line of Wes Colady of RBC Capital. Your line is open. Hey, good
morning, everyone. Just want to go back to Puerto Rico. Are you receiving any business interruption insurance? And are you looking I guess, what is the loss NOI for the year?
Well, that's not in our numbers and we don't book BI until we actually receive it. And in fact, if you see some of the P and L changes and reduction in minimum rents and tenant reimbursements, a lot of that is due to the Puerto Rico situation. So none of that's in our guidance. I'm sorry, none of that's in our none of that has been received and it's not in our guidance at this point.
Okay. And then looking to the second half for same store NOI base rent, do you expect a meaningful lift from converting temporary tenants to permanent tenants?
No. I mean, we don't look at it quite that way. And as you know, we give our same store comp NOI at the beginning of the year and then whatever the number is, the number is. We do our best to do a little bit better than what the number is.
Okay, fair enough. Thanks for taking the question.
Sure. No worries.
Thank you. And at this time, there are no further questions. I'd like to turn the conference back over to Mr. David Simon, Chief Executive Officer, for closing remarks.
All right. Thank you very much, and have a good day.
Ladies and gentlemen, thank you for your