Good day, ladies and gentlemen, and welcome to the Q2 2016 Simon Property Group earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press the star then the 0 key on your touch-tone telephone. As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Tom Ward, Senior Vice President of Investor Relations. Please go ahead.
Thank you, Catherine. Good morning, everyone. Thank you for joining us today. Presenting on today's call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer, Andrew Juster, Chief Financial Officer, and Steven Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I'm pleased to introduce David Simon.
Okay. Thank you. We had a productive quarter. We're pleased with our strong financial results. We started, completed, opened several significant redevelopment and new development projects that will further enhance the value of our portfolio. We completed the acquisition of The Shops at Crystals, and we continued to achieve strong operating and financial results and raised our dividend yet again. Results in the quarter were highlighted by FFO of $2.63 per share. On a comparable basis, excluding a gain on the sale of marketable securities in the prior year period, FFO per diluted share increased 9.1% or $0.22 year-over-year for the quarter. And for the first six months, our comparable FFO per diluted share is up 12.1% compared to the prior year period. Our operating metrics were strong as well as our cash flow. Our mall and premium outlets occupancy was 95.9%.
The 20 basis point decrease in occupancy from the prior year period is a direct result due to the new developments and expansions we opened recently. Leasing activity remains healthy. The malls and premium outlets recorded re-leasing spreads of $8.88 per square foot, an increase of 14.8%, and our base minimum rent was $50.43, which was up 4.9% compared to last year, reflecting the strong retail demand for our location. As a reminder, we provided additional new metrics summarizing the composition of our total portfolio NOI. Please see this in the supplemental in the release. For the Q2 2016, our total portfolio NOI increased 7.4% and has increased 7.6% year to date. Our comp NOI increased 3.2% for the quarter and is up 4.1% year to date.
Total reported retail sales per square foot at our mall and outlets were $6.07 compared to $6.20 in the prior year period. Let me put a couple things in perspective. Reported retailer sales continued to be negatively impacted by the strong dollar at some of our tourist-oriented malls and outlets. Reported sales per square foot for the malls was down slightly compared to the prior year period, primarily due to a retailer in a state with no sales tax implementing sales restrictions. We mentioned this previously, it is important to reiterate. Excluding this anomaly, our mall sales per square foot increased for the period. Lower tourism spending continues to impact retail sales at some of our premium outlets. Excluding the negative impact of these high-performing tourist-oriented centers, retail reported sales per square foot for the premium outlets was flat.
In fact, our traffic in our outlet business thus far is up 2.65% for the year. Finally, the second quarter, I'd like to point out that retail sales trends improved progressively, with June recording the strongest monthly sales performance, with total sales volume at comparable properties increasing across all of our property types. At the end of the quarter, redevelopment expansion projects were ongoing at 33 properties across the platforms. Our share is $1.4 billion. We continue to expand, transform, enhance our properties.
We completed Stanford Shopping Center, and over the next several weeks, we'll complete a number of other transformative and redevelopments, including the completion of the connector at King of Prussia that will link the court and the plaza, creating 50 new specialty stores. A comprehensive redevelopment expansion to the fashion center at Pentagon City, a densification of Phipps Plaza with the completion of AC Hotel by Marriott, and multifamily residential units. We are also underway with the transformation of Plaza in McAllen, Texas, where we demolished the former Sears box. We are under construction on an expansion wing that will accommodate up to 50 specialty stores, four junior anchors, and an exciting new dining plaza. All of these are creative returns will continue to flow and fuel our profitability, construction includes, among others, but not an exhaustive list, Woodbury Common, Sawgrass Mills, The Galleria at Houston, and on.
Our new development is focused on important markets where demand is there. During the quarter, we opened a new Tanger Outlets Columbus. It's off to a great start. It's been a great partnership with Steve. Our construction continues on our new outlet in Clarksburg, Maryland, which will open in the fourth quarter of this year. We also recently broke ground on a new outlet in Norfolk, Virginia, which will open in mid-2017. We've got exciting projects outside the U.S. We have an outlet under construction in Provence, France, South Korea, and Canada. All will open in 2017, also fueling our growth. We also recently started construction in Kuala Lumpur in Malaysia with Genting, who was our partner in our other Malaysia asset. Construction is nearing completion at Brickell City Centre in Miami. The center is almost entirely leased, with 80 retailers and restaurants coming to the projects.
We're also continuing construction at our high-end retail projects in Fort Worth, anchored by Neiman and The Shops at Clearfork. Acquisitions. Beyond The Shops at Crystals, we also bought our partner out in our Naples and Venice outlets. We now effectively own 90% of these two great assets. Turning to capital markets, we completed a successful EUR senior offering, EUR 500 million at 1.25% for nine years. Our liquidity stands at $6 billion, and we have an industry-leading balance sheet, as we hope you know. We increased our dividend, 6.5% year-over-year, 3% from the second quarter. We'll pay at least 6.50%, which will be 7% over last year. We've also increased our guidance from $10.77 to $10.85. This reflects solid performance in the first half and our current view the remainder of the year. We are very pleased with our performance. Questions are available.
Thank you, ladies and gentlemen. If you have a question at this time, please press the star then the one key on your touch-tone telephone. Our first question comes from Craig Schmidt with Bank of America. Your line is open.
Thank you. David, you referenced that there was a pickup in June relative to some of the other months. Do you think that we will start to see the annualization of the international shopper pullback? Will that have a less of an impact on the numbers going forward?
It's hard to predict, Craig Schmidt. It's good to see the June sales for our retailers were up. We're starting to see the stronger dollar anniversary, so it'll have a less impact on the metrics. More importantly, we're seeing, other than the anomaly I talked about with the one state, our sales are fine, and the portfolio outside the tourist centers, sales are fine. We're operating pretty effectively in a very slow-growth U.S. economy. The anniversary impact is coming up in the next few months. We're starting to see it stabilize, but it's very hard to predict.
You've expanded your presence, obviously, in Las Vegas with Crystals. I just wondered if there would be differing strategies going forward, where you might take Forum Shops one direction and Crystals in another?
As you know, Vegas, there's so much tourism there. I mean, 50 million visitors a year. Each has its own distinct, separate marketplace. Obviously, Forum Shops is bigger. It caters to not only a high-end consumer but also a broader consumer. Crystals is more luxury-oriented. They both have distinct markets. We'll continue to take advantage of those great assets and continue to drive the income up in both. I don't think there'll be a huge change in strategy, but a continuation of improving operations in both assets.
Thank you.
Sure.
Thank you. Our next question comes from Steve Sakwa with Evercore ISI. Your line is open.
Hi, good morning, David.
Good morning.
Hi. Look, I know a lot of the metrics were fairly positive. I guess the one that just sort of jumped out was sort of the rolling 12 months leasing spread, which had a noticeable drop from 17.5% to just under 15%. Is there anything that sort of happened in this quarter that would have pulled that number down? What do you think is a reasonable expectation going forward?
Well, look, again, I respect that everyone loves to focus on operating metrics. As you know me pretty well, Steve, what's the one operating metric that I focus on? Is this the question?
I know you like-
Huh?
Total NOI growth.
No, I look at cash flow growth, my friend. Okay? The other thing that I'd like to point out on that is that we put our entire bucket of activity in that number. I don't know what others do, but, so if we have, as an example, lease amendments. Let's say we have a retailer that we have to restructure because we figure, well, let's keep them in and operating while we'll ultimately re-lease the space. That amendment goes into that spread. If there's anything, again, I'm pleased with the spread. I think we've so much outperformed on our spread that number of 15% is pretty damn good. $8.88 over ending rent for new rent is pretty damn good. Put that aside.
If you are looking to grasp on anything, I would say it's somewhat affected by the fact that we have amendments due to some of the retailer situations that we've been dealing with over the last 12 months. I'm very pleased with the spread. Nine dollars is a good number in a flat economy. You look at our comp NOI, which is where I'm focused on cash flow growth. You look at our comp NOI, we haven't just had a couple of years of good numbers. We've had a decade of outperformance versus our peer group. As you know, when you comp over a comp, over a comp, over a comp, that's pretty damn good. We're very pleased with the number.
If you want to point out something, which I know it's your job to do, I would say it's more the amendments, which we view is something that we're doing in a very slow economic growth environment in the U.S. We're dealing with that effectively, and yet we're still producing very healthy spreads.
Okay. No, that's helpful. I guess just secondly, in terms of sort of recapturing some of the department stores and the JVs that you've got with Seritage, can you just sort of provide an update on sort of where you stand and the opportunities that you see over the next couple of years to maybe recapture some more boxes?
Steve, Rick Sokolov. We have continued to work with Seritage and Sears. We've got users identified for our properties in Seritage, as we mentioned last quarter. We're working with Sears just on how to downsize their stores, and that process is ongoing. I will tell you, if you look over the years, we've recaptured 93 department stores, and we've done a very effective job of deploying them. If you look at our anchor schedule, we have them going on right now. It's an ongoing process. We have a whole team dedicated to it, and the good news is we have substantial demand identified in each of our properties. We know how we're going to deal with any of these stores that we do get the opportunity to recapture. David talked about La Plaza Mall, which was the Sears store.
We got a Sears store back at College Mall, now demolished, and we're adding 365 Whole Foods, Ulta, small shops, and restaurants. We're making money and making the properties better.
Okay, thanks, guys. Appreciate it.
Sure. Thank you.
Thank you. Our next question comes from Paul Morgan with Canaccord. Your line is open.
Hi, good morning.
Good morning.
As you look at the development and redevelopment pipeline, you've got $2.1 billion, your share of cost for the projects that are going now and almost that in CIP. How should we think about kind of beyond the projects that are kind of in place right now, what the shadow pipeline looks like? I mean, you talked about, it is a tougher environment. I mean, do you think that this could be a peak that would slow going forward as some of these project completions roll off looking into next year? Or do you think you've got a shadow pipeline that's going to keep it going at around this level?
Well, let me answer it this way. We actually had a meeting yesterday on Sawgrass Mills and Jersey Gardens as just two examples that together would be $500 million-$600 million of redevelopment. We're very comfortable and confident, Paul, that even though retail sales have been anemic this year, that when you have properties like that can be expanded, we have the appropriate amount of demand to make the financial consequences very positive for the company, in addition to making those properties even more important. I don't think we are backing off at all our redevelopment and expansion portfolio. The good news is we have such a good number of high-quality assets that we'll continue to find opportunities to expand them.
Like I said, Jersey Gardens and Sawgrass are just two simple examples that pop to mind, but that's going to be $500 million-$600 million spread, and will be hopefully delivered in 2019-ish, maybe 2020-ish, and will continue to enhance their marketplace position. We haven't really changed. I think if we've changed anything is, and I mentioned, I think last call, the call before that, we put a lot in the system, and that's kind of a little bit about, you saw the 20 basis point. Again now, you might react to 20 basis points decrease in occupancy. I assure you I do not. Okay. I assure you I do not.
We put a lot in the system over the last whatever, six months, primarily in the outlet that we've decided to spread some of those new ground-up developments out a little bit so that we don't stress the system. We get the lease up that we want in those. Our strategy really hasn't changed, and I think we've got plenty of opportunities to continue to enhance our portfolio.
Great. Thanks. My other question, you've talked about, and you provided a pretty long list of e-retailers who are looking to open stores in your malls, and I wonder if you have an update on kind of how those roll-outs are being received, whether some of these retailers might be initially opening three or four. These could become 20 or 30 or 40, or kind of how it's been playing out so far.
I'll let Rick do his list, and I appreciate you giving him the opportunity because he loves to read his list. I will say this, though, there's so much creative stuff going on with new ideas, new concepts, that as a simple example, we did a pop-up store at Woodbury Commons with Rent the Runway, where they actually sold some of their existing inventory, and it had unbelievable success. I'm not going to tell you how much they sold because I don't frankly know if I'm allowed to or whatever. There's a lot of creativity and a lot of e-tailers that want access to the physical world, and that's just a small example of a unique idea. I actually happened to meet with the CEO and said, "Do a pop-up store at Woodbury." Okay. They did it. They had great success.
Now I'll turn it over to Rick to give you the list.
The other thing I would tell you is there have been a number of them, and we've listed them. Obviously, we've talked about Fabletics, Birchbox, Yogasmoga. Everyone understands what's the dynamics going on with Amazon. We just made a deal with UNTUCKit. The most important aspect of this is that all of these retailers that have internet presence understand that a bricks and mortar presence is an essential part of their strategy. They get much higher conversion in their store. Their customer acquisition is frankly cheaper, and it's something that we're seeing more and more of. We're working with, frankly, scores of them to come to our properties. It's certainly going to be a source of growth for us going forward in the out-years.
The condition on doing that deal was that Rick could not wear the UNTUCKit shorts. Okay?
Brand negative.
Okay? It's in the lease.
Great. Thanks.
No worries.
Thank you. Our next question comes from Jeremy Metz with UBS. Your line is open.
Hey, good morning. David, earlier you mentioned lease amendments having a bit of an impact on releasing spreads. Obviously, you're taking a selective approach here. I was just wondering if, more generally, are you seeing an increased level of tenants coming to you looking for lease amendments, or would it more or less be consistent with the prior couple of years?
Well, obviously, there's some High level news out there with certain retailers. It's really more of that category than just the person here and a person there. It's kind of what you've seen. We have less year-to-date bankruptcies than we did last year. Some of that's just rolling through the numbers that we had to deal with last year.
Okay. Just sticking with leasing here, obviously more sales moving online and not maybe getting captured in your sales or occupancy cost figures. I'm just wondering, are you exploring any changes to your lease structures at all at this point to better capture or monitor those sales?
Well, again, our view is to get the market rent that's appropriate for that space. Retail reported, and I underscore reported retail sales, does not necessarily, as we've had this discussion, correlate to what the market rent for that space is. It's more of a function of location, property, location in the mall, property type, position in the marketplace, and so on. Our focus is getting market rent for each and every space, and doing it in a way that does not put us at risk with their sales and what we get paid for that space. That's not changing.
There's a lot of things going on in the lease in terms of getting credit if the sale. Again, this is only a case when you have overage rent, and we're hopefully marking at the market, where overage rent, they've got to really outperform to pay us overage rent. In their reported sales number, we're negotiating, including if something's fulfilled from the POS system and so on, that it be included in their reported sales number. Again, our focus is more on what the market rent for that space is as opposed to necessarily what the tenant's sales are going to be out of that space.
Good. Appreciate the call.
Sure. Thanks.
Thank you. Our next question comes from Caitlin Burrows with Goldman Sachs. Your line is open.
Hi, good morning. You kind of touched on it earlier, you guys have two ground-up outlets in process now for being developed in Virginia and Maryland and a number of full-price mall expansions going on. How would you describe the demand for that space, either outlet versus full price or either one versus itself, a year or two ago?
Well, I would say to you that Columbus, where we partnered with Tanger, was 100% leased, I think. Maybe there's a couple of vacancies. That was not impacted at all. We've got Clarksburg, where I think it's going to be a great development, opens up in Q4. In that case, we are bringing in a very, what I'd call a high-end mix, because we really kind of want that to be ultimately kind of the Woodbury. This is an over-exaggeration, don't hold me to it, we want it to kind of be the high-end fashion outlet for the Mid-Atlantic, more or less.
Those retailers, sometimes getting them to commit to a new outlet is a little longer process because in a lot of cases, they don't manufacture for it, and it's a function of their full price strategy. I won't bore you with all the ins and outs of that. We're going to deliver a great mix, and I think the demand has been excellent, and we're going to hold a couple of spaces just to fill out the kind of the unique mix there. I'd say the outlet demand for new product is good. It really hasn't changed. The only thing that I would say for new projects is the luxury-oriented folks are taking a little bit of a breather, a lot of that because of what's going on with tourism.
That's a little bit, what I'd call softer than it might have been a year plus ago. Not material, as evidenced by the mix that we're producing at Brickell, which is going to be a great project that the three partners have worked very hard to produce.
Okay. It seems like over the past couple of years, some kind of bright spots at the mall in terms of who's been opening and who's been doing well that you and your peers have talked about, include fast fashion and restaurants. I was just wondering if those types of mall tenants are still generally looking to have larger stores or more stores or just generally doing maybe better than the other apparel type guys.
Hi, this is Rick. We are continuing to very much focus on the addition of restaurants and food throughout the portfolios. There's still a considerable amount of demand. Just to let you know, last five years, we've added almost 200 restaurants across our portfolio. We had 25 last year. We have another 53 scheduled to open this year and next year. They're also finding substantially increased productivity when they are associated with our projects as opposed to a free-standing pad. That has certainly helped that demand. In terms of the other tenants you alluded to, certainly the international tenants are continuing to grow. We've already talked about e-tailers. We've got brand extensions. There is still considerable demand for our space, and we're doing okay.
As Rick said, the restaurant demand is great.
Yeah.
Great. Thank you.
Sure.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is open.
Good morning out there.
Good morning. Yeah, we are out here. We are out here in the great Midwest.
Increasingly important part of the country this year.
You betcha.
Just a few questions here, David. First, you guys obviously disclose your rent spreads and those sort of stats and say, can you give a little bit more color on same center ancillary income growth? As you guys have rolled out that program, is it still growing? Is the growth really coming from rolling out more and more ancillary at each mall? Or is it more that maybe you've maxed out individual malls so that more of the growth is coming as you roll out different programs to new malls and outlets too?
Let me give you just a big picture view. I would say it's actually in the, when you ancillary a lot, put kind of our SPV effort to a side, we've actually reduced it pretty significantly in our high-end portfolio. We've cleaned out what I'll call a lot of stuff. Again, we think that's the right thing to do. It's clearly costing us some income, but at the end of the day, we think it's the right thing to do. If you look at kind of our high-end portfolio, we've cleaned a lot of stuff out. We're very sensitive to creating the environment where those retailers can do the most business. If anything, we suffered dilution, and you know how I love cash flow, but I've got to balance that. We've actually reduced that, and that's hurt us over the last few quarters.
In the outlet business, it's probably picked up a little bit. There again, there's an answer for everything, but I think we've put in some what I'd call veteran mall people to kind of run that business over the last couple of years, and they've actually done a pretty nice job increasing those ancillaries. Up in outlet, down in the high-end malls pretty significantly, I think the rest of it's kind of commensurate with the marketplace.
As far as the reduction at the high-end malls, can you just give sort of a magnitude, like a percentage? Was it a 5% reduction to overall ancillary income, 10% when you're looking in the aggregate of what you guys do?
It's enough for me to notice, but we put it all in our numbers, and our numbers are our numbers. I don't want to get into what amount, but let me frame it this way a little bit. It could be, at a big mall, $1 million. How's that if you really want to pinpoint me on something.
$1 million.
Yeah, at a big mall, it could be $1 million.
A $1 million going away.
No, at a big mall. At one big mall.
Okay.
Okay?
No, yeah.
We've done it at a handful of malls, at a big mall, it could be a $1 million.
Okay. That's helpful.
Yeah.
Second question is, just looking at your European portfolio, obviously a lot of unfortunate, tragic events that have occurred. What has been the impact at the retail level? Is it people are going forward and life goes on, or have you seen any impact to either tenant openings or sales or anything like that? Or maybe just increased expenses from things that have to be done.
In our ownership interest, again, we have basically two ways we operate in Europe. We own properties primarily through McArthurGlen. We have our ownership interest in Klépierre. Klépierre is a public company. I think they reported today. Their numbers have been pretty good. Look at retail sales. The only country that I'd say, which is not insignificant there, that's a little bit underperforming but still up, is in France.
I don't know that I'd necessarily equate that to what's happened terrorist-wise. Just France's general economy is a little bit behind, say, Italy, Spain and the Netherlands and Scandinavia, and so on. All that data is out there for you. I think their business is actually pretty decent. They chug along. We've seen no impact whatsoever in our McArthurGlen portfolio. Look, their assets are, in a lot of cases, tourist-oriented. If tourism changes, you'll see that impact a little bit. We haven't seen it so far. Their numbers have been pretty impressive year to date.
Okay. Thanks a lot, David.
Sure.
Thank you. Our next question comes from Christy McElroy with Citi. Your line is open.
Hi, good morning, Michael and Rick as well.
Good morning.
Just to follow up on the department store recapture. To what extent do you think we'll continue to see department store closings? How do you think about sort of the economics of redeveloping a box like that in terms of the cost per square foot of the redevelopment and then looking at sort of the rents that you can get on new tenants versus the in-place rents of the department stores currently there?
Christy, first of all of our recapture activity has been included in all of our development yield tables. I think we've said that we work it out, we get comparable yields that we can get in the rest of our development projects. There's a range from the high single digit, low double digit. We've identified the boxes, every deal is unique as to what the cost would be for redeveloping the box. Is it a full box user? Are we splitting the box? How the box is configured. All of those yields are in, the most important thing is that we've been able to produce our results, we've had a great deal of activity in that sector, as witnessed by all the anchors that we continue to add across the company.
Are you closer to executing on some of the Seritage deals?
I'm sorry. Could you repeat that?
Are you closer to executing on some of the Seritage projects that you've discussed in the past?
Well, we're again, working with Sears on the economics and configuration of their downsizes. As soon as we have that in place, we'll be able to proceed. We have identified and have firmed up commitments for the vast majority of those boxes.
Hey, David, it's Michael Bilerman. I had a quick question on the balance sheet. Back at our conference in March, you talked about wanting to sort of hoard more capital at this stage rather than expending a lot of capital. You look at the balance sheet today, it's the best it's ever been in your entire history. You talk about $6 billion of liquidity, a significant amount of balance sheet capacity, an unbelievable cost of capital. How should we interpret that positioning? Is it gearing up to be able to be opportunistic in the next cycle or still within this cycle? How should we think about the capital that you have?
Well, look, I love being in the spot that we're in. We have no plans. As you know, I've said it publicly, we're out of the big deal business. I reserve the right to change my mind, I guess, but if you ask me today, I'm out of the big deal business. Eventually, as we all know, there's going to be cycles in the economic world that we live in. Rick and I are grizzled veterans when it comes to real estate recessions and stuff. It's always good to be in that spot. Obviously, Andy's here. We've worked very hard to be in that spot. It allows us to grow our dividend. It allows us to put capital back into the business that feeds on itself. I think pretty much nothing's changed, Michael. It's business as usual.
We have no intention of really doing anything with that other than continuing to build it. I don't know if there'll be a cycle. I have no idea. We are out of the big deal business. We're going to maintain that kind of liquidity and capital. That's the balance sheet we want. We think that should be valued by the market. I'll let you decide whether it is or isn't. I don't know. It allows us to reinvest in our portfolio. I think the one thing that we all talk about physical retail, and we talk about physical real estate, and I don't care whether it's an office, a hotel, a mall, a strip center. If you don't have a good-looking product, your customer's not going to show up.
If you've got an apartment building, you've got an office building, you've got a mall, you've got a strip center, you've got a physical retail store
If it doesn't look good and it doesn't have the right services, and it doesn't have the right tenant mix or clientele, you're going somewhere down the road. That's the competitive society that we live in. I think our capital allows us to try. We don't execute this the way I think we can continue to be much better in this. Our balance sheet allows us to have a really good-looking physical product, and we've got a lot of work to continue to make it even better. I would encourage anybody that owns physical real estate or leases physical real estate, that's our goal. That's our job. Just like if you're Boeing and you manufacture airplanes, you go to their manufacturing facility, I guarantee it's state-of-the-art, beautiful, and that's what they do with their capital.
Right. You're still earning very good returns on that incremental investment, it's creating a lot of underlying value overall.
That's why we have the balance sheet that we've got today.
Right. Well, the question is whether you think there's going to be something bigger from an investment perspective at your assets that you want to position for, right? Being able, Christy asked about the department stores, whether you become much more aggressive at putting a lot of capital and being very aggressive in the near term to sort of attack that, right? It's not thinking out of the big deal business buying someone else, but you can certainly do something internally with your own space that may require above average capital spend for a period of time.
Yeah. Look, I think with all the activity there, I think we see that kind of continuing at the pace that it's been. We've been obviously very active the last few years doing that, and a lot of this good stuff is coming online. I think, if outlet new development slows, that's more capital that we can dedicate to getting the box money back. I kind of see that as a steady state, frankly. We're not warehousing capital to do some big transaction. It's basically to continue to be a appropriately rated company and continuing to have the capital to invest in our product.
Right.
That's the goal.
Okay. Thanks, David.
Sure.
Thank you. Our next question comes from Paul Adornato with BMO Capital Markets. Your line is open.
Thanks. Good morning. I was wondering if you could provide an update on what you're seeing in terms of traffic at your properties. I appreciate your comments on the tourist visits, what else are you seeing in terms of traffic?
Well, you may have missed this. In the outlet business, our traffic is up 2.65% year to date, even though spend is down in some of the tourist-oriented centers.
On the malls, what we're finding is that the traffic is stable. Interestingly, I know a lot of retailers have reported decreased traffic. What we're seeing is that the consumers are still in our properties, but they are visiting less stores on each visit. It gets back to David's point about the physical presentation. Our retailers need to have stores that present compelling reasons for these consumers to visit them as they're walking our properties. There will be less traffic because they're stopping in less stores. The measures that we look at, the traffic in our properties overall is stable.
As a follow-up, whose problem is that when it comes to leasing? Does that fall back on the retailer, or ultimately, you need to attract that retailer as well?
Well, I think, listen, we're going to take responsibility as well. The retailer needs to. I think we're all in this together kind of deal. We've got to have the right retail mix. We've also got to be able to introduce technology in the mall that gets people to visit. I think what Rick was really saying is that with all of the research that's done by a consumer, when they go to the mall, they're not probably doing as much window shopping as they've probably done historically. They're more kind of on a mission. They know they want to go to these three stores. It's our goal, and obviously the retailer's goal, but it's our goal to get them to spend more time. More time means more spend and visit more stores. We have to take some of that responsibility as well. We're certainly not shirking that.
I think that's where technology can help us do that.
Oh, great. What specifically are you rolling out, and how's that going in terms of-
Well, we have much too long of a conversation to do that. There's a lot of communication that we're doing directly to consumer that we'll hope that it will get the consumer to stay longer As well as visit more stores. The communication helps visit more stores. Staying longer, I think, is an ambiance, a diverse, more mix, restaurants, entertainment, et cetera, that will help in that cause.
Great. Thank you.
Sure.
Thank you. Our next question comes from Vincent Chao with Deutsche Bank. Your line is open.
Hey, good morning, everyone.
Good morning.
I know we've talked about the rent spreads earlier, but just curious in the context of the commentary about the overall economy being soft. That's been your commentary for quite some time.
By the way, have I been accurate in that? I just want to know.
You have been accurate.
All right.
No question there. I guess, the question is just around sort of pricing power with your tenants. However you want to define it, if rent spread's not necessarily the best metric. Just curious if there's been any change there.
I said rent spreads. Somebody asked me a question. I explained to you that we put amendments in our rent spreads, okay? If I had to isolate, again, I think the $8.88 is pretty damn good, but if you had to isolate why wasn't it 17%, it's because of certain amendments where we're taking the decision either to work with the retailer or do it more on a temporary fashion where we release the space, which makes economic sense. Again, I would also point out that year-to-date, our comp NOI is up 4%, 4.1%. The economy's growing at 1%. I don't know. You tell me what it is. You've got a bunch of people on your payroll that'll tell you what the economy's growing. Maybe not on your payroll, but on the bank's payroll.
We're outperforming 300 basis points, you got to put it in perspective. What's your question?
I guess the question is, regardless of the spread, how are you thinking about pricing power with your tenants today versus maybe six months ago or a year ago?
I think, we don't have a cookie cutter commodity product. Every deal is different. In some cases, we have pricing power, and frankly, in some cases, we don't, because of whatever, competitive situation, bad space, mediocre asset. In some cases, we have great space, great asset, high demand. We put it all in the blender, we produce the results that we produce. I don't have a cookie cutter answer for you. It is deal by deal. We are driven deal by deal, space by space, lease by lease. We've been doing it for a lot of years, and that's what we continue to do. There's just no easy answer I can give to you other than all of that dynamics of what I just described funnel into our numbers, that funnel into the results. Then we declare our results.
Okay. That's fair enough. Another question, just in terms of the investment side of things, I know you're out of the big deal business here. You also said that you're not really seeing any real impacts in Europe as of yet. I'm just curious, do you expect to see some opportunities open up over there, particularly in the U.K.? Obviously, the dollar is strong right now, so it would help the investment case, although I know that's not your focus, but just curious how you're thinking about the investment opportunity over there.
Well, look, I think all of those transactions are very difficult. Here's my short answer on the U.K. I offered a company who bought an asset, diluted the company's shareholders down by 25%. I offered GBP 4.25. They told me the company was worth GBP 6.50, and the stock today is trading at GBP 2.70. Okay? I'm not enthralled with I think the U.K., it's impossible to make deals happen unless somebody wants something to happen. I'm out of the big deal business. The U.K., I have no interest in the U.K., other than I have a affinity to a football club there that I really love, okay? Beyond that, I doubt that there'll be any great opportunities in those markets.
Okay. Thanks a lot.
Yeah, no worries.
Thank you. Our next question comes from Rich Moore with RBC Capital Markets. Your line is open.
Yeah. Hi, good morning, guys.
Good morning.
If I could, to the Seritage stuff that a couple people have asked about. The first thing, Rick, I'm curious. I thought when these were all set up originally, each of the boxes, there was a specific plan laid out for which part Sears would get and which part Seritage would get. So are you guys negotiating to try to change that or try to take more of the space, I guess, from the Sears pad?
The primary discussion is just on the cost
Of implementing the agreed-upon downsizes. In a couple of instances, the way that we've been able to procure users would make it more efficient for both Sears and us if there were slight reconfigurations. That's not the issue. It's just the process of, you talk about loading docks and separating air conditioning systems and vertical escalation systems and entrances. It's just a complicated process that we're going through.
Okay. I thought also that on that, you had to, at some point, the landlord has to provide Sears with a six-month notice, to vacate, and they have six months to actually leave the property. Have you guys given, or I guess has Seritage given or the joint venture given notice to Sears yet to vacate those various assets?
We have not, we will not until we have a firm understanding of what our capital requirements are and what our returns are going to be. We can't do that until we finalize these discussions.
Okay. None of the stores have been given that six-month notice?
No.
Okay. The last thing, guys, is, do you still own the Seritage stock that you got as part of this whole transaction?
Yes.
Okay. You plan to keep that, I guess? Is that the idea?
Plan's a funny word, right? Hard to say, Rich. Just hard to say.
Okay. All right, good. Thank you, guys. Appreciate it.
Yeah, no worries.
Thank you. Our next question comes from Ki Bin Kim with SunTrust. Your line is open.
Thank you. Just a broader question about market rents for A malls. If I look back at a couple two years of leasing activity, you've roughly signed rents at $68-$70 a square foot. I would think over that two-year period or more, the noise of good spaces versus bad spaces probably gets averaged away with lot of large numbers. I'm just curious, do you think market rents on average for your product has grown recently, and what do you think will happen going forward?
Well, we give you every year our earnings estimate and our comp NOI estimate. That's made up of a lot of things, including our view of what certain spaces are worth and what we think the rents are. I don't know what else I can tell you other than what I've already said earlier. If anything, we've increased our guidance. We haven't backed off our comp or portfolio NOI. We've actually outperformed so far. All that kind of ultimately shows itself, kind of our view. Again, we're not a hotel, even if our market rent view changed up or down, I don't control the lease. They have a lease there. Again, it's only going to impact what, 8% of the portfolio per year. Take an example. Let's say we got nervous and we cut all these bad deals.
Wouldn't really impact us at the end of the day because it's only 8% of the portfolio per annum. Now, if you did it several years in a row, it would catch up with you. Again, market rents, I don't mark my portfolio up or down every day like I do a hotel business. That's why we have stability of cash flow. That's why we can withstand cycles. That's why we've had this history of comp NOI increases. I don't know what else I can do other than answer it in that fashion.
Yeah. The reason I ask is just how to gauge the difference between the NOI growth stemming from favorable vintage re-leasing, which is with any real estate company, versus market rent growth. That's why I asked that question. My second question is more on leverage. You've always done a little mix of European denominated debt, or EUR denominated debt versus U.S. I'm assuming that spread has gotten more favorable towards the EUR. Any change in larger plans of how to refinance some of the debt coming due, maybe more geared towards Europe versus here?
No, we're pretty much hedged on the margin. We're not going to get over-allocated to Europe. We're only going to finance kind of what our investment base there is, and we are pretty much hedged. Even though there may be a rate differential, we'd have to swap it back to U.S. dollars, because otherwise we would be over-
Over-allocated, as I said, we're hedged. That could be something we would look at, but to me, it's a little too cute. I'd rather finance my U.S. assets in U.S. dollars and my European assets in EUR and my Japanese assets in JPY. The currency fluctuations are the currency fluctuations, and we have the natural hedge with our investment base. That's been the strategy. I don't think it'll change.
Great. Okay. Thank you.
Sure.
Thank you. Our next question comes from Michael Mueller with JPMorgan. Your line is open.
Thanks. Hi. Just have a couple quick numbers questions. One, are there any material Crystals acquisition costs in the quarter? Secondly, your occupancy cost was 12.7% in the quarter. How does that compare to the combined levels that you had in, say, 2007, 2008?
Boy, the answer is no. The first one, and then Tom will get back to you on what our occupancy cost in 2007, 2008 is. I don't recall, frankly.
Got it. Okay. Thank you.
No worries.
Thank you. Our next question comes from Richard Hill with Morgan Stanley. Your line is open.
Hey. Good morning. Two quick questions from me. I'm sorry if I missed this previously, but you mentioned about the anomaly with some sort of sales restrictions in a particular state. Again, I'm sorry if I missed it, but could you elaborate on that?
No.
Okay. All right. Thank you.
Sure.
Secondly, I know you've said you're out of the big deal business, and you've said that there's not necessarily opportunities in Europe. I look at Klépierre, and it does look like it's performing well, as you mentioned. Would you consider increasing your stake there?
I think we're very pleased with the position that we're in.
Okay. Thank you.
Sure.
No more questions for me.
No worries. Thank you.
Thank you. Our next question comes from Omotayo Okusanya with Jefferies. Your line is open.
Good morning. Just a quick question around the lease amendments that you talked about earlier on that had some impact on releasing spreads. Is there any other detail you can kind of share about those amendments, kind of how they come up, why the decision was made to actually do them?
Well, it's a lease-by-lease, store-by-store, mall-by-mall analysis. We make a judgment call. That's what we do every day, judge do we want to release it? What's the downtime? Does it give us time to release it? On and on and on. It's 50 years of experience that goes into that.
Okay. Is it a mix of tenants, like large national guys and local guys, and it's like a whole mix of people that are kind of impacted by that?
It's just the nature of our business for many, many years, about what the right thing to do is with that retailer and that specific space.
Got it. Okay. Thank you.
Yeah, no worries.
Thank you. Our next question comes from Floris van Dijkum with Boenning & Scattergood. Your line is open.
Great. Thank you. I'll keep it very short because I know there's some other calls coming up.
Sure.
David and Rick, quick question. Your vision of the mall in five years, how is the tenant composition today going to change, in your view, in terms of the percentage of, for example, entertainment as a percentage of the overall mall tenant base?
Well, look, the simple answer is there's no cookie cutter answer. The mall business and the retail business, you can have these big overriding themes, but the reality is how it gets executed really focuses on trade area by trade area, layout by layout, physical configuration by physical configuration. Therefore, there's no overall answer to that other than simplistically, I think the mix will be more diverse. There will be more entertainment, more food services, more other services, and there'll be technology in it to enhance the shopping experiences. There'll be more services. How that all gets computed into one particular scenario will depend differently on the north side of Indianapolis versus the south side of Indianapolis.
That's just the nature of our projects. The good news is we've got an organization that can figure out, I hope, the north side of Indianapolis versus the south side of Indianapolis, and what's right for that trade area. That's the simple answer.
Okay. Just curious, what's your favorite football team?
Crystal Palace.
Okay. Great. Thanks.
No worries.
Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. David Simon for any closing remarks.
Thank you, and have a good rest of the summer.
Thank you, ladies and gentlemen, for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.