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Edited Transcript of SPG earnings conference call or presentation 31-Jul-19 12:30pm GMT

Q2 2019 Simon Property Group Inc Earnings Call

INDIANAPOLIS Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Simon Property Group Inc earnings conference call or presentation Wednesday, July 31, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian J. McDade

Simon Property Group, Inc. - Executive VP, CFO & Treasurer

* David E. Simon

Simon Property Group, Inc. - Chairman, CEO & President

* Richard S. Sokolov

Simon Property Group, Inc. - Vice Chairman

* Thomas Ward

Simon Property Group, Inc. - SVP of IR

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Linda Tsai

Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Richard Hill

Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Stephen Thomas Sakwa

Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst

* Wesley Keith Golladay

RBC Capital Markets, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Second Quarter 2019 Simon Property Group Inc. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Mr. Tom Ward, Senior Vice President of Investor Relations.

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Thomas Ward, Simon Property Group, Inc. - SVP of IR [2]

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Thank you, Cristal. Good morning, everyone, and thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Rick Sokolov, Vice Chairman; Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Credit Officer.

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

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. For our prepared remarks, I'm please to introduce David Simon.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [3]

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Okay. Good morning. We had a very productive quarter and are pleased with our financial results. Results in the quarter were highlighted by funds from operation of $1.06 billion or $2.99 per share. Adjusting for the prior year for our noncash investment gain of Aeropostale IPCO ABG exchange and the impact of external leasing cost, [our] FFO growth rate was 4.9% per share. We continue to grow our cash flow. We report solid key operating metrics. Our comp NOI increased 2% for the second quarter, and total portfolio NOI increased 1.6% for the quarter. Retail bankruptcies in the second quarter impacted our comp NOI by over 100 basis points. Year-to-date comp NOI has increased 1.8%, and to put this in perspective, our comp NOI grew 3.6% in '16, 3.2% in '17, last year, 2.3%, and we continue [to comping on it] NOI base of more than $5 billion.

Leasing activity remains solid. Average base rent was $54.52 and our leasing spread was $16.53 per square foot, an increase of 32.3%. And we're pleased that our sales momentum from our retailers continued in the second quarter. Reported retail sales per square foot for our malls and outlets was $669 per foot compared to $646 in the prior-year period, an increase of 3.5%.

And just to give you a fun fact, we have over 77 properties, that's right, 77 properties that if you average their total sales, will be over $900 a foot. So 77 over $900 a foot, and you can see that clearly, as our report retail sales on an NOI weighted basis of $852 compared to the $669 per foot, occupancy would be 95.5% compared to 94.4% and our average base minimum rent would be around $73, a little over $73 per foot.

New development, we broke ground on a luxury outlet in Normandy, which is our first designer outlet in Western Paris, catchment area and our third in France, the center is projected to open in the second quarter of 2021. Construction continues on the 3 international outlets, Málaga, Spain, Bangkok, Thailand, West Midlands, England, all open in 2020. Querétaro, Mexico, opened and its full grand opening will be in the fall of this year. We continue to expand our international outlet presence in growing markets, adding to our overall franchise value with high rates of return. And as I mentioned to you in the press release today, we have 42 international outlets after we finish the 4 that are currently under construction.

Redevelopment, just highlights, a lot going on, as you know. So we have 30 properties across all of our platforms in the U.S. and internationally, with our share of net cost of approximately $1.7 billion. Our extensive identified pipeline is over $5 billion in new development or redevelopment across all our platforms. These significant redevelopments and transformations will continue to fuel our profitability. Importantly, we'll fund these accretive projects through our internally-generated cash flow and they'll continue to serve our communities. As you know, our properties generate significant property taxes and significant sales taxes for their jurisdictions that fund the police, fire, schools, et cetera. So we continue to play a very, very important role in the livelihood of our communities that we operate in.

Now, going to liquidity, you'll be pleased to know that we have $6.8 billion of liquidity, and that is net of our outstanding CP balance. During the quarter, we purchased 1.05 million shares of common stock. We continued in July to purchase another 630,000 shares. So we have combined, over last, essentially, 4 months, 1.68 million shares are repurchased, and this -- further is represented by our strong balance sheet, which continues to be a [far] significant advantage in our area.

We announced a dividend increase. We're now paying $2.10. That's an increase of 5% on a trailing 12-month basis ending June 30. Over the last 3 years, our dividends have grown at more than 8%. Another fun fact, which I'm here to supply, to put our dividends in perspective as a public company, we have paid more than $30 billion, [$30 billion] to our shareholders, in cash, in dividends, pretty good number. As a reminder, our annualized current dividend yield of more than 5% is third -- 300 basis points higher than 10-year treasury, and our dividend is more than 1.5x covered by our annual FFO.

We continue to reinforce our guidance of $12.30 to $12.40, despite some headwinds, which include lower lease settlement income, lower distribution income from our international investments, a stronger dollar, obviously, all the redevelopment and -- that's going on with our [anchors], accelerated redevelopment including [say] Northgate, some of the unanticipated bankruptcies and some of our SPO costs, which were now accelerating.

So to conclude, we've produced another good quarter of results and operating metrics. There is no company in our industry that has the reach and impact on the communities that we have. And we continue to focus on the long-term and continue to invest in our product and generate the kind of returns that will grow our earnings, cash flow and dividends. We're now ready for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Jeremy Metz with BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [2]

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Dave, I was wondering if you could break it down for us and then talk about what you're seeing on the mall front in terms of trends and traffic versus what you're seeing in the outlets. Anything that's going better than you expected so far this year, even lagging a bit? And maybe just as a follow-on. What your expectations are that you have built in for you Dressbarn here?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [3]

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Well, I would say and Rick can weigh in. The mall business, the sales are up, traffic is reasonably good. I'd say it's -- there are ups and downs, but overall, it's up slightly. In the outlet business, we're skewed a little bit more towards the tourism. And because of the strong dollar and some of the implications of what's going on in the global environment, traffic there is flattish, but sales are more flattish and that's really a function of the big tourist centers [in] the outlet business that are essentially flat where we would expect them to be up. [Average] rent is up in the mall business. It's a little under [plan] in the outlet business. So I'd say, generally, [it's] absent the strong dollar and absent [what's] the decrease in overall tourism in the U.S, we would be performing well ahead of our plan. Obviously, the unanticipated bankruptcies is something we're dealing with, yet even with that, we've produced the 2% comp NOI growth. And I missed your last -- what was your -- well, Dressbarn, it is what it is, and we'll see what happens, insignificant to us in the scheme of our operation. Rick?

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [4]

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The only thing that I would add is that is that the trends that David talked about are manifesting themselves in the interest that we're seeing from our retailers. There's still a steady stream of retailers that are seeking to find space in our property, and the properties continue to get better through the addition of retailers that are making a difference in our trade area presence.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [5]

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And David, you just talk about the investment in Black Ridge and Allied Esports, what drove this? And what sort of larger opportunities you possibly see here for that?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [6]

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Well, I -- look, I think, we do think -- obviously, there's a huge momentum going on about the e-sports and venues. And we have, just like the exhibition [fever] business, I mean, a mall is a great place to host those kind of events and a setting like that drives sponsorship income, drive traffic, reinforce the -- our real estate is kind of the place to be for the community. So we've got lots of options beyond just Allied about bringing those kind of venues to our real estate. And in fact, I mean, it -- the whole -- the explosion in the location-based entertainment area is incredible from kind of where it was a decade ago to where it is today. So we have essentially a dedicated team that's looking at all sorts of operations and venues that we're going to be bringing to our real estate that will broaden the mix, invest in the community, increase traffic, bring sponsorship opportunities, food and beverage. And given that the department store -- getting those department stores back in a lot of cases, or buying them back in some cases, gives us the real estate that we've never had before to bring them into the mall. So that's what's really exciting is that, yes, it's a lot of work; yes, we have to be focused, but we now have the ability where we didn't have it before to bring all sorts of those venues into our real estate. So we brought a team on, essentially, just to deal with the -- for no better [word] the location-based entertainment concepts just to go through that so that we can bring them to the centers. And again, we now have, in some cases, the real estate to put them in where we didn't have it otherwise, and we can do it at accretive returns. Rick, would you like to add anything?

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [7]

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The only thing that I would add is that we've been doing this for over a decade because we have a very large relationship with Merlin through our Mills portfolio, and we've got a great set of experiences there that demonstrates the viability of our properties for these types of uses. So we're building off of strength to implement the initiatives David just talk about.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [8]

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And last for me, and just sticking somewhat along that -- those lines is, looking back at the investment you made in Aero alongside ABG and your experience you've had since that time, how you think about making similar investments? Would you do it -- would you -- what would you look for? Just given some of the distress out there, wondering if this is something we could see you guys do again here at some point in the near term?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [9]

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Well, look, I think, it's very possible. We're going to be very smart about it, Jeremy. Now, it's interesting because, as you know, we -- Authentic Brands Group just did a private placement where we decided to keep our stock, but certain shareholders sold and new shareholders came in. We decided [not] to keep our entire interest, so we didn't sell them because we believe in the company. But that stake, based on its current raise in terms of new shareholders coming in, is worth $153 million, and we, basically, put no money in it. We still have the Aero IPCO, which is, we own 44% and it's going to do $65 million of EBITDA thereabouts. So I think we're not too bad with this investment. We're certainly as good as the private equity guys when it comes to retail investment.

And so I wouldn't rule it out, but I mean, we've made a ton of money in Aero, and we're -- we love being partners with Authentic Brands Group and we'll work together on other distressed situations, and let's face it, there are some out there. So -- but we're only going to buy into companies that, we think, have brands and that the volume that is worth doing it. So they just bought Sports Illustrated. I think they've got a great intellectual property there. I think it's got a great future with company like ABG to focus on. We may invest in that, as an example. That could be Sports Illustrated, e-sports, gaming, food and beverage, and we'll be at the forefront of trying to be as creative as we can with our real estate that you cannot duplicate. And again, what we do there is we serve the community, we pay significant real estate taxes, significant -- our retailers and us pay significant sales tax, so -- and we're investing in our properties to -- obviously, for our shareholders, but also for the benefit of these communities.

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Operator [10]

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Your next question comes from the line of Christy McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [11]

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Just off of Jeremy's last question, but maybe from a little bit of a different angle, given that past expense with Aero and Nautica, and the insights that you've gained from these investments and you also talked about being on many creditor committees in the past. How are you approaching retailer restructuring and bankruptcies differently than in the past? Or maybe, differently than what some of the other mall REITs have had the capability to do that maybe gives you a competitive advantage with tenant fallout [off] bankruptcy activity having picked up again this year?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [12]

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Well, that's a good question. I would say, we have another, what is it called quiver in my -- what is it? Arrow in my quiver...

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [13]

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Arrow in your quiver.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [14]

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Arrow in my quiver. I always like reverse what I am suppose to say. Robin Hood and [now]. But I would say we certainly have the ability to help beyond what you might do on the leases, become an investor in a distress situation. So we have the ability to -- I'm not sure we would do it alone, but with somebody like ABG, we've obviously worked well with, historically, General Growth and now Brookfield. So we have kind of the ability to gather or even individually or some combination thereof to look at becoming more than just a real estate player, but a buyer of these brands. And that's the difference -- that's the majority difference. We also have the ability to underwrite the business a lot better than we could have. So we're left in the dark about what the right rent should be in a workout scenario. And we have resources. I mean our -- the folks at Aero IPCO, the folks at ABG, our friends at Brookfield and our team can basically, rapidly, run through any kind of investment or retail scenario and find out -- get to the bottom of what the right fix is. And I would say to you, we were decent at it a few years ago, but now we're pretty good at it.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [15]

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Okay. And then just with a straight line rent adjustment elevated in Q2 and somewhat volatile over the last couple of quarters. Wondering if you could provide some insight into what's driving that? Perhaps, impacted by some of the lease accounting stuff. And how we should think about the impact of GAAP noncash rent adjustments for the full year?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [16]

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Yes. So look, with the new [add] we pronounced this week, historically, we have never straight lined our CAM, even though, as you know, a lot of our CAM is not -- most of it, 95% of it is fixed with the growth in it. And I believe a lot of our peer groups, historically, have straight lined that. So we have to straight line that because of the new pronouncements so that's really the change in that. Again, our comp NOI, Christy, as you know, picked [out up] any straight line impacts or it's basically cash. And -- but that's basically all there is to it. When you look at kind of the increase in straight line, less the -- now that we can't capitalize our leasing cost, I mean, it's basically less than 1% differential in terms of our FFO per share is one way to look at it. But the reality is, if you look at the comp NOI, we strip it out in any event. But it's simply -- we never straightened CAM expense and now we have to.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [17]

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Okay. So we should expect a [terming elevated] going forward because of the straight-line [impact]?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [18]

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Well, certainly this year. Then I think you'll see it more normalized. Now, we also write off strictly -- we have to write -- when we have a bankruptcy, we have -- we've had straight-line rent write offs this year because if you have a tenant that goes into bankruptcy and you certainly -- any straight-line rent or straight-line CAM that you may have for that tenant is going to be written off. So we've had certainly some of that as well.

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Operator [19]

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You're next question comes from the line of Steve Sakwa from Evercore ISI.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [20]

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I guess just a couple of questions. First, maybe just start on kind of the leasing environment. I mean you and Rick touched on a little bit that there are good demand, I mean can you could just elaborate a little bit more. You said you've been impacted about a 100 basis points from bankruptcies this year. And I'm just wondering, David, just sort of look at the tenant watch list and the potential tenants that your still kind of working with to restructure. Where do you sort of feel like where you are in that kind of pendulum? Or timeframe of kind of getting to the end of that? And does 2020 kind of begin to show a little bit of light at the end of the tunnel?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [21]

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Well, I still think there are a couple out there without naming names, Steve, that we're monitoring, and we'll have to see kind of where that goes. So it's hard for me to give you an exact response specifically to that question other than, there are still a couple out there that we're monitoring and we'll see how it ultimately resides. I will tell you, not that this is of interest, but it's not a reflection of our business, okay? And I know that's hard to say, it's hard to -- I know that's a statement that many don't believe, but if you look at the bankruptcies, each one of these folks, there were things and decisions that they did that led them to that point as opposed to it's -- this -- it's our business, okay? And I won't go through names, but lack of investment, too much leverage, opening too big of stores, going international when they should have stayed domestic, picking the wrong -- it's not endemic of our business and that's the important point because the reality is, even with these bankruptcies that we've had to deal with, we're comping up, yes, it's not where I'd like to see it, but it's comping up a couple of percent. And we would have really outperformed had we not had the unanticipated bankruptcies. We are outperforming an average rent in the mall business, underperforming in the out of business because of the tourism that I showed you. So there's pros in that, and what we're seeing in sales there. The higher rent continues to do well. As I mentioned to you we have 77 properties in total [that] would get you over, if you just took the top 7 we'd be over $900 a square foot.

So it's not endemic of our business or our industry, it's each one of these -- each one of these has a story. And I could spend 3 hours going through pros and cons as to what decision they made that led them to that problem. And that's the most important message I can deliver to you today. It's not [quote] , and again, we're much more diversified than the mall business. But let's talk -- it's not the mall business. It's certain folks that ran their business not in the best way. And yes, we suffer while we recharacterize or release the space to better operators. So I'll turn it over to Rick to add any application to your question.

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [22]

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And part of that is demonstrated by the fact that our occupancy trends have held up very nicely in spite of all that bankruptcy. And as we detailed in the past, there is still a broad [way] of tenants that are seeking to come to our properties, whether they're new concepts, whether they are digitally native retailers, whether they are international retailers, we still have retailers that are traditional retailers like Aerie and American Eagle that are still growing significantly. And we are adding a lot of fuel to our property and all of that is contributing to the fact that you are seeing our sales growth and you are seeing our NOI growth.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [23]

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Okay. David, just a small point. On the total portfolio NOI was up less than the comp, which is not normally the case, and your share of NOI from investments was down. Is there anything kind of just for us to focus in on as we think about [next quarter] or the rest of the year?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [24]

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Well, remember, we sold our interest internationally in HBS. That's the biggest reduction. In addition, we've got of a lot of redevelopment going on. You could see that number. We have a number of properties that are basically taking a step back because of our redevelopment efforts. But that's -- those are the biggest ones that jump out of me, right? So -- and Tom just mentioned to me, FX as well. So when you put -- I'd say those are the 3 things. So HPF has gone international, FX, currency, and then the redevelopment, as you can see, we have a number of properties that are kind of going down a little bit this year as we redevelop it Burlington Mall, Ross Park Mall, a handful of these that are taking a step back to take several steps forward. That's basically the math.

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Stephen Thomas Sakwa, Evercore ISI Institutional Equities, Research Division - Senior MD & Senior Equity Research Analyst [25]

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Okay. And then lastly, I just noted the average base rent per foot which I know takes into [account] a lot of things, including lease restructuring and others, was up a more modest, I guess 1.2% to 1.3%. Anything we should just be thinking about that number versus, say, the lease spread you're getting, and obviously, the change in occupancy, I just was curious on that trend.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [26]

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No, I'd say, it's basically a function of some of the [workouts] that we're having to deal with.

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Operator [27]

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You're next question comes from the line of Craig Schmidt from Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [28]

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I wondered that if you could characterize the store closing and outlet space versus the mall space? Is -- are they experiencing store closings to a comparable degree? Or are they more immune to the malaise?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [29]

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I would say, they're -- the last few bankruptcies have also had outlet exposure. So they're more comparable, where a couple of years ago, it was more of mall than the outlets and now they're similar. There is not a trend that outlets are better or worse than the malls. And when it comes to store closings due to bankruptcies, I'd say they're more similar in terms of that pattern.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [30]

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Great. And then, obviously, very active in the redevelopment. I wondered if it's possible to categorize what inning you think you're in in terms of the major anchorage position. I recognize you are always going to do it, but in terms of this major push for anchoring position, maybe what inning we are in?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [31]

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Well, I've never been much of a baseball player, but I would say, what inning? I would say, the third, comps, give me 3. So he got -- so he and I hit the number at the same time. I'd say the third inning.

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Operator [32]

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Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [33]

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Okay. Just 2 questions here. First, David, sort of following up to Kristy's question, [the] jump in. So 2-part question on the leasing spread and straight line rent. So one, how much of the increase [on] straight line rent? Is any of that due to increased leasing activity because looking at the leasing expense, they've really jumped over the past year? So I don't know if it's purely mix? Or maybe this is a benefit of backfill? But if I look at your TIs over the past year, they've gone up a little bit, but nowhere near as much as the rent spreads have jumped. So just trying to understand how much of the jump in rent spreads is purely just mix versus it's actually you guys getting better tenants and maybe some of that is leaking into the higher straight line rent?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [34]

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Well, we certainly continue to straight line our rental income beyond CAM. I don't have the breakdown for you, but it does add into that amount. We continue -- what I mean [is] that our rent spreads continue to be healthy, obviously, a lot of that will be significantly enhanced [we're] getting back very cheap space that we can rent it. I mean that's going to be the future growth of the company is taking back some of these bigger spaces and generating much greater rental income from them. And that's why we're spending that capital. So it all kind of [eats] in to each other in terms of generating our cash flow, future NOI growth, leasing spreads and, obviously, that would be part of the straight line rent income as well.

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [35]

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And I would just confirm your observation that our tenant allowances have been very stable over the years and there has not been a -- I think a noticeable increase at all. It's business as usual as it happens.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [36]

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So then, Rick, the rising -- releasing spread, is this just purely mix? Or we should expect these -- I mean just wondering, next few quarters, are these going to go down to more in the mid-teens? Or these going to stay elevated?

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [37]

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That's why you have a job, okay? You'll see when it happens, okay? But the bottom line is -- and that's so we have a job, the bottom line is, [we] are -- certainly one of the greatest opportunities we've had as a company, and I can't underestimate. Yes, some people could look at the demise of certain anchors as a sign of impending doom. We look it -- we look at it in the complete reverse as a significant opportunity because we're now getting the ability to take that space and redevelop it with accretive returns on investment and higher rents. And so I do think that trend will continue, whether it'll be up $5 or down, that's just -- that's a quarter-to-quarter change, but that is -- that's why we're spending -- that's why we have a $5 billion pipe. I mean that is our business going forward, and it's important for the market to understand. I mean that's where we see great opportunity.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [38]

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David, I just want to make sure this wasn't like a definitional change or some accounting change? I'm just trying to get to -- because obviously, it's impressive. So just want to understand if this is definitional change or accounting change or...?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [39]

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No. Not at all.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [40]

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Okay. And then second question is, just quantifying -- obviously, got Forever 21, pretty small, but overall, your comments about what your guidance has endured as far as headwinds, stronger U.S. dollar, tourism and all this stuff, where are you guys trending as far as your bad debt budget? So presumably, you budget, whatever it is, 100 basis points or something like that, for the year. Where are you trending on, whatever your budget is, where are you trending on that year-to-date?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [41]

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I would say we're higher. I mean I don't have an exact number, but it's higher than what we -- certainly higher than what we budgeted because we had some unanticipated bankruptcies. Look, unfortunately, when we do our model, it's at the end of last, basically, November -- October, November. And we are now in July, and we've had a lot of stuff that we've had to deal with. So it's definitely higher than what we budgeted.

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Operator [42]

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Your next question comes from the line of Caitlin Burrows from Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [43]

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Maybe on the leverage side, net debt to NOI has been coming down to 5.1x now, and I think investors do like to see [that] . So I was just wondering, what's driving this decision from the Simon side versus spending more on, say, development, buybacks or something else?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [44]

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Well, look, I think we try to manage the balance sheet with great care, and so we do have a -- the pipe, we can -- if we -- we have, not capital constraints on the pipe, but really, human resource and permitting constraints. And obviously, we're very focused on supply and demand in those particular markets because, as you know, a lot of that -- a lot of the redevelopment efforts are going to be kind of mixed-use elements. But we can only go as fast as the permits and our human resources can do it and it does take, in certain markets, especially California, where we have a pretty big pipe; and in Seattle, with Northgate, a huge development there, development that is based on phasing, but in over a period of time and the approval process there is going very well, but that's a spend that could approach $1 billion, given the opportunities we see with that site, so -- but we got, unfortunately, we got to tear them all down first. It takes time, which we're -- I think we start, in 8 days, right?

So I think that, to get back to your question, I think the biggest constraint is really just human resources and permitting. So it's not -- listen, we don't want to be cavalier with the balance sheet, and as Rick mentioned, I mean, we're very -- every once in a while, we'll take a flyer on a development or redevelopment. But we certainly, when it comes to tenant allowance, it comes to capital, as you can see over the history of the company, we're very, very thoughtful on that. I mean we don't bat 1,000, you see, I'm using the baseball analogy, but we're -- so we're very thoughtful on that.

And then I think the buyback, look, we're going to be opportunistic. REITs will always be, and I think I read, not to quote Steve Roth, because I don't want to give him a big head, but I do think REITs are always going to be somewhat limited on buybacks compared to industrial America because of our need to pay out our taxable income, obviously, to maintain a REIT status. And that's why, if you leave with anything in this call, is we have paid out $30 billion, that's with a B, of dividends in the history of this company, which is pretty damn remarkable, I think. Tom, you agree?

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Thomas Ward, Simon Property Group, Inc. - SVP of IR [45]

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Agree.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [46]

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Okay. So it will always be something nice to do, but we're always going to be somewhat constrained, just because we're paying out so much capital in dividends. Now the reality is we would buy -- if we didn't have to pay out our taxable income, we'd be a cash flow machine, we'd buy a tremendous amount of stock back. So that will always be there for us to do to be opportunistic, but it can overwhelm, given our payout on the dividend front.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [47]

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Got it. Okay. And then maybe just, you do have a history of raising FFO guidance the vast majority of quarters in the past. So just wondering if you could give some detail on how maybe results played out during the quarter? How that related to your own budget? And what prevented you from raising the full year guidance? I know in the previous set of questions, you did mention potentially that bad debt was trending a little higher than you had originally budgeted.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [48]

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Well, I probably bored you, but the reason we haven't raised guidance this year is a few things, and I'll just restate what I said. We have lower lease -- lower lease settlement income than we had budgeted. We had lower distribution income from our interest, essentially in value retail. We don't equity account for that. As you know, cash account, cost accounting. Not to bore you, I don't know what your background is, but cost accounting -- cost accounting still exists, correct? Kind of?

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Brian J. McDade, Simon Property Group, Inc. - Executive VP, CFO & Treasurer [49]

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Yes. Kind of.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [50]

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Okay. You can see how old I am. But cost accounting -- basically, we only book with what cash we get. So we anticipate a little bit higher distribution income from our investments in value retail. We haven't gotten -- we had the stronger dollar. Obviously, we had unanticipated bankruptcies. We didn't budget SPO, though we kind of knew that we might do it, we just -- it's kind of out there and we decided, "Well, it's out there." And then, obviously, the anticipated bankruptcies. On [average] rent, we're trending above in the mall business, but below in the outlet. And I've explained that basically, it's not a function of the business, it's a function of tourism and a strong dollar being basically reduced in the country. And we're not the only company in America that's telling you that. You can see that from a number of different ways. So that's basically -- so that's what's been going on and why we haven't raised guidance this year.

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Operator [51]

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Your next question comes from the line of Rich Hill from Morgan Stanley.

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Richard Hill, Morgan Stanley, Research Division - Head of U.S. REIT Equity & Commercial Real Estate Debt Research and Head of U.S. CMBS [52]

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David, first of all, thanks for reporting prior to the open. It's nice and refreshing to have it mixed up from the deluge of companies reporting after the close. I appreciate the color on FFO guidance. But I wanted to also maybe talk about retail overall and maybe how you're thinking about some of your investments. So maybe first, could you maybe give us an update on your Klépierre stake and if you would ever think about increasing that? Looks like that's been a pretty good investment. And then maybe also an update on the fifth consumer-facing platform as well.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [53]

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Okay. So I mean, having just been at a Board meeting last week, I think they're doing an excellent job. They're very well-positioned. Their balance sheet is -- continues to be much better than their peer group. And their cash flows are like-to-like, I don't remember exactly what the number was, but I thought it was pretty good given what's going on, they continue to sell assets, shore up the business. And what we've seen is a company that continues to operate better and better over the years that we've invested. I would say to you, it's unlikely we would ever -- if we go over 30, I don't know if you know the rules, we'll probably have to -- we have to offer the whole company. I would say it's not in our plans ever to do that right now, but I mean, it's certainly an option that we would have down the road, but it's not in our plans at all.

So with that said, and then our SPO, we have -- we're still in beta. We have got 12 retailers, 3,000-ish brands online. We're going through kind of the kinks. So you can have access to it if you're one of our loyalty members. We've got another 15-or-so that's in the process of coming on board and our plan is to make it public sometime in the third quarter. And I'd say to you we've got a lot of interesting things going on with that platform beyond just that, but I can't really share much beyond that other than stay tuned. I do think we can have a -- I do think we can create a real business opportunity for us in this area.

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Operator [54]

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Your next question comes from the line of Nick Yulico from Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [55]

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David, I just wanted to go back to the topic of redevelopment and also tie it into the question about total portfolio NOI growth. I think we can appreciate how redevelopment's a disruptive NOI process with some attractive payoff down the road. But could we get a sense of timing of when this will start to benefit overall portfolio growth? Because it's not showing up in the numbers this year, and you mentioned, your guess is that we're in the third innings of this process. I mean does this mean that it's going to be an ongoing drag on total portfolio NOI growth? Or does this change at some point in the next year or so?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [56]

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Again, just to be clear, I -- there are 3 major elements on that. One is the -- that's where the currency, stronger dollar has hurt us. Number two is we sold an asset. Well, when you sell an asset, you don't have the income, okay? So and then the third element is our redevelopment. So the properties there are relatively flat and normally, we would see growth there, so I just want you to put that in perspective. So with that said, I'll address your question. Look, I think you will start to see benefits in 2020 later, but it takes time. I mean that's the reality. From a new development point of view, we don't have a lot. So a lot of the driving of the new development was through that line. We did decide to, more or less, buy the land in Tulsa to build Tulsa Premium Outlets yesterday and the outlet there. So that's a go project. We still have some hurdles to do, but that's pretty much -- so -- and that's opening in 2021. And then we've got a lot of the international outlets that are really opening in late '20 and early '21. So it's going to take time. Now, Nick, here is the important thing. You will never hear from this company, "We will have a throwaway year", okay? So even with a kind of like, yes, it's not that exciting, we're not going to tell you, "Wait for next year." We don't wait for Godot, okay? Not here. So yes, it's going to accelerate, but we're worried about '19 and '20 and '21. So we don't have throwaway years.

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Operator [57]

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Your next question comes from the line of Linda Tsai from Barclays.

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Linda Tsai, Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs [58]

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Your weighted average interest cost is pretty impressive at 3.49% and then in 2020, you have some higher-rate debt maturing for both consolidated and JV debt. With the 10-year having trended lower, do you think you'll achieve some interest rate savings on these upcoming maturities?

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Brian J. McDade, Simon Property Group, Inc. - Executive VP, CFO & Treasurer [59]

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Linda, it's Brian. Yes, as we look out into the future and looking at it through the perspective of today's current interest rate environment, certainly, there would be some pickup if we stay in this environment for a longer period of time.

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Linda Tsai, Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs [60]

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And then hopefully I heard this correctly, bankruptcy impact on SS NOI year-to-date was 100 bps. But then given some subsequent comments about fallout being high, does that mean that the full year impact on SS NOI would be greater than 200 bps?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [61]

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No. I think what we said to you, so far, the -- let me restate what you just said so there's no ambiguity. We had comp NOI growth of 2%. We generally, based on our budget, would've been a little over 3% had it not been from the unanticipated bankruptcies. We're still -- our goal for this year is still 2%.

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Linda Tsai, Barclays Bank PLC, Research Division - VP & Research Analyst of Retail REITs [62]

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What's the overall impact of bankruptcies on same-store for '19?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [63]

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We just told you, year-to-date, it's around 100 basis points.

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Operator [64]

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Your next question comes from the line of Derek Johnston from Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [65]

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You've covered a lot. So just one for me, if you don't mind. David, look, I like malls, okay? But acknowledging that sentiment on malls has been pretty poor so far in 2019, frankly, worse than the fundamentals, and clearly, nobody knows your business better than you guys. So when you look past '19 with 2020 and beyond fast approaching, what is the management team most excited about opportunity-wise or strategically speaking?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [66]

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Well, thank you, and a very great question. So I would say the most exciting, the most difficult thing that we've -- I mean, in terms of exciting, but difficult in terms of work and execution, is the ability to redevelop our centers. And what we're doing with the Phipps of the world, the Northgates of the world, Brea, on down the line is, to me, really, really exciting. I mean yes, it's a lot of work. I'd rather have my feet up on the desk, but that's the most exciting. So it's -- we have been constrained, Derek, on how to redevelop a lot of these centers because we had to run through all these suits with the department stores. Well, if we've got the space back, and we have their acreage, then we -- then the only thing constraining us is our imagination and our ability to get permits and obviously, you got to be grounded by supply and demand. So that to me is the most exciting opportunity ahead of us, is to really reimagine the center.

Now, you are right about the mall business sentiment. Now, Rick and I are old enough, Rick a little bit older, to know that people have been trying to kill off the malls for 50, 60 years, right? So it was the town centers, it was the power centers, it was Walmart, it was Amazon, it was this guy, it was that guy. Look, we're resilient. Rick and I are like cockroaches, okay? We're going to still hang around, so -- but I do think that doesn't mean that we've got a -- we can't keep reimagining our places. And I would say that's the most exciting. The other thing I would say to you, Derek, that is as exciting to us is because of our high-quality portfolio, our high-quality balance sheet, the stability of our cash flow, even with all the turmoil going on in our -- the retail world, we have lots of opportunities beyond what we do today, and we evaluate those with keen interest.

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Operator [67]

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Your next question comes from the line of Michael Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [68]

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David, you mentioned you have 77 assets that generate more than $900 a foot of sales. Can you give us a sense as to what portion of your pro rata NOI those assets represent?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [69]

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No. But we will -- I will -- let me think about whether I should give that to you. I'm worried what you might do with that, Michael, you may tell somebody. Kidding, it was a joke.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [70]

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No, I know. I got it. So are you still thinking about it, or...?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [71]

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It's well -- I'll put it this way, it's well over 50%. It's probably 70-ish, give or take.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [72]

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Got it. Okay. And then maybe push it a little further at the opposite end of the spectrum, how small is the contribution from the assets doing, say, less than $500 a foot?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [73]

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I don't have those numbers off the top of my head.

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Operator [74]

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Your next question comes from the line of Wes Golladay from RBC Capital Markets.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [75]

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I'm looking at the international properties in the total NOI bucket, and I'm seeing that that's been growing about 4% year-to-date. First question is, is that largely comparable? And what is driving that strength?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [76]

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Well, it's largely comparable other than there may be an expansion here or there. But remember, that's also being impacted by FX, so it's actually probably would be higher than that, had we compared to last year. Most of that, most -- the dollar has been obviously significantly stronger, and we had budgeted to be not as strong and certainly, year-over-year comparison stronger than where it was last year. But the vast majority of that is comparable, the vast, vast, vast.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [77]

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Would you ever consider putting that into the total bucket and maybe adjusting on a constant currency basis?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [78]

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We thought about it and we should do it because it would demonstrate the -- I mean, the fact is, I think a lot of people forget about the diversity and the high-quality portfolio we have. By the way, the 77 assets that would average over $900 has nothing to do with our international assets. They all, I'd say, by and large, are well over $1,000 a foot. So we thought about it, but then I don't know, it's just -- I don't know, we decided not to. But I -- we thought about it. It would certainly generate higher comp NOI growth, and I know others do, do that, they lump it in there. So maybe one day, but then you would ask what the domestic business is, and we would be back to where we are today.

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Wesley Keith Golladay, RBC Capital Markets, LLC, Research Division - Associate [79]

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Well, you could keep them as separate lines, but yes, that's fine.

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Operator [80]

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Your next question comes from the line of Christine McElroy with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [81]

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It's Michael Bilerman here with Christy. David, I wonder if you can step back and think about the mall or the retail competitive landscape from a landlord perspective. You talked about the turmoil in the retail industry. It's clearly affecting different of your peers in different ways, especially those that don't have the cost of capital or balance sheet. I was wondering if you can talk a little bit about, perhaps, your market share of retail leasing? And whether you believe you're getting a disproportionate share of retailer store openings, or a lower share of retailer store closings, given that relationship and where you stand relative to all the other mall peers?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [82]

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Well, I actually don't think, Michael, that I actually referenced any of our peers in this call other than to say we do have some expertise that maybe others don't when it comes to looking at opportunities or restructures or retailers. So look, I would say to you -- so I don't really think I referenced the peers all that much.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [83]

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No, you didn't. I'm asking the question about whether you running the company are feeling as though you're getting a disproportionate share of leasing or a lower share of closings, given retailers' desire to be in your portfolio, given a lot of the other things that go along with Simon, including the balance sheet and all the other variabilities. Are retailers more apt to call on...?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [84]

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No. I got the question. I would say -- I would answer it this way, and Rick can add or embellish on it. I would say simply, we've always -- we've kind of always had that position, frankly, because the quality of our real estate and the fact that the quality of our real estate, the organizational strengths and so on. So maybe on the margin, it's even more important today. But I think that the stability of the organization and the quality of the real estate and the fact that people know we're going to invest in our real estate certainly helps and certainly shouldn't be overlooked. And I will say anecdotally, without numbers and whatever that's worth. I mean landlords do matter. Historically, maybe in a go-go time period, maybe they matter less, and I'm hopeful that as retailers look at whether it's in downsizing or restructuring or growing, whatever the scenario is, they do take into account who their partner is. But I think we've always been in that spot. Maybe it's slightly enhanced, and I do think the landlord -- the ability to invest. I mean Rick and I run around, we talk to people, they say, "Yes, we know you're going to take care of your properties." Maybe there's a few retailers that want to put in, what I call, the clause where that if we don't own it, they can do whatever the hell they want, they can lease. We try not to do that, but I mean, we hear stuff like that, but I'd say that's kind of on the margin. Rick, please embellish.

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Richard S. Sokolov, Simon Property Group, Inc. - Vice Chairman [85]

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The only other thing that I would add is that our portfolio creates a lot of profits for these retailers. They are not charitable institutions. I think they do hold us in high regard; witness our results. But the reason we have an ability to interact with our retailers in a productive way is because they make a lot of money on our properties, and when they think about their business, it's in their best interest to do business with us. And that's a function of all the things that David's been talking about the entire call, about reinvesting in the properties, having a stable balance sheet, having all these inventive and innovative plans. It all comes down to having more productive properties and that's what gives us, I think, an edge.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [86]

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David, can you talk a little bit about sort of all the fifth platform initiatives? You've obviously had the outlet online business, you've done the Esports, the can -- the CBD shops, there's a lot of other little bets you're placing, in a lot of different ways. I guess, how should we think about how you're spending your time on all of those initiatives? And how should we think about the capital that you may put forth to additional programs to drive more use of your assets?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [87]

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Well, I think you'll see more and more of it, Michael, and can't really quantify it because it is opportunistic. But look, all of this is return-based. I mean it's not money that we're willy-nilly just throwing there hoping it sticks. It's not spaghetti up against the wall. But I do think we're going to be as creative and as innovative as we possibly can be with the guardrails that we have historically used, which is making sure that it's a good return on investment, making sure that it's synergistic to what we do, making sure that we're betting on the right people, on the right product and the right vision. But you will absolutely see more from us in this area, and I'm hoping from that -- look, we've been fighting the fight for years that we're more than a mall company. We've always defined ourselves as a retail real estate company from the get-go. Even when we went public, we were more than a mall company. We had morphed into retail real estate. We morphed into outlets. We've morphed into the Mills. We've morphed into international. So we are densifying our business in terms of -- so I am hopeful that with time, even though we are categorized as a mall company, again, I'm not running from the mall business and someone asked earlier, what's one of our most exciting things we have is redeveloping all this anchor space. But we are much different than that and that process and evolution will continue. And we're hopeful that we will be profitable in it like we have in our other ventures out of our traditional business, not our core business, our traditional business.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [88]

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Just last one, sort of strategically. As part of when you spun-off WPG, which in hindsight, I think those assets clearly would have been a little bit more of an anchor to your growth, you did spin off the open-air shopping center business. I guess as being a retail landlord, does that business and the potential to maybe reaggregate in that space, or that's not on the table at all?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [89]

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Well, I -- the -- I don't think it's on the table. If I understood the question, I don't think it's on the table. I think there's a lot of opportunities ahead of us, and I just wouldn't rank that as high up there.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [90]

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And then how does the U.K., which is obviously going through -- the stocks there are obviously having a lot of difficulties given their leverage position. You had Klépierre try to do something. Does that rank high on your list?

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [91]

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I'm more worried about my -- that the season is about to start for my team, Crystal Palace. I'm more worried about -- I have another -- I want a solid year this year. I'm tired of watching the relegation fights. So I'm more worried about that right now.

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Operator [92]

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I am showing no further questions at this time. I would now like to turn the conference back to Mr. David Simon.

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David E. Simon, Simon Property Group, Inc. - Chairman, CEO & President [93]

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Okay. Thank you, and have a great rest of your summer, and we'll talk to you soon.

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Operator [94]

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Ladies and gentlemen, this concludes today's conference. Thank you for your participation. Have a wonderful day. You may all disconnect.