Simon Property Group Inc (SPG) — Q2 2015 Earnings Call Transcript

Thank you, Lauren. Good morning and thank you for joining us today. Presenting on today’s call is David Simon, Chairman and Chief Executive Officer. Also on the call are Rick Sokolov, President and Chief Operating Officer; Andy Juster, Chief Financial Officer; and Steve Broadwater, Chief Accounting Officer. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today’s press release and our SEC filings for a detailed discussion of 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.

Good morning. We had a productive quarter; we completed several significant redevelopment projects, started construction on others, announced even more that will further enhance the value of our real estate. We identified additional avenues for growth through our two new retail partner joint ventures. Most importantly, we continue to produce strong operating and financial performance. Results in the quarter were highlighted by FFO of $2.63 per share, which included a $0.22 gain on a sale of marketable securities. Excluding the investment gain, FFO per share was $2.41, which exceeded First Call consensus again by $0.06. These results were achieved even with the negative impact of $0.04 for the quarter compared to the prior year quarter due to a strong dollar against the Euro and Yen. On a comparable basis excluding the contribution from WP properties in the prior year period and again the investment gain, our FFO per diluted share increased 14.2% or over $0.30 year-over-year. Occupancy was 96.1%, leasing activity remains healthy. We recorded spreads of $10.87, an increase of 18.4%. Comp NOI for the quarter increased 3.6%, which was coming off a 5.6% comp increase in the second quarter of 2014. For those of you that are interested, we do not include lease settlement income in our comp NOI or new deals such as Jersey Gardens or our recent joint venture activity, and we also do not include the impact of recently developed or expanded centers. We continue to produce strong comp NOI increases year after year as well as operating at the highest margins in our industry. Total sales across the portfolio increased 2.2% for the trailing 12 months even with the loss of bankrupt tenants. On a comparable basis, the sales per square foot increased for the 12 months ending June 30 by 4.2%. Our sales per square foot metric is not adjusted to remove any tenants who have vacated their spaces and includes tenant sales activity for all months a tenant is open during the trailing 12-month period. Redevelopment is ongoing for 28 properties across all three platforms for total spend of $1.7 billion. We opened significant expansion activities at Las Vegas North and Shisui Premium Outlets in Japan and started construction on several new strategic projects during the quarter. Construction continues on some iconic properties including Roosevelt Field, The Galleria in Houston, Stanford Shopping Center, King of Prussia, Del Amo, and our premium outlets are expanding in Chicago, San Francisco and Woodbury. Our Chicago and San Francisco outlets are set to open in August, and the remaining expansions of those iconic centers are set to open in the next 12 months. We also announced plans for further expansions in Sawgrass, The Mills at Jersey Gardens, La Plaza Mall, and the shops at Riverside. We expect our redevelopment investment to be at least $1 billion annually through 2017, which will be substantially funded with our annual free cash flow and will continue to contribute incremental growth in our NOI and reinforce the positions of those assets in their respective marketplaces. In terms of new development, construction continues on three new outlets all in major markets, scheduled to open in the next three months. Gloucester in Southern New Jersey, near Philadelphia, opens in two weeks, on August 13. Tampa and Tucson open in October. Finally, we opened Vancouver on July 9, with traffic that exceeded expectations. Construction has begun in Columbus with our partner Tanger, and we are slated to begin construction on one new domestic premium outlet, to be announced at year-end. We also started construction at the Shops at Clearfork, our new full-price development in Fort Worth, anchored by Neiman Marcus, which will open in early 2017. We are pleased to partner with Swire and the Whitman family on the retail component of Brickell City Centre, which will open in the fall of 2016. We own 25% of this project and will manage the center upon completion. Klépierre continues to progress according to plan. Their integration of Corio is proceeding well, as they continue to recycle their assets and recently announced a deal to sell a portfolio of Netherlands assets for €770 million, which will continue to deleverage their company. We purchased 2% of Klépierre from the BNP offering and now hold 20.3%, with the stock trading higher than where we purchased that additional 2%. Balance sheet activity remains strong, as we completed several secured financings in the quarter, continuing to lower our borrowing costs and increase our debt maturity. Our liquidity is $5.5 billion. Our industry-leading balance sheet continues to get reinforced and separates us from our peer group. Our unencumbered cash flow is well over $2.5 billion, as Andy shakes his head affirmatively. Finally, we announced our $2 billion share repurchase program, and in fact, in the quarter we bought $505 million of both common and units, as disclosed. Now, regarding the dividend – let's not lose sight of the dividend. We announced another increase sequentially of 3% to $1.55 and a year-over-year increase of 19%. We will pay at least $6 in 2015, which is an increase of at least 17% from 2014 and well above our previous high of $3.60 in 2008. Guidance has again been increased to $10.02 to $10.07. We are now ready for your questions.

Hey, thanks. Good morning, guys. Here with Jeremy Metz. Hey, David, with the repurchase from the OP unitholders, who were the sellers of those units? Did you approach them? Did they approach you? How did that work?

A little bit of both; it was associated with the prime transaction loss that we completed in 2010, and they were the sellers.

Okay, so no members of the Simon family sold…

That's correct.

Okay. And then on the buyback as well, how should we think about it from a balance sheet perspective? If I look at your funding needs against your after-dividend free cash flow, my math is basically you can fund your entire development program with, call it, $1 billion of free cash flow a year. So if you continue to buy back stock at this rate, obviously, the leverage of the company would tick higher. So how should we think about continued buyback versus balance sheet?

Well, it’s a very good question. I think the first – we want that in our arsenal. We are sensitive to – it’s part of our capital allocation strategy. I think you should look at this first step as a trade from one of our other marketable securities that we had held but had no reason to hold those. We took that capital and reinvested it in our business, as we wanted to signal the market that we believe in the continued growth of our enterprise. I think it should also signal that we are out of the big deal business. So I think no one has picked that up, but we don't see any big deals on the horizon for us. We are obviously very focused on development and redevelopment. You know I mean I stumble, I’m not a very good reader of a text, but you look at our activity in redevelopment and new development; it’s astronomical, it’s industry-leading – lots of great stuff going on and I think that's the way to look at it. We are price-sensitive; we wanted to be there. REIT stocks have been very volatile, but I think the signal that we took one investment and reinforced that we’re out of the big deal business. That's not to say we might find a deal here or there, but the balance sheet is sacrosanct to us. We haven't worked 22 years to do this; we survived the last great recession with flying colors, we quadrupled our dividend and earnings per share and all the other things that I won’t go through, but I think it's more of a signal and belief in our business as well as signal the market that we are out of the big deal business.

Great. Hey, David, good morning. Just continuing in terms of the buyback, you talk about your business and having confidence in your business. You didn't talk a little bit about discount to NAV and the arbitrage that exists between public and private. I take your comment exactly in terms of flipping out of Macerich that $450 million, putting it into your own stock, which I think has great prospects. But would you think about accelerating or selling interest in any assets to go further into your stock and narrow that discount that exists between public and private?

Well, look, I think the reason - it's more than just NAV. It’s what your enterprise can do in terms of growing your earnings and cash flow, and then ultimately increasing your dividend. If you strip out the gain in that WPR, our quarter-over-quarter growth was 14.3%, which as you know, a lot of people have criticized our size, yet we continue to be industry-leading in earnings growth. So, you’ve got to look at, whenever you invest in something, what's that yield going to get you? As our earnings grow you know that’s not a bad investment. It’s more than just the NAV analysis. We will continue to sell what I call lower quality non-important assets to us. We don't publicize it until after it's done, but we’ll continue to prune the portfolio. However, we’re not big believers in selling our top assets to reinforce the value of our company for external purposes. We know what we’re worth, and we operate accordingly. But selling the top assets at the end of the day those top assets tend to grow the most. I’d rather have our shareholders own more of it than less of it. We have the free cash flow to take advantage of the arbitrage that may exist between private and public values, and it’s just another tool we have available to us to take advantage as we look for investment opportunities.

Great. Just one quick one for Rick. The popular press wants to focus a lot on shrinking retailers and closing stores. Can you just give us an update in terms of who are the fastest-growing retailers, the most exciting retailers that you're seeing pick up stores? Maybe just break it up between a larger format and a smaller format store base.

Well, thank you for the opportunity to talk about my list. I think there are four categories of retailers that we’re really seeing a lot of business with. International retailers, the e-tailers that are looking for a presence in our properties. We recently just announced and have opened Blue Nile and Bauble Bar, and we’re working with a number of others that want to come into the properties. Our existing retailers are looking to grow through brand extension. Maybe you just saw Dick’s announce the Chelsea Collective this fall. L Brands is rolling out White Barn Candle. The last are just the new retailers that are coming online and just to - we’ve done deals recently with Mont Blanc, Frye Boots, Jo Malone's, Suitsupply, and Aritzia. All of these are really exciting concepts that are relatively unique in the number of stores, and that’s going to separate our properties.

Great, thank you.

And I would just say this, Michael, what’s exciting – yes, we have had bankruptcies this year; it does take time to replace them. But the amount of new concepts and new entrepreneurs coming into our environment, whether it’s restaurants or e-commerce going to physical brand expansion is really at an all-time high. Our leasing folks, if you see what we’re going to do at Roosevelt Field with some of the new food operators as well as some of the e-commerce with physical, I mean, it’s good stuff. In that sense, it’s comforting to see that there is a whole host of new entrepreneurs who want to be in our environments.

Yes, thanks.

Thanks.

Hi, good morning.

Good morning.

You talked about how your same-store numbers don't include your redevelopments. I'm just wondering. At this point right now, it seems like you have a very large share of some of your top centers in redevelopments. Is that a drag, having that excluded, given the strength of some of those?

First of all, we don’t consider it a drag. You have to put comp numbers in a historical perspective. You can’t just look at it one quarter over quarter; you’ve got to look at it over a three to five-year period. If you look at our comp NOI increases over that time frame, you would conclude that we have significant outperformance. I don't look as much as everyone wants to focus on a quarter here and a quarter there. I want to reinforce we do have the highest operating margins in the business. We also have the lowest overhead in terms of enterprise value, percent of EBITDA, percent of revenues in the business. That’s why we have the best balance sheet in the business and that’s why we’re able to grow our dividend 15% to 20% a year. So, again, certainly there are – yes, we’re remerchandising Houston Galleria, Copley, Stanford, Roosevelt Field, King of Prussia, and we’re moving tenants left and right. We encourage everybody to go see the properties and yes, from a quarter perspective, it's not going to impress some, but I’m really impressed with what we’re doing internally. I would encourage you and others to look at comp NOI over a more extended period than comp quarter-to-quarter.

So, I mean, if I do that...

But again, long story short, yes, we are having some impact from all the remerchandising going on in our portfolio.

So, I mean, if I take that longer view and look back over the past, say, two or three years in your numbers, is there any reason to think as I look forward two or three years that you wouldn't be able to do kind of the same type of numbers, I guess deeper into the economic cycle?

Well, listen, history is a good indicator of what you might be able to do in the future. We would hope that all the stuff that we’re doing will accelerate the growth profile of those assets. We have to execute; believe me, we are not out of the execution phase. But I would think, Paul, at the end of the day, that these assets are going to grow very nicely and we’ll increase our comp NOI growth and meet our historical growth. Now the fact is we’re subject to economic cycles, we’re subject to tenants going bankrupt, we are subject to downtime, we’re subject to sales volatility. So, we don't control everything, but we’ve had a pretty good track record. I would hope that would continue, but it’s not something you just follow up and get a lot for this stuff. You’ve got to do it every day, and our team is pretty good at it.

Thanks. And then just my follow-up on the Sears joint venture. How far are you into the process of going through and saying: well, here's what we're going to do near-term, here we’d like to do longer-term? And the size of the potential redevelopment and the timing and when we might get some of those details?

Hi, it’s Rick. We are very far along in that process; we’ve already had multiple meetings with Seritage. We have developed redevelopment plans for each of the assets. They are in the process right now of being priced, and as they mature, we will announce them and proceed forward, but they include the addition of specialty stores, mall expansion, adding restaurants, adding boxes, and appropriately sizing Sears. Bear in mind, in our venture, it’s almost 850,000 square feet of additional space that will be able to redeploy along with those TBA auto centers. It’s a great opportunity and we are well into it.

Thank you.

I just wanted to focus a little bit more on the redevelopment pipeline. David, I believe you said that $1 billion through 2017, and I know it's been going on for a number of years now. I mean, what are your thoughts, I guess, at this point beyond 2017? Is that – by 2017 you are really at this point touching those top-producing assets? Or do you think you can expand that program beyond?

Well, I think as Rick mentioned, I mean I do think Sears gives us a whole host of additional redevelopment opportunities. We are closer and closer to starting – in fact we are actually starting the Southwest Corridor and Copley, which is not in those numbers yet. Absent something really unexpected, we are going to start Copley very shortly; we've got fail safes in that investment, but we are moving with speed to deliver that. We think that’s great. Sears presents a lot of opportunities. We've got outlets that we've done the big ones; we’re doing a bunch of small ones that we need to look at. Rick, do you want to add to that?

I would also tell you, we’ve already announced the expansion in Jersey Gardens that is going to be a major redevelopment. We have announced the expansion of Sawgrass. Right now we're finalizing an expansion of Colonnade, redeveloping the Oasis. I can assure you we are continuing to mine this portfolio, and I believe we’ll have a continuing series of pretty substantial value-add opportunities across all three of our platforms.

Okay, thanks. One of the other focuses that Craig and I have been paying attention to is on the technology front, the winners in the Simon Launch, particularly SKU IQ. From where we sit, it’s just been hard over the last year to really keep track of exactly what's going on here on these different initiatives. Can you discuss either the winners or SKU IQ in particular and where you think this may go?

Yes, look; I don't get mad at me, Jeff, but I believe we are happy to do – I think we are close to putting together with Skyler and Michael and an investor meeting to layout all of the investments we made and the reasons behind them. We’re shooting for sometime in October. There’s a lot of neat stuff here. These are little investments in the grand scheme of things, but they cover creating energy efficiency with all of our LED lighting to helping retailers with new e-commerce ideas that may go to the mall. So it’s a lot of different categories, different levels of investment, in the kind of the A, B, C rounds. We’re happy to share that data; there’s a lot to do it on a call like this, but we will be sharing much of that information with our investors.

Okay, thanks.

Sure.

Thank you. A quick follow-up first. Have you bought any more shares post the quarter end?

If you are familiar, you have to operate under a 10(b) 15 rule once your quarter is completed. We gave guidelines because you can't be in the market during that period of time, and the guidelines we gave to the broker were not met. Therefore, the answer is we have not purchased any further.

Okay. The second question, is there any incremental change in trends you're noticing in the outlet business? Maybe not the premium, but more secondary, where maybe the pricing gap between full-line mall retailers and outlet businesses or retailers are narrowing? You've seen like T.J. Maxx and Ross doing better. Have the secondary type of outlets - do you notice any less importance or less traffic or any kind of incremental trends?

Not really; I mean I think not really at all. Our outlet retailers are very focused on finding the right balance between full price and outlet; that's why they are very focused on not overexposing the brand. There have been certain retailers that have had disappointing sales both in full price and in outlet. Outlet’s no different than full price in that if a retailer is not hitting it, it will affect their sales in full-price and in outlet. But no trend in that at all. We have outlets in Cincinnati, Columbus, Indiana, and St. Louis that are all doing just fine. They are affected by retailers that may not be doing as well as they were a year ago, but that's similar to the full price small business as well.

Okay, thank you.

Hey, good morning out there.

Good morning.

Just a few questions here, David. First, just going back to the dividend and stock buyback; certainly, as you guys outlined where you want to put your money, redevelopment and development seems to be the first and foremost. Once you've solved for paying out appropriate taxable income, it sounds like your bias is still towards increasing the dividend versus buyback. So I just want to see if that’s the proper interpretation from your comments or if you think that any excess cash may now go more towards buyback versus strong dividend growth.

The dividend -- listen, this sounds weird, but we're highly profitable, right? As our earnings increase, you know our taxable income increases and therefore, our dividend increases. Very simple, that’s the REIT model. We’re great believers in the REIT model; that’s why we are all here. Therefore, our dividend is going to increase. There is just no two ways about it, because we have created a very nice earnings machine. As long as we don’t make mistakes about where we invest capital, we’ll be in good shape. I always like increasing the dividend more than stock buybacks; we had this unusual situation where we took one investment and felt the most immediate interesting return would be buying our stock back. I think having the flexibility to buy it in a volatile market, when there is a big disconnect is what we will focus on. But I would continue to expect – knock on wood, as our earnings continue to move up, we’re going to be focused on increasing our dividend. It’s underappreciated in the REIT sector, but if you look at our dividend yield compared to our peer group and you look at our dividend growth and expectations of a higher dividend growth, we look like a cheap stock; so do what you want with that.

Well, which as an analyst, we can't do anything with it because we can't own it. But obviously, it's good to cash dividend checks. Moving over to Europe, you guys announced the JV with HBC in Germany, involving a lot of High Street retail. In the U.S. you've shied away from doing High Street retail. You've stuck to the malls and outlets. So, just curious, do you have a different view with High Street retail in Europe that you don't share in the U.S.? Or is it really again just a pure credit play focusing on retailers, and you're not trying to do something as far as the potential to get at High Street retail in Europe?

Look, I think the market in the U.S. with respect to High Street retail is sophisticated; there are a lot of guys that have been added for a long time. We think Europe is a little different in that maybe there is more opportunity for us to do that, just like the opportunity we saw with Klépierre a few years ago. That’s not to say the HBC thing is a little credit play; it's a little accretive growing vehicle, betting on a very talented CEO and the team at HBC. These guys are entrepreneurs; they are smart, they are sophisticated, and they want to grow their business. We are happy to be their partner, and I think that entity will ultimately look to create a broader portfolio. High Street Europe is a little more interesting from an evaluation point of view. The U.S. is a little more pricey, with a lot more sophisticated players, but we’ll see how it evolves; we are making, I think, a good bet where we’ve got very strong partners, strong assets, and strong credit.

Okay, that’s helpful. Listen, thank you.

Hey, good morning, everyone. Just want to go back to the Sears JV. Just curious, in the context of investment opportunities, there's a lot of chatter about different retailers doing something with their real estate. Just curious if you are having more conversations with others on structures like the Sears or the HBC deals that you have.

Well, I think there have got to be more than just marketing or financing retailers' real estate. The reason we did Sears is that partnering with them is because it’s all about redeveloping over time those boxes. The store of the future may or may not be part of it, but that’s basically a redevelopment play. HBC, in contrast, was about marking out real estate, and we created – if HBC only wanted to just market the real estate and do credit, we wouldn’t have played. We saw an opportunity to bet on a very accomplished entrepreneur with great brands. Low and behold, we did the deal, and they are buying the German department store, but we are entering German real estate in a big way. If it's just marketing real estate or just for credit, that’s not really exciting for us. We’re happy to talk strategically with our retailers about it, but there's got to be more to it than just that. I think this world will present opportunities, but there's got to be more than just marketing the real estate, whether it's redevelopment or creating a growth vehicle.

That makes sense. But I guess I would just – it seems like there would be plenty of redevelopment opportunities beyond just Sears, although Sears offers plenty of opportunity in itself, I guess. But maybe just thinking about other areas, I mean, can you just comment on the McArthurGlen pipeline? I think there's one project that you were expecting to start here this year. But how does the rest of the pipeline look like for potential additional developments there?

Sure, there is – in Provence, we are about to start construction in September after the growing season, and that’s an all-systems-go deal; we just bought the land. We are in the final throes of expansion in Roermond. We’ve partnered on other projects in Normandy, and we have partnerships in Spain, and we are looking seriously at expanding Venice. It’s a very active time in terms of new development, and obviously being able to build starting in September in the south of France is very exciting and pleasing.

Okay. Just one last cleanup question in terms of the guidance. Assuming that it does not include any future buybacks, just what's closed already?

Well, Tom and I had this philosophical discussion today. We are a pretty large company; we are going to earn $10 a share this year, thereabouts. We have so many ins and outs; we’re not a portfolio. We’ve got many things going on. That’s our best guess; we put it all in the blender, we give it to you and it's all subject to change quarter-over-quarter. The good news is we hit our numbers, knock on wood. Hopefully, we'll continue. We don’t isolate one particular thing over another, and we’ll see where it shakes out.

Okay, thanks a lot.

Good morning.

Good morning.

At this point with your other department store tenants, are you seeing any of them wanting to right-size space like Sears?

Not really, we are constantly in conversations with them and we are doing a number of other potential things involving relocating department stores. For example, at Stamford, we had a Bloomingdale's that was oversized; we worked with them, they built a brand new store, and now we’re redeveloping the old Bloomingdale's into small shops. We did the same thing with Saks at the Houston Galleria. So it’s a very dynamic process. We’re constantly in conversation with them and we’re doing a lot of things as a result of that. But there is not another store out there that has the kind of focused, programmatic approach to decreasing their footprint size.

Okay. Thank you.

Yes, hi. Just going back to Sears again, what's a rough idea of the dollars that could be invested in those 10 or 11 boxes over time?

I think we’re going to use that on a project-by-project basis, but obviously, as we’ve articulated, it’s a substantial opportunity and would certainly be in a larger amount as opposed to a lesser amount. It depends on the scope of the individual projects, but that is to come.

Got it. Okay. So it sounds like it could be in the couple - in the hundreds of millions of dollars.

Potentially, yes.

Got it. Then I guess, how does it work? If you demolish a Sears box and do a major expansion well beyond the footprint, do they participate in that or is it just to the scope of the footprint?

Each project is different. In the Sears venture, they own a part of the Seritage; our venture owns a parcel of land. So the venture would be focusing its redevelopment efforts on the parcel of land owned in the venture. That would be the extent of the activity in the venture.

Got it. Okay, thank you.

Hi, good morning. Just a quick question on occupancy and the impact of bankruptcies from earlier in the year. I think we were pretty happily surprised to see that your second-quarter occupancy and same-store NOI were actually somewhat stronger than the first quarter. I was just wondering if you could go through some of the progress on re-leasing that space and when you expect to have made up for the lost occupancy and NOI.

I will just say our goal is still to try to come close to our year-end occupancy from last year, but it’s going to be - it’s not a no-brainer. It could slip what I’d say is immaterially, but others may have a different view, and I respect that. We’re trending up, we are making progress, and I think we’ve got momentum, but it takes time. Our goal is still to try to get back to last year. But we lost, what Rick?

940,000.

Yes, 940,000 feet, so that’s a lot of work. So we are a little bit on the treadmill, but we're a fit athlete and we're running...

David is speaking for himself.

I wish.

I would just add one thing that we are making very good progress going through it and it is an opportunity. It's hard work and has the short-term impact, but the tenants that we are bringing in are certainly higher productivity tenants from a sales perspective, and so far the rents that we’ve been able to generate are in excess of the rents being paid by the former tenants that went bankrupt.

Got it. Then just also, is there anything you could say on the difference you're seeing in re-leasing the space at, say, your trophy properties versus whatever you would call the next tier of your properties?

Look, it's axiomatic that the higher-productivity properties have a broader range of interest, but happily we’re also blessed with a portfolio that is predominantly those strong properties.

Great. Okay, thank you.

You are welcome.

Hi. I'm not sure if this is something you could comment on deeply, but when you look at your redevelopment plans for Sears, do you think you're approaching your plans any differently from GGP or Macerich? Or is it relatively straightforward in terms of figuring out what the property is missing and splitting boxes and adding entertainment?

Look, I think they're both very confident developers and redevelopers. At the end of the day, my guess is it’s not going to be all that crazily different. But it’s so much of that is dependent upon the location and the local market, but they’re both confident developers. I would probably venture to say it will be similar, but if they’re better than us, we intend to copy immediately.

Then retail is cyclical, and while there's been a recent wave of closures, you also noted that there's a lot of entrepreneurial concepts popping up. Do you think there's anything different about the cycle time around as it relates to maybe omnichannel selling or bifurcation amongst brands catering to high-end or low-end consumers?

Well, look, would you say generally there is obviously the whole movement towards value on one hand and luxury on the other continues? The general – the good news about that is we’re positioned in both of those barbells extremely well. But that’s not to say people lose sight of that; that doesn't mean the middle American mall isn't doing well. It's part of the community, it’s ignored from a media point of view; there are assumptions made about those assets. There is extrapolation because one mall went out of business that all malls are going out of business. But I would say to you that the solid middle malls throughout America continue to do well, serve their purpose. You’ll clearly see a movement in a lot of retailers from either aspirational higher-end goods or value. There is no question about that.

One comment I would make to you on the new retailers we are dealing with is that they are substantially more sophisticated than the crop of new retailers we dealt with say 10 years ago; better financed, much more focused on their niche, and it’s been much easier to deal with this new crop of entrepreneurs than might have been the case.

Look, in today's world we have to be better; we’ll have to be on our game better. So that comes with – okay, what industry it’s – let’s say I mean everybody – the rapid changes in the world is putting pressure on every industry, every operator, and that’s why you got a strong people, strong assets, and strong balance sheet to deal with it all.

Thanks.

Thanks. Just a couple quick questions. Rick, if you look at kind of the sales and leasing trends, is there anything that you can talk about regionally? Any big differences that you see?

Look, there are a couple of differences across the board in our business. The Great Lakes, Southeast, and Pacific are stronger; mountain and New England are a little weaker. The better categories were home furniture, food, personal care, jewelry, and athletic shoes.

Okay.

I mean, I say Steve, you clearly – the stronger dollar and the economic upheavals in growing markets, but with wealthy people in Brazil and what's going on with China and their focus – obviously, Europe with the stronger dollar. It has impacted sales in the high tourist centers. We’ve got them. We’ve got them in South Florida; we’ve got them in Orlando. We don't have New York City, but we have Woodbury, which has been relatively flat. That's usually a center that grows every year; I think that’s more of all the stuff going on with the center and the tourism. The tourism centers have had a little softness, as we see in the hotel industry. So, we are not immune to that.

I presume that's not having much of an impact on leasing, just given their long-term nature? Or do you actually think it's impacting leasing at all?

I would say it has had no impact on leasing.

Any update on the Copley kind of residential project? Well, I mentioned it briefly earlier which is look; we’re doing the Southwest Corridor. We’re finalizing the permit there, which is more administrative, so it is all shaping up to we start to dig down to support the foundation going up. That’s all moving; we should start the Southwest Corridor in the next month. We have certain fail-safes; the way that building is being constructed has fail-safes. For instance, we’re going to do the Southwest Corridor first, which is because we’ve got to create a new entry to create the way to build. We have to go down into the Turnpike to create new entrance first. That’s happening, and that’s been approved by us. Then we go down into the Turnpike, then we go up to support this field going up. We’re making incremental decisions; once we do the Southwest, we’ll do that. Building the podium is where it's really guts poker; that's a year decision from now, but all systems are go, and we are cranking. We don’t see any reason to stop.

Okay. And then just last question. Anything on Deliv? That kind of system just seems to have taken a backseat; haven't heard much about it. Any thoughts about that or how it's working?

I would comment on Deliv that Macy's just recently announced that they are expanding the footprint of stores in which Deliv is going to be working with them. So that is certainly a positive sign, and we continue to believe that there is a significant role for all of our properties to play in the fulfillment aspect of an omnichannel retail business, and it’s moving at pace.

So Rick, do you think it’s more a function of just consumers not really realizing it exists to kind of get more critical mass?

I think it’s just a function of getting the systems right and getting the retail to the point where they are ready to fulfill from their store that there is a big systems upgrade going on right now across the entire industry. Ultimately, there is going to be a seamless integrated experience for our consumers, and certainly fulfilling from the store to their home is going to be part of that. Deliv can be part of that solution.

Okay, thanks.

Thank you. Just one quick follow-up on Sears. Given the potential size of the capital spend for some of the Sears projects that you were talking about earlier, if Seritage can't meet its share of the capital requirements, is there an opportunity for you to put up a disproportionate amount of the capital to potentially grow your interest in the joint venture?

Well, that would have to be a negotiated part of the deal, but it seems to me they have got the balance sheet to be able to do that; I'm sure we could figure it out as they didn’t.

But is it correct to assume you guys are controlling kind of the process and the strategies at each of the center?

We’re joint venture partners; it’s both parties that need to approve. I’d say we are taking the lead on coming up with the plans for the redevelopment and the different uses. But they are riding shotgun with us.

And I would also say to you that we have a significant number of Sears stores that are not in our venture that are in Seritage. When we meet with Seritage, we are actively working with them, as we have done in the past, to help them redeploy those phases in a productive way and an example of that is King of Prussia, where Dick's now opened and Primark is opening this fall. Between the two of them, they will 100% occupy the former Sears store.

And just a follow up on that, Rick. With Seritage kind of taking control of the Sears space and the talks of other department stores potentially monetizing their real estate, do you see any difference in the operations? I know it's early, but do you see any potential impact to the way you negotiate, lease, or deal with the anchors if the landlord is no longer the retailer?

No.

Yes, they don’t have the infrastructure to get stuff done like we do; I don't see the dynamics changing.

Thank you. Just a quick follow-up. I know most of the conversations are always circling around upgrading quality and reinvesting in your better assets. But given that you do have some of your malls tied into WPG and the history there, and just because the stock price has gotten cheaper over the past year, is there a certain point where a lower-quality portfolio might look interesting just because it's so cheap? Or should we just basically consider this like a permanent divorce?

I don't know even how to interpret your question. We spun off WPG well over a year ago. They are a separate independent company, focused on the strip center and B mall business. You can hear that directly from them. We do services for them that ultimately will go away mid-next year and their growth opportunities are better discussed with them. I think our focus, as you’ve seen over the years, is to buy the bigger assets or assets that we feel we can improve upon, but the primary focus is on our redevelopment or finding different vehicles for growth, whether it’s Europe, whether it’s HBC, etc. and continue to grow our business. I said the amount of the big deal business we are not going to buy B assets; I think that’s better for others to do given what’s on our plate, but I’m not sure I answered the question, but I tried.

Yes, you kind of did. I was just basically asking if there's a certain price where something like that would be interesting again?

I think that this is better for others to do, but that’s not up to me to decide.

Hey, guys. Good morning. My question, David, was kind of on the flip side of that. You have 200 assets. If you rank them all, does it make sense to get rid of 190 through 200? That kind of thing?

Well, we are always doing that; we just do it – we don’t do it ahead of that. So we have a deal that’s closing mid-August that involved a lot of work, and we just didn’t want to deal with it. We are closing on another deal, so we do that all. Rich, I know if you looked at our history, we have sold a bunch of stuff, so we will always sell assets. That’s always part of what we do.

Got it. Okay. So are you marketing things actively, or is it just sort of opportunistic? Yes? Okay.

Yes, we market. The two that I’m referring to were marketed, yes.

Got it. Okay. Then on the lease term income you guys got this quarter, it was kind of big. I'm curious; I know you can't tell each quarter what's going to happen. But is that something that's going to pick up here you think in the last two quarters of the year? Are there more discussions you're having on this kind of thing?

There could be a few deals here or there, but if you look at it year-over-year and year-to-date, it’s not all that different from 2014. So it’s generally lumpy but I don’t think it’s going to be all that different. Steve, right?

Same as 2014.

Exactly. So that’s the business; it’s lumpy in terms of quarter-to-quarter, but it's actually relatively consistent year-over-year.

Okay, great. Thanks, guys. End of Q&A.

Okay, thank you. Have a wonderful last few weeks of summer. Sorry to have ruined your Friday on a summer Friday. Enjoy.