Simon Property Group’s Q4 2021 earnings call, annotated

In 2021, companies scrambled to get back into physical retail as vaccinations promised a post-Covid world. Then the Delta and Omicron variants confused things. For 2022, Simon Property Group will be looking to e-commerce and its acquired brands, including Brooks Brothers and Aeropostale, to drive growth, while hitting the brakes on new acquisitions.

Below, we’ve transcribed the company’s fourth-quarter earnings call and annotated it with thoughts, comments, clarifications and links to relevant stories.

Operator: A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Mr. Tom Ward, senior vice president of investor relations. Please go ahead, sir.

Tom Ward: Presenting on today’s call is David Simon, chairman, chief executive officer and president. Also on the call are Brian McDade, chief financial officer, and Adam Reuille, chief accounting officer. 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 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 aka filing. Both the press release and the supplemental information are available on our website at investors.simon.com. Our conference call will be limited to one hour. For those who would like to participate in the question and answer session. We ask that you please respect our requests and limit yourself to one question.

Now I am pleased to introduce David Simon.

David Simon: We had a very busy and productive quarter to end a very successful year. We recorded record occupancy gains, retail sales, and demand for our space from a broad spectrum of tenants is robust, and our other platform investments had strong results. We generated nearly four and a half-billion dollars in funds from operations in 2021 or $11.94 per share. The $4.5 billion is a record amount for our company for a year and coming off a difficult year of 2020. These results are a testament to our relentless focus on operations, cost structure, active portfolio management, smart investments coupled with a coherent strategy.

The difficulty Simon refers to in 2020 was considerable. Simon Property Group’s revenue that year was barely a quarter of what it is now and thousands of properties were closed. More than 10% of its owed rent was not collected, contributing to the losses.

Fourth-quarter funds from operations were $1.16 billion or $3.09 per share. Included in the fourth quarter results was a net loss of $0.10 per share from a loss on extinguishment of debt and a write-off of pre-development cost partially offset by an after-tax gain on the sale of equity interest. Our domestic operations had another excellent quarter to conclude the year. Our international operations improved in the quarter domestic property [net operating income] increased 22.4% for the quarter and 12% for the year, including our share of [net operating income] from TRG in our international properties, portfolio [net operating income] increased 33.6% for the quarter and 22.3% for the year.

Simon’s international efforts have been particularly focused on China. The company opened its first office in Hong Kong in May of 2021.

Mall and outlet occupancy at the end of the fourth quarter was 93.4%, an increase sequentially of 60 basis points and 260 basis points year-over-year.

Simon’s full malls are an outlier in American retail. Most malls have been under 90% occupancy throughout 2021.

Average base minimum rent was $53.91, add $8 to that if you included variable rent for the year. We find more than 4,100 leases for a total of more than 15 million square feet. This was the highest amount of leasing active activity we have done over the last six years. Retail sales continued in the fourth quarter. Mall sales for the fourth quarter were up 8% compared to the fourth quarter of 2019 and 34% year-over-year, reported retail sales per square foot reached a record level for 2021 At $713 per foot for our mall and outlet business and $645 for the Mills. These results obviously are impressive, particularly given the lack of international tourism in 2021.

Simon’s high amount of leasing activity was most likely driven by retailers’ scrambling to exit low-performing shopping malls in less than ideal markets and seeking out strip malls, open-air markets and neighborhood shopping centers. In January of 2021, Modern Retail published a smart look at where those brands were going. Many were swept up by Simon Property Group.

Occupancy costs at the end of 2021 are the lowest they’ve been in five years, at 12.6% by year-end. We opened two new developments in 2021: one in the UK and a premium outlet in South Korea. Construction continues on our tenth outlet in Japan, opening this fall, and Normandy, France opening the spring of 2023. We completed five significant redevelopments. We added densification components with the opening of two hotels and the completion of an NHL headquarters and practice facility. Progress continues on the densification of Phipps Plaza, which will open this fall. We have a significant pipeline of redevelopment projects, which will be funded from our internally-generated cash flow.

Let me turn to our other platformer investments. They produced terrific results in 2021, namely JC Penney, SPARC, ABG and Real Gilt Groupe. JC Penney’s results were impressive. Their liquidity position is growing now to a 1.6 billion dollar company, they deleveraged their balance sheet and have no borrowings on their line of credit. CEO Mark Rosen strengthened his management team with a new chief information officer and chief digital officer. RGG, including our shop premium outlet marketplace, saw growth continue, and we expect continued investment in 2022 to drive customer acquisition and sales growth.

Simon and ABG, which together form the joint venture SPARC, have been behind many major retail acquisitions in the last two years, scooping up brands like Reebok, Eddie Bauer, Forever 21, Brooks Brothers and Aeropostale. Authentic Brands Group’s CEO Jamie Salter has seemingly made it his mission to pick up as many bankrupt retail brands as possible. The strategy continues under the joint venture of SPARC. The early results showed the success of the strategy. In 2020, just four of those brands brought in a collective $260 million for ABG, far more than what the company paid for them.

SPARC Group will be the operating partner for Reebok in the US; a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach. TRG, Talmon Realty Group, which we own 80% of, posted great operating metrics and results, which also beat our underwriting. Reported retail sales were $942 per square foot, a 31% increase year-over-year. Occupancy also increased 210 basis points for the year.

Now turning to the balance sheet, we’ve been active in the debt markets. We amended and extended our $3.5 billion revolving credit facility with a lower pricing grid. For five years, we issued $2.75 billion of senior notes, $750 million — or 50 million euro notes — completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.14%, repaid more than $4 billion in debt, and deleveraged by $1.5 billion. And with the recent January notes offering, our liquidity stands at $8 billion.

Now, just to turn to dividend. We paid out $2.7 billion in cash common stock dividends last year. Today we announced a dividend of $1.65 per share for the quarter, a year-over-year increase of 27%. This dividend is payable on March 31.

Now just to go through guidance for 2022, our FFO guidance is $11.50 to $11.70 cents per share. When looking at our 2022 FFO guidance, it’s important to note the following items as compared to 2021 actual results. Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klépierre and up approximately $0.32 per share in gains related to our investment in Authentic Brands Group.

Klépierre is a French real estate company that was acquired by Simon Property Group in 2012.

These gains were partially offset by approximately $0.14 per share in debt extinguishment charges, resulting in an adjusted FFO of $11.44 per share for 2021. Also, a significant increase in overage and percentage rent compared to prior years, and lease settlement income of approximately $0.10 higher than historical average.

Our guidance reflects the following assumptions: domestic property [net operating income] growth of up to 2%, approximately $0.15 to $0.20 drag on FFO from additional investments in RGG, and SPO, JC Penney and the Reebok integration costs of SPARC, all to fund future growth. The impact of a continued strong US dollar versus the euro and yen compared to 2021 levels, continued muted international tourism and no significant acquisition or disposition activity.

Finally, I really want to thank the entire assignment team for their tireless work that they continue to do for retailers, shoppers and communities every day, and for bouncing back in 2021, after a very difficult 2020. Make no mistake about it, 2021 was a great year. And I think Tom knows, but I think our SFL guidance was, which was consistent with basically the analytic community, around $9.60 per share. And we reported $11.94 per share. So that’s a heck of a year. I’m very excited about our plans for 2022 and the future growth prospects of our company and we’re ready for any questions.

Despite Simon’s positive tone, investors were slightly less keen on the guidance given here. Simon’s highest estimated share price, $11.70, is below investors’ desired $11.79. Its stock fell by two points after this call. It wasn’t the worst hit for Simon Property, but given its ambitions around acquisitions and the return of brick-and-mortar retail, there’s a bit of misalignment between company expectations and the investing community’s confidence.

Operator: Thank you. At this time, we’ll be conducting a question-and-answer session. Our first question comes from the line of Steve Sakwa with Evercore ISI please proceed with your question.

Steve Sakwa: Thanks. Good afternoon, David and team. Thanks for the detail or at least the additional disclosure on the guidance. I guess, just sort of tying back to the leasing comment you made about the 15 million feet being kind of a record year for the last six years, what are your expectations for leasing activity in 22? And how that might tie into further occupancy gains. And then I also noticed that the leasing spread information that used to provide this supplemental wasn’t there anymore. And I was just wondering if you could comment on pricing trends that you’re seeing. Thanks.

David Simon: Sure. So, I think that we’re very optimistic, Steve, about 2022 leasing. A lot of new business with a lot of new tenants is the goal. We expect to increase occupancy compared to year-end 2021. And, obviously, the last couple of years, with COVID, we’ve been working with our retailers so we haven’t quite had the level of pricing power that we’d like to see. We’re starting to see that strengthen from our standpoint. And we’re still looking for win-wins between us in our clients.

The pandemic meant a lack of demand for retail spaces, which led to owners forcibly lowering the price for those spaces. 2021 saw many retailers looking for new spaces, but with more leverage to get lower lease prices. This year, lease prices could remain low while the demand for new spaces potentially stagnates.

But we feel better that we will continue to drive rental growth over time and we took a bet that the world of brick-and-mortar was not going down. So we did deal with a lot of renegotiations that came about because of COVID. We tried to make it back on sales because we believed in our business and that’s why you’ve got to look at what we’re achieving on either percentage or overage rent, which historically we haven’t taken into account in our spreads. And one of the reasons why we have done away with the spreads is the fact that there’s no industry uniformity, and more importantly, there are very few retailers, retail or real estate companies, that are doing it. But we bet on our company, we made the right bet that it produced the results that we wanted to see in 2021, frankly, above our expectations. And that the strength of our portfolio and the demand is there. So now we’ve just got to execute it. I do think there’s so much going on that I’d be remiss not to say it still takes a while to get stores open. And with all the activity, we’ll see some of them 2022. But we’re going to see a tremendous amount of great new stores in 2023.

Here, Simon is again hedging on the prospects for 2022. Prices still may not be back up, plus many of the deals struck this year won’t see the stores actually open until 2023.

Operator: Our next question comes from Caitlin Burrows with Goldman Sachs.

Caitlin Burrows: Hi, everyone. Maybe just a question on the guidance and the retailer contribution part. David, I know that you mentioned that the 2022 guide includes a $0.15 to $0.20 drive from additional investments this year. I was wondering if you could just go through what contribution the retailers had in 2021, what the guidance assumes for 2022. And any more background you can give on what’s causing that drag, what the impact in 2022 is, and what’s specifically driving it?

David Simon: Yeah, the drag is all about future investments. So, we outlined a little bit on the call, but we’re in a growth mode with Rue La La, Gilt and sharppremiumoutlets.com. So we’re acquiring customers, we’re marketing more, and we’re building the technology out to serve those three platforms with great sales growth and marketplace growth. That takes investment.

Among Simon Property Group’s more interesting recent projects is growing the e-commerce side of its retail stable. The Rue Gilt Group, which Simon backed in 2019 and went public in 2020, has been the most successful attempt on that front. Its revenue jumped by 34% in 2021.

So that’s one element of it. The second element of it, JC Penney is building out its beauty business, as well as its digital business. So again, it’s the belief in the brand that’s going to create these unique opportunities, and we’re going to invest in doing that. And then finally, the Reebok integration will reduce the operating earnings from SPARC, just temporarily in 02, as it deals with consolidating its operation.

Simon meant to say “2022” not “02.”

We now have an office deal that hasn’t closed yet. It’s going to close at the end of the month. But the return for 23 on that will be much more than whatever the investment is. So all of these have the payback on RGG stuff is 16 months, they track it by the nickel, the same in various businesses. But you’ve got to invest for future growth. That’s what we’re seeing in terms of operations outside of that came in and we’re basically more or less budgeting that same EBIT God and net operating income levels for our other platform investments, other than these investments that I just mentioned.

Caitlin Burrows: And just one quick thing. You saidd the Reebok integration will reduce SPARC earnings in 02. Did you mean Q2?

David Simon: I’m sorry. I meant 2022.

Caitlin Burrows: Got it. Thank you.

Operator: Our next question comes from Rich Hill with Morgan Stanley, please proceed with your question.

Rich Hill: Hey, good evening, David. I want to talk about the dividend for a moment. You’ve raised it for three consecutive times. I think we’ve discussed in the past that it’s well below where you were in 2019, despite free cash flow being similar to where you were in 2019. Can you maybe just elaborate on why not increase the dividend more here? I recognize in previous answer you were talking about being in growth mode and investing in businesses. But is there a trajectory actually to get back up to $8.30, where you were prior to COVID?

David Simon: It would be my expectation over time that we’ll reach those levels. I think it’s just an abundance of caution. But if you look at Q-over-Q, it’s over 27% increase. So, I know, sequentially, it’s not. But that’s what we tend to do historically is be flat in Q1 area, we measure our taxable income, and as earnings percolate, we tend to raise with our taxable income. So I think I think we’re really adopting what we’ve done historically. But our payout ratio is low. The liquidity is strong. And I would expect, hopefully, that our dividend, we’ll continue to see increases from 2020 to 2021. So, I’m hoping we’ll continue a very positive trend.

Rich Hill: Thank you. And just one more question. If I think back to this time last year, you initially guided to 950 million to 975 [million.] You put up a really healthy number this year. What would give us confidence that 2022 could surprise the upside, just like 2021? Or do you view this year as more baked, so to speak, than in 2021?

David Simon: Well, the year’s never baked, right? I think the big variable that is always there is sales, because we still have some COVID-oriented leases that have not rolled over. We still are a little more dependent on sales than we would have said three, four years ago. So that is why we’re a little more cautious. I like to say we’re as good as we are. We can’t predict with certainty sales. But I’m hopeful that the way we talk to retailers, they still feel very good about the economy and what’s going on. Obviously, there’s a lot of volatility in the world today. And we’re not immune to that. So we just have to wait and see. But we are building off a terrific 2021. So we’ll see. I am hopeful that will continue to produce growth. Assuming that everything holds together externally with our economy and so on. There’s no certainty but I feel pretty good about where we stand.

Physical retail and real estate are uniquely vulnerable to the ups and downs of the pandemic. New variants will likely spring up, and surges of new cases can drastically decrease both consumers’ interest in going to the store and brands’ interest in opening new stores. In light of that, Simon Property Group’s increased interest in e-commerce makes sense.

Operator: Our next question comes from Michael Bilerman with Citi Bank. Please proceed with your question.

Unfortunately, Bilerman’s question gets garbled due to a poor connection and Simon struggles to understand it. The following exchange gets a bit confusing and doesn’t really answer Bilerman’s question.

Michael Bilerman: Thank you. Good afternoon. I wanted to come back to the growth that you’re getting from a lot of these unique and differentiated investments that you’re making, and just how it ties back to this year’s earnings forecast, but also that growth in the future. You gave us a couple of key reasons, but they’re all a little bit different department altogether, so I’m going to use one for now and maybe we can pivot off that. But if you just look at your FFO from investments, which is on page 28, but includes all of the other investments that you’re making. — you’re looking at 2021 at about $550 million, about $1.46.

You’ve now thrown out for this coming year, the $0.15 to $0.20 drag from the investments that are being made. And I’m just trying to reconcile well, how much is in the $11.60 a share for all of these, which are both retailer investments, as well as Klépierre, what sort of range are we thinking about — that’s obviously gross, but then netted down by, I guess, $0.15 to $0.20 for these other investments. I’m just trying to put it all together.

Unknown Speaker: Didn’t hear past that.

David Simon: Michael, if you went back to the office, you might be able to sound a little a little clearer. Okay. I don’t know. Maybe you can. I’m happy if you can read it out loud.

Michael Bilerman: I am in the office. How about if I pick up my phone? Is that better for you, David?

David Simon: Slightly.

Michael Bilerman: I’ll take slightly. But I’m just trying to, on page 28, you actually list the FFO contribution, right? $550 million from everything, right? A buck 46. So I’m just trying to triangulate what you earned in 2021. And how that compares to the $11.60. In 2022, you’ve given us a couple of nuggets of information, the $0.15 to $0.20 drag. But it doesn’t map out to actually what’s in guidance for these investments.

David Simon: Well, again, the tax effect is that there’s no surprise. Our math is very simple. I’m sorry, we’ve made money in all these investments. Now you have to pay attention to it. Unlike other people that make investments and lose money. We actually make investments that make money. These are the net operating income. They’re not — the tax line is below this. This is just kind of — this is like an EBITDA number that we try to show the market. That’s all that this is, and it’s there for your information. And again, the net operating income from other platforms I described, the net operating income from investments is Klépierre and HPS and we footnote corporate and other net operating income sources. So, I don’t know what else you want. The guys are happy to take the question offline.

Michael Bilerman: Okay, yeah, I was looking at page 28, not the net operating income page. That’s where the confusion was coming from, David. Maybe just see the FFO investments? Right. So that includes all of the FFO from all these great investments you’re making? And there’s not a negative question, David, that this is positive stuff that —

David Simon: That includes everything lumped together, and then take the tax impact. It’s the net operating income so it’s pre-interest. But we’re happy to walk you through it.

Michael Bilerman: Okay, well, that’s exactly it. Now we’ve gotten to the question, which is that that’s why that’s the number we do know, right? So there’s no ambiguity.

David Simon: It’s EBIT. So, remember, retailers have depreciation that we don’t add back and so on and so forth. But the guys will be happy to walk you through it.

Tom Ward: We’ll connect offline, Michael.

Michael Bilerman: Okay. David, can you just talk generally your opening comment in the press release that was all about unlocking value, and you’ve already done some of that through the transactions. How do you think about the initiatives that you want to focus on this year and what value is sitting in this platform for Simon shareholders?

David Simon: Well, I mean given our level of cash investment, if you were to look at it on a private equity basis, we’ve made 20x on our investments. And they’re continuing to grow. And SPARC, I think, is a good example and RGG have great platforms that can continue to be a leader in their business. And ultimately, the market we’ll see if we need to at some point in time, monetize these or highlight the value, but it’s embedded here at multiples that the market is ascribing to us, but frankly, the external market is probably valuing it more than what it is today.

It’s notable that Simon believes the SPARC acquisitions like Brooks Brothers and e-commerce ventures with RGG are where much of the company’s return on investment will come from in 2022. It’s another sign that brick-and-mortar retail, while performing well at the moment, is more volatile.

Michael Bilerman: Right. And that’s all the questions that I’m asking, David. These are positive things that you’ve done that we get asked by the investment community. I’m trying to ask for more disclosure to try to ascribe that value that you want. So it’s coming from a good place. And usually, I’m good at that math but –

David Simon: I never suggested you aren’t. I’m just having a hard time hearing you. That was the only negative comment. 

Michael Bilerman: OK, OK. Thank you. Bye.

David Simon: OK. So, sorry about that. But again, we’re happy to walk you through it. So, you can understand what we’re doing.

Operator: Our next question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.

Derek Johnston: Hi everybody and good evening. So, I’ll abandon the retail investment question for now. But now in Q4 2019, pre-pandemic, David, the redevelopment pipeline was $1.8 billion at its peak. Now, it’s $944 million in Q4. That’s just a really modest increase from Q3. So, as you talk about record FFO and very healthy cash flow, how are you looking at capital allocation priorities going forward? Should we expect ramping redevelopment, some transformation clearly, some more retailer investments, dividends, buybacks, you mentioned no acquisitions. How do you view the priorities here?

David Simon: Well, the good news is our pipeline is kind of back to where it was in 2019. However, remember, in 2019, we finished some stuff, right? So naturally, that falls off. And then we didn’t add anything really until this year. But I think you’ll see steady progress in adding, and remember, we only add when we start construction on a project or we internally to prove it or we’re about to.

So, we would expect to be able to add to that number this year. So you’ll see that I’d be disappointed if it didn’t grow in size and stature and mostly in mixed-use. I would still say that’s the number one priority. We’re going to invest in our existing platforms that we have, whether they’re SPARC or ABG or RGG, so those are businesses that we have a lot of faith in, and we’ll continue to invest in those.

We’re still doing a lot of investment in updating the technology aspects of our shopping centers that we’ll continue to do. That’s important to us. We expect to raise the dividend. We’ve been really quiet on the acquisition front, and that’s that’s perfectly fine with us. We’ll see how the market transpires, but we feel really good about our portfolio. And if there’s something that fits in nicely, reasonably priced, we’ll take a look at it, but if not, ces’t la vie. And then I think we’re going to build another platform. It’s not necessarily a retail platform, but we’re in the midst of kind of working through some opportunities.

Stay tuned.

While SPARC has been on an acquisitions rampage for two straight years, it seems 2022 will see the cadence of new retail brands added to the portfolio slow down. But ABG and Simon have both shown a willingness to pounce on a newly bankrupt retail brand in a moment’s notice, as it did with Brooks Brothers in December of 2020.

Derek Johnston: Interesting. Thank you. 

David Simon: Thank you.

Operator: Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Alexander Goldfarb: Hey, David. I’m torn because you guys said one question first. I have two, but I’m going to restrain myself and just ask one unless Tom will give somebody the go-ahead. I’m going to go back to the retailer question.

You guys made a lot of headway on your brands. You added $160 million of net operating income, EBITDA, whatever you want to call it, from the retailer platform last year. And you guys seem to have a pretty quick turnaround of the brands. So, one, does it surprise you how quickly these brands have turned around, given that there are a number of brands and retailers out there who have been trying to restructure for years and haven’t been successful whereas in short order you guys have? And two, does this give you a better insight into your tenant negotiations such that now you have much more informed view of when you’re in negotiations with the tenants what their true potential is versus what they may be telling you at the table?

David Simon: Yeah. So, on the fast turnaround, I would say, yes. But remember, we bought most of them in bankruptcy. So, that allows you to clear out a lot of the issues and gives you a kind of a clean slate to grow from.

I’d say that the management team that we put together at SPARC is excellent. They know how to integrate. And between our oversight from ABG and SPG, you know, we’ve got good formula that’s working. Their performance has absolutely no relevance or insight at all when it comes to our negotiation or our insight into how to deal with retailers.

As previously mentioned, SPARC’s newly acquired brands have brought in a 20x return on investment. However, given that they were bought from bankruptcy, that’s not too surpising.

So, that’s just a flat-out no, Alex. I could see how you might ask that question, but it really doesn’t. Because each brand is unique and they don’t necessarily have a direct competitor that would be helpful, and we just don’t think like that because every space and every mall is different and market rents are all over the place. So, simple answer to that is no.

Alexander Goldfarb: OK. And Tom, will you allow me a second? Or are there a lot of questions you got to move on?

David Simon: He’s got a puppy dog look toward me. So, based on that, we will allow you. Thank you. OK. Go ahead.

Alexander Goldfarb: So, big picture. Obviously, a lot of what’s going on in retail and the crime and all these headlines is out there. My question for you is, is your sense from talking to the industry and obviously talking to local officials, is the view that it’s on the industry to try and beef up security and solve this? Or do you sense that the local authorities are finally realizing they need to do more from their end?

David Simon: Look, I think we are topnotch in this area, though, unfortunately, as good as we are, we cannot avoid what’s happened. So, we’re all subject to this. I don’t think it’s an industry issue. I think it’s a local jurisdiction issue.

And it’s a nationwide issue. And I believe the tide is turning. We are all over this, the safety of our consumers and obviously, the retailers is priority No. 1. We’re not immune to it as much as we would like to be. We have a very sophisticated operations center that deals with this. If you ask the retailers, they would tell you that I think, Alex, that we’re No. 1 in this area, but we’re not immune, I would love to be immune.

But we, as a nation have to address this, and it’s happening, obviously, in a lot of different areas. I don’t want to get into politics at all. But I don’t think the industry can solve it. I do think it’s got to be at the local and national level.

And I do think we’ve got to hold everyone accountable that this kind of stuff cannot be tolerated. But believe me, we are all over it but some of these things are just impossible to avoid. However, what you don’t hear from us, Alex, is all the ones that were defrauded, you know, dozens and dozens of multiple ones, and we do an excellent job, but we have to deal with some unfortunate consequences of these acts.

While a “crisis” of shoplifting in 2021 was a popular narrative, especially among retail and real estate business organizations, the actual data suggests that it hasn’t been nearly so bad. The Los Angeles Times reported that “shrink,” the total losses of a retailer due to theft, lost product and fraud, rose only 0.2% between 2015 and 2021.

Alexander Goldfarb: Thank you.

Operator: Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Juan Sanabria: Just hoping to ask a little bit about rents and leasing spreads again. So, the base rent was flat sequentially at just under $54. Do you think that’s now bottomed or stabilized and it’s headed upwards from here? And on the releasing spreads, I think you talked about $8 being in the number for the deals maybe sit in the fourth quarter or at quarter-end, not quite sure there. But when will that translate into the baseline rent? When will that kind of sunset out? And how are you guys thinking about internally on that spread number that’s no longer disclosed? Like what’s the expectation for what you generated in 2021 and what your expectation is for 2022?

David Simon: We focus on net operating income growth. So, that’s number one. And we expect to have NOI growth. So, that’s the first. Maybe we weren’t clear, but the $54 is just the base minimum rent that our portfolio averages. It does not include overage or percentage rent. If you included that based on 2021 results, that $54 would be $62, OK? So that’s the relationship there. I try to listen carefully to your question, but it just goes to show that the $54 is missing this component, and we thought it was material enough to point it out.

Juan Sanabria: And so when do you think that $8 comes into the number? Does that $8 count — that $8 assumption?

David Simon: Yeah. That’s all a function of lease expiration. So, we tend to — we tend to raise — if someone is an overage rent or they have a percent rent deal that’s expiring, we try to raise the base minimum rent or we try to capture as much in the base minimum rent from the overage that’s generated. You don’t always get all of it, but you do some of it. So, it should pick up over time, but it’s really a function of the big overage rent payers and when their leases expire.

Juan Sanabria: Thank you.

David Simon: Certainly.

Again, Simon Property Group’s lease prices remain relatively low and that will likely continue into 2022. That’s why it’s relying on new tenants to drive revenue.

Operator: Our next question comes from Floris Van Dijkum with Compass Point. Please proceed with your question.

Floris Van Dijkum: Thanks for taking my question, guys. David, you just mentioned net operating income growth. And obviously, I still think there’s a lot of value in the business here. But, you know, again, you might be slightly joking —

David Simon: By the way, so do I, so do I, Floris, okay?

Floris Van Dijkum: No, no. I know you think there’s a lot of value. And I’m trying to help you get that out. But the 2% net operating income growth that you have in your assumptions for 2022. If you have your fixed bumps in your leases typically of around 3%. You don’t get it for all of them, but you’re a little bit shy of 3% maybe. You should get around 2.5% to 3% NOI growth. Yet you’re only guiding for 2% growth.

David Simon: Yeah. I think it’s very simple. The real simple answer is sales, and we do a very sophisticated model. If we have sales levels that are above this year, we will overachieve that number.

But again, we’re in February, and we tend to be cautious on that number. And then there are increases in cost that we’re dealing with as well for us. Obviously, we have wage inflation. So, we have pressures on expenses just like everybody else. We’ve got no break on the real estate tax front from the local municipalities, even though we were closed for months in many cases in 2020 — 2019 and 2020. But our real estate tax expense keeps going up. So, we have pressures there that we’re just trying to be relatively thoughtful about, you know, how to deal with.

And then the percent overage sales number going into every year is a little bit of the unknown, and we’re trying to make some conservatism into that thought process.

Floris Van Dijkum: David, but a lot of your costs would be recaptured through CAM [common area maintenance.] You’ve got fixed CAM that increases at inflation. So, you know, that would imply that your fixed CAM —

David Simon: No, no. We don’t have CPI-adjusted.

Floris Van Dijkum: Well, that’s right. You have 3% bumps. You’re right.

David Simon: And we have bumps if it goes up 6% and we’re going up 3%, we lose 3%. So, again, I mean, it’s all factored in. But I would say there’s a little bit of margin pressure. And again, hopefully, I’ve been clear on the sales front.

Floris Van Dijkum: So, David, maybe if you can touch on one little area, which I looked at in your release, you have 6.8 million square feet of leases that are longer than a year, but that are sort of temporary tenants, specialty leasing, which are at an average rent of around — off the top of my head, $17. It’s 10% of your small shop portfolio that is at a third of your average rent that you’re getting. What happens when those leases go to market or become full tenants? Theoretically, they should go up by 300%. Is that the right way to look at it?

David Simon: Look, I think that’s a great opportunity for our company. We did a very good job. It’s kind of a flex business. We’re still under-occupied. We still have a number of tenants like that that are important to the community, but as more permanent tenants come to the market. That’s a great opportunity for the company.

This is a real interesting thing, a lot of that stuff is happening now. So, think about it this way. In 2021 — in 2020, we got decimated by COVID, right? We came back unbelievably strong in 2021, much better than anyone would have predicted, and reinforced our business model, I would venture to say.

But we still have a lot of short-term leasing or what I’ll call specialty leasing. But that as we release that space, that comes in these three quarters, that comes in first quarter, second quarter, third quarter of 2022 because, remember, our retail base, a lot of it sat on the sidelines and didn’t really start opening up to buy until 2021. And by the time you build out a store in a mall, it’s a six- to nine-month process.

Yet another reason Simon Property Group is hedging for this year. Even if it has higher occupancy rates than average, many of its tenants are specialty retailers or on short-term pandemic leases. When those run out, there’s no telling whether they’ll turn into full-price, full-term leases.

But we still have a transition year in 2022. But it’s not an excuse. I’ve never used that as an excuse. But believe me, as we continue to lease up to permanent retailers away from specialty, we’re going to generate more income, but it’s not all going to fall in 2022.

Now, did I explain myself well? Guys, would you add to it?

Operator: Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.

Haendel St. Juste: Hey, good evening. Thank you for the question. David, I’ve got a question on OCR, something we haven’t talked about in a while. And that 12.6%, you mentioned that’s the highest level in five years. I guess I’m curious how important is OCR today in tenant conversations? Are they willing to pay or even consider some of these look that OCRs? And any color on where you think that OCRs might go near-term? Or do we ever get kind of back to the mid- to upper teen levels? Thanks.

David Simon: Yeah. Look, I think it reflects an earlier comment, which is we are starting to see a little more pricing power when demand goes up and the fact that the overall business is better. So, it’s a good insurance policy, and that the retailers are producing very positive results in our portfolio. we don’t want to put them on the edge, but we’ve taken our lumps over the last few years.

And now we’re just trying to balance it a little bit better than what we’ve seen over the last couple of years. So, it’s a good indicator that we’ve got some room to go. That’s all it is.

Haendel St. Juste: Gotcha. And if I could follow up. I don’t know if you mentioned it earlier, if you’re dealing in the share. Are you still doing any of those shorter-term leases that you were doing during COVID with the lower upfront rent threshold, but with the lower percentage rent thresholds so you can make out in the event of improving sales? Or is that in the event of the past now?

David Simon: It’s essentially a thing in the past, though, there’s always a case here or there where we might have a deal in 2023 for space, but they’re not ready. So, 2022 might be an extension of that while we finalized the lease for 2023. And that’s a little bit what I was talking about with Floris as well.

While Simon still has tenants that signed pandemic-influenced cheaper, shorter leases, the company will not be signing new leases like that in the future.

Tom Ward: Next question, please.

Operator: Our next question comes from Vince Tibone with Green Street. Please proceed with your question.

Vince Tibone: Hi. Good evening. I wanted to follow up on Floris’ question. I believe you mentioned that if tenant sales repeated 2021 levels, you would likely exceed the 2% guidance for domestic property net operating income. I just want to get a better understanding of maybe what sales levels you have baked into current guidance. And it would seem that the base case is actually a decline in sales compared to last year. So, trying to just get a little more color there would be very helpful.

David Simon: Well, we do it — I don’t know why — but we do it tenant by tenant. Simple thing is if we do see sales above this year, we would hopefully be putting aside the comment about rising expense cost. If you kept our expenses flat, we would see a better, more robust net operating income — portfolio net operating income growth. Simple answer is that.

And we do have some baked-in conservatism in that number. But again, we do this budgeting process late in the year. Actually, some people, they do it earlier than I’d like, but it’s always, in the case of sales, an art versus the science. The good news, though, when we talk to retailers, they are planning up sales compared to 2021, okay? And that’s positive. And if they produce their own plan, we’ll see the benefit of that.

Vince Tibone: So is it fair to say that you’re forecasting sales to be negative? Maybe that’s the base case of guidance? Or am I misreading into that?

David Simon: I would say at around the 2% level, it’s relatively flat.

Vince Tibon:  Okay. That’s helpful. If I could maybe try to squeeze one more quick one in there. I’m just curious for the overage rents component. How much was overage rents in terms of total lease income? Like what percentage was that for this last year?

David Simon: We don’t give that out, but I’ll ask the guys if they want to give it out. We tend not to do that. But I would say it was similar to what we would use to see from when we had big international tourism in our big international properties from a percent point of view, okay? And then it really went away. So, it’s kind of back to where we were maybe four, five, six years ago.

Vince Tibone: That’s really helpful. Thank you for the time.

Tom Ward: We have time for one more question.

Operator: Our final question comes from Mike Mueller with JPMorgan. Please proceed with your question.

Mike Mueller: Hey, quick one. Rent per square foot was lower year-over-year in the Malls outlets, but it was higher in the Mills. I’m curious what’s driving that dynamic?

David Simon: Yeah. In the Mills, we include all the boxes. So, every square footage. Whereas in the outlet Mall, it’s basically just the interior space that’s the department store. So they have a few big tenants that may be driving the increase. But that business has been very healthy and we’re very pleased with the results there.

Mike Mueller: Got it. That was it. Thank you.

David Simon: Sure.

Operator: Ladies and gentlemen, we’ve reached the end of the question-and-answer session. And I’d like to turn the call back to Mr. David Simon, chairman, for closing remarks.

David Simon: Thank you. I know there’s a few that are still looking to get some questions answered. So, Brian and Tom will be available. Of course, I am as well. And thanks for participating in the call today.