Simon Property Group Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2022

There are 13 speakers on the call.

Operator

Greetings. Welcome to the Simon Property Group Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Tom Ward, Senior Vice President of Investor Relations. You may begin.

Speaker 1

Thank you, Kyle, and thank you, everyone, for joining us this evening. 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 Roy, 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 you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements.

Speaker 1

Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information In today's Form 8 ks filing, both the press release and the supplemental information are available on our IR website We ask that you please respect the request to limit yourself to one question. I'm pleased to introduce David Simon.

Speaker 2

Thank you. Please report our 2nd quarter results. 2nd quarter funds from operations were $1,100,000,000 For $2.96 per share prior to a non cash unrealized loss $0.05 from a mark to market and fair value publicly held securities. Let me walk you through the big variances For this quarter compared to Q2 of 2021, our domestic operations had an excellent quarter And contributed $0.13 of growth driven by higher rental income of $0.09 Strong performance in Simon Brand Ventures and short term leasing of $0.05 TRG contributed $0.04 of growth And they were partially offset by higher operating costs of approximately $0.05 Our international operations posted strong results in the quarter and increased $0.10 Lower interest rate or interest expense contributed $0.03 and these $0.26 of positive contributions We're partially offset by the headwind from a strong U. S.

Speaker 2

Dollar of $0.03 and a $0.19 lower contribution From our other platform investments, principally from JCPenney and a couple of brands within Spark, These costs include these included costs associated with JCPenney's launch of new brands, The recent Reebok transaction and the integration costs associated with that And a softening of sales from our value oriented brands due to inflationary pressures on that consumer. We generated $1,200,000,000 in free cash flow in the quarter, which was $200,000,000 higher than the Q1 of this year, and we have generated $2,200,000,000 for the 1st 6 months of the year. Domestic property NOI increased 3.6% year over year for the quarter and 5.6 Percent for the first half of the year, portfolio NOI, which includes our international properties, grew 4.6% for the quarter And 6.7% for the 1st 6 months. Occupancy at the end of the second quarter was 90 3.9%, an increase of 210 basis points and TRG was at 93.4%. The number of tenant terminations this year has been at record low levels.

Speaker 2

Average based rent increased Average base minimum rent increased for the Q3 in a row and was at $54.58 Leasing momentum accelerated across our portfolio. We signed nearly 1300 leases For more than 4,000,000 square feet in the quarter, have signed over 2,200 leases for more than 7,000,000 square feet Through the first half of the year, and we have a significant number of leases in our pipeline, Nearly 40% of our total leasing activity in the 1st 6 months of the year has been new deal volume. This is up approximately 25% from last year. Retail sales continued. Mall sales volumes for the Q2 were up 7%.

Speaker 2

Our reported retailer sales per square foot reached another record In the Q2 at $7.46 per square foot for the malls and the outlets combined, Which was an increase of 26 percent, dollars 6.74 for the mills, a 29% increase. TRG was at $10.68 per square foot, a 35% increase. We We began our National Outlet Shopping Day, which was very successful for shoppers And participating retailers offering a timely first of its kind power shopping experience, More than 3,000,000 shoppers visited our premium outlets and mills over the shopping weekend. Feedback following the event has been tremendous from both our retailers and consumers. We're already planning next year's event, which we expect to be bigger, so please stay tuned on that.

Speaker 2

Our occupancy costs at the end of the quarter Are the lowest they've been in 7 years, 12.1% in Q2 of 2022. Now our other platform investments, let's talk about it. We were pleased with the results Of our investments in the platform for the Q2, they contributed approximately $0.21 in FFO, Even though we were down from last year's terrific results, primarily, as I mentioned, continued investment And the inflationary pressures that have developed, based on our distributions, Based upon our cash distributions received, we have no cash Equity investment in Spark and JCPenney. And in fact, We have parlayed our Spark investment into our investment in ABG that is now worth Over $1,000,000,000 There will be a little more volatility from quarter to quarter When it comes to Spark and JCPenney, but please keep this in the proper perspective. It's all upside from here.

Speaker 2

During the quarter, we also, as I mentioned, had our mark on our SoHo and Lifetime Holdings $0.05 A reminder on that, it's a non cash mark, and we would expect that those companies would bounce back. We completed the refinancing of 14 property mortgages during the first half of the year for a total of $1,600,000,000 At an average interest rate of 3.75 percent, we reduced our share of total indebtedness by More than $650,000,000 and once again our balance sheet is strong. We have $8,500,000,000 Of liquidity, dollars 8,500,000,000 Today, we announced our dividend of $1.75 per share At the end of Q3, September 30, during the quarter, we repurchased 1 point 4,000,000 shares of our common stock for $144,000,000 And let me point out, while other companies In our sector are paying little or no dividends and issuing equity, We are repeatedly raising our dividend and buying our stock back. We have now returned more than 37 $1,000,000,000 of capital to our shareholders since we've been public, dollars 37,000,000,000 Given our current view of the remainder of the year, we are increasing our full year 2020 2 comparable FFO guidance from $11.60 to $11.75 per share to the new range of $11.70 to $11.77 per share, which compares to a comparable number of last year of $11.44 per share.

Speaker 2

This is an increase of $0.10 At the bottom end of the range and $0.06 at the midpoint of the range. The guidance comes in the face, Obviously, we have a strong U. S. Dollar rising interest rates and the inflationary pressures that are out there in the marketplace. So let me conclude.

Speaker 2

I'm pleased with our 2nd quarter results. Our business is strong. The higher income consumers in good shape. Brick and mortar stores are where the shoppers want to be, outpacing e commerce across the world And the broad retail spectrum, demand for our space is extremely strong. Worldwide retailers Need to grow and they're doubling down on the U.

Speaker 2

S. International tourism is returning. Domestic tourism is strong. Our redevelopment pipeline is growing with exciting projects and our addition to our newly announced Premium outlet, new developments and expansions. We are experienced at managing our business through volatile periods, including leveraging our existing platform for operating efficiencies, Allocating capital appropriately, managing risks, we are not over our skis in any aspect Of our business, I encourage you to look at our track record.

Speaker 2

We outperform in these kinds of periods, And we also do some of our best work as well. So thank you, operator. We're ready for any questions At this moment.

Operator

At this time, we will be conducting a question and answer session. Our first question is from Craig Mailman with Citigroup. Please proceed with your question.

Speaker 2

Hey, it's actually Michael Bilerman here with Craig. Good afternoon, David. David, I was wondering if you can talk a little bit about sort of that inflationary pressure that's on the retailers that you're starting to experience And obviously, your knowledge base of the retailer environment is significant. But now actually being on both sides, what Can you do as a landlord to help your tenants through this period of time where they are dealing with a lot of inflationary pressures And more inventory, because arguably, I know from a landlord perspective, you want your rent to inflate and that just makes matters worse. So Well, thank you, Michael, for that question.

Speaker 2

So look, We're not presumptuous to tell any retailer under any circumstance how to run their business. So it's really Entirely up to them on how they see fit, how to manage inventory, etcetera. And just our own experience, within Spark, we have several brands. And we did see Some softness in the more value oriented brands. And then And again, we do think that pressure on the consumer with respect to food, housing, Obviously, gas, and they reined it in.

Speaker 2

But again, I think the important Things to keep in mind, Michael, is even with that said, we were profitable. We had an unbelievably A strong year last year with Penny and Spark. We're still projecting Really high EBITDA growth for these companies. And even though they're obviously, their consumers Being cautious, back to school so far is off to a good start. Our traffic is actually Pretty good.

Speaker 2

And I think just from our own operating experience, the Spark management team and the Penny, I think do what a lot of retailers do. They rein in discretionary Capital, they watch the overhead. They really don't close stores because stores are profitable to them. They watch marketing expenses. They're very focused on the payback when it comes to Return on investment with digital spending.

Speaker 2

So I think The JCPenney and Spark team will do kind of similar to what others, but we would never We would never tell a retailer what they should do. If they want to compare notes, we're happy to do that. But That's just not our style. And again, as we try to it's really important. This other business That we're in, it's not our it's a very small part of our business.

Speaker 2

It's under 10% at the end of the day. We have no cash left in it. So I've got I'm just talking cash on cash Return, let's go simple math. I've taken distributions, cash distributions in both Spark and Kenny It basically has me at a 0 net investment. And it will they'll have volatility with the earnings like any other retailer.

Speaker 2

And that's just the way of the world. And it's all upside, frankly. And these businesses are Importantly, and this is very important, they're very well positioned to weather if this continues, Which we kind of expected to. They're very well positioned to weather any storm because As a simple example, JCPenney has $1,300,000,000 in liquidity, just to throw that out there. So I hope that answers your question.

Speaker 2

Thank you.

Operator

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 3

Hey, good afternoon out there. David, a question on following up on the retailer platform income. The NOI this year was like $116,000,000 in the year. Last year, it was $195,000,000 So is this some of the volatility that you're talking about? And just curious what drove that mark?

Speaker 3

And if I can do a footnote for a sort of quasi second question, You mentioned something about the value brands in your retailer platform having trouble, but the other brands were doing well. Maybe just A little bit more comment on that.

Speaker 2

Yes. Look, Alex, it was $0.19 for the quarter. So we can spend a lot of time on it. But the reason I went through with you is because We have no cash investments in these businesses. So I'm happy to go through it, but let's put it in perspective, Please.

Speaker 2

The point is, yes, so let's just talk about Spark. Spark, Nautica, Brooks Brothers, Lucky did great. Above edges, Eddie Bauer, above budget, So on the only softness we really saw Was a little bit in the teen market at aero, a little bit in the fast fashion business in F21 And a little bit in JCPenney. And we also, as we told everyone at the beginning of the year, we had Significant integration cost at Spark with respect to the Reebok transaction. So that so and obviously that closed and we saw some of that in the Q2.

Speaker 2

So that's the status. Everything we also had a management change at F 2021, which we think will be for the better. That happened, I believe at the beginning of the year. We've got our we also had our new CEO at Pennie, Which also happened last year. So they're absolutely greatly positioned.

Speaker 2

We got all the confidence in the world And it's a retailer and there will be ups and downs, dollars 0.19 out of $2.96 okay? That's the math. And no investment, no cash investment, okay? So I think I answered it, but if there's something you'd like me to dwell on more than I did, I'm happy To do well, I guess, that's the one question, right? So it's over, right?

Speaker 2

Go ahead, Alex. I'll let you because I like you. Go ahead. What else you got?

Speaker 3

Okay. Well, then I'll ask you one other question. You guys are always financially savvy and you buy back stock. I'm imagining that buying back debt is not attractive just given where your outstanding debt coupons are or has the disruptions in the Debt markets given you opportunity to buy certain pieces of paper?

Speaker 2

Well, we unencumbered the reason we have lower interest It's because we unencumbered assets. We have that flexibility. So we don't like the mortgage market. Unlike some others, We just write a check. And we that's why we have lower interest expense compared to last year, and I did the Q over Q Because we can write a check and just unencumber it.

Speaker 2

At a lower cost. At a lower cost. So we look at that all the time. And that may not be buying Get back, but it's more or less the same thing, ends in the same result.

Speaker 4

Thank you.

Speaker 2

My pleasure.

Operator

Our next question is from Steve Sakwa with Evercore ISI. Please proceed with your question.

Speaker 2

Yes, thanks. Good afternoon. David, I was wondering if you could A little bit more color on the leasing pipeline. It was nice to see the occupancy up as much as it was from Q1 to Q2. But could you The really strong centers versus maybe centers in the middle and the lower end of the portfolio?

Speaker 2

Well, again, our lower end is It's just not just to get it's a good question because we don't put these numbers in. But our EBITDA weighted This excludes TRG, but our EBITDA weighted sales are $9.54 a foot. Our average base rent actually increased 70 basis points At 73.41 versus 7287. So and that's what's driving our NOI, Right, because it's the bigger property. So, yes, look, it is Across the board, it's also across the retail type.

Speaker 2

It's restaurants, it's entertainment. It's obviously the high end folks, but it's all and I don't like naming retailers. Rick does, but it always bothered me and he's not here to do it. So but we have value oriented retailers that are On very much aggressive opening program. So It really is across the board.

Speaker 2

Only the best properties get the high end folks. We're seeing a big rebound in Vegas. Florida is on fire. California is finding its sea legs. Westchester and Roseville Field are all coming back as the suburbs.

Speaker 2

So Midwest has been stable. So we're seeing it across the board by retailer, by price point, By geography, by mix, pretty much across the board. And so I mean, it's not really granular and you probably wanted names, No, but and we have not seen thankfully, even With what's going on in the world, we really haven't seen anyone back out of deals Of note at all. And I said this last quarter, I said it this quarter in my prepared remarks, The U. S.

Speaker 2

Is the let's hope the U. S. We don't screw it up, but the U. S. Is The bastion of growth for the world compared to because we know China's The way COVID is dealt with there, that's going to have ebbs and flows.

Speaker 2

And I think our economy is still pretty healthy. Consumers in good shape. I think the growth will continue in the U. S. And I think the future is bright here.

Operator

Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

Speaker 5

Hey, David, and good afternoon. I just wanted to drill in a little bit more on capital allocation. Obviously, you raised the dividend here again, Active on the buyback in the quarter in just a couple of months. And I put out these kind of press releases as well about some of the kind of the new and renewed development projects. Just wanted to kind of maybe hear you kind of maybe rank or just kind of discuss the different options for capital allocation here.

Speaker 5

And I know external growth It's always maybe an option as well. You talked about it last quarter. But maybe if you could just kind of rank the different options here with your capital and excess free cash flow.

Speaker 2

Well, look, as a REIT, it will always be the dividend. But So that would I mean, it's hard to rank it, but I think Clearly, the dividend, we have to pay out 90% to 95 of our taxable income, there's a difference if you pay out 90% technically versus 95%, but you got to pay out 95% of your taxable income. We're fortunate to be highly we have taxable income. So We pay out close to we're at 100% of our taxable income. That's growing.

Speaker 2

So that's going to be paid out in cash. Obviously, We've modified that twice in our history. 1 was COVID, obviously, when we were shut down And 2 was in the great recession. So that always will rank number 1. 2 is, we Our stock is just we look at other REITs, we look at other S and P 500 Companies, we look at our balance sheet, we look at the fact that We're a cash flow company that generates cash, return on equity.

Speaker 2

We make deals like Spark that Gets all our money back and we have free cash flow. We can't figure out our value. So the reality is Market, we have refuted e commerce taking the malls down. We have withstood COVID. Our business is strong growing in the enclosed ball business.

Speaker 2

In the enclosed mall business, it's strong, yet we have naysayers out there that don't believe it. But we believe it, so our stock is cheap and we're going to keep buying stock back. And then I think we have a duty To make our properties as efficient and As attractive as we can to the consumer, I mean, obviously, we have to do it with a remind We have to do it with a return on investment methodology, I. E, if we had a property and we spent All this money on it got no return, we wouldn't do it. But where we can do that, that's what we should do and we will do that.

Speaker 2

And then the external stuff, I don't really care about. And if If it's there and it makes sense, we'll do it. We have the flexibility to do it. But I'd rather Do the dividend, buy our ridiculously cheap stock back, make our existing portfolio better. And then every once in a while, we'll have great new development to do that will do it because That also is a core competency of ours that we'll do.

Speaker 2

And that's how I look at it.

Operator

Our next question is from Derek Johnston with Deutsche Bank. Please proceed with your question.

Speaker 6

Hi, everyone. Good evening. Yes, so on real estate, Phipps Plaza slated for an October opener Relaunch, let's say. So David, I believe you took roughly $1,000,000 in NOI offline to develop. So upon stabilization, what NOI contribution from this project is expected?

Speaker 6

And really should we look at this as one of the key earnings accretion blueprints, looking ahead with other mixed use projects? Thanks.

Speaker 2

Yes. Thank you. I'm happy to focus on real estate. And look, I mean, That's a fantastic story because we took an old department store. It had Belk's, it was an underperformer, had 14 acres.

Speaker 2

We couldn't redevelop it. We're going to spend around $350,000,000 and we're going to get about $35,000,000 of NOI, Just on that. Yes, on that. But more importantly, well, I shouldn't say more importantly, in addition to that. And eventually, we'll show everybody what we did.

Speaker 2

But we the leasing momentum That we have created there in terms of re tenanting, re leasing FIPS It's staggering. So, FIPS, again, we don't really disclose that. But my guess is The existing property will increase by roughly 30% NOI When we're done with it, if not more, without that not including the incremental investment I just mentioned, But because of all the re tenanting and more importantly, we will have all of the best brands when we're done with it. And that's ongoing. That won't all be done probably until 2024, because some of the other Existing retailers have leases and they're coming over after that.

Speaker 2

But we're taking A quiet mall and making it and it's going to be, I think, The hubs of activity in a great area in Buckhead, and a lot of good stuff is happening in Atlantic at the same time. But yes, the simple answer to your question is I would hope to do that in Brea, Ross Park, go down the list, but yes, we have a ton of those opportunities. And The mixed use most of our real estate is really well located And adding the mixed use components, especially residential, really does add a lot of Synergy, a lot of mojo to the property. So we hope for that to continue.

Speaker 3

Thanks.

Speaker 2

Sure.

Operator

Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question.

Speaker 7

Hey, David. Hopefully, easy 2 parter for you, but

Speaker 8

how is

Speaker 7

the broader economic environment adjusted the process For adding projects to development pipeline and how the increases in construction costs and labor shortages impacted Pipeline returns and timelines?

Speaker 2

Let me talk timelines. The only the biggest issue that we're having on Time lines is in what I call in the restaurant industry, In that, some of the equipment required to open restaurants does have a backlog. The storefront improvement is increasing. Obviously, tenants are very, very focused on that, not affecting timing, but it is something that we're watching. It has not affected deal flow or deal economics.

Speaker 2

And I do think the good news when it comes to At least materials, we are at a lower level than we were a few months ago. So on a timing Side, it's really just equipment for restaurants. On our return development, Nothing yes, we have a little bit more here and there, but nothing that is going Ultimately decide to go from a gold project to a negative. If anything, In a lot of these cases, we're planning on higher income. So they seem to be getting basically the same returns.

Speaker 2

But We're not nothing's changed dramatically that would suddenly scratch a project.

Speaker 7

If I could just add just real quick to that. What about now that you have a lower priced stock, so investment in the stock versus Redevelopment expense,

Speaker 2

deciding which one we'll do. I think we can do both. I think we can. And again, I mean, some of these things, We really want folks to focus on others in our sector. When you put us in perspective, We're buying stock back.

Speaker 2

We're not issuing equity and we're raising our dividend. I don't There are very few and you can define the sector any way you want and I don't want, but there's not many we're just built a little bit differently even We may be in the same industry. We were built differently, okay? And So that's the important point. And that's why we really try to emphasize it much like We emphasize Spark about some of the mathematical differences about our company Beyond just, oh, we're in the same business.

Speaker 2

It is math. At the end of the day, you got to run your business so the math Works. But yes, I'd like buying our stock back. But like I said, I do think we have a duty to Continue to invest in our portfolio as long as we see the right return on investment on that. Thanks, David.

Speaker 2

Sure.

Operator

Our next question is from Mike Mueller with JPMorgan. Please proceed with your question. Yes. Hi. The year over year ABR per square foot comp at TRG looks pretty strong at about up 5%.

Operator

Is there anything out of the ordinary driving that?

Speaker 2

No. I just think we've worked well together and The portfolio is in great shape and driving And we're driving growth out of it, collectively. So it's all good.

Speaker 7

Okay. Thank you.

Speaker 2

Thank

Operator

you. Our next question is from Flores Van Dijkam with Compass Point. Please proceed with your question.

Speaker 9

Thanks for taking my question, guys. Last quarter, you indicated your Signed not open pipeline was around 200 basis points,

Speaker 10

I believe, and it was

Speaker 9

a little bit higher in the malls than the outlets. I was curious if you can give an update on that. And also maybe, David, you've got these retailers. Are you everybody's been talking about a glut of Inventory, will you create outlet stores for some of your retailers? And where else are you Some of the demand for the outlets coming from, is there more luxury potentially that's coming to the outlets or

Speaker 2

Well, let Brian answer the it was very clever to get 2 questions. But let Brian answer the first and then I'll take a shot at the second part. Forrest, we're still hovering right around 200 basis points in the second quarter. And then I would say, there's no I mean, there are some of these The big, big retailers had a glut of inventory. We The luxury guys do not have a glut of inventory, okay?

Speaker 2

So that's not happening. And to the extent that the Spark brands by and large are already A lot of outlets, some of ours, a lot are not ours. There's really no change in plan. Maybe there's been a few some of the brands, not just Spark, but elsewhere, had a few pop ups, but That ebbs and flows, I don't think, Forrest, there's any real interesting dynamic going on that. And there's not a lot of folks with a glut of inventory as far as I can see.

Speaker 2

I mean, yes, obviously, some Bigger folks, but most of those guys want to flush it through their existing system. And there is no the higher end folks, there's no glut of inventory that we see.

Operator

Please proceed with your question.

Speaker 4

Hi, good evening. Could you drill down a little more on sales trends during the quarter? Did sales start to slow down at all in the back half of the quarter as inflation accelerated and recession fears increased?

Speaker 2

No, no, not really. So it was I mean, Not really. We didn't really in fact, in July, in a lot of cases, we saw a little bit Better results recently. So no real trend there, Vince.

Speaker 4

That's good to hear. It's helpful. And then just maybe one follow-up for that. Are you seeing any difference in tenant sales performance between the higher end and luxury tenants versus the more Mainstream brands, presumably the latter would be more impacted by the inflation issues.

Speaker 2

I would absolutely we definitely have seen that Whether value oriented retailers or there is no question the consumer That is pressed on discretionary income Is dealing with a very difficult situation with food, obviously gas And dwelling. So and they They're reining in their spend. So there's no question about that. But we haven't really seen that At all, in kind of the better brands and like I mentioned earlier, Spark, Like the Brooks Brothers, the Lucky's of the world are doing very well, but where you do see it a little bit is And the value oriented retailer or the younger consumer that suddenly gas has taken a lot Out of the pocketbook.

Speaker 4

Great. Thank you. Appreciate it.

Speaker 2

Thank you.

Operator

Our next question is from Craig Schmidt with Bank of America. Please proceed with your question.

Speaker 11

Great. Thanks. Domestic same store NOI was up 3.6% compared to 7.5%. It looks like a lot of it was due to the tougher comps In Q2 and in that case, it seems like the comps only get more difficult 3rd Q4. Is that Why the same store NOI number might actually be going down for the second half of the year?

Speaker 11

Or is it the macro factors?

Speaker 2

No. I mean, Craig, we were really clear. We're actually outperforming what we thought. We Q1 of last year had the big benefit of Going up against COVID, right? So, no, we were really, really clear What we saw overall and we've been outperforming and I think we'll outperform our initial guidance of 2%.

Speaker 2

But that's nothing other than that. Our normal seasonality of the business, Yes. I mean, this is better than our plan and is consistent With our plan, even though the trend is above our plan.

Speaker 11

So that your leasing Year to date, if you will, is strong enough that you think that has it continued in July? And do you think you could continue Despite some of the macro factors?

Speaker 2

Well, I said that several times. Yes, the answer is We have not our pipeline is as strong as it's been. We're doing a bunch of new deals. Now, Craig, you know, When you sign a lease, the store doesn't open tomorrow in a lot of cases. And this is really, really important for Everyone to understand, we're very optimistic because a lot of the leasing that we've done Really doesn't open until 2023, 2024.

Speaker 2

So not only are we outperforming our budget this year Office strong last year, but we actually feel really good that as we get these stores open That we leased to over the last 6, 9 months that will continue to fuel positive comp NOI. Thank you, Craig.

Speaker 8

Thank you.

Operator

Our next question is from Michael Goldsmith with UBS.

Speaker 2

So my question is, What's implied for the performance of the base business in the second half kind of relative to what you saw in the domestic and international operations in the second quarter? Maybe said another way, how sensitive is your performance to the macro environment and what's the outlook for percentage rents? Well, it's a very look, I think we feel really positive about The portfolio, the results that we'll generate from the portfolio and again, The higher income consumer is still spending money. And if anything, I think if you go back in history and actually Tom did a very good piece on that, if any of you are interested, you can call Tom. We'll go through with you.

Speaker 2

Our business and our industry actually tends to outperform During recessionary environments, if to the extent that we get there, and maybe we're in 1, maybe we're not, I'll stay out of that Political definition, primarily because the big ticket items Suddenly go toward kind of what we sell at our property. So And that's kind of a somewhat of an insurance policy and it's historically always proved to be Very positive. So even in every recession, other than COVID, When we were told to shut down, our cash flow from our properties was flat. It did not decrease. So Tom has a great paper on it.

Speaker 2

If you're interested, we'll charge you, but we'll give you the data. I think the same case will be here. If we do get into a full blown recession, Our cash flow will be positive. It won't maybe grow as high. We'll have some exposure on sales.

Speaker 2

But we do see The big tickets kind of go away and they move toward the items that we sell in our properties. And again, I think you asked something about Spark. Again, it's really just a couple of the brands. It's also going against a great year. And again, let's have a bigger picture view of that business.

Operator

Our next question is from Juan Sanabria with BMO Capital Markets, please proceed with your question.

Speaker 2

Hi, good afternoon. Just wanted to ask with regards to the

Speaker 1

month to month basis that are

Speaker 2

still on the books are a little bit higher than the historical average. Should we expect that to stay there? Are you still comfortable kind of Now for higher rents or how are you thinking in the current context? Yes. I think That's more a function of documentation than deal making and that we don't put that done until it's signed.

Speaker 2

And a lot of our bigger renewals have been done over the last 2, 3, 4 months And all that's being documented. So I would expect that, that number would continue to go down. But we have We have no fear in that number. Thank you. Thank you.

Operator

Our next question is from Haendel St. Juste with Mizuho. Please proceed with your question.

Speaker 10

Hey there, good afternoon.

Speaker 1

Dave, I guess a question on

Speaker 10

a follow-up on the seasonality of NOI in the first half of this year. 2nd quarter NOI Lower than the Q1 based on supplemental from both periods, which is unusual. How are operating expenses impacting typical seasonality? And what's

Speaker 2

Could you please repeat it?

Speaker 10

First question is on the impact of seasonality and the sequential NOI from 1Q to 2Q. 2Q looked lower than 1Q, which is unusual. And so I was actually asking how

Speaker 2

Yes. I don't think the NOI was lowered quarter over sequentially quarter over quarter. We do have a lot of companies hit in overage Rent in the Q1 because their leases end in January 31. So you pick some of that up in Q1, but That's not that would be the only reason.

Speaker 10

And on OpEx, any color on how that might be impacting seasonality or perhaps what's your expectation or embedded in the 2% same sort of guidance

Speaker 8

you mentioned?

Speaker 2

Again, I'm sorry, but your connection is really not so good. We're not really Seeing much inflation just yet in operating expenses. As you think about us, we've got long term contracts to protect us from material increases. We did increase our operating expenses $0.05 We did hit a negative $0.05 for the quarter.

Operator

Our next question is from Ki Bin Kim with Churit Securities.

Speaker 8

Just to follow-up on Haendel's question, your NOI from Klapiyar and HBS Also increased pretty significantly in 2Q over Q1. I was just curious about how much of that is sustainable in a run rate Okay. Well, my perspective, what if there's some one time items?

Speaker 2

Well, no. Clay Pier was shut down last quarter. So This is kind of more now I mean, last year at this quarter. So this is they're still not firing on all cylinders. So We'd expect future growth here.

Speaker 2

So comparing to Q2 of 2021 Compared to Q2 of 2022, Q2 of 2021, they were under a lot of Restrictions and in some cases closed. And HBS is so small, it's insignificant. There's no real change there. It's a lease that Pays a certain amount of rent every month. So it's there's no very little growth other than like the normal step ups, Very small.

Speaker 2

So the change is okay.

Speaker 8

I actually meant sequentially. I actually meant to sequentially increase by, I think, dollars 10,000,000 or so?

Speaker 2

Well, We did a restructuring, so that's part of it. And they're doing better, quite honestly. They're now results in strong results. So I think you're seeing that starting to come through our results as well.

Speaker 8

Okay. And I'm not sure if I missed it or not, but any kind of commentary you can share on what the lease spreads look like in 2Q? And given that you're close to 94% occupancy, as you continue to increase to that, what kind of pricing power do you expect to gain When you start to reach 95% or 96% occupancy?

Speaker 2

Well, rents are all moving in the right direction and our spreads are moving in the right direction too.

Operator

Our next question is from Linda Tsai with Jefferies.

Speaker 12

Growth and year to date is 5.6%. So is there any update to the 2%?

Speaker 2

As we've said for several years, we do not update that. We give you our best guess at the beginning of the year. It's all part of our plan. We disclose Well, we think the number is, but we do not update it quarter to quarter other than, as we've said, We're pretty confident we're going to beat our initial expectations.

Speaker 12

Got it. Can you talk about what you're most focused on from an ESG perspective in 2022? And what are some initiatives where we might see some progress?

Speaker 2

Well, we I mean, that's a I don't have enough time to go through it. But obviously, we're it's across the enterprise. And obviously, from an operating point of view, a lot of it continues to be focused on reducing our carbon footprint, but And giving back to the communities, which we do in a lot of different ways. But it's That's a very long please read our report. If you don't have it, there's a link.

Speaker 2

I'm sure Tom can give it to you, but it's it's certainly focused on the big item is focusing We have reached

Operator

the end of the question and answer session. And I will now turn the call over to Mr. David Simon for closing remarks.

Speaker 2

Okay. Thank you. I believe that's our allotted time. So thanks for everybody's Questions and any follow-up, please call Tom and Brian. Thank you.

Operator

This concludes today's conference and you may

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Earnings Conference Call
Simon Property Group Q2 2022
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