Simon Property Group Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 7, 2022

There are 14 speakers on the call.

Operator

Greetings, and welcome to the Simon Property Group 4th Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr.

Operator

Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Hector. Good evening, and thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are 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.

Speaker 1

We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements. Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in Today's Form 8 ks filing, both the press release and the supplemental information are available on our IR website at investors. Simon.com. Our conference call this evening will be limited to 1 hour.

Speaker 1

For those who would like to participate in the question and answer session, we ask that you please respect our request to limit yourself to one question. I'm pleased to introduce David Simon.

Speaker 2

We had a very busy and productive quarter to end a very successful year. We recorded occupancy gains record retail sales and demand for our space from a broad spectrum of Tenet's is robust and our other platform investments had strong results. We generated nearly $4,500,000,000 in funds from operation in 2021 or 11.94 cents per share. The $4,500,000,000 is a record amount for our company for the 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. 4th quarter funds from operations were 1,160,000,000 I'm sorry, $1,160,000,000 or $3.09 per share included in the 4th quarter results Was a net loss of $0.10 per share from a loss on extinguishment of debt and a write off of predevelopment cost, partially offset by an after tax gain on the sale of equity interest.

Speaker 2

Our domestic Operations improved in the quarter. Domestic property NOI increased 22.4% Year over year I'm sorry, for the quarter and 12% for the year, including our share of NOI from TRG and our international properties portfolio NOI increased 33.6 Percent for the quarter and 22.3 percent for the year. Mall and outlet occupancy at the end of the 4th quarter was 93.4 percent, an increase sequentially of 60 basis points And 2 60 basis points year over year. Average base minimum rent was $53.91 Add $8 to that if you included variable rent. For the year, we signed more than 4,100 leases for a total of more than 15 1,000,000 Square Feet.

Speaker 2

This was the highest amount of leasing activity we have done over the last 6 years. Retail sales reported retail sales continued in the 4th quarter. Mall sales for the 4th quarter were up 8% Compared to the Q4 of 2019 and up 34% year over year, Reported retail sales per square foot reached a record level for 2021 At $7.13 per foot for our mall and outlet business and $6.45 for The mills, these results obviously are impressive, particularly given the lack of International tourism for 2021, occupancy costs at the end of 2021 are the lowest they've been in 5 years at 12.6% year end. We opened 2 new developments in 2021, 1 in the UK and a premium outlet in South Korea. Construction continues On our 10th outlet in Japan, opening this fall and Normandy, France opening in the spring of 'twenty three, We completed 5 significant redevelopments.

Speaker 2

We added densification components with the opening of 2 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 platform investments. They produced terrific results in 2021, namely JCPenney, Spark, ABG and RGG, Which is Rue Gilt Group. J.

Speaker 2

C. Penney's results were impressive. Their liquidity Position is growing, now $1,600,000,000 Company delevered their balance sheet, has no borrowings on their line of credit. CEO, Mark Rosen, strengthened his management team with a new CIO and Chief Digital Officer. RGG, including our shop premium outlet marketplace, Growth continues and we expect continued investment in 2022 to drive Customer acquisition and sales growth, Spark Group will be the operating partner for Reebok in the U.

Speaker 2

S. It's It's a tremendous opportunity for Spark to develop sportswear and footwear expertise. The Reebok integration Will require additional investment by Spark as it expands its capability and reach. TRG, Calvin Realty Group, which we own 80%, posted great operating metrics and results, Which also beat our underwriting, reported retail sales was $9.42 per square foot, a 31% Increase year over year. Occupancy also increased 210 basis points for the year.

Speaker 2

Now turning to the balance sheet, we've been active in the debt markets. We amended and extended our $3,500,000,000 Revolving credit facility with lower pricing grid for 5 years, we issued $2,750,000,000 of senior notes, €750,000,000 notes completed the refinancing of 25 property mortgages For a total of $3,300,000,000 at an average interest rate of 3.1 4%, repaid more than $4,000,000,000 in debt and delevered by $1,500,000,000 And with the recent January notes offering, our liquidity stands at $8,000,000,000 Now, just to turn to dividend, We paid out $2,700,000,000 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 $0.50 to $11.70 per share.

Speaker 2

When looking at our 'twenty two FFO guidance, it is important to note the following items as compared to 'twenty one actual results. Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klepierre, Approximately $0.32 per share in gains related to our investment in Authentic Brands. 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 'twenty one. 21 also included 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 NOI growth Of up to 2%, approximately $0.15 to $0.20 drag on FFO From additional investments in RGG and SPO, JCPenney and The Reebok integration costs at Spark all to fund future growth, the impact of a continued strong U. S.

Speaker 2

Dollar versus the euro and yen compared to 'twenty one levels and continued muted international tourism, No significant acquisition or disposition activity. Finally, I really want to thank The entire Simon team for their tireless work that they continue to do for our retailers, shoppers After a very difficult 2020, make no mistake about it, 'twenty one was a great year. And I think Tom knows, but I think our FFO 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 'twenty two and the future growth prospects of our company and we're ready for any questions.

Operator

Thank you. At this time, we'll be conducting a question and answer session. In the interest of time, please limit yourselves to comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Speaker 3

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 15,000,000 feet being kind of a record year for the last 6 years. What are your expectations for leasing activity in 2022 and And how that might tie into further occupancy gains?

Speaker 3

And then I also noticed that the leasing spread information that you used to provide in the supplemental Wasn't there anymore. And I was just wondering if you could comment on kind of pricing trends that you're seeing. Thanks.

Speaker 2

Sure. So I think 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 Obviously, 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.

Speaker 2

And we're still looking for win wins between us and our clients, But we feel better that we'll continue to drive rental growth over time. And As you know, we took a bet that the world and bricks and mortar was not going to end. So we when we did Deal with a lot of renegotiations that came about because of COVID. We got We tried to make it back on sales because we believed in our business And that's why you've got to look at that, what we're achieving on the 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 that and the fact that there is no industry uniformity and more importantly there is very few retail real estate Companies that are doing it. But we bet on our company.

Speaker 2

We made the right bet. It produced the results that we wanted to see in 2021, frankly, above our expectations. And The strength of our portfolio and the demand is there. So now we 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.

Speaker 2

And with all the activity, we'll see some of that in 'twenty two, but we're going to see a tremendous amount of Great new stores in the 'twenty three time period. Great. Thank you.

Operator

Our next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.

Speaker 4

Hi, everyone. Maybe just a question on the guidance and the retailer contribution part. David, I know that you mentioned So the 'twenty two guide includes the $0.15 to $0.20 drag from additional investments this year. I guess I was wondering if you could just go through Kind of what contribution the retailers had in 2021, what the guidance assumes for 2022 and any more kind of Background you can give on what's causing that drag, realize that it's for future growth, but what the impact in 'twenty two is and what's specifically driving it?

Speaker 2

Yes. I mean, 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 shoppremiumoutlets.com. So we're Acquiring customers, we're marketing more and we're building the technology out To serve those 3 platforms with great sales growth and marketplace growth, but that takes investment. So that's one element of it.

Speaker 2

2nd element of it, as you know, JCPenney It's 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 bigger The Reebok integration will reduce the operating earnings from Spark, just temporarily in 2002 As it deals with consolidating its operation, we now have an office. The deal hasn't closed yet. It's going to close at the end of the month.

Speaker 2

We have excess real estate, so we have to work through all of that. But the return for 'twenty three 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. We track it by the nickel, penny, the same, I mean, very similar to the previous businesses, But you got to invest for future growth.

Speaker 2

That's what we're seeing. In terms of operational outside of that, Caitlin, we're basically more or less budgeting the same EBITDA, NOI levels for our investments, our other platform investments Other than these investments that I just mentioned.

Speaker 4

Got it. And just One quick thing, you mentioned the Reebok integration will reduce Spark earnings in 2, did you mean Q2?

Speaker 2

I meant 22, I'm sorry,

Speaker 5

22. Got

Speaker 4

it. Okay. Thank you.

Speaker 2

No problem.

Operator

Our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.

Speaker 6

Hey, good evening, David. I want to talk about The dividend for a moment, you've raised it for 3 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 the previous answer you were about in growth mode and investing in businesses, but is there a trajectory to get back up to $8.30 where you were, I think, prior to COVID?

Speaker 2

Yes. I mean, again, it would be my expectation over time that We'll reach those levels. I think it's just abundance of caution. But if you look at Q over Q, it's a 27% increase. So I know sequentially it's not.

Speaker 2

But that's what we tend to do historically is we tend to be flat in the Q1 Area, we measure our taxable income and as earnings percolate, We tend to raise with our taxable income. So I think we're really adopting what we've done historically. But our payout ratio is low. Our liquidity is strong, and I would expect, Hopefully, that our dividend will continue to see the increases. Now It was dramatic increase from 'twenty to 'twenty one.

Speaker 2

So I'm hoping we'll continue a very positive trend.

Speaker 6

Got it. Thank you. And just one more question. If I think back to this time last year, you guided to initially guided to 9.50 to 9.75. You put up a really healthy number this year.

Speaker 6

We're at we see at 11.36x the one timers you mentioned. I'm not sure if we see eye to eye in that, but that's pretty close. Is there what would give us what would give you any confidence that this could that 2022 could surprise the upside Just like 2021, or do you view this year as more baked, so to speak, than 2021?

Speaker 2

Well, the year is never baked, right? So, look, I think the big variable That is always there is basically sales, because We still have because we still have some COVID oriented leases that have not Rolled over that we still are a little more dependent on sales than we would have said 3, 4 years ago. So that is why we're a little more cautious because we don't I'd like to say we're as good as we are, we're not We can't predict with certainty sales, but so I think I'm hopeful that When 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.

Speaker 2

But We are building off a terrific 'twenty one. So we'll see. I am hopeful that we'll Continue to produce growth, assuming that everything holds together externally With our economy and so on. So there's no certainty, but I feel pretty good about where we stand.

Speaker 6

Okay. Thank you.

Speaker 2

Sure.

Operator

Our next question comes from Michael Bilerman with Citi, please proceed with your question.

Speaker 7

Great. Thank you, David. Good afternoon. David, I wanted to come back to sort of The growth that you're getting from a lot of these unique and differentiated investments that you're making and just sort of how it ties back to This year's earnings forecast, but also that growth in the future, you gave us a couple of pieces, but they're all a little bit different, the timing altogether. So I'm just going to use one for now and maybe we can take it off of that.

Speaker 7

But if you just looked at your FFO from investments, which is on Page 29 of the sub, which I recognize includes a clapier, but it includes, sorry, page 28, but includes all of these other investments that you're making. You're looking at 2021 at about $550,000,000 about $1.46 You've now thrown out for This coming year, the $0.15 to $0.20 drag from these 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 Klepierre? 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.

Speaker 2

Well, I mean, it's pretty straightforward, but we really did not hear you well. But Just to clarify what we did pick up, the NOI from investments is only Klepierre And it includes our small interest in HBS, which is de minimis. Other platform or investment, Okay. The other NOI from other platform investments would include RGG, Spark, JCPenney, our share of ABG. So that's that line, just To clarify, I did hear that guys.

Speaker 2

Did you hear the question?

Speaker 7

I didn't hear the question.

Speaker 2

Okay. Does that help you? No. Let me I'll try to be clear, David. Michael, if you went back to the office, You might be able to sound a little clearer, okay?

Speaker 2

So I don't know, maybe you can I'm happy if you check this, we'll read it out loud and we cannot hear you.

Speaker 7

Well, I'm in the office. How about if I pick up my phone? Is that better for you, David?

Speaker 2

Slightly.

Speaker 7

All right. Well, I'll take slightly. But I'm just trying to get you on Page 28, you actually list the FFO Contribution, right, dollars 550,000,000 from everything, right, dollars 1.46 So I'm just trying to triangulate What you earned in 'twenty one and how that compares to the $11.60 in 'twenty two. You've given us a couple of nuggets of information, The $0.15 to $0.20 drag, but it doesn't net out to actually what's in guidance for these investments?

Speaker 2

Well, again, the tax effect of that, let's There's no surprise. Our math is very simple. I'm sorry we 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.

Speaker 2

These are the NOI. They're not the tax line is below this. This is 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 NOI from other platforms I've described, the NOI from investments is ClayPure and HBS, And we footnote corporate and other NOI sources.

Speaker 2

So I don't know what else you want

Speaker 5

to Because I'm looking

Speaker 2

at a different case. The guys are happy to take the question offline.

Speaker 7

Okay. Yes, I was looking at Page 28, not the NOI page. That's where the confusion was coming from, David. Maybe just Okay. You see the FFO of investments, right?

Speaker 7

So that includes All of the FFO from all these great investments you're making and this is not a negative question, David, but this is a positive of

Speaker 2

Yes, that includes everything lumped together And then take the tax impact. And again, it's NOI, so it's pre interest. Then obviously FFO is not, but we're happy to walk you through. Okay.

Speaker 7

Well, and that's exactly now we've gotten to the question, which is that's the number we do know, right? So there's no ambiguity in the Q and A.

Speaker 2

And 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. Yes.

Speaker 8

We'll connect offline, Michael.

Speaker 7

Okay. David, can you just talk generally, your opening comment in the press release was all about unlocking 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?

Speaker 2

Well, I mean, given our level of cash investment, If you were to look at it on a private equity basis, right, We've made 20x on our investments. So and they're continuing to grow and Spark, I think, is a good example on RGG Or have great platforms that can continue to be a leader in their business. Right. 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 The market is ascribing to us, but frankly, the external market is Probably valuing it more than what it is today.

Speaker 7

Right. And that's where it'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 of trying to ask for more disclosure to try to get to ascribe that value that you want. So that's it's coming from a good place. And Usually, I'm good at math,

Speaker 2

but I have a negative. I never suggested you aren't. I'm just having a hard time hearing you. That was the only negative comment. Okay.

Speaker 2

Okay.

Speaker 7

Thank you. Goodbye.

Speaker 2

So sorry about that. But again, we're happy to walk you through it, so it can help you understand what we're doing.

Operator

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

Speaker 9

Hi, everybody, and good evening. So I'll abandon the retail investment question for now. But in 4Q 2019, pre pandemic, David, the redev Pipeline was $1,800,000,000 at its peak. Now it's $944,000,000 in 4Q, and that's just a really modest increase from 3Q. So as you talk about record FFO and very healthy cash flow, how are you looking at capital allocation priorities going forward?

Speaker 9

Should we expect ramping, redevelopment, some transformational, clearly some more retailer investments, dividends, Buybacks, you mentioned no acquisitions. How do you view the priorities here?

Speaker 2

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 approve it or we're about to.

Speaker 2

So we would expect to be able to add to that number this year. So you'll see that I would I'd be disappointed if it didn't grow in size and stature, And mostly in mixed use. So we still 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 Spark or ABG or RGG, so those Our 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 kind of in updating The technology aspects of our shopping centers that we'll continue to do, that's important to us.

Speaker 2

We expect to raise the dividend. We've been really quiet on the acquisition front, and that's like That's perfectly fine with us. We'll see how the market transpires, but we have no real 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, C'est 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.

Speaker 2

Stay tuned.

Speaker 9

Interesting. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 8

Hey, David. I'm touring because you guys said one question per, so I have 2, But I'm going to restrain myself and just ask one unless Tom gives me 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 $160,000,000 of NOI, EBITDA, whatever you want to From the retailer platform last year and you guys seem to have pretty quick turnaround of the brands.

Speaker 8

So 1, does it surprise you how quickly these brands have turned around given that there are a number of We won't mention retailers, but brands out there, retailers who have been trying to restructure for years and haven't been successful, whereas In short order, you guys have? And 2, does this give you a better insight into your tenant negotiations such that now you have much more informed A 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?

Speaker 2

Yes. So on the fast turnaround, I would say yes. But remember, we bought these in bankruptcy, which Most of them in bankruptcy. So that allows you 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 Spark is excellent.

Speaker 2

They know how to integrate. And Between our oversight from AVG and SPG, 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. 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 that is there is unique And they don't necessarily have a direct competitor That would be helpful.

Speaker 2

We just don't we don't think like that, because as you know, every space and every mall is different and Market rents are all over the place. So, simple answer to that is no.

Speaker 8

Okay. And Tom, will you allow me a second or are there a lot of questions, you got to move on?

Speaker 2

He's got a puppy dog look toward me. So based on that, we will allow you. Thank you. Okay.

Speaker 8

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.

Speaker 2

Well, look, I think we are Top notch in this area, though unfortunately as good as we are, We cannot avoid what's happened. So we're all subject to this. I think it 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.

Speaker 2

The safety of our consumers and obviously the retailers It's priority number 1. We're not immune to it as much as we would like to be. We have a very sophisticated operations center, intelligence center that deals with this. If you ask the retailers, they would tell us tell you that I think, Alex, that We're number 1 in this area, but we're not immune. I would love to be immune.

Speaker 2

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 it's an 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 But believe me, we are all over it, but we're we Some of these things are just impossible to avoid. However, what you don't hear from us, Alex, It's all the ones that we forwarded, dozens and dozens of multiple ones. And We do an excellent job, but it's we're we have to deal with some unfortunate consequences Of these acts.

Speaker 5

Thank you.

Speaker 2

Sure.

Operator

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

Speaker 10

Hi, thanks. Just hoping to ask a little bit about rents and leasing spreads again. 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?

Speaker 7

And on

Speaker 10

the releasing spreads, I think you talked about $8 being in the number for the deals Maybe 5 in the 4th 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? What's the expectation for what you generated in 'twenty one and what your expectation is for 'twenty two?

Speaker 2

Well, we 1st of all, we focus on NOI growth. So that's number 1, and we expect to have NOI growth. So that's the first. I'd say to you, I think you're not maybe we weren't clear, but the $54 is somewhat It's just the base minimum rent that our portfolio averages. It does not include overage or percentage rent.

Speaker 2

If you included that based on 'twenty one results, that 54 would be 62, Okay. So that's the relationship there. And I don't I try to listen carefully to your question, It just goes to show that the 54 is missing this component, And we thought it was material enough to point it out.

Speaker 10

And so when do you think that $8 comes in as

Speaker 2

a number? When does that $8 comes in? Yes, that's all a Function of lease expiration. So, we tend to raise If someone is in 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.

Speaker 2

So it's It should eke up over time, but it's really a function of the big overage rent Payers and when their leases expire.

Speaker 10

Thank you. Certainly.

Operator

Our next question comes from florist van Dischamps with Compass Point. Please proceed with your question.

Speaker 11

Thanks. Thanks for taking my question, guys. David, you just mentioned NOI growth. And obviously, you know that I've been I still think there's a lot of value in the business here, but Again, you might be slightly guilty.

Speaker 2

By the way, so do I. So do I, Forrest. Okay.

Speaker 11

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% walk me again, the 2% NOI growth that you have in your assumptions For 2022, if you have your basically, you have fixed bumps in your leases typically of around 3%. You'll get

Speaker 2

it for all of them.

Speaker 11

So you're a little bit shy of 3% maybe, but all things ceteris, paribus, everything else stays the same, occupancy stays the same. You should get around 2.5% to 3% NOI growth. You're only guiding for 2% growth.

Speaker 2

Yes. 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 Try to be cautious on that number, but that's really and then there are increases in cost That we're dealing with as well for us.

Speaker 2

So for instance, I mean, security expenses All right. Based on we just had a discussion with Alex on that. Obviously, we have wage inflation janitorial. So we have Pressures on expenses just like everybody else. We got no break on the real estate tax front From the local municipalities, even though we were closed for months in many cases In 2019 2020, but our real estate tax expense keeps going up.

Speaker 2

So we have pressures there That we're just trying to be relatively thoughtful about 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.

Speaker 10

So David, I mean, just

Speaker 11

again, but a lot of your costs would be recaptured through CAM. You've got fixed CAM That increase is at inflation. So that would imply that your fixed

Speaker 2

No, no, no. We don't have CPI adjusted. That's right. You have 3% bumps. You have 3% bumps, you're right.

Speaker 2

Yes. And we have bumps. But if it goes up 6% and we're going

Speaker 5

up 3%, we lose 3%.

Speaker 2

So, 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.

Speaker 10

So David, so maybe if

Speaker 11

you can touch on one little area, which I looked at in your lease. You have 6,800,000 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, dollars 17, it's 10% of your small shop portfolio that is at a 3rd, your average rent that you're getting. What happens when those leases Go to market or become full tenants. Speaking of rent, they should go up by 300%. Is that the right way to look at it?

Speaker 2

Yes. 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.

Speaker 2

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. Forrest, this is a real interesting thing. A lot of that stuff is happening now. So think about it this way, in 'twenty one in 'twenty, we got decimated by COVID, Right.

Speaker 2

We came back unbelievably strong in 'twenty one, 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 re lease that space, That comes in midstream. That comes in Q1, Q2, Q3 of 'twenty two, because as remember, our Retail base, a lot of it sat on the sidelines all of 'twenty and didn't really start Opening up open to buy in 'twenty one. And by the time you build out a store in a mall, It's a 6 to 9 month process.

Speaker 2

So as much given where we are today, I would say to you, and we never like this is so anti the way I think, 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 the permanent retailers away from specialty, We're going to generate more income, but it's not all going to fall in 'twenty two. Now, did I explain myself well, guys? Would you add to it?

Speaker 2

Yes, you can do your right job. Okay. So sometimes I'm inarticulate. So I mean and again, that's not an Excuse, but that's how but 'twenty two is going to be continue to be a transition year Like 'twenty one was, but we kicked it we kicked the crap out of 'twenty one. It was an unbelievable year, Spectacular based on where we were.

Speaker 2

Okay, Forrest?

Speaker 1

Next question Hector, please.

Operator

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

Speaker 12

Hey, good evening. Thank you for taking the question. Davis, I got a question on OCR. You mentioned OCRs earlier, something we haven't talked about in a while and at 12.6%, you mentioned that's the highest level in 5 years. I guess I'm curious how important is OCR today in kind of conversations?

Speaker 12

Are they willing to pay or even consider some of these look back OCRs? And any color on where you think that OCR might go near term or do we ever get kind of back to those mid to upper team levels? Thanks.

Speaker 2

Yes. Look, I think It reflects an earlier comment, which is we are starting to see A little more pricing power as 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 got some room to go.

Speaker 2

That's all it

Speaker 12

I got you, I got you. And if I could follow-up, I don't know if you mentioned it earlier, if you're willing to 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 threshold, so you can make out in the event of Improving sales or is that an event of the past now?

Speaker 2

It's essentially a thing of the past though. There's always a case here or there where We might have a deal in 'twenty three for space, but they're not ready. I'm sorry, they're not ready in 23, so we have a retailer in the space. So 'twenty two might be an extension of that While we finalize the lease for 'twenty three, and that's a little bit what I was talking about with florist as well.

Speaker 1

Hector, next question please.

Operator

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

Speaker 5

Hi, good evening. I wanted to follow-up on Floris' question. I believe you mentioned that if sales Tenant sales repeated 2021 levels, you would likely exceed the 2% guidance for domestic property NOI. I just want to get a better understanding of maybe what sales levels you have baked into current guidance and it would seem that your the base case is actually declined in sales compared to last year. So trying to just get a little more color there would be helpful.

Speaker 2

Well, we do it we really do it. I don't know why, but we do do it tenant by tenant. And I do simple thing is if we Do see sales above this year. We would hopefully putting aside the comment about rising expense cost, If you kept our expenses flat, we would see a better, more robust NOI portfolio NOI growth. Simple answer is that.

Speaker 2

And we do have some baked in conservatism in that number. But again, it's We do this budgeting process late in the year. Actually, to some people, they do it earlier than I'd like, but we it's always it's in the case of sales, it's 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.

Speaker 2

And if they produce their own plan, We'll see the benefit of that.

Speaker 5

So is it fair to say that you're forecasting sales to be negative, maybe that's the base case The guidance or am I misreading into that?

Speaker 2

I would say around The 2% level, it's relatively flat.

Speaker 5

Okay. That's helpful. If I could maybe try to squeeze one more I'm just curious for like the over rent component. How much was over rent in terms of total lease income? Like what percentage was that for this last year?

Speaker 2

We don't give that out. But if we do I'll ask the guys if they want We tend not to do that. But it I would say was similar to what we would use to see From when we had big international tourism at our big international properties from a percent point of view? Okay. Guys, is that right?

Speaker 2

Yes. Okay. And then it really went away. So it's kind of back Where we were maybe 4, 5, 6 years ago.

Speaker 5

That's really helpful. Thank you for the time.

Speaker 1

Hector, we have time for one more question.

Operator

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

Speaker 13

Yes. Hi. A quick one. Rent per square foot was lower year over year in the malls outlets, but it was higher in the mills. And curious what's driving that dynamic?

Speaker 2

I'm sorry, could you repeat? I didn't you broke up there for a second.

Speaker 13

Yes, your rent per square foot for malls and outlets is down year over year, but for the mills, it's up year over year?

Speaker 2

Yes. In the mills, they include all of the boxes. We include all the boxes. Shouldn't say that. We include all the boxes.

Speaker 2

So every square footage, it's not Whereas in the outlet mall, it's basically just the interior space, not the department stores. So that's 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.

Speaker 5

Got it. That was it. Thank you.

Speaker 10

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.

Speaker 2

Okay. Thank you. I know there's a few that are still looking to get some questions answered. So Ryan and Tom will be available. Of course, I am as well.

Speaker 2

And thanks for participating in the call today.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.

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Earnings Conference Call
Simon Property Group Q4 2021
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