Simon Property Group Q2 2022 Earnings Report

Simon Property Group EPS Results

• Actual EPS: $1.51
• Consensus EPS: $1.43
• Beat/Miss: Beat by +$0.08
• One Year Ago EPS: $2.92

Simon Property Group Revenue Results

• Actual Revenue: $1.28 billion
• Expected Revenue: $1.25 billion
• Beat/Miss: Beat by +$27.86 million
• YoY Revenue Growth: +2.00%

Simon Property Group Announcement Details

• Quarter: Q2 2022
• Date: 8/1/2022
• Time: After Market Closes
• Conference Call Date: Sunday, July 31, 2022
• Conference Call Time: 8:03PM ET

Simon Property Group (NYSE:SPG) (NYSE: SPG) is a publicly traded real estate investment trust (REIT) that owns, develops and manages retail real estate properties. Its core business activities include acquisition, development, leasing and property management of regional malls, outlet centers and mixed‑use retail destinations. The company operates retail brands that include high‑profile regional shopping centers and the Premium Outlets platform, and it provides services such as tenant leasing, marketing, property operations and capital projects to optimize asset performance.

Simon’s portfolio spans a broad mix of enclosed malls, open‑air centers, outlet properties and mixed‑use developments, and the company pursues redevelopment and repositioning to adapt properties to changing consumer and retail trends. The company has built its business through a combination of development, strategic acquisitions and joint ventures, and it operates properties across North America with a presence in international markets through outlet and partner arrangements. Its assets serve a wide range of national, regional and local retailers as well as entertainment and dining concepts aimed at driving foot traffic and shopper engagement.

Corporate strategy emphasizes active asset management, redevelopment of underperforming properties, and growth of outlet and mixed‑use formats that reflect evolving consumer preferences. The company is led by Chairman and Chief Executive Officer David Simon, and it works with institutional partners and capital markets to finance development and acquisitions. Simon Property Group’s operations center on maintaining high occupancy, enhancing the shopper experience and generating long‑term value through property-level improvements and portfolio optimization.

Simon Property Group Q2 2022 Earnings Call Transcript

Key Takeaways

• Simon Property Group reported Q2 FFO of $2.96 per share, driven by domestic (+$0.13) and international (+$0.10) operations and lower interest expense (+$0.03).
• Occupancy rose to 93.9% (+210 bps), with record‐low tenant terminations and nearly 1,300 leases for over 4 million sq ft signed in Q2, boosting leasing momentum.
• Retail sales per sq ft hit record highs: $7.46 (+26%) for combined malls/outlets, $6.74 (+29%) at outlets, and $10.68 (+35%) at TRG.
• Company raised full‐year FFO guidance to $11.70–$11.77 per share, up from the prior $11.60–$11.75 range, reflecting strong performance.
• Headwinds included a strong U.S. dollar (-$0.03), lower platform‐investment contributions (-$0.19) from JCPenney/Spark integration and value‐brand softness, and a noncash $0.05 mark-to-market loss.

Presentation

[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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Ward, Senior Vice President of Investor Relations. You may begin.

[Tom Ward, VP of Investor Relations at Simon Property Group]

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 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 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.

[Tom Ward, VP of Investor Relations at Simon Property Group]

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening 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 request to limit yourself to one question. I'm pleased to introduce David Simon.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you. Pleased to report our second quarter results. Second quarter funds from operations were $1.1 billion or $2.96 per share prior to a non-cash unrealized loss of $0.05 from a mark-to-market and fair value of 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.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Lower interest rate or interest expense contributed $0.03, and these $0.26 of positive contributions were partially offset by the headwind from a strong US dollar of $0.03 and a $0.19 lower contribution from our other platform investments, principally from JCPenney and a couple of brands within SPARC. 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 $1.2 billion in free cash flow in the quarter, which was $200 million higher than the first quarter of this year, and we have generated $2.2 billion for the first six months of the year.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Domestic property NOI increased 3.6% year-over-year for the quarter and 5.6% 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 first six months. Occupancy at the end of the second quarter was 93.9%, 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. Average base minimum rent increased for the third quarter in a row and was at $54.58. Leasing momentum accelerated across our portfolio.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We signed nearly 1,300 leases for more than 4 million sq ft in the quarter, have signed over 2,200 leases for more than 7 million sq ft 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 first six 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 second quarter were up 7%. Our reported retailer sales per sq ft reached another record in the second quarter at $746 per sq ft for the malls and the outlets combined, which was an increase of 26%, $674 for the Mills, a 29% increase.

[David Simon, Chairman, CEO, and President at Simon Property Group]

TRG was at $1,068 per sq ft, a 35% increase. 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 million shoppers visited our Premium Outlets and The 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. Our occupancy costs at the end of the quarter are the lowest they've been in seven years, 12.1% in Q2 of 2022. Now, our other platform or investments. Let's talk about it. We were pleased with the results of our investments in the platform for the second quarter.

[David Simon, Chairman, CEO, and President at Simon Property Group]

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 SPARC and JCPenney. In fact, we have parlayed our SPARC investment into our investment in ABG that is now worth over $1 billion. There will be a little more volatility from quarter to quarter when it comes to SPARC and JCPenney, but please keep this in the proper perspective. It's all upside from here. During the quarter, we also, as I mentioned, had our mark on our SoFi and Life Time holdings of $0.05.

[David Simon, Chairman, CEO, and President at Simon Property Group]

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 $1.6 billion at an average interest rate of 3.75%. We reduced our share of total indebtedness by more than $650 million. Once again, our balance sheet's strong. We have $8.5 billion of liquidity. $8.5 billion. Today, we announced our dividend of $1.75 per share for the third quarter, a year-over-year increase of 17%. This will be payable at the end of the third quarter, September 30. During the quarter, we repurchased 1.4 million shares of our common stock for $144 million.

[David Simon, Chairman, CEO, and President at Simon Property Group]

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 billion of capital to our shareholders since we've been public. $37 billion. Now given our current view of the remainder of the year, we are increasing our full-year 2022 comparable FFO guidance from $11.60-$11.75 per share to the new range of $11.70-$11.77 per share, which compares to a comparable number of last year of $11.44 per share.

[David Simon, Chairman, CEO, and President at Simon Property Group]

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, of a strong U.S. dollar, rising interest rates, and the inflationary pressures that are out there in the marketplace. Let me conclude. I'm pleased with our second quarter results. Our business is strong. The higher income consumer is 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.S. International tourism is returning. Domestic tourism is strong. Our redevelopment pipeline is growing with exciting projects.

[David Simon, Chairman, CEO, and President at Simon Property Group]

In 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. We outperform in these kinds of periods. We also do some of our best work as well. 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. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. In the interest of time, we ask that you please limit to one question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question is from Craig Mailman with Citigroup. Please proceed with your question.

[Michael Bilerman, Managing Director at Citigroup]

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 know, you're starting to experience firsthand, 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, you know, from a landlord perspective, you want your rent to inflate, and that just makes matters worse.

[Michael Bilerman, Managing Director at Citigroup]

Can you just talk a little bit about the things that you can do to take share and really leverage what you're learning on the retailer side for the benefit of shareholders?

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, thank you, Michael, for that question. Look, we're not presumptuous to tell any retailer under any circumstance how to run their business. It's really, you know, entirely up to them on how they see fit, how to manage inventory, et cetera. Just our own experience, you know, within SPARC, we have several brands. We did see some softness in the more value-oriented brands. We do think that's pressure on the consumer with respect to food, housing, obviously, gas, and they reined it in. Again, I think the important thing to keep in mind, Michael, is even with that said, we were profitable. We had an unbelievably strong year last year with JCPenney and SPARC.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We're still projecting really high EBITDA growth for these companies. 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. I think, you know, just from our own operating experience, you know, the SPARC management team and the JCPenney, I think do what a lot of retailers do. You know, they rein in discretionary capital. They watch the overhead. They really don't close stores 'cause stores are profitable to them. They watch marketing expenses, you know, they're very focused on the payback when it comes to return on investment with digital spending.

[David Simon, Chairman, CEO, and President at Simon Property Group]

I think the JCPenney and SPARC team will do kind of similar to what others. We would never tell a retailer what they should do. If they wanna compare notes, we're happy to do that, but that's just not our style. We try to. You know, it's really important. This other business that we're in is not our, you know, it's a very small part of our business. It's under, you know, 10% at the end of the day. We have no cash invested in it. I'm just talking, you know, cash-on-cash return. Let's go simple math. I've taken distributions, cash distributions in both SPARC and JCPenney that basically has me at a zero net investment. It will.

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, they'll have volatility with the earnings like any other retailer. You know, that's just the way of the world. It's all left side, frankly. These businesses are importantly, and this is very important, they're very well-positioned. They're very well-positioned to weather if this continues, which we kind of expect it to. They're very well-positioned to weather any storm because, as a simple example, JCPenney has $1.3 billion in liquidity. You know, just to throw that out there. So I hope that answers your question.

[Michael Bilerman, Managing Director at Citigroup]

Thank you.

[Operator]

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

[Alexander Goldfarb, Managing Director at Piper Sandler]

Hey, good afternoon. Good afternoon out there. David, a question on, you know, following up on the retailer platform income. The NOI this year was, like, $116 million in the year. Last year was $195 million. So is this some of the volatility that you're talking about? Just curious what drove that move. 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, you know, were doing well. Maybe just a little bit more comment on that.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yeah. Look, Alex, it was $0.19 for the quarter, so we can spend a lot of time on it. The reason I went through it with you is because, you know, we have no cash investments in these businesses, so I'm happy to go through it, but let's put it in perspective, please. The point is, yeah, let's just talk about SPARC. SPARC, Nautica, Brooks Brothers, Lucky did great. Above budget. Eddie Bauer, above budget. So on. The only softness we really saw was a little bit in the teen market at Aéropostale, a little bit in the fast fashion business in Forever 21, and a little bit in JCPenney.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We also, as we told everyone at the beginning of the year, we had significant integration costs at SPARC with respect to the Reebok transaction. Obviously that closed, and we saw some of that in the second quarter. That's the status. We also had a management change at Forever 21, which we think will be for the better. That happened, I believe, at the beginning of the year. We also had our new CEO at JCPenney, which also happened last year. They're absolutely greatly positioned. We got all the confidence in the world, and it's a retailer, and there'll be ups and downs, $0.19 out of $2.96, okay? That's the net.

[Alexander Goldfarb, Managing Director at Piper Sandler]

What? No.

[David Simon, Chairman, CEO, and President at Simon Property Group]

No investment, no cash investment, okay? 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 you're, that's the one question, right? It's over, right? Go ahead, Alex. I'll let you because I like you. Go ahead. What else you got?

[Alexander Goldfarb, Managing Director at Piper Sandler]

Okay. Well, 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. Has the disruptions in the debt markets given you opportunity to buy certain pieces of paper?

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, the reason we have lower interest expense is 'cause we unencumbered assets. We had that flexibility. We don't like the mortgage market, unlike some others. We just write a check. 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.

[Alexander Goldfarb, Managing Director at Piper Sandler]

At a lower cost.

[David Simon, Chairman, CEO, and President at Simon Property Group]

At a lower cost. We look at that all the time. That may not be buying debt back, but it's more or less the same thing. Ends in the same result.

[Alexander Goldfarb, Managing Director at Piper Sandler]

Thank you.

[David Simon, Chairman, CEO, and President at Simon Property Group]

My pleasure.

[Operator]

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

[Steve Sakwa, Senior Managing Director at Evercore ISI]

Yeah. Thanks. Good afternoon, David. I was wondering if you could provide 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 talk a little bit more about the pipeline, the types of tenants and, you know, when you sort of look at the demand, you know, if you sort of were to try and bifurcate the portfolio maybe by sales, you know, I guess how different is the demand for the really strong centers versus maybe centers in the middle and the lower end of the portfolio?

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, again, you know, our lower end is just not. It's a good question, 'cause we don't put these numbers in. Our EBITDA weighted, this excludes TRG. Our EBITDA weighted sales are $954 a sq ft. Our average base rent actually increased 70 basis points, you know, at $73.41 versus $72.87. That's what's driving our NOI, right? Because it's the bigger property. Yeah, you know, look, it is across the board. It's also across the retail type. It's restaurants, it's entertainment, it's obviously the high-end folks, but it's all. I don't like naming retailers. You know, Rick does, but, you know, it would really bother me, and he's not here to do it, so.

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, there we have value-oriented retailers that are on a very much aggressive opening program. It really is across the board. You know, 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. You know, Westchester and Roosevelt Field are all coming back as the suburbs. Midwest has been stable. We're seeing it across the board by retailer, by price point, by geography, by mix, pretty much across the board. You know, I mean, it's not really granular, and you probably wanted names, but you know, but.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We have not seen, thankfully, you know, even with, you know, the, with what's going on in the world, we really haven't seen anyone back out of deals of note at all. I said this last quarter, I said it this quarter in my prepared remarks, you know, the U.S. is. Let's hope the U.S., we don't screw it up, but the U.S. is, you know, the bastion of growth for the world, you know, compared to, you know, because we know China's, you know, with the way COVID is dealt with there, that's gonna have ebbs and flows. You know, I think our economy is still pretty healthy, consumer's in good shape.

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, 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.

[Adam Kramer, VP of Equity Research at Morgan Stanley]

Hey, David, good afternoon. I just wanted to drill in a little bit more on capital allocation. You know, obviously raised the dividend here again, was active on the buyback in the quarter in just a couple months. You know, 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, you know, maybe hear you kind of maybe rank or just kind of discuss the different options for capital allocation here. You know, I know external growth is always maybe an option as well. You talked about it last quarter. Maybe if you could just kind of rank the different options here with your capital and excess free cash flow.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, look, as a REIT, it'll always be, you know, the dividend. You know, I mean, it's hard to rank it, but I think, clearly the dividend, you know, we have to pay out 90, you know, 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, so that's gonna be paid out in cash. Obviously, we've modified that twice in our history. One was COVID, obviously, when we were shut down, and two was in the Great Recession.

[David Simon, Chairman, CEO, and President at Simon Property Group]

That always will rank number 1. 2 is, you know, our stock is just. You know, we look at other REITs, we look at other S&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. We make deals like SPARC that, you know, gets all our money back, and we have free cash flow. You know, we can't figure out our value, so the reality is the market. You know, we have refuted e-commerce taking the malls down. You know, we have withstood COVID. You know, our business is strong, growing in the enclosed mall business. In the enclosed mall business, it's strong, yet, you know, we have naysayers out there that don't believe it.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We believe it, so our stock is cheap, and we're gonna keep buying stock back. I think we have a duty, you know, 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 ROI, you know, methodology, i.e., if we had a property and we spent all this money on it and got no return, we wouldn't do it. Where we can do that's what we should do, and we will do that. I don't really care about the external stuff.

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, if it's there and it makes sense, we'll do it. We have the flexibility to do it. I'd rather do the dividend, buy our ridiculously cheap stock back, make our existing portfolio better. Then every once in a while, we'll have, you know, great new development to do that we'll do it because that also is a core competency of ours, you know, that, you know, we'll do. That's how I look at it.

[Operator]

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

[Derek Johnston, Lead Analyst NA REITs at Deutsche Bank]

Hi, everyone. Good evening. On real estate, Phipps Plaza slated for an October opening relaunch, let's say. David, I believe you took roughly $1 million in NOI offline to develop. You know, upon stabilization, you know, what NOI contribution from this project is expected? Really, should we look at this as one of the key earnings accretion blueprints, looking ahead with other mixed-use projects? Thanks.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yes. Thank you. I'm happy to focus on real estate. Look, I mean, Phipps is a fantastic story because, you know, we took an old department store. It had, you know, Belk. It was an underperformer, had 14 acres. We couldn't redevelop it. We're gonna spend around, you know, $350 million, and we're gonna get about $35 million of NOI just on that, yeah, on that. But more importantly. Well, I shouldn't say more importantly, in addition to that, and, you know, eventually we'll show everybody what we did. But the leasing momentum that we have created there in terms of, retenanting, releasing Phipps is staggering.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Phipps, you know, 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, you know, without that. Not including the incremental investment I just mentioned, but because of all the retenanting. 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. We're taking a, you know, a quiet mall and making it going, you know. It's gonna be, I think, the hub of activity in a great area in Buckhead. A lot of good stuff's happening in Atlanta at the same time.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yes, the simple answer to your question is I would hope to do that in Brea, you know, Ross Park, you know, go down the list. Yeah, we have a ton of those opportunities and, you know, the mixed use, you know, most of our real estate is really well located. You know, the adding the mixed use components, especially residential, you know, really does add a lot of synergy, a lot of mojo to the property. We hope for that to continue.

[Derek Johnston, Lead Analyst NA REITs at Deutsche Bank]

Thanks.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Sure.

[Operator]

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

[Greg McGinniss, Director at Scotiabank]

Hey, David. Hopefully an easy two-parter for you, but how has the broader economic environment adjusted the process for adding projects to the development pipeline? How have increases in construction costs and labor shortages impacted pipeline returns and timelines?

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, let me talk timelines. The only the biggest issue that we're having on timelines is in what I call in the restaurant industry, in that, you know, some of the equipment required to open restaurants does have a backlog. This the storefront improvements is increasing. Obviously, tenants are very focused on that, not affecting timing, but it is something that we're watching. It has not affected deal flow or deal economics. And I do think the good news when it comes to, you know, at least materials, you know, we are at a lower level than we were a few months ago. On a timing side, it's really just equipment for restaurants. On our redevelopment, nothing, you know.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yeah, we have a little bit more here and there, but nothing that is gonna, you know, ultimately decide to go from, you know, a go 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. We're not. Nothing's changed dramatically that would, you know, suddenly scratch a project.

[Greg McGinniss, Director at Scotiabank]

If I could just add real quick to that, what about now that you have a, you know, lower priced stock, so investing in the stock versus, you know, redevelopment expense side of things, too?

[David Simon, Chairman, CEO, and President at Simon Property Group]

I think we can do both. I think we can. Again, I mean, some of these things, you know, we really want folks to focus on. Others in our sector, you know, when you put us in perspective, you know, we're buying stock back. 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. You know, we're just built a little bit differently, even though, you know, we may be in the same industry, we're built differently, okay?

[David Simon, Chairman, CEO, and President at Simon Property Group]

That's the important point, and that's why we really try to emphasize it much like, you know, we emphasize SPARC about some of the, you know, mathematical differences about our company beyond just, oh, we're in the same business. It is math. At the end of the day, you gotta run your business so the math works. Yeah, I like buying our stock back, but, you know, 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.

[Greg McGinniss, Director at Scotiabank]

Thanks, David.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Sure.

[Operator]

Our next question is from Michael Mueller with J.P. Morgan. Please proceed with your question.

[Michael Mueller, Analyst at J.P. Morgan]

Yeah. Hi. The year-over-year ABR per sq ft comp at TRG looks pretty strong at about up 5%. Is there anything out of the ordinary driving that?

[David Simon, Chairman, CEO, and President at Simon Property Group]

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

[Michael Mueller, Analyst at J.P. Morgan]

Okay. Thank you.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Floris van Dijkum with Compass Point. Please proceed with your question.

[Floris van Dijkum, Managing Director at Compass Point Research & Trading]

Thanks for taking my question, guys. Last quarter, you indicated your signed not open pipeline was around 200 basis points, I believe, and it was a little bit higher in the malls than the outlets. I was curious if you can give an update on that. Also maybe, David, you know, you've got these retailers, are you. You know, everybody's been talking about a glut of inventory. Will you create outlet stores for some of your retailers, and where else are you seeing some of the demand for the outlets coming from? Is there more luxury potentially that's coming to the outlets or home wares or what other segments do you think will expand into the outlet business?

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, I'll let Brian answer the first, that was very clever to get two questions in. Let Brian answer the first, and then I'll take a shot at the second part.

[Brian McDade, CFO at Simon Property Group]

Floris, we're still hovering right around 200 basis points in the second quarter.

[Michael Mueller, Analyst at J.P. Morgan]

Okay.

[David Simon, Chairman, CEO, and President at Simon Property Group]

I would say, you know, I mean, some of these, the big retailers had a glut of inventory. The luxury guys do not have a glut of inventory. Okay? So they're, that's not happening. You know, to the extent that, you know, SPARC -- the SPARC brands by and large are already in a lot of outlets, some of ours. You know, a lot are not ours. There's really no change in plan. You know, maybe there's been a few, you know, some of the brands, not just SPARC, but elsewhere have had a few pop-ups, but that ebbs and flows.

[David Simon, Chairman, CEO, and President at Simon Property Group]

I don't think, Floris, there's any real interesting dynamic going on that, you know, and there's not a lot of folks with a glut of inventory as far as I can see. I mean, yeah, obviously some bigger folks, but most of those guys wanna flush it through their existing system. The higher end folks, there's no glut of inventory that we see.

[Floris van Dijkum, Managing Director at Compass Point Research & Trading]

Thanks, David.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

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

[Vince Tibone, Senior Analyst and Retail Sector Head at Green Street]

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?

[David Simon, Chairman, CEO, and President at Simon Property Group]

No. Not really. I mean, not really. We didn't really. In fact, in July, in a lot of cases we saw you know, a little bit better results recently. You know, no real trend there, Vince.

[Vince Tibone, Senior Analyst and Retail Sector Head at Green Street]

No, it's good to hear. It's helpful. Just maybe one follow-up to 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, you know, more impacted by the inflation issues.

[David Simon, Chairman, CEO, and President at Simon Property Group]

I would absolutely. You know, we definitely have seen that where the value-oriented retailers. There's no question the consumer that is pressed on discretionary income is dealing with a very difficult situation with food, obviously gas, and dwelling. They're reining in their spend. There's no question about that. But we haven't really seen that at all in kind of the better brands. Like I mentioned earlier, SPARC, like the Brooks Brothers, the Lucky's of the world are doing very well.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Where you do see it a little bit is, you know, in the value-oriented retailer or the younger consumer, you know, that suddenly, you know, gas is, you know, taking a lot out of their pocketbook.

[Vince Tibone, Senior Analyst and Retail Sector Head at Green Street]

Great. Thank you. Appreciate it.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

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

[Craig Schmidt, Analyst at Bank of America Securities]

Oh, 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 second quarter. In that case, it seems like the comps only get more difficult third and fourth quarter. Is that why the same-store NOI number might actually be going down for the second half of the year, or is it the macro factors?

[David Simon, Chairman, CEO, and President at Simon Property Group]

No. I mean, Craig, we were really clear. We're actually outperforming what we thought. You know, 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, you know, I think we'll outperform our initial guidance of 2%.

[David Simon, Chairman, CEO, and President at Simon Property Group]

That's, you know, nothing other than that. Well, normal seasonality is a business, Craig. Yeah. I mean, this is better than our plan, and it's consistent with our plan, even though the trend is above our plan.

[Craig Schmidt, Analyst at Bank of America Securities]

Your leasing year-to-date, if you will, is strong enough that you think that. Has it continued in July, and do you think it could continue despite some of the macro factors?

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, I said that several times. Yes. The answer is 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. This is really important for everyone to understand.

[David Simon, Chairman, CEO, and President at Simon Property Group]

We're very optimistic because a lot of the leasing that we've done really doesn't open till 2023, 2024. Not only are we outperforming our budget this year off a 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, you know, that will continue to fuel positive comp NOI. Thank you, Craig.

[Craig Schmidt, Analyst at Bank of America Securities]

Thank you.

[Operator]

Our next question is from Michael Goldsmith with UBS. Please proceed with your question.

[Michael Goldsmith, US REITs Analyst at UBS]

Good evening. Thanks a lot for taking my question. On the guidance, the low end of the range has come up, the high end relatively flat at a time when you're seeing softening of sales at your lower income brands. 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?

[David Simon, Chairman, CEO, and President at Simon Property Group]

You know, look, I think we feel really positive about the portfolio, the results that we'll generate from the portfolio. Again, the higher income consumer is still spending money. 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. He'll go through it with you. Our business and our industry actually tend to outperform during recessionary environments to the extent that we get there, and maybe we're in one, maybe we're not. I'll stay out of that political definition. Primarily because, you know, the big-ticket items, you know, suddenly go toward kind of what we sell at our properties.

[David Simon, Chairman, CEO, and President at Simon Property Group]

That's kind of a somewhat of an insurance policy, and it's historically always proved to be, you know, very, you know, very positive. 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. Tom has a great paper on it. If you're interested, we'll charge you, but we'll give you the data. I think the same case will be here. You know, we'll. You know, 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. We do see, you know, the big tickets kinda go away, and they move toward, you know, move toward the items that we sell on our properties.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Again, I think he asked something about SPARC. You know, again, it's really just a couple of the brands. It's also going against a great year. Again, let's have a bigger picture view of that business.

[Michael Goldsmith, US REITs Analyst at UBS]

Thank you.

[Operator]

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

[Juan Sanabria, Managing Director at BMO Capital Markets]

Hi, good afternoon.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Just wanted to ask with regards to the month-to-month leases that are still on the books are a little bit higher than the historical average. Should we expect that to stay there or are you still comfortable kind of now for higher rents or how are you thinking current context?

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yeah, I think that's more a function of documentation than deal-making in that we don't put that down until it's signed. A lot of our bigger renewals have been done over the last two, three, four months, and all that's being documented. I would expect that number would continue to go down. We have no, you know, fear in that number.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Thank you.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

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

[Haendel St. Juste, Managing Director and Senior Equity Research Analyst at Mizuho]

Hey there. Good afternoon. Dave, I guess a question on a follow-up on the seasonality of NOI first half of this year. Second quarter NOI lower than the first quarter based on supplementals in both periods, which is unusual. How are operating expenses impacting typical seasonality? What's embedded in the 5% same-store NOI guidance for this year? Thanks.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Yeah, we didn't gather your first question. Could you please repeat it?

[Haendel St. Juste, Managing Director and Senior Equity Research Analyst at Mizuho]

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

[David Simon, Chairman, CEO, and President at Simon Property Group]

I don't think the NOI is lower sequentially quarter-over-quarter. Now, we do have, you know, a lot of companies hit an overage rent in the first quarter because their leases end in January 31. You know, you pick some of that up in Q1, but that's not, you know, that would be the only reason.

[Haendel St. Juste, Managing Director and Senior Equity Research Analyst at Mizuho]

On OpEx, any color on how this might be impacting seasonality or perhaps what's your expectation or embedded in the 2% same-store NOI got mentioned?

[David Simon, Chairman, CEO, and President at Simon Property Group]

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 that protect us from material increases. I mean, we did increase our operating expenses $0.05. You know, we did hit a -$0.05 for the quarter.

[Operator]

Our next question is from Ki Bin Kim with Truist Securities. Please proceed with your question.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist]

Thanks. Just to follow up on Haendel's question, your NOI from Klépierre and HBS also increased pretty significantly in 2Q over Q1. Also curious about how much of that is sustainable in a run rate, from a run rate perspective, or if there's some one-time items.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, no, Klépierre was shut down last quarter, so this is kind of more now—I mean, last year at this quarter. They're still not firing on all cylinders, so we'd expect future growth here. Comparing to Q2 of 2021 compared to Q2 of 2022, they were under a lot of restrictions and in some cases closed. HBS is so small, it's, you know, it's insignificant. But there's no real change there. It's a lease that pays a certain amount of rent every month. It's, there's no very little growth and, you know, other than like the normal step ups, very small. The change is all-

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist]

I actually meant sequentially.

[David Simon, Chairman, CEO, and President at Simon Property Group]

You meant, yeah.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist]

I actually meant sequentially. I actually meant that sequentially it increased by, I think, $10 million or so.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, you know, we did a restructuring, so, you know, that's part of it. They're doing better, quite honestly. They've announced results in strong results. I think you're seeing that starting to come through our results as well.

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist]

Okay. 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? Given that you're close to 94% occupancy, as you continue to increase to that, you know, what kind of pricing power do you expect to gain, when you start to reach 95% or 96% occupancy?

[David Simon, Chairman, CEO, and President at Simon Property Group]

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

[Ki Bin Kim, Managing Director of US REIT Equity Research at Truist]

Okay. Thanks.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

Our next question is from Linda Tsai with Jefferies. Please proceed with your question.

[Linda Tsai, Senior Analyst of US REIT Team at Jefferies]

Hi. Thanks for taking my question. On the guidance, original guidance was domestic NOI of 2% growth, and year to date it's 5.6%. Is there any update to the 2%?

[David Simon, Chairman, CEO, and President at Simon Property Group]

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

[Linda Tsai, Senior Analyst of US REIT Team at Jefferies]

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

[David Simon, Chairman, CEO, and President at Simon Property Group]

Well, I mean, that's a lot. You know, I don't have enough time to go through it. Obviously, it's across the enterprise. You know, and obviously, from an operating point of view, a lot of it continues to, you know, to be focused on reducing our carbon footprint, but, and giving back to the communities, which we do in a lot of different ways. It's a, you know, that's a very long. Please read our report. If you don't have it, there's a link. I'm sure Tom can give it to you. It's, you know, it certainly focused on, you know, the big item is focusing on reducing our carbon footprint.

[Linda Tsai, Senior Analyst of US REIT Team at Jefferies]

Thank you.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Thank you.

[Operator]

We have reached the

[David Simon, Chairman, CEO, and President at Simon Property Group]

Okay. Oh, sorry. Go ahead.

[Operator]

We have reached the end of the question-and-answer session. I'll now turn the call over to Mr. David Simon for closing remarks.

[David Simon, Chairman, CEO, and President at Simon Property Group]

Okay, thank you. I believe that's our allotted time. You know, thanks for everybody's questions. Any follow-up, please call Tom and Brian. Thank you.

[Operator]

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

Participants

Executives

• Brian McDade, CFO
• David Simon, Chairman, CEO, and President
• Tom Ward, VP of Investor Relations

Analysts

• Adam Kramer, VP of Equity Research at Morgan Stanley
• Alexander Goldfarb, Managing Director at Piper Sandler
• Craig Schmidt, Analyst at Bank of America Securities
• Derek Johnston, Lead Analyst NA REITs at Deutsche Bank
• Floris van Dijkum, Managing Director at Compass Point Research & Trading
• Greg McGinniss, Director at Scotiabank
• Haendel St. Juste, Managing Director and Senior Equity Research Analyst at Mizuho
• Juan Sanabria, Managing Director at BMO Capital Markets
• Ki Bin Kim, Managing Director of US REIT Equity Research at Truist
• Linda Tsai, Senior Analyst of US REIT Team at Jefferies
• Michael Bilerman, Managing Director at Citigroup
• Michael Goldsmith, US REITs Analyst at UBS
• Michael Mueller, Analyst at J.P. Morgan
• Steve Sakwa, Senior Managing Director at Evercore ISI
• Vince Tibone, Senior Analyst and Retail Sector Head at Green Street