Simon Property Group Q2 2021 Earnings Report

Simon Property Group EPS Results

• Actual EPS: $1.56
• Consensus EPS: $2.37
• Beat/Miss: Missed by -$0.81
• One Year Ago EPS: $0.83

Simon Property Group Revenue Results

• Actual Revenue: $1.25 billion
• Expected Revenue: $1.13 billion
• Beat/Miss: Beat by +$122.13 million
• YoY Revenue Growth: +18.10%

Simon Property Group Announcement Details

• Quarter: Q2 2021
• Date: 8/1/2021
• Time: After Market Closes
• Conference Call Date: Monday, August 2, 2021
• Conference Call Time: 5:31AM 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 2021 Earnings Call Transcript

Key Takeaways

• Q2 FFO came in at $3.24 per share and Simon raised full-year FFO guidance by $1 to a range of $10.70–$10.80 per share, reflecting 17–19% growth.
• Mall and outlet occupancy climbed to 91.8% (up 100 bps from Q1) as Simon signed nearly 1,400 leases covering 5.2 million square feet in Q2.
• June retail sales at Simon properties matched June 2019 levels and were up ~80% year-over-year, with several U.S. regions surpassing pre-pandemic volumes.
• The Q3 dividend was increased to $1.50 per share, marking a 7.1% sequential and 15.4% year-over-year increase, and Simon returned to its historical dividend declaration cadence.
• International operations faced government closures and capacity restrictions that cost approximately $0.06 per share in Q2, underscoring lingering pandemic headwinds abroad.

Presentation

[Operator]

Thank you for standing by, and welcome to the Q2 2021 Simon Property Group Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. Should you require any further assistance, please press star zero. I would now like to hand the conference over to your host, Senior Vice President, Investor Relations, Tom Ward. You may begin.

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

Thank you, Ateef, and thank you all 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. Before we begin, a quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the safe harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of 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, Senior VP of Investor Relations at Simon Property Group]

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included in the press release and the supplemental information in today's 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Please note, our 8-K filing is still in process with the SEC. It has not yet been accepted tonight. In the meantime, as mentioned previously, the 8-K has been posted to our website. For those of you 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 and one follow-up question, so we might allow everyone with interest the opportunity to participate. For our prepared remarks, I'm pleased to introduce David Simon.

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

Good evening. I'm pleased to report our business is solid and improving. Demand for our space and our well-located properties is increasing. I'll turn to some highlights. Our profitability and cash flow have significantly increased. Second quarter funds from operations were $1.22 billion or $3.24 per share. Our domestic operations had an excellent quarter. Our international operations continued to be affected by governmental closure orders and capacity restrictions, which cost us roughly $0.06 per share for this quarter compared to our expectations, due to the equivalent of a two and a half month of closures. As we said in the press release, our quarter results included a non-cash gain of $118 million or $0.32 per share from the reversal of a deferred tax liability at Klépierre. We generated over $1 billion in cash from operations in the quarter, which was $125 million more than the first quarter.

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

Additionally, compared to the second quarter of last year, our cash flow from operations was break even due to the lockdown. Domestic international property NOI combined increased 16.6% year-over-year for the quarter and 2.8% for the first half of the year. Remember, the first quarter of 2020 was relatively unaffected by the COVID-19 pandemic. These growth rates do not include any contribution from the Taubman portfolio or lease settlement income. Malls and outlets occupancy at the end of the second quarter was 91.8%, an increase of 100 basis points compared to the first quarter. We continue to see demand for space across our portfolio from healthy local, regional, and national tenants, entrepreneurs, restaurateurs, and mixed-use demand ever so increasing day by day. Our team is active in signing leases with new and exciting tenants. Average base minimum rent was $50.03.

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

Our average base rents was impacted by the initial lower base rents we agreed to in addressing certain tenant COVID negotiations in exchange for lower sales breakpoints. If variable rents that were recognized in the first half of the year were included, it would add approximately $5/ft to our average base minimum rent. Leasing spreads declined again due to mix of deals that are now included, as well as the activity that had fallen out of the spread, given its rolling 12-month nature and metric. New leasing activity that has affected the spread include large footprint entertainment, fitness, and large scale retailers. These big box deals reduced our opening rate as they're all included in our spread metric. As a reminder, the opening rate included in our spread calculation does not include any estimates for percentage rent based income based on sales, as I mentioned just recently.

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

Leasing activity accelerated in the quarter. We signed nearly 1,400 leases for approximately 5.2 million sq ft and have a significant number of leases in our pipeline. Through the first six months, we signed 2,500 leases for over 9.5 million sq ft. Our team executed leases for 3 million more sq ft or over approximately 800 more deals compared to the first six months of 2019. We have completed nearly 90% of our expiring leases for 2021. We recently had deal committee. What I'm told by my leasing folks is that that was the most active deal committee that they've had in several years. Retail sales continued increase. Total sales for the month of June were equal to June 2019 and up 80% compared to last year, and were approximately 5% higher than May sales.

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

If you exclude two well-known tenants, our mall sales were up 8% more than compared to June of 2019. Multiple regions in the U.S. recorded higher sales volume in June and for the second quarter compared to our 2019 levels. We're active in redevelopment and new development. We opened West Midlands Designer Outlet, and we started construction in the Western Paris suburb for our third outlet in France. The end of the quarter, new development, redevelopment was underway across all our platforms for our share of $850 million. Our retail investments posted exceptional results. All of our global brands within SPARC Group outperformed their budget in the quarter on sales, gross margin, and EBITDA, led by Forever 21 and Aéropostale. SPARC's newest brand, Eddie Bauer, also outperformed our initial expectations. We're also very pleased with JCPenney results. They continue to outperform their plan.

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

Their liquidity position is growing, now $1.4 billion, and they do not have any outstanding balance on their line of credit. Penney will launch several private national brands later this year, as well as their new beauty initiative. Taubman Realty Group is operating their 2021 budget at a level above that and above our underwriting. Their portfolio, our portfolio shows resilience as sales are quickly returning to pre-pandemic levels. Year-to-date through June, retail sales are 13% higher than the first half of 2019. Balance sheet, as you would expect, we've been very active in the capital markets. We refinanced 13 mortgages in the first half of the year for a total of $2.2 billion. In total, our share of which is $1.3 billion at an average interest rate of 2.9%.

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

Our liquidity is more than $8.8 billion, consisting of $6.9 billion available on our credit facility and $1.9 billion of cash, including our share of JV cash. Again, our liquidity is net of $500 million of U.S. commercial paper that's outstanding at quarter end. Dividend, we paid $1.40 per share of dividend in cash on July 23rd for the second quarter. That was a 7.7% increase sequentially and year-over-year. Today, we announced our third quarter dividend of $1.50 per share in cash, which is an increase of 7.1% sequentially and 15.4% year-over-year. The dividend is payable September 30. You will note that going forward, we are returning to our historical cadence of declaring dividends as we announce our quarterly earnings. Now guidance.

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

Given our results for the first half of the year, as well as our view for the remainder of 2021, we are increasing our full year 2021 FFO guidance range from $9.70-$9.80 per share to $10.70-$10.80 per share. This is an increase of $1 per share at the midpoint, and the range represents approximately 17%-19% growth compared to 2020 results. Before we open it up to Q&A, I wanted to provide some additional perspective. First, we expect to generate approximately $4 billion in FFO this year. That will be approximately 25% increase compared to last year, and just 5% below our 2019 number.

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

To be just 5% below 2019, given all that we've endured over the last 15, 16 months, including significant restrictive governmental orders that forced us to shut down, unlike many other establishments, is a testament to our portfolio and a real testament to the Simon team and people. Second, we expect to distribute more than $2 billion in dividends this year. Keep in mind, we did not suspend our dividend at any point during the pandemic, and in fact, we have now increased our dividend twice already this year. Now, just a point on valuation, and I tend to never really talk about it, but I felt it was appropriate today. Our valuation continues to be well below our historical averages when it comes to FFO multiples compared to other retail REITs, retailers, and the S&P 500.

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

Our dividend yield is higher than the S&P 500 by more than 250 basis points, Treasuries by 325 basis points, and the REIT industry by 150 basis points. As I mentioned to you, our dividend is growing. Our company has a diverse product offering that possesses many multiple drivers of earnings growth, creative capital investment opportunities, and a balance sheet to support our growth. We are increasing our performance, profitability, cash flow, and return to our shareholders, and we're ready for questions.

[Operator]

Thank you. As a reminder to ask a question, please press star one on your touch tone telephone. To withdraw your question, press the pound key. Our first question comes from the line of Steve Sakwa of Evercore ISI. Your line is open.

[Steve Sakwa, Analyst at Evercore ISI]

Thanks. Good afternoon, David. I guess I want to just start on the occupancy trend, which was up pretty nicely from 1Q to 2Q. You talked about the leasing activity that you had in the quarter in the pipeline. Could you just maybe share with us what your expectations are for occupancy by the end of this year, and what's sort of embedded in the guidance?

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

Well, the guidance is affected by the continuing uptrend. We expect our occupancy by year end to increase from the levels that we have right now. I don't have a number that I'm going to give to you specifically, but, as I mentioned to you, Steve, in talking to my heads of leasing, maybe this is an overstatement, we're tickled pink by the demand by the new retailers and tenants that are surfacing, the many opportunities that we have with restaurants, with mixed-use developments. I mentioned to you, our deal committee had more deals than it's had in a few years. Look, we still have a hole to dig out of, because of the bankruptcies that we had to confront with the pandemic. I'm very pleased with the activity, the mojo that we have in leasing, the work that our personnel are doing there, the creativity.

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

It's pretty encouraging.

[Steve Sakwa, Analyst at Evercore ISI]

Okay. Maybe just as a follow-up, just on the leasing commentary. I know that you guys had to make some accommodations to the retailers, and you lowered the base rent and took more percentage rent. Given that sales seem to be coming back very quickly, do you sense that that dynamic is changing at all as you're having these current discussions about future leasing, or do you still anticipate having to have kind of lower base and take more upside going forward?

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

Look, it's tenant by tenant. The strategy we adopted in the height of the pandemic is playing out better than we could have expected. We made the right move. We got the renewals done. We accommodated the vast majority of retailers, assuming they were reasonable in their approach. We got the job done. We kept our properties functioning. We bet on the rebound, and we're seeing the benefits of that. As I look back, I'm not certain I would change a lot. The reality is, there's always going to be a few, a handful of situations where we'll bet on the come, bet on retailers because we have confidence in our properties. We have a confidence in the retailers that we're doing business with.

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

I think physical retail. When I listen to the pundits and they're throwing the baby out with the bathwater, read my lips, physical retail is here to stay, and people really like to shop in the physical world. Don't believe everything you hear on TV. We've got the evidence.

[Steve Sakwa, Analyst at Evercore ISI]

That's it for me. Thanks.

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

Thank you.

[Operator]

Thank you. Our next question comes from Alexander Goldfarb of Piper Sandler. Please go ahead.

[Alexander Goldfarb, Analyst at Piper Sandler]

Hey, good afternoon, David. And Hope. You guys have had a really good quarter. Just amazing to see guidance up by a buck. Continuing on Steve's question there, amazing on the dividend rebound, amazing on the guidance, on the leasing activity you guys talked about, and everything is good. When you think about people pulling out the negative, and believe it or not, David, people do look at some things in a negative limelight. They'll see negative 22% re-leasing spreads, and that negative spread is widening. I understand that you did deals to get the company through, makes sense.

[Alexander Goldfarb, Analyst at Piper Sandler]

From an expectation standpoint, what would you think the cadence is over the next few quarters of this spread, and how do we sort of relate to that versus the cash flow growth and everything else that's going on? Clearly, there's a disconnect between your cash flow recovery and this negative spread metric.

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

Yeah, look, Alex, stats don't mean as much to me as they do to you because I look at cash flow growth, because there's a lot that goes into cash flow growth, a lot more than spreads. The sole reason that the spread is down to 22% is because of mix and the COVID deals that we did. The mix is that the spread probably was higher than, because we had a lot of boxes that rolled out, that were low rents. We got the benefit of that, and those are out of our 12-month numbers. The kind of the new leasing that we're doing is in it, and that's the sole thing. I would encourage our investors that know what we're all about to understand that it's a mix.

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

If I do a deal with Dick's or an entertainment box and they pay $15 a ft, but the expiration of that box was 15 months ago with $3 a ft, I still may have made a $15 spread, but because it was in our rollout 15 months ago, you don't see it. It's not space by space. If I did space by space, the percentage would not be anywhere near that. Do you understand what I just explained? Remember, we had a lot of boxes that were pre-COVID at low rents, but we didn't do box leasing for the last 12, 14 months because of the pandemic. That's the sole reason. You follow what I'm saying, right, Alex?

[Alexander Goldfarb, Analyst at Piper Sandler]

Yeah, I do. I wasn't about to volunteer Tom rehash for a space by space. I do understand what you're saying.

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

This is not a space by space, the reality is if I had boxes that space that I got back that was at low numbers, they were 15 months ago, those closings is gone. That really jerks up the number, then I have the new lease that's at a low number that jerks it down. If you really compare it over a longer period of time, we've got a positive spread. Follow me?

[Alexander Goldfarb, Analyst at Piper Sandler]

Yeah. It makes total sense. The next topic, David, obviously arising-

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

It should make more than sense. It's the math.

[Alexander Goldfarb, Analyst at Piper Sandler]

I can see the math as evidenced in the earnings growth, the cash flow growth. You've explained it well so that when understanding this, that explanation that it's not based on space by space makes it crystal clear what's going on.

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

Right.

[Alexander Goldfarb, Analyst at Piper Sandler]

The next question is on the rising of COVID, Delta, whatever other variants there are out there, obviously fact of life, but you're seeing tremendous leasing demand, restaurant demand, et cetera. Your malls and outlets are throughout the country. Is it your view in what your mall managers are saying and tenants are saying is that most people just accept COVID is part of life, and therefore it doesn't interfere with their shopping or their restaurants or their activity? Is there a concern that people may start to pull back from some of the increasing activity that we've seen this year?

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

Well, it's a very good question. I'm only going to give you my personal opinion, which could be wrong, but it's an opinion, so I guess technically it shouldn't be wrong. I would say this, I think, the most important, this is factual, and I actually checked it. As you know, there are Delta hotspots. We actually have malls in some of these hotspots. The Land of the Ozarks is in Springfield, Missouri. You only know that through the Netflix show, right? The Ozarks. You haven't been there, but I've been there, and it's a wonderful place. I checked, have we seen in our Battlefield Mall, which is in Springfield, Missouri, have we seen an uptick in COVID cases at the mall? We get the report from all the retailers and our staff, and the reality is we haven't. The mall is safe. Okay?

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

Even though we're starting to see counties talk about indoors, there's no science about the mall. I underline that. We've been mistreated in this whole 18-month ordeal, but it is what it is. I personally think, now, going back to your question, and I've checked it, like in Florida, where there's some upticks. We have not seen in an enclosed mall an uptick in COVID-19 cases for the people that are in the mall, the staff, whether it's a retailer or our management team. Period, end of story. No question about that. I personally think that people are just going to deal with Delta. I'm hopeful that people will get vaccinated. We're not going to mandate vaccines. We're going to encourage them. I think we've got to keep as being safe as possible, going on with our life.

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

Where we need to mask up, we're going to mask up, I think the consumer and the folks have all just kind of dealt with it and are moving forward in that environment right now. I'm hopeful that, as a country, we don't get into these lockdowns. I studied Sweden. I studied France. COVID reverts to the mean. Sweden did not lock down, France did, if you look at the chart on COVID cases, it all reverts to the mean. Lockdown, no lockdown. Let us do our business. Mask up if you need to. The mall is safe. Next question.

[Alexander Goldfarb, Analyst at Piper Sandler]

Thank you, David.

[Operator]

Thank you. Our next question comes from Rich Hill of Morgan Stanley. Your question, please.

[Richard Hill, Analyst at Morgan Stanley]

Hey, good afternoon, David. I want to just focus on maybe just some of the numbers, and specifically the income from unconsolidated entities. If I'm looking at the numbers right, you had a pretty healthy increase, in that line item, which obviously includes Taubman along with the retailers. I think it went to around $348.5 million versus $15 million the last quarter, despite depreciation amortization looking like it's approximately flat year-over-year. That suggests to me something pretty healthy is happening in those line items. I was hoping you could maybe just give us a little bit more transparency in what you're seeing there and what's driving that beyond what you said in the prepared remarks.

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

Well, we're always transparent. That'll be in our Q. We have our Klépierre deferred tax gain running through that. We have our retail investments running through that, are the two major pieces of that increase. Obviously, positive operations in all of our joint venture properties. That's really it. Taubman, because that runs through that as well, but we also have increased depreciation and amortization associated with it, so that's kind of not overly material in that big increase. Fellas, what else do we want to say? That's it?

[Brian McDade, CFO at Simon Property Group]

That's it.

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

Okay. Fellas agree with my assessment.

[Richard Hill, Analyst at Morgan Stanley]

Thank you. I'm sure I'll follow up offline with Brian and Tom on that. I do want to come back to, my words, not yours, soft guidance on core NOI. I think you've said in the past, it was maybe going to be a 4%-5%, closer to 5%, if I'm reading the transcript from last quarter correctly. You obviously just had a really big quarter. How do you feel about that now, and do you see potential for upside from that 5%?

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

Yes. We should outperform that.

[Richard Hill, Analyst at Morgan Stanley]

Okay. That's my two questions, so I will get back in the queue. Thanks, David.

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

Thank you.

[Operator]

The next question comes from Michael Bilerman of Citi. Please go ahead.

[Michael Bilerman, Analyst at Citi]

Great. Just two quick ones. Well, one quick one, maybe one a little bit longer. The first one, just on the dollar increase, can you just break that down into just some major buckets? The buck increase, the guidance about $380 million. I would assume part of it's $0.32, the deferred tax liability that you booked this quarter, which leaves another $0.68 unaccounted for. Maybe if you can just bucket it into like maybe retailer investments, core, and other would be helpful.

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

You're right. You're right. $0.32 of that is because of the deferred tax. Then $0.68 plus is from just core plus retail. We're not going to break out which is which. The good news is we've got our core beating our initial budget. Retail, we're in the same spot.

[Michael Bilerman, Analyst at Citi]

Yeah, your original retailer investment was like $0.15-$0.20. It would appear that you may have blown through that just in this quarter. That's why I was just trying to get a little bit of.

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

Yeah. No.

[Michael Bilerman, Analyst at Citi]

That one's a lot more volatile, right?

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

It's entirely a fair and legitimate question. There's no qualms on that. It's just we're not breaking out the beat, or the increase, I should say, other than the $0.32, and that which is right. The other $0.68, and I hope it'll be plus than that, will be as retail and core.

[Michael Bilerman, Analyst at Citi]

Right. It's just going to sort of blur the line.

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

I mean, if the retailer multiples, maybe retail is core. What's core, what's non-core? Okay.

[Michael Bilerman, Analyst at Citi]

That's a longer discussion. The second question, David, is, given your perspective now, obviously, you've been a landlord forever, but you're increasingly now getting your hands dirty at being a retailer. I'm curious what you're seeing from the retailers that you own and sort of dealing with in this environment and turning it around relative to what you are as a landlord, right? Because I think you said you're tickled pink. If you're sitting as a retailer, that must be a different description that you would use. Maybe you can talk a little bit about what you're doing on the retailer side to bring people into the assets. What type of promotions are you trying to lure people to bricks and mortar, and just the whole omni-channel world with the retailers you own? Just trying to understand that relative to your time as a landlord.

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

You're right. If I did that question justice, it would be a long answer. Let me just say this, and this is really important. The retailers that we bought, if we didn't buy them, they would be gone. I'm most proud, forget about the numbers and what it's meant for us financially, but we're most proud because we basically kept companies alive that otherwise would be dead, buried, and liquidated. What we found out is, you know what? If we just focus on the business, focus on cash flow, focus on the consumer, we could stabilize these businesses, have patient money. Patient, not worried about comp from one quarter to the next. We could turn those around.

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

I'm most proud because I should know, maybe Brian knows, but our SPARC operations employ thousands of people, when you add Penney, you've got well over 50,000, 60,000 people. Don't underestimate what we've done. These were companies that were, frankly, roadkill, and we saved them, and for that, I'm very thankful for. That's one. I'd say, Michael, generally, and I can get into this in more detail. It's just too much to tell you now.

[Michael Bilerman, Analyst at Citi]

Yeah.

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

I'd say two things. One is the store is critical. If you talk to the retailers that run these businesses, and in our case in particular, because most of these companies didn't have the capital to invest in the internet and the omni-channel.

[Michael Bilerman, Analyst at Citi]

Right.

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

We're making it at the store level, okay? These are really turned into be good physical store operators. Eddie Bauer is more sophisticated on the e-commerce than some of the other ones that we got when we bought them. The store is a really, really important component that gets, in today's world, it is what it is, gets overlooked. I'd say we've also had a great partner in ABG that adds a lot to the marketing and know-how about sourcing that was very important to what we have. Brookfield has been a terrific partner as well, and adds a lot of value. They're in some deals, they've been converted in others, but they've been like us. What do we do that's right for the business? How do we keep these companies alive and prosper-

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

-quick decisions, all the rest of the stuff. Omni-channel clearly is very important to the future, but these companies are basically surviving and prospering because of their physical footprint, not because of e-commerce.

[Michael Bilerman, Analyst at Citi]

Right. I would say if I have a vote, I know you probably wouldn't give me a vote, but on the retailer versus core Simon earnings, I do think there's a difference. The market can describe what multiple they want. You have leases and contracts. Retailers, on the other hand, have just a different business model.

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

Well, traditionally, you're right in that, but if you look at where the retailer multiples are compared to ours, you would argue the reverse.

[Michael Bilerman, Analyst at Citi]

That's why I said, the market's going to tell us where, but at least having all the details of the components, I think is just a very helpful piece of information that the Street can then. Maybe we can get into an argument about how things should be valued, not having the individual pieces in a clear and concise way, I don't think allows to have that conversation.

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

Yeah.

[Michael Bilerman, Analyst at Citi]

It becomes a little bit more adversarial.

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

Well, we got it. We understand the issue, but at the end of the day, we'll see the level of materiality to it, and we'll see if it makes sense. We've got partners in there as well.

[Michael Bilerman, Analyst at Citi]

Yep.

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

The market is the market. I have to respect it. We hear what you're saying.

[Michael Bilerman, Analyst at Citi]

Okay. I appreciate the time, David.

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

Thanks, Michael.

[Michael Bilerman, Analyst at Citi]

Have a good one.

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

Okay.

[Operator]

Thank you. Our next question comes from Caitlin Burrows of Goldman Sachs. Your question please.

[Caitlin Burrows, Analyst at Goldman Sachs]

Hi, everyone. I was just wondering maybe if we could talk a little bit about the conversations you're having with retailers. I think in the past and even last quarter, it sounded like there were still retailers that were maybe giving you a hard time about rent payment or rent negotiations. Wondering if you can give an update on how those conversations with the retailers are going, and also whether that is impacting the lease termination fees.

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

I would say we're really down to a couple of folks. It's really, Caitlin, way down. Everybody's lived up to their basically COVID deal. I would say right now, other than one or two folks, it's really kind of business as usual. How do we do business better? How do we grow our business? How do we do things more strategically? I think I'm hopeful. It was tough for us, it was tough for them. We were all dealing with unprecedented sequence of events. I think it's all behind us. Our collection rates are back to normal. Yes, we've got two or three folks that are still out there. If they stay out there, it is what it is. We're moving forward.

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

It's all pretty much behind us, assuming nothing that we had to deal with like we did last year.

[Caitlin Burrows, Analyst at Goldman Sachs]

Mm-hmm. Got it. Okay. Then maybe just a quick one on the other income, both the lease settlement income was up decently in the quarter and also the bucket for other income. I was just wondering if you could give some detail on those two line items.

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

Yeah. I remember lease settlement income was up a few million dollars, not much, maybe $0.02. We sold one residential property at a gain, and we had a significant increase in our Simon Brand Ventures business, which is probably the bigger grower of that number.

[Brian McDade, CFO at Simon Property Group]

Yeah, absolutely, Caitlin, it's Brian. We saw a pretty substantial increase in Simon Brand Ventures in our gift card business and some of our kind of mall food operations, which obviously in the second quarter of last year were nonexistent.

[Caitlin Burrows, Analyst at Goldman Sachs]

Got it. Okay, thanks.

[Operator]

Thank you. Our next question comes from Derek Johnston of Deutsche Bank. Your line is open.

[Derek Johnston, Analyst at Deutsche Bank]

Hi, everybody. Good evening. What do you need to see in order to green light additional transformational mixed-use projects, especially the Taubman assets, which we think make a lot of sense? Clearly Northgate never skipped a beat, and now Phipps Plaza really looks like it's back on track. Maybe I missed it earlier, David, but I recall the office component being temporarily shelved, but what do you need to see to ramp additional transformational type projects? Is there a laddered development program in place or any material ongoing in process, entitlement requests you can share?

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

Sure. You're right about Phipps, where basically all systems go there. We expect to finish everything by the end of 2022, which would be the new Class A office, Nobu Hotel, Life Time Athletic. It's all going back. You're right, we did shut it down during COVID. We restarted this, I don't know, two, three months ago. We weatherproofed some of the stuff earlier, but we really are finishing the project. I'm really excited about that. Hopefully we'll be able to show you that and be something really proud of. I would say we took a hiatus of 12 months, more or less, Brian, right? 12, 14 months.

[Brian McDade, CFO at Simon Property Group]

Yeah.

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

We're back at it. I think I mentioned last call, we're probably, in some cases, decreasing the amount of maybe new retail space. We're back at it, and it's more mixed use than ever. The demand on the mixed use front has been really, really nice to see. Just to name a few that were in the permitting process would be Brea in Orange County. We've got Stoneridge in the Northern California area. Just to get the permitting process restarted. Some of those things we have to start again because the plan's different. The idea to redevelop, a lot of them are the old department store boxes that we got back or that we ended up buying. We're going. The plans may be a little less grandiose, so to speak, but it's very active on that front across the board.

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

Look for more and more of our pipeline to increase as we go through the vetting process. I think with the Taubman portfolio, you're right, there's a lot to do there. I keep saying they, but we don't have a lot of empty boxes there, so there's not the plethora of opportunities that you might otherwise think. There are some, and we're working those as well. It's great real estate, great location. I think I mentioned last call, I do think, not that there's really a silver lining in any of this, but I do think our properties, both by the communities and maybe the general movement there, the suburbs are, especially in markets that we're in, are going to be really appreciated, and I think we're going to be the center of activity.

[Derek Johnston, Analyst at Deutsche Bank]

Okay, great. Thank you. I guess just my follow-up will be a quick follow-up to this question. Is the 13-story Class A office building, is Life Time Work an anchor tenant there? Did you sign them?

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

No.

[Derek Johnston, Analyst at Deutsche Bank]

Have you pre-leased any of this space that gave you confidence to move ahead? Are you just moving ahead because you feel better in general?

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

Let me be clear. Life Time is its own separate building. It's actually built on top of a world-class food hall that we're doing with C3. Inside Life Time Athletic, they will have their own coworking. The office building is on its own. There's no leasing to Life Time on that. It's 13 stories. We're building it spec, though we just signed our first 90,000 sq ft lease. The short answer is yes, we are going.

[Derek Johnston, Analyst at Deutsche Bank]

Thank you.

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

Sure.

[Operator]

Thank you. Our next question comes from Craig Schmidt of Bank of America. Please go ahead.

[Craig Schmidt, Analyst at Bank of America]

Thank you. Looking at the guidance for 2021, you'll have recovered a half of the loss from your previous peak on FFO per share. I'm wondering, as you work on to create the income to get you back to the second half, is that going to be harder than the first half, or could that be easier?

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

Just quarter-over-quarter?

[Craig Schmidt, Analyst at Bank of America]

I'm just thinking, I mean.

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

I don't think anybody understood. Your connection's not that good, Craig, so maybe can you restate it, please?

[Craig Schmidt, Analyst at Bank of America]

Sorry. Can you hear me now?

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

Yes.

[Craig Schmidt, Analyst at Bank of America]

Okay. Your guidance for 2021 already brings you halfway back to your peak FFO per share. Thinking about the second half, is that going to be harder to recover or easier?

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

Well, if you go quarter-over-quarter, I would just say, and I'll let Brian and Adam weigh in, but we had the brunt of COVID-19 abatements and relief defaults in Q2 and Q3, if I remember correctly. The comparison to Q3 of 2021 compared to 2020 should be a pretty big gap. By Q4, we had dealt with most of the stuff. If that's your question, I'm not sure I really maybe comprehended it completely, but if that's your question, I think hopefully that answers it.

[Craig Schmidt, Analyst at Bank of America]

Great. Do you foresee any changes in the REIT rules that might allow you to grow your retail and some of your other businesses beyond previous limitations?

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

Well, that's hard to know, Craig. I'm hopeful. There are limitations. You're right, 100% right. There are limitations, and I'm hopeful that the folks that do legislate this stuff will understand the benefit that we've provided to basically working families because we've saved these retailers. Yes, there are rules that make it complicated. They should be less. Remember, our retail investments are in a taxable REIT subsidiary. If you look at our P&L, you'll see a big tax expense, correct, gentleman?

[Brian McDade, CFO at Simon Property Group]

Yes.

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

That's associated with the fact that our TRS is taxable and we're paying the corporate tax rate at its full level. When you look at, hopefully, the benefit of what we've done for these companies that otherwise may not exist, frankly, that the folks that write legislation will see that this is really an arcane rule that was around a long time ago, and there's a real benefit to trying to keep retailers and others alive to try and create employment and all the good stuff that they do in the community. I am hopeful, but there's no certainty on that.

[Craig Schmidt, Analyst at Bank of America]

Understood. Thanks.

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

Thank you, Craig.

[Operator]

Thank you. Our next question comes from Floris van Dijkum of Compass Point. Your line is open.

[Floris van Dijkum, Analyst at Compass Point]

Thanks for taking my question. David, I have a feeling of sort of deja vu. We've seen this picture before following the great financial crisis. Obviously, things are different, of course, it seems like we're reliving those times a bit. My question to you is regarding tenant sales. Again, the key lifebloods to your malls and the key, obviously, to the retailer profitability, too. Very encouraged by your statement of retail sales in June, in your portfolio equaling 19 levels and up 5% from May. Maybe if you can give some more breakdown in that, particularly as it comes out of the first quarter. Also, did I hear you correct? Did you say that Taubman sales are 13% ahead of 19 levels?

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

Correct.

[Brian McDade, CFO at Simon Property Group]

Yes.

[Floris van Dijkum, Analyst at Compass Point]

Does that-

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

It's a good number. Look, I do think we all deal, Floris, in a very tough. It's really hard to make any predictions, but I think what it should tell all of us is that, and I said it a little bit earlier, physical shopping is people like to physically shop, okay? We are, by no stretch of the imagination, hitting on all cylinders. We still have tourist centers that don't have tourists other than domestic. We have parts of the region that were slower to open up, i.e., California, than others. I just think the most important point is that people like physical shopping. Listen, you hear it all the time, and I'm sure your clients ask you, well, nobody shops physically anymore, and you try to defend it, or you say, yeah, but what about this?

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

What about that? I think we're showing that it matters to the consumer and to these communities, and hopefully that will continue. I will say this, maybe getting to your question. It is across the board. Yes, it's the luxury retailers, but it's also Aéropostale, which the AUR is, I won't tell you, I don't know if I'm allowed to tell you, but the AUR is lower than what it might be for a luxury retailer, okay? It's at Forever 21, which has a low AUR. I think that's just encouraging. Hopefully, the trend will continue, but I think the consumer likes the idea that they can go to a physical shopping place.

[Floris van Dijkum, Analyst at Compass Point]

Great. If I can follow up, I guess. You talk about the fact that your lease spreads are not space for space, like for like. I wonder if you had that, also, what is the impact if your average sales get to 19 levels, what's the impact on the effective rent that you would be getting relative to the reported rents that you've talked about?

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

Well, I think the easiest way to do that, it's a complicated number because you got to go retailer by retailer. We did it for the first six months, and our estimate of what our base rent would be based upon. We got the benefit. There's $5 more of base rent had we not lowered our breakpoints, due to the COVID relief. That gives you an indication of an interesting stat, if maybe it's of interest to you.

[Floris van Dijkum, Analyst at Compass Point]

Have you-

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

I can't really give you a number off the top of my head. It would just be a guess, and I really don't want to do that, on what it might be. Again, on the spreads, it's not space by space. A lot of people, and I know the burden's on you and the analytic community. Very few people do it the way we do it. Most people do it space by space. Some people also include their estimate of, if they have a base rent of X and they think they're going to be in percent rent, they include that in their spreads. It's all in and all out. Mix matters because of these boxes I explained to you. You know what? It'll manifest itself in the cash flow.

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

The big cash flow growth story that we have going forward is sales growth, and occupancy growth, and SPG growth, getting that back to normal. That's the big story. The spreads, I could do a bunch of boxes. The spreads can look not as good as you have looked historically, but the reality is my cash flow went up because that was vacant space and it's already out of the spread calculation. Focus on cash flow growth, is the bottom line.

[Floris van Dijkum, Analyst at Compass Point]

Thanks, David. Appreciate it.

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

Sure.

[Operator]

Thank you. Our next question comes from Mike Mueller of JPMorgan. Your line is open.

[Michael Mueller, Analyst at JPMorgan]

Hi. Q2 looks like it was about $292 without the reversal. If you look at the $1,075 guides, it implies about a $250 a quarter average for the balance of the year. What was the level of income in Q2 that won't recur going forward?

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

I'm not sure.

[Brian McDade, CFO at Simon Property Group]

Say that one more time, Michael. Can you go through that question again, please?

[Michael Mueller, Analyst at JPMorgan]

Yeah. If you could comment on Q2 without-

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

Let me say it this way. The only thing that's not going to recur is the Klépierre deferred tax gain. I can't tell you exactly what retail sales are going to be. I can't tell you what our retail investments is going to be. The only thing that's kind of non-recurring, we will always have certain non-recurring things every year. Lease settlement income, sale of a income-producing property. These things always kind of ebb and flow. The only thing that is not going to recur is the deferred tax. That's a one-time gain, clearly articulated in our press release of $0.32.

[Michael Mueller, Analyst at JPMorgan]

What about prior period collections? Were there any in there that were significant?

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

No, they wouldn't come through the P&L either.

[Brian McDade, CFO at Simon Property Group]

We saw no recovery, Michael.

[Michael Mueller, Analyst at JPMorgan]

Yeah. Got it. Okay. Thank you.

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

Thanks.

[Operator]

Thank you. Our next question comes from Vince Tibone of Green Street. Your line is open.

[Vince Tibone, Analyst at Green Street]

Hi, good afternoon. It seems clear that variable rent is growing in the portfolio. Could you help frame how much this is shifting? For the leases you're negotiating today, what is the split between contractual rent and the expected variable rent component? How is that different from before the pandemic?

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

Well, look, I think the simple way to say that, Vince, is that if we are willing to bet, in some cases, on the prospect of our property and our retailer, and to the extent that they are cautious because of what they've had to deal with as well, we're willing to accept a lower base rent in some cases, if we get a artificial upside in other cases. It's not anywhere near the majority. It's only dealing with certain cases, certain lease rollovers. Again, those lease rollovers happen, let's say on average, we have 12% a year that rolls over. Now, last year, we had more only because we dealt with bankruptcies, which in theory, when you're in a bankruptcy, all of your leases roll over because you have the right to reject leases.

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

We did a little bit more last year with some of the brands that went through bankruptcy, because it was in the height of the pandemic, and they were cautious with their plan, but we made artificially low breakpoints to make some of the income back up if their sales hit. I would say, going forward, we're pretty much back to the normal way to do it. Which is trying to get the appropriate base rent and a natural break over that to generate percentage rent.

[Vince Tibone, Analyst at Green Street]

Got it. Yeah.

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

I will say this, we are still really important. We used to have big, big overage rent numbers from our outlet portfolio because of the foreign tourism. We're still not seeing that. Obviously, tourism dropped during the last couple of years, pre-pandemic, strong dollar, relationships with countries, et cetera. I won't go through all that stuff. We had the pandemic and the restriction. One of the unique things that I think, and I hope, not knowing Delta or anything else, how it's all going to play out, but at some point in the not too distant future, we're going to see really good growth in our high-quality tourism centers, that should manifest itself in additional percentage rent. We have yet to see that, primarily our outlet, but also our Vegas properties as well, like our Forum Shops.

[Vince Tibone, Analyst at Green Street]

Yeah. No, thank you. That's really helpful color. It sounds like the lease structure is more temporary versus a secular shift towards more available rent. I appreciate the color there.

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

So-

[Vince Tibone, Analyst at Green Street]

One more from me, maybe just shifting gears. You were fairly active in the mortgage market in recent months. Just was hoping you could provide some color on the recent trends there and just the ability for both you and others in the industry to get non-recourse financing on high-quality malls today.

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

I'd say it's significantly improved, not easy. Not a day at the beach. Retail is still, I think a quarter like this, couple of other quarters, pandemic in the rear view mirror, I expect it to get back to normal, that market is still difficult. The unique thing about us is we have the unsecured market for us, we don't necessarily need the mortgage market. Sponsorship is really important. It's dramatically improved, but it's not where it needs to be, where it should be, and where it has been.

[Vince Tibone, Analyst at Green Street]

Yeah, that makes sense. If you had to draw maybe a line in the sand for sales per sq ft or quality in terms of being able to get debt, is there anything you willing to throw out there?

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

Look, I think we've done the Pentagon Cities of the world. We've done those in a really good, solid mall in a not sexy town, is tougher, and it shouldn't be because the stability of that cash flow is frankly pretty good under our management and ownership. Often, sexy Like we did Domain.

[Vince Tibone, Analyst at Green Street]

Yeah.

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

We had an old real estate parlance, we over-financed it. The Pentagon Cities of the world are fine. If you have a traditional mall in a smaller market, even though it's really good, really solid, really stable, still is more difficult than it should be, in my opinion.

[Vince Tibone, Analyst at Green Street]

Oh, interesting. Well, thank you for the time.

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

Sure. Thanks, Vince.

[Operator]

Thank you. Our next question comes from Ki Bin Kim of Truist. Your line is open.

[Ki Bin Kim, Analyst at Truist]

Thanks. Good afternoon. Can you talk about the retailer investments, the $195 million of NOI? I would've thought you would've gotten that type of level of income towards the fourth quarter, just given the seasonality that's inherent in retail. I'm just trying to think about that compared to your previous guidance of $260 million of EBITDA, and should we expect a similarly strong quarter in the fourth quarter, or is there something unique that happened this time around?

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

Well, again, remember, this is all. You're 100% right in that, like traditional retailers, a lot of it's backend weighted. We budget the same way. We way outperformed our first six months. Hard to know exactly what it'll be the next six months. We budget the ramp up too, Ki Bin Kim. We'll see whether we're on budget, above budget, below budget. We budget that ramp up as well.

[Ki Bin Kim, Analyst at Truist]

Okay. There wasn't anything unique to this quarter that there was like a one-time item or anything like that?

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

Other than dramatic outperformance. That was what's unique about it.

[Brian McDade, CFO at Simon Property Group]

Yeah. No one-time item, either.

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

Yeah.

[Ki Bin Kim, Analyst at Truist]

All right. What are your latest thoughts on acquisitions? It's a bit ask out there, how that compares to your kind of internal hurdles, just any kind of color you can share on that.

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

Well, there's no action. I don't know if I should say this publicly, but it's a little late now. We're really not looking at anything that I know of. There's really no action. It's really hard for me to comment on it because there's just not much happening.

[Ki Bin Kim, Analyst at Truist]

Okay. Thank you.

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

Sure.

[Operator]

Thank you. Our next question comes from Linda Tsai of Jefferies. Your line is open.

[Linda Tsai, Analyst at Jefferies]

Hi. With the pandemic driving more buy online and pickup in store, how do you think retailers are considering their occupancy cost ratios, and is this a similar approach to the way the retailers you've invested in also approach occupancy cost ratios?

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

Well, that's like there's no standard answer other than to say, if they buy online and pick up in store, that sale goes through in our leases. That sale goes into our sales calculation. It's not like it's excluded. That's going to be part of our occupancy cost discussion.

[Linda Tsai, Analyst at Jefferies]

Got it. Any sense of how the comps have trended for your retailer investments the past couple of months as maybe it relates to 2019 levels?

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

How our retail investments did to 2019?

[Linda Tsai, Analyst at Jefferies]

Yeah, like same-store sales.

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

Yeah. I would say generally above 2019, except for JCPenney, because they really were not in bankruptcy in 2019, so we're still having the bankruptcy. They went into bankruptcy in early 2020.

[Brian McDade, CFO at Simon Property Group]

Yeah.

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

They had a lot less unaffected year, so we're still below 2019 levels, but the rest of them are above 2019 levels-

[Brian McDade, CFO at Simon Property Group]

Yeah

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

-pretty handsomely.

[Linda Tsai, Analyst at Jefferies]

Thanks.

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

Sure.

[Operator]

Thank you. Next question comes from Haendel St. Juste of Mizuho. Your line is open.

[Haendel St. Juste, Analyst at Mizuho]

Hey, good evening out there.

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

We're out here.

[Haendel St. Juste, Analyst at Mizuho]

I wanted to come back to leasing for a second. Clearly, the industry's gone through some changes here last year, a few more shorter-term deals being done, percentage rent deals are a bit more prevalent. I guess I'm curious, as you look at the U.S. mall business here over the next year or two, and more especially in that period from 2023 to 2025, I'm thinking about how do you assess the likelihood that leases perhaps don't necessarily go back to being long-term with fixed rate contractual rent bumps, or maybe they become more like in Asia, where they are more percentage rent, and perhaps the leases are shorter in nature.

[Haendel St. Juste, Analyst at Mizuho]

I guess I'm curious, seeing what you're seeing, the tone of the conversations, what your thoughts are on there, and maybe some color on the average change in lease term here being signed in the portfolio the last couple of months?

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

Yeah. The term hasn't changed all that significantly. Look, I would say that I don't think there's a big fundamental shift. When you tend to go short-term, it's because you can't agree on what you think the fair market value is. You kind of do a short-term deal, and again, there's some cautiousness from the retail community because of the pandemic. I think assuming we get over this, I think we're going to see long-term deals. We also use short-term deals to our advantage because one is we may be testing out a new concept, one is we don't like the rent that the retailer's offering, so let's keep that retailer in there while we go find a better long-term tenant. There's a redevelopment. We want to move people around. There's all sorts of strategic reasons to do short-term leasings.

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

I think that the simple, straightforward answer is, I don't think that the fundamental nature of our business has changed in terms of long-term leases. Listen, the retailers, if they're investing in the store, the better retailers want long-term leases because they want the store to look good. They want their personnel to be there. They don't want to go through different personnel. Personnel at the store levels know when leases are short and when leases are long. They're more committed to that company. They're as motivated in many, many cases as we are to have long-term leases. I really don't think other than because of the nature of the pandemic, that short-term leases are de facto the new industry. I just don't see it.

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

No retailer is going to invest in a store without long-term leases, and all the better retailers all want a good physical plan, all want to put in their omni-channel capabilities, and they're not going to do that on a short-term lease.

[Haendel St. Juste, Analyst at Mizuho]

I got you. I appreciate those comments. I was just trying to understand if there's any concern on your part by perhaps the lease expiration schedule that's building up here over the next two years with some of the shorter-term leases that have been signed in the last one or two years, adding on top of the normal lease expiration schedule, especially in that 2023-2025 period in which you'll be anniversarying against, I think, some tougher comps from leases signed 7-10 years ago.

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

Look. I think, again, because of the quality of our portfolio, I'm not concerned about that. The reality is, we may be negotiating from a position of better position because our properties look great. Sales are great. A lot of the physical retail has dissipated in the markets where the action is. We've made those bets all the time, that we're going to bet on the future, and if we can't make a long-term deal, we make it short because we're betting on the future, and we've been right more than we've been wrong in those bets, but we're not always right. That's the judgment that we have to make, and we make it reasonably well, in my opinion.

[Haendel St. Juste, Analyst at Mizuho]

Okay. Fair enough. A follow-up, if I could, on the leasing spreads, understanding that that's been impacted by some of the leases you're doing with the lower percentage rent thresholds. I guess I'm curious.

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

No.

[Haendel St. Juste, Analyst at Mizuho]

Are you able to provide us-

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

It's a little bit of that, but it's primarily the mix, as I've stated.

[Haendel St. Juste, Analyst at Mizuho]

Okay

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

It's not space by space.

[Haendel St. Juste, Analyst at Mizuho]

Understood. I was just curious if you were able to provide a figure net of these newer leases that have been done here with the lower percentage rent thresholds.

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

Let me just say this. We could paint an unbelievably good picture there. We just put all the stuff in. The number is the number. If we went space by space, if we did it over a certain period of time. There's all sorts of ways you could create the number we would want you to focus on. It's just a number to us. It's not what's driving our business. Okay?

[Haendel St. Juste, Analyst at Mizuho]

All right. Thank you.

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

Thank you.

[Operator]

Thank you. Our next question comes from Greg McGinniss of Scotiabank. Your line is open.

[Greg McGinniss, Director at Scotiabank]

Hey, David, hi, team. I think one of the key concerns for investors today is the potential longer-term drag from lower quality assets. Maybe at least not if they remain primarily retail. How are you thinking about investing or maybe not investing in the different quality bands within your portfolio to extract the most long-term value from those assets?

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

Really not much of an issue for us. It's a de minimis number, and it's like any other company. If you have a profitable business, maybe you don't invest in it. If you don't think the growth is there, and you milk the cash flow. If investors are concerned about that, my initial reaction is, we should do a better job of explaining the quality of our portfolio and the depth and breadth of our business. We'd encourage you to have them call us. We'd be more than happy to walk through the portfolio, answer any questions that they have on it. I don't think after that they would come away with that being a real concern. If that does happen, it's on the margin, $0.03, $0.05, something like that.

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

Anybody that's concerned about that, please call me, Brian, Tom, or you can set it up and we'll walk them through the asset base.

[Greg McGinniss, Director at Scotiabank]

All right. Appreciate that. Could you possibly touch on maybe how the operating performance differs between the higher end and the lower end? You used to give those NOI-weighted numbers, which were helpful.

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

Yeah

[Greg McGinniss, Director at Scotiabank]

I'm just curious how that performance is going today.

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

I have them somewhere. Somewhere. Old. Yeah, let's see. Basically, occupancy in the EBITDA weighted is-

[Adam Reuille, Chief Accounting Officer at Simon Property Group]

93

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

93.2 to 91.8. Okay. Average base minimum rent is higher, obviously, but the spread's about the same, and the total rent's about the same. Sales or rolling 12 are pretty consistent on a percent basis. The rolling 12, and you can't remember, rolling 12, we have three months of downtime, so it's kind of irrelevant.

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

The most important number is occupancy, and it's a little bit better.

[Greg McGinniss, Director at Scotiabank]

Okay. I guess really what I'm trying to understand, and I think what others are trying to understand, is whether or not there's any need for a higher level of dispositions post pandemic or maybe just as the retail market evolves, right, how the portfolio is going to address evolving.

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

We've always been selling. We just sold the residential thing at-

[Adam Reuille, Chief Accounting Officer at Simon Property Group]

Three

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

-below sub-4 cap rate. There are a couple of retail properties that we've earmarked for sale. Market's not quite there. We'll see what happens. Thank you.

[Greg McGinniss, Director at Scotiabank]

All right. Thanks.

[Operator]

Thank you. Our next question comes from Juan Sanabria of BMO Capital Markets. Please go ahead.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Hi. Just wanted to hit on the guidance question again. It seems like you guys have outperformed expectations on the retail side on your investments, but the guidance implies a decel kind of ex-one-time from Klépierre. Should we just think of that as just conservativism built in for the second half, given the volatility on the retail side, or is there another reason for the sequential implied decline in the back half from a clean second quarter run rate number?

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

Well, look, I think all I can tell you is that we've beaten our first quarter, our second quarter. We hope to beat third, and we hope to beat the fourth. We're in the midst of the third, and we're in the midst of the fourth, and we'll see how it shakes out. We feel, as I mentioned to you earlier, we feel pretty good as to where we're positioned.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Just my follow-up is, just in terms of mall operating hours, are those back to pre-pandemic levels? If not-

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

Yeah, that's a good question. They're inching back toward it, more or less. Excuse me. We may be an hour short on Monday through Wednesday, but basically Thursday, Friday, Saturday, we're pretty much back to normal.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Is that just a lack of availability of labor issue, or is it something else at this point?

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

It's pretty back to normal. I think that in some cases, the retailers like it. It's something we're always monitoring, and it's a very interesting subject because some retailers love it, some want the hours to go back. It gives me a headache when I think about all the different opinions. It's pretty much back to normal, maybe an hour short in the early part of the week.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Thank you.

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

The important point, it's something we monitor and manage daily, weekly in significant consultation with our retailers. It has increased materially since the early days of reopening.

[Juan Sanabria, Managing Director at BMO Capital Markets]

Understood. Thank you.

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

Thank you.

[Operator]

Thank you. At this time. Oh, I'm sorry.

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

No, go ahead. Go ahead, Operator.

[Operator]

Yeah, at this time, I would like to turn the call over to David Simon for closing remarks. Sir?

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

All right. Thank you. Have a great rest of your summer, and we'll talk soon. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.

Participants

Executives

• Adam Reuille, Chief Accounting Officer
• Brian McDade, CFO
• David Simon, Chairman, CEO, and President
• Tom Ward, Senior VP of Investor Relations

Analysts

• Alexander Goldfarb, Analyst at Piper Sandler
• Caitlin Burrows, Analyst at Goldman Sachs
• Craig Schmidt, Analyst at Bank of America
• Derek Johnston, Analyst at Deutsche Bank
• Floris van Dijkum, Analyst at Compass Point
• Greg McGinniss, Director at Scotiabank
• Haendel St. Juste, Analyst at Mizuho
• Juan Sanabria, Managing Director at BMO Capital Markets
• Ki Bin Kim, Analyst at Truist
• Linda Tsai, Analyst at Jefferies
• Michael Bilerman, Analyst at Citi
• Michael Mueller, Analyst at JPMorgan
• Richard Hill, Analyst at Morgan Stanley
• Steve Sakwa, Analyst at Evercore ISI
• Vince Tibone, Analyst at Green Street