Simon Property Group Q3 2021 Earnings Call Transcript

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October 31, 2021

Key Takeaways

  • Simon Property generated FFO of $1.18 billion ($3.13/share) in Q3, driving cash flow to nearly $3 billion year-to-date—back to pre-pandemic levels and including a $0.30/share non-cash gain from its Authentic Brands stake.
  • Domestic property NOI rose 24.5% year-over-year (portfolio NOI up 34.3%), occupancy climbed 100 basis points to 92.8%, and 3,500 new leases (12.8 million sq ft) were signed in the first nine months.
  • Mall sales jumped 43% versus Q3 2019, surpassing pre-pandemic peaks despite limited international tourism, which is expected to improve as travel restrictions ease.
  • Retail investment platforms—including an 11% stake in Authentic Brands, SPARC, JCPenney and TRG—are outperforming budgets on sales, margins and EBITDA, highlighting strong returns beyond core real estate.
  • Simon maintains $8 billion of liquidity, raised its Q4 dividend 10% sequentially to $1.65 (27% YoY), and boosted full-year FFO guidance to $11.55–$11.65 (up 27% YoY), while trading at just 13× FFO versus a 24× REIT average.
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Earnings Conference Call
Simon Property Group Q3 2021
00:00 / 00:00

There are 15 speakers on the call.

Operator

Welcome to the Q3 2021 Simon Property Group, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded.

Operator

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

Speaker 1

Thank you, Alex, and thank you for joining us this evening. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also on the call are Brian McDade, Chief Financial Officer and Adam Roy, Chief Accounting Officer. Quick reminder that statements made during this call may be deemed forward looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995, and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release And our SEC filings for a detailed discussion of the risk factors relating to those forward looking statements.

Speaker 1

Please note that this Call includes information that may be accurate only as of today's date. Reconciliations of non GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8 ks filing. Both the press release and the supplemental information are available on our IR website at investors. Simon.com. Our conference call this evening will be limited to 1 hour.

Speaker 1

And please introduce David Simon.

Speaker 2

Our cash flow increased to nearly $3,000,000,000 year to date consistent with pre pandemic levels. We recorded increased leasing volumes, occupancy gains, shopper traffic and retail sales, Demand for our space from a broad spectrum of tenants is strong and growing, And our various platform investments continue to outperform. 3rd quarter highlights Funds from operation starts with $1,180,000,000 or $3.13 per share. Included in the Q3 results were a non cash after tax gain of $0.30 per share from distribution of our interest in the Forever 21 and Brooks Brothers Licensing Ventures for additional equity ownership In Authentic Brands Group, we now own approximately 11% of ABG and a loss on extinguishment of debt of $0.08 per share from the redemption of the $1,650,000,000 of senior notes. Our domestic operations had another excellent quarter.

Speaker 2

Our international operations have improved. However, the quarter was below our budget by roughly $0.03 per share, primarily due to various COVID restrictions. Domestic property NOI increased 24.5% year over year for the quarter and 8.8% Year to date, these growth rates do not include any contribution from the TRG portfolio or lease settlement income. And if you did include TRG and International Properties, our portfolio NOI Increased 34.3 percent for the quarter and 18.7% year to date. Occupancy was 92.8%, which was an increase of 100 basis points compared to the 2nd quarter.

Speaker 2

Average base rent was $53.91 However, that excludes percentage rent. And if you included that, that would add actually another $7 The BMR, for the 1st 9 months, we signed 3,500 Leases for 12,800,000 Square Feet, Which was nearly 3,000,000 square feet or approximately 800 more deals compared to the 1st 9 months of 2019 mall sales for the Compared to Q3 2019, up 43% year over year. Our sales are over 2019 peak levels. These results are impressive, in particular, given lack of international tourism, Which we believe will start to increase after the restrictions on international travel are lifted beginning next week. Our company's focus, as you know, is cash flow growth, which should allow us to fund our growth opportunities And increase our dividend.

Speaker 2

We would encourage, the analytic community to focus on our cash flow and its growth Because there are many levers that contribute to it beyond what is contained in 1 or 2 operating metrics. A simple case in point, our mathematical open and close spread has declined, yet our cash flow has significantly increased. Leasing spreads are calculated at a point in time. We have studied the leasing spread metric across the various retail real estate companies And highlight the following. Spreads are significantly impacted by tenant mix.

Speaker 2

Our leasing spreads Include all openings and closing and it's not a same space measure. However, we believe many other companies use only this subset For their calculation, we do not include variable lease income in our spread calculation, others do. And there's no consistency in approach. We intend to spend the next several months working to achieve uniformity on this metric, much like we did for sales reporting, although the shopping center sector still does not Disclose any sales productivity for its retailers. Let's keep in mind that all of these metrics, We need to put in perspective and we encourage you to take this opportunity to refocus on the importance of cash flow.

Speaker 2

We opened our 5th premium outlet in Korea and our tent in Japan is under construction. Our redevelopment activity is accelerating. Northgate Station opened at Seattle Kraken Community Iceplex, And we have many developments ongoing at Phipps, King of Prussia, Southdale and many others. Our share of net cost of development projects Is now approaching $1,000,000,000 Our retail investment platform are performing very well, Including Spark, Penny and ABG, Spark outperformed their budgets on sales, gross margins and EBITDA, And we're very pleased with the JCPenney results. The PennEast team has stabilized the business, improved financial results, And we've added private and exclusive national brands to it.

Speaker 2

Our liquidity position It's at $1,500,000,000 and there's no outstanding balance on their line of credit. And we're very excited to announce, And in fact, his first day is today, Mark Rosen. He's joined the company as the CEO. He's got a terrific background, Great leader and we look very forward to working with him as he builds on the momentum Penny has established this year. Penny's success is an excellent example of how to better understand our company.

Speaker 2

We appointed Stanley Sashua as the Interim CEO for nearly a year ago and look at the results. Much like the variety of our investments, no other company or industry has the capability to put an executive In an interim role, we'll produce these results. This is a testament not only to STANLEY, but to the Simon culture. TRG is operating above our underwriting, posted also impressive results for cash flow growth, occupancy Gains in retail sales, which were 16% higher. As you know, we amended and extended our $3,500,000,000 revolving credit Facility, we refinanced a number of mortgages and our liquidity stands at $8,000,000,000 Including $6,900,000 available on our credit facility, the rest in our share of cash.

Speaker 2

We paid a dividend of $1.50 in September. That was a 7.1% increase sequentially And 5 15.4 percent year over year. Today, we announced our 4th quarter dividend of 1 point $65 per share in cash, which is an increase of 10% sequentially And 27% year over year, dividend will be paid December 31. Now we raised our guidance From $10.70 to $10.80 last quarter to $11.55 to $11.65 per share, This is 85% increase on the midpoint. That's 27% to 28% growth compared to 2020 results And basically $2 higher than our initial budget this year.

Speaker 2

Let me just conclude by saying the following. Even though Our stock has posted impressive year to date returns. We strongly believe it is still undervalued. Our current multiple 13 times is approximately 3 turns lower than our historical average and screens Very cheap compared to the REIT sector at 24 times and in many cases, even close to 30. We have unequivocally proven with our results year to date that we've overcome the arbitrary shutdown of our business due to the pandemic and our cash flow has bounced back dramatically, which many I doubt it.

Speaker 2

We have growth levers beyond our real estate assets that are unique attributes We have proven to be astute investors. We have unique business models And diversity of income streams. Our balance sheet is industry leading and as strong as it's ever been. Our dividend yield is 4.7% and growing, well covered, higher than the S and P yield of 1.9% And the REIT average of 2.9 percent and we have the potential to perform very well in an inflationary cycle. We're now ready for questions.

Operator

Thank you. At this time, we will be conducting a question and answer session. Our first question comes from the line of Rich Hill with Morgan Stanley. Please proceed with your question.

Speaker 3

Hey, good morning or good afternoon, guys. Sorry, it's been a long day. Congrats on another really good quarter, David. I did want to maybe just understand a little bit more about the sequential Slow down on maybe TRG's domestic portfolio in the international portfolio. Is there anything specifically that would drive that?

Speaker 3

And I'm really only asking the question In terms of how we should think about forward modeling, because I do recognize that you're

Speaker 2

guiding. No, no, no. You're wrong. It's we're just showing our share. So, compared to the gross number last quarter?

Speaker 2

Yes. Okay. So, no, it's a good question, but it's just our share.

Speaker 3

Okay. Thank you very much for that clarification.

Speaker 2

Yes. No, no, no. I'm glad you pointed that out. Thank you.

Speaker 3

Got it. And then I did want to maybe just understand a little bit more about the income from unconsolidated entities. Just to be clear, like last Quarter, the non cash gain was included in that number. Is that right?

Speaker 2

Yes. Yes.

Speaker 3

Okay. And then maybe we can just talk about how why that number went down a little bit. I do recognize depreciation went up Pretty significantly versus the prior quarter. Obviously, seasonality would dictate that the retailers were doing pretty well. Is there anything that we should think about in that number We look going forward?

Speaker 2

No. It's just it's probably most impacted by our European And international business, as I mentioned earlier.

Speaker 3

Great. Thanks. That's it for me. Thanks again and congrats on another good quarter.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Craig Schmidt with Bank of America. Please proceed with your question.

Speaker 4

Great. Thank you. I noticed going from 2nd and third quarter, you increased your total redevelopment about 83,000,000 The total investment, but that does not include Taubman. Have you started to make any of your Investments in terms of carbon redevelopments?

Speaker 2

Yes. I mean, it's progressing the way we thought it would. There's a big master planning in the works Cherry Creek, but that'll be several years in the making. But no, there's some good stuff happening in that portfolio as well.

Speaker 4

Great. And then, how should we think about your retail investment In terms of I mean, quarter to quarter, it kind of moves around. I mean, should we look at it on an annual basis? Or How should we get a better handle on what you've been able to produce out of your investment in retail?

Speaker 2

Well, I think you should think about us as A company that can add value to what we invest in and you should always You should never worry about quarter over quarter or you should look at annual results and compare them historically. So I'd just say that's generally. But I think we're I think the most important thing is, Craig, we're just a different company Then what most think of us, I mean, we have lots of avenues for growth and our investments in retailers and other companies It has proven to be extremely successful and it will create Some variability to quarter over quarter, but year after year, I think, when you look at our return on Investment return on our EBITDA for those businesses is actually quite outstanding. And if you look at the valuations that E commerce companies are getting for their dotcombusinesses. We've got embedded value here that's pretty exciting.

Speaker 2

So I would never worry about 1 quarter over another.

Speaker 4

No, I'm particularly thinking about the 11% interest in APG And what people say that might go for on an IPO, it's very impressive. Thank you.

Speaker 2

Yes. Look, I mean, I just Yes. Look, we're just not your we're more than just a Even though we're you call us a mall company, I think we've proven to be beyond that. And that's what I encourage you to focus on.

Speaker 4

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Speaker 5

Thanks. Good afternoon, David. It was nice to see the occupancy up 100 basis points sequentially. I'm just wondering if you could discuss a little bit about your leasing pipeline and backlog, Maybe where you think occupancy ends at the end of this year and what your expectations are for a recovery in occupancy?

Speaker 2

Well, I think it's going to take a little bit of time to get back to where we were pre pandemic. But I think what's exciting, Steve, is that when we're talking to our folks, they're Just seeing a tremendous amount of demand, never been busier, lots of new Retailers, lots of new uses and I think the action is in our portfolio. So we'll have another increase this Quarter upcoming and then we'll increase our occupancy next year. I don't I can't as you know, we never give specific Guidance on that, but the demand, I strongly would tell you that it's very good. So And it's across the board.

Speaker 2

I mean, it's the high end retailers, it's the value oriented retailers. So we're very pleased with what we're seeing.

Speaker 5

Great. Thanks.

Speaker 2

Thank you.

Operator

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

Speaker 6

Hi, good evening and nice quarter. I guess maybe just another question on the retailer part of the business. I was wondering if you could go through from a REIT Perspective, is there a max how big this business how big this can be as a part of your business? And just what's The current goal or ultimate plan for your own brands, is it just to grow the existing brands, acquire more, sell it, but just any thoughts on the plans going forward?

Speaker 2

Well, listen, we're obviously very dedicated to Being a REIT and staying a REIT And all of these businesses are taxable REIT subsidiary. So, and you see that in this quarter in particular, you'll see The big tax expense that is flowing through our P and L. But because we tend to buy these in partnerships, we have really a runway To continue to grow that business, not to mention that we still have our SPAC out there that In a sense, a vehicle for growth. So I'm optimistic That based on our track record, we're going to continue to find Other investments, whether it's retailer or similar situated businesses that will continue to Add to our unique company and we'll take it from there.

Speaker 6

Got it. Okay. And then maybe just a quick follow-up. I think we'll learn more once the 10 Q is out. But until then, just on that tax number in the quarter, could you clarify If that was just related to the retailer income in the Taxable REIT subsidiaries or if there was anything one time included.

Speaker 7

Hey, Caitlin. It's Brian. There's actually a one time $48,000,000 number coming through there from the ABG Transaction that we had in the quarter. So you got to bifurcate the two numbers. There's a 48 and then the rest is just our normal regular occurring operational tax accrual.

Operator

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Michael Bilerman with Citi. Please proceed with your question.

Speaker 5

Great. Katie McConnell is on with me as well. David, good afternoon. I was wondering if you can maybe delve a little bit deeper Into the retailer environment in the sense that we know sales are extraordinarily strong as everyone's gotten back out and enjoyed buying things again. But the retailers are struggling sort of a little bit below the sales line, right?

Speaker 5

They're struggling with staffing. They're struggling with keeping product Up to date, most of it punch on ships. So how are you sort of thinking about it from two sides? 1, The retailers that you own and sort of dealing with some of these issues where they're also dealing with their e comm problems too. And also from the standpoint of how you think retailers are going to Approach sort of the store openings next year given maybe some of the product, given some of the staffing concerns And how all that sort of melts together now that you're more and more sitting on both sides of this equation and really understanding some of these pressure points?

Speaker 2

Well, let me just tackle The backlog in getting product to the stores, which does have an impact on us, Just with respect to our tenants and then as well as the brands that we own. There's variability. I mean, everyone is pretty comfortable or confident, I should say confident that They're going to get the product in there for the holiday season, but I would tell you that there's no guarantee. So there'll be some variability. Absent that, we probably would have felt a little bit better going in 4th quarter, but we were cautious on it because we just don't know and it's out of our hands though.

Speaker 2

I did throw a shout out to Stanley only because by the way I trained him, but just don't forget that. But he did tell me that he was going to if he had to go to the Port of LA and unpack boxes To get him into the Penny store, he said he was going to do it. And I said, well, that's a great idea. I'll do it too. So we're on call to help.

Speaker 2

So that's that. I mean, if there is variability, I don't know. But I think generally people are reasonably confident that they'll get their product in for time For Christmas. Now with respect to employment, this is well beyond retail. And I mean, it's a with all the political back and Fourth going on, it's really not talked about.

Speaker 2

And just From a CEO point of view and just someone that's worried about Growing our overall economy because obviously we're correlated to GDP growth. We've got to figure out whatever is causing the lack of Employment growth, we've got to get to the root of it because it's not clear to me that there's a big focus on it. It has finally getting to your last question. Thankfully, Michael, I have not seen it Impact folks open to buy their growth. Could it Eventually, the answer is sure, but we have not seen it yet.

Speaker 2

But the lack of Employment is an issue, especially And some of our retailers are they're doing one shift. They're increasing the salaries of the people there less part time. So they're combating it maybe in a good long term way because they're raising salaries And getting more loyalty out of that. But the increase in Restaurant demand has been phenomenal and that's the area I worry most about It's just, ultimately whether the employment picture could slow that demand. I don't know Right now, but it's a concern.

Speaker 2

Right.

Speaker 5

And so when you throw all this stuff into the pot, you obviously have a lot more Earnings and cash flow drivers at time today than it's ever been in your history. Does your disclosure to be able to get credit And for The Street to sort of value things to the point, which you're talking about your stock being undervalued, Isn't it necessary to like sort of break down some of these businesses or to give a little bit more information Within the supplemental, so that people can really identify each of these drivers from more operating businesses to the more rent business. There's like little pieces like you have FFO from investments on a trailing 12 month basis in the credit metrics section. It would be really good to get that on a quarterly And all those I guess, are you stepping back? I know you talked about the lease spreads, but is there an opportunity to sort of revamp disclosure To give the investment community more of that level detail overall.

Speaker 2

I mean, it's we're not going to rule it out. It is Our property domestic property business, just to put it in perspective, Michael, is around 80% of our Cash flow earnings, however FFO, however you want to define it. So then we have the 20% other stuff. And I just worry that if we do get into that, we'll spend more time on the 20%. Now, 10 years from now, it may be different.

Speaker 2

And 5 years from now, it could be different. The 80% could be 50% and then I Agree 100% with your encouragement or point of view that it needs to be Better articulated. The other option is we could sell our dotcom business at a huge number and like some of the others out there And then you'll ascribe a certain value to it. Believe me, we wouldn't rule that out. Yes, yes.

Speaker 2

You were

Speaker 5

never in the mark business to begin with. You and I have gone back on that about selling interest in malls, right? You never wanted to be in the You want the damn cash flow and the value.

Speaker 2

I mean, I'm a terrible seller as I've admitted. In any event, I think, look, I'm excited about what we're doing. I do think it's still it's a tail wagging the dog, but It's an important tale and it's a beautiful tale and it wags nice and it's very friendly. And As we grow that, I think what you say is certainly appropriate.

Speaker 5

All right. Thanks. If we have time, I'll queue up for a quick guidance one later.

Speaker 2

Okay.

Operator

Thank you. Our next question comes from the line of Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Speaker 8

Hey, good afternoon out there, David. I didn't realize that you and David that you and Stanley are both You need longshoremen able to work on in the LA and Long Beach peers. That's pretty impressive.

Speaker 2

Well, We'll do whatever it takes to get product into our stores.

Speaker 8

Well, I think if you know this union

Speaker 2

guide well You can join us, Alex. You could join us.

Speaker 8

Hey, you need work is pretty tough work unless You can get to the crane operator. Those guys make good money. So, a question for you, And it sounds like, Tom, we got 2 questions, so I love it. David, it sounds like in your opening comments, you said that you were a little bit Behind budget because of some of the COVID closures that you are still experiencing. Despite that and backing out the ABG intellectual property game, which is awesome, You guys still handedly beat.

Speaker 8

So I know you guys I know, David, you like to run your crew really hard and You know, whip and do all the fun stuff, shout, get your team excited to win. But still, it's hard to say that you guys were under budget when you beat You have consensus as much and it sounds in your answers to Michael on store openings and labor and All different things. It doesn't sound like there are really any headwinds. It sounds like you guys are just really rebounding strong.

Speaker 7

So what was the below budget

Speaker 8

We're weighted to as far

Speaker 2

as Yes, Alex, that was just our international ops. So if I didn't say the word international, just because I misread it on the script, I said it. Yes, so it's just international. It's the only business that I would say is under our initial budget for 2021.

Speaker 8

Okay. So then just drilling into that international part, what are you seeing? Are you seeing anything like the rebound that we've seen in the U. S, whether it's Asia or Europe? Or are the consumer rebound trends very different?

Speaker 2

Yes, that's a good question. And it's By country in a sense. So there's no simple answer then I would say to you, It's very much how COVID is impacting that country. As you know, Europe was much Generally, in France and Italy, much more stringent on how they open. And as you know, we Our friends at Clay Pier had to deal with almost a which by the way, LA County almost did, but We'd have to enforce whether or not people had vaccine cards to let them in the mall, which thankfully Cooler has prevailed, but it really is a country by country.

Speaker 2

We're seeing a little bit Decent results in the European outlet business. And ClayPure is feeling more confident about what they Are seen. But I would tell you, Asia generally no, Japan is pretty tough, but that's they They've had a pretty strict shutdown. Korea is doing just fine. So I'd say generally the U.

Speaker 2

S. Is clearly outperforming, other just from retail sales than Other parts of the world, I should

Speaker 8

say. And then on your international folks though, are they telling you like, yes, by January 1, The rest of Asia, Japan, Europe, France, all the different countries in Europe, everyone should be back? Or is there just a continued concern That those countries are going to continue to punt on reopenings and ease of COVID mandates such that Maybe 2022 is as greatly impacted on the international as the heroes.

Speaker 2

I'm hopeful 2022 will be a better year for them Like 'twenty one was for us. So, but they'll be more proactive Gentlemen, I say they, I mean, again, it's country by country, but in many spots, they'll be more proactive if COVID spikes. Okay. And

Speaker 5

then just a quick question

Speaker 2

In terms of restrictions, I should say. Okay.

Speaker 8

Just a quick question for Brian. On the new line of credit where you switched over from LIBOR to SOFR, the net end of the day, the economic impact, You guys are still are basically paying the same cost or this switchover, you guys are ending up paying a little bit more, maybe it's a little bit less, I don't know.

Speaker 7

No, it's a push. It's an economic push. That was the whole design and so for Alex. The intent was to be economically neutral.

Speaker 8

Okay. Thanks.

Operator

Thank you. Our next question comes from the line of Mike Mueller with JPMorgan. Please Proceed with your question.

Speaker 9

Yes. Hi. Just wondering outside of the $0.22 of net 3Q one time items, Can you break down what drove the guidance increase for the balance of the year?

Speaker 5

Can you repeat that, Michael?

Speaker 9

Yes. You had net $0.22 of onetime items that you called out and guidance went up, I think $0.85 So what drove the other $0.60 So

Speaker 5

the increase, if you

Speaker 9

could break that down, how much retailer versus domestic ops?

Speaker 2

We don't break that down, but it was a combination of both.

Speaker 9

Got it. Okay. That was it. Thank you.

Speaker 2

Thank you.

Operator

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

Speaker 10

Hi. Just hoping you could walk through maybe the quarterly volatility. I know you told Craig not to look at quarterly I apologize for this, but given the movements, it does seem like last quarter it was reported at share, this quarter's at share And the retailer NOI dipped and the corporate NOI dipped as well, but the guidance went up. So I'm just trying to put these pieces together and maybe get The components for those 2 NOI pieces, retail and corporate, and then tying that back to the guidance question that Mike just asked.

Speaker 7

Well, Juan, you got to remember here, looking at annual numbers here or even quarterly numbers, there were a variety of retailer businesses that we didn't own last year. So that's part of this noise when you're looking at it year over year or quarter over quarter. That's a big piece of this. J. C.

Speaker 7

Penney didn't close until year end of last year, Which is a big driver of this. So you've got a different population, if you would.

Speaker 10

Yes. I'm just focused on Sequential because the numbers did go down for it seems those 2 buckets on a share basis, the retailer investments NOI and the corporate and other NOIs.

Speaker 7

Sure. You have just seasonality and timing on the retailer side of it. And then corporate and other, the bigger changes that we recognized last Order a larger amount of termination income.

Speaker 10

Okay. And then just more of a conceptual question On retailing, I mean, you guys own different pieces of the retailer landscape you have, Like the licensing or traditional the licensing and intellectual property licensing and the traditional retailing, How do you think of the multiples that you would apply for those or the stickiness of the cash flows? I don't know if you could talk about typical margins. Just trying to get a sense Maybe where the EBITDA is coming from between those two pieces and how you think about those

Speaker 2

two pieces as well? Where is the EBITDA coming from, the retailer?

Speaker 10

Between the licensing and traditional retailer, yes, because you have the ABG investment, which is

Speaker 2

This is the well, ABG is more or less owns the brands, A lot of brands and license income. The retailers run the e commerce and operate stores. So It's essential like any other retailer and the valuation of those should just be the way you look at You know any other public company retailer, I will tell you today, I mean, from an EBITDA multiple, retailers are more Value to the higher EBITDA multiple than Simon Property Group.

Speaker 10

And what is a better margin business do you think, the licensing or the traditional retailing?

Speaker 2

Well, the licensing, I mean, that's a Licensing business, are you amortizing the cost of buying the license or not? So The brand, if you don't they have a higher margin, but the gross margins of good retailers are in the 60 plus range.

Speaker 11

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Vince Tibone with Green Street. Please proceed with your question.

Speaker 12

Hi, good afternoon. How are same property operating expenses trending versus 2019? Are you experiencing any pressure from wage inflation or extra Cleaning costs given most of the retailers are on a fixed can basis?

Speaker 2

Not currently, no. I think we'll see how it impacts 2022, but not Rising costs from our standpoint in 2021 shouldn't be all that material.

Speaker 12

Are you much higher than where you were in 2019? Or is it kind of adjusted for occupancy changes like margins more or less Same in your mind or kind of spend ratios?

Speaker 2

Yes. I'd say, well, other than the drop in occupancy, I think In terms of operating, it's probably pretty similar to 2019.

Speaker 12

And are you thinking about go ahead, sorry.

Speaker 2

No, that's it. I don't know.

Speaker 12

Just there, are you thinking about the way CAM structured any differently now Given the prospects of higher inflation or it yes, just curious to get your thoughts there.

Speaker 2

Not really. No, I think The fixed CAM and obviously it grows in many cases tied to CPI. It's just an ease of doing business with the retailer and I don't see that changing.

Speaker 12

Got it. Thank you. Maybe one last quick one Could you just share your latest expectations for domestic property NOI growth from the year? I think the last time you formally said anything was at 5% at the beginning of the year, and I think it's Clearly higher from there.

Speaker 2

It's going to be higher, Vince.

Speaker 12

Any number you could throw out there for us?

Speaker 2

Well, no, we look at these things on an annual basis, but I'd hate to put a number in, but we're going to be really based on where we were And what we guided to, we should double it more or less, right, More or less. So, yes, I mean, I think why do we guide to 4% or something like that? Yes. So we'll be we should be in that range.

Speaker 12

Okay. Appreciate that. Thank you.

Speaker 2

Yes. Thanks. Way to get it out of me, Vince. Way to go.

Operator

Our next question comes from the line of Floris Van Dischombe with Compass Please proceed with your questions.

Speaker 11

Hey, thanks guys. Thanks for taking my question. I sometimes wonder whether people are Not seeing the forest through the trees here. I mean, your guidance for the year is $0.60 over 22 estimates right now for consensus, which is, yes, I suspect those numbers are going to have to come up drastically. Let me get to my question here.

Speaker 11

It's about the leasing environment. And I'd love to get your color on What you're seeing obviously that you talked about the leasing spreads being negative and again those are backwards looking because those deals were negotiated call it 3 to 6 to 12 months ago, obviously, when we are in a different environment. There were many articles written about tenants wanting more turnover, sales, rent Based Structures. You talked about that in past quarters about offering some of that, but actually as sales now are in excess of 19 levels comfortably in excess apparently. Are you actually capturing more rent?

Speaker 11

And what do you think that's going to do for your overage rent? And also, How is that impacting your negotiations with tenants? Do they want to go back to the fixed rents with a smaller Turnover base, I'd love to get your thoughts on that.

Speaker 2

Yes. Thank you, Flor. So I would say, Look, our overage rent is going to be significant this year. But I do want to Put I want to underline, we still do not have international Tourism. So we think there's another and I don't believe now the rules of Who can come where and how and whatever are very, very confusing.

Speaker 2

Having Make my own 2 international trips, I get confused on what I have to do to go from one place to the next. But Next week, there is a lifting of international tourism. I think it's we'll see whether it has any impact this year It was kind of I doubt it, but even with overage rent having a very good year this year, We still think that there is another leg up if we get kind of the international tourist That we haven't seen for a couple of 2, 3 years, right? And now the strength of the dollar May offset that to some extent, but we'll see. On your question about lease, Listen, I think some of the folks that wanted to tie Their rent to and we did it in a select few cases, not a lot.

Speaker 2

But yes, they may suddenly think Maybe they should do another kind of traditional and go back and do a basic deal. But By and large, Forrest, there's not a lot. I'd say the negotiations about The structure of the lease and overage rent, I call it overage, but overage rent and break points, It's all pretty it's all, I'd say, pretty consistent. So not a huge change in what's going on there.

Speaker 11

And David, maybe if you could touch on the specialty leasing environment as well. Obviously, last year, When a lot of your malls were closed, clearly, you couldn't have much kiosk income. Obviously, billboards, billboard income is really Driven by economic growth. So that presumably was very low last year. What do you see I mean, this is a it could be up to 10% of your NOI.

Speaker 11

I mean, how do you see that part of the business Performing as we head into 2022?

Speaker 2

I think we're going to have a very good year in 2022 on that side, Because again, it there's just a better appreciation for our kind of product And demand is good there and growing and traffic is still reaching Previous level, so I think they're going to have a very good year this year, but a better year in 2022, at least from our initial And a review of that business plan, that we just had recently.

Speaker 11

Great. I mean, maybe if I ask what I mean, it sort of was asked before, but certainly the backlog of leasing, Can you give us any more insight? I know somebody else asked a question about that. But certainly, in terms of what that could mean in terms of occupancy gains In 2022, because clearly that's the easy income, if you will, because it all drops down to the bottom line. Any sort of backlog that you're working with right now?

Speaker 11

Your leasing is busy and stretched To the max, I would imagine.

Speaker 2

Listen, I always worry they tell me what I want to hear. But what they're telling me, okay, and what I'm seeing in my own having To deal with a few retailer space demands, Demand is good. So I think, listen, the world is uncertain As all get out, right? I mean, we all know it's just a it's a very interesting time, the last several years And this and the future is no different. But for us, the good news is the demand for our product is good.

Speaker 2

And our folks are busy and they're hitting the streets and making deals. So Again, we never give an occupancy number, but I would be very disappointed if we didn't have an uptick in our occupancy next year.

Speaker 9

Thanks, David.

Speaker 11

That's it for me.

Speaker 2

Thank you.

Operator

Our next question comes from the line of Greg McGinniss with Scotiabank. Please proceed with your question.

Speaker 9

Hi. David, maybe asking Mike's question a bit differently and doing some back of the nap here. So FFO per share guidance appears to anticipate a slowdown in Q4 versus Q3 after adjusting for the non cash items. Could you help us understand what items might be impacting those expectations?

Speaker 2

Your versus what You are doing or what we're doing?

Speaker 9

You have $291,000,000 Q3 if we take out the non cash items and then that kind of assumes $270,000,000 $280,000,000 in Q4.

Speaker 2

We'll see what we We don't really look at it quarter by quarter.

Speaker 9

All right. Then maybe shifting gears a little bit to the percent rent leases. First, I'm just trying to understand what portion of leases signed this last year are tied to percent rent deals. How does that compare to history? And then you also mentioned that overage rent will be significant this year.

Speaker 9

Is there going to be seasonality associated With that, we're just trying to understand if we should expect a sizable pop in Q1 next year as Christmas sales and associated rent are calculated or If it should be smoother throughout the year.

Speaker 2

Well, overage rent does is impacted by holiday shopping. There is some seasonality to it. We don't give out the specifics on What deals are percent versus fixed though, It's not a very big number. I mean, overwhelmingly a high, high, high percentage Our leases are fixed and sometimes we have unnatural break points, Which we'll get we can get into the mechanics of that later if you'd like. Where we do maybe and in COVID, this is We did a few a handful with some retailers where we maybe lowered the fix, but we got Greater upside on sales, but 90 some odd percent of our leases are all fixed rent.

Speaker 2

And I think I answered your question unless I missed something.

Speaker 9

No, you did. So if we think about how leases are getting signed now, now that we're coming out of COVID, Should we expect to see those that percent rent number go down and maybe just base rent number start going back up again?

Speaker 2

Well, yes, on rollover, sure, over time. I mean, again, it's a function of when leases expire. Right. Okay. Thank you.

Speaker 2

Sure.

Operator

Our next question comes from the line of Haendel St. Juste With Mizuho, please proceed with your question.

Speaker 13

Hey, David. Good evening.

Speaker 2

How are you?

Speaker 13

So You mentioned earlier the stock being cheap 13 times FFO, I get it, and you point out your long term average. But I guess the one missing piece we haven't seen is the asset value Clarity. I guess I'm curious, where you peg a mall cap rates today? Was there anything in your recent mall refinancing A negotiation that was informative about how the lending community is viewing mall values and how would you characterize the market appetite for mall refinancings today? Thanks.

Speaker 2

Good. I think we did. How many financing should we do?

Speaker 7

We've done $22,000,000,000 this year, almost $3,000,000,000 So the market is open from a refinancing

Speaker 2

Yes. Look, I think, we're I'd say, we're A, assets. There's I mean, I've discussed this before, not to bore you, but there's not a lot of buyers and sellers Realize how valuable they are and they want a really low cap rate. There is no A asset In this country, that would sell for anything above a 5 cap rate, In my opinion, in my humble opinion.

Speaker 13

No, I appreciate that. I was looking also if there's anything from the other side that you could share from how The lenders are valuing or any

Speaker 2

I thought you were an equity analyst. Why do you care about lenders?

Speaker 13

Well, there's a value which the loan is ascribed to.

Speaker 2

I mean, Look, they look at debt yield. Debt yield is

Speaker 7

cash flow covered. Yes. It's the metrics that they're using more importantly.

Speaker 2

And sponsorship on this course.

Speaker 13

Okay. Well, I guess I'll move on to my next question. Thank you, though. I wanted to ask about the pricing and demand for your JCPenney boxes. Anything you could share on that?

Speaker 13

Thanks.

Speaker 2

Well, the ones that we own, we're not selling because PennEast is performing terrifically well.

Speaker 11

Okay. Thanks.

Speaker 1

Alex, we have time for one more question, please.

Operator

Thank you. Our final question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

Speaker 14

Hi. Thanks for taking my question. Sure. In terms of the $7 of variable rents that weren't included in the base minimum rent, when would you Expect to see improvement in that number and how much of that those $7 could be moved to fixed?

Speaker 2

You mean improvement or just when it goes to fixed essentially, right?

Speaker 14

Well, I guess 2 separate questions. When it goes to fixed And then when would we see like an overall improvement in base minimum rents given the moving pieces?

Speaker 2

Well, I mean, It's lease by lease to build that number up. I mean demand is picking up, so we're focused on driving our cash flow. But again, as I maybe you missed my maybe it wasn't overly compelling, but you missed my opening remarks In that, I would recommend, again, I know, I'd recommend you just kind of look at the cash flow of the company and Not overly worry about a metric here or there. It just it all kind of manifests itself in the cash. In terms of when that will end up in base rent, it's really, as I said earlier, it's just going to be a function of when That particular lease rules when it expires.

Speaker 2

And traditionally, when that does, We're usually pretty effective at trying to garner as much of that overage rent or that percentage rent above the Breakpoint back into the base rent.

Speaker 14

Got it. And then store closures are way down from prior years And given the importance of holiday to retailers, but also challenges around supply chain, do you think this is potentially a threat to some of the smaller, lower credit retailers?

Speaker 2

I don't think so. And honestly, the credit profile of The retail community is not bad. I mean, there's always going to be There's always going to be a few out there, but I would say generally that credit profile is pretty, pretty not going to look pretty good. So, the retailers are always turning their portfolio and so on. I don't think the supply chain is going to cause it might unfortunately cause a local Mom and pop, some stress, but I don't think it will cause A regional or a bigger chain financial calamity.

Operator

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I will now turn the call over to David Simon for closing remarks.

Speaker 2

All right. Thank you and appreciate all the questions. We'll talk soon.

Operator

Thank you. This

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