Simon Property Group Q4 2021 Earnings Call Transcript

Participants

Corporate Executives

• Thomas Ward, Senior Vice President - Investor Relations
• David Simon, Chairman, Chief Executive Officer and President
• Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer

Analysts

• Steve Sakwa, Evercore ISI Group
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Richard Hill, Morgan Stanley
• Michael Bilerman, Citi Investment Research
• Derek Johnston, Deutsche Bank Aktiengesellschaft
• Alexander Goldfarb, Piper Sandler Companies
• Juan Sanabria, BMO Capital Markets
• Floris van Dijkum, Compass Point Research & Trading
• Haendel St. Juste, Mizuho Securities
• Vince Tibone, Green Street Advisors
• Michael Mueller, J.P. Morgan

Presentation

[Operator]

Greetings, and welcome to the Simon Property Group Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

[Thomas Ward, Senior Vice President - Investor Relations at Simon Property Group]

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

A quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995 and actual results may differ materially due to a variety of risks, uncertainties and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements.

Please note that this call includes information that may be accurate only as of today's date. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filings. Both the press release and the supplemental information are available on our IR website at investors.simon.com.

Our conference call this evening will be limited to one hour. For those who would like to participate in the question and answer session, we ask that you please respect our request to limit yourself to one question.

I'm pleased to introduce David Simon.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

We had a very busy and productive quarter and a very successful year. We recorded occupancy gains, record retail sales and demand for our space from a broad spectrum of tenants is robust and our other platform investments had strong results. We generated nearly $4.5 billion in funds from operation in '21 or $11.94 per share. The $4.5 billion is a record amount for our company for the year. And coming off a difficult year of 2020, these results are a testament to our relentless focus on operations, cost structure, active portfolio management, smart investments coupled with a coherent strategy.

Fourth quarter funds from operations were $1.16 billion or $3.09 per share. Included in the fourth quarter results was a net loss of $0.10 per share from a loss on extinguishment of debt and a write-off of pre-development cost, partially offset by an after-tax gain on the sale of equity interest. Our domestic operations had another excellent quarter to conclude the year. Our international operations improved in the quarter.

Domestic property NOI increased 22.4% year-over-year -- I'm sorry, for the quarter and 12% for the year, including our share of NOI from TRG. And our international properties portfolio NOI increased 33.6% for the quarter and 22.3% for the year. Mall and outlet occupancy at the end of the fourth quarter was 93.4%, an increased sequentially of 60 basis points and 260 basis points year-over-year. Average base minimum rent was $53.91, add $8 to that if you included variable rent.

For the year, we signed more than 4,100 leases for a total of more than 15 million square feet. This was the highest amount of leasing activity we have done over the last six years. Retail sales -- reported retail sales continued in the fourth quarter. Mall sales for the fourth quarter were up 8% compared to the fourth quarter of 2019 and up 34% year-over-year. Reported retail sales per square foot reached a record level for 2021 at $713 per foot for our mall and outlet business and $645 for the mills. These results obviously are impressive, particularly given the lack of international tourism for '21.

Occupancy cost at the end of 2021 are the lowest they've been in five years at 12.6% year end. We opened two new developments in 2021, one in the U.K. and a premium outlet in South Korea. Construction continues on our 10th outlet in Japan opening this fall and Normandy, France opening in the spring of '23. We completed five significant redevelopments. We added densification components with the opening of two hotels and the completion of an NHL headquarters and practice facility. Progress continues on the densification of Phipps Plaza, which will open this fall. We have a significant pipeline of redevelopment projects which will be funded from our internally generated cash flow.

Let me turn to our other platform investments. They produced terrific results in 2021, namely, JCPenney, SPARC, ABG and RGG, which is Rue Gilt Groupe. JCPenney's results were impressive. Their liquidity position is growing, now $1.6 billion. Company delevered their balance sheet, has no borrowings on their line of credit. CEO, Marc Rosen strengthened his management team with a new CIO and Chief Digital Officer. RGG, including our shop premium outlet marketplace, growth continues. And we expect continued investment in 2022 to drive customer acquisition and sales growth.

SPARC Group will be the operating partner for Reebok in the U.S. So a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach. TRG, Taubman Realty Group, which we own 80%, posted great operating metrics and results which also beat our underwriting. Reported retail sales was $942 per square foot, a 31% increase year-over-year. Occupancy also increased 210 basis points for the year.

Now turning to the balance sheet. We've been active in the debt markets. We amended and extended our $3.5 billion revolving credit facility with lower pricing grid to five years. We issued $2.75 billion of senior notes, $750 million -- EUR50 million notes, completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.1%, 4% -- repaid more than $4 billion of debt and delevered by $1.5 billion. And with the recent January notes offering, our liquidity stands at $8 billion.

Now just to turn to dividend, we paid out $2.7 billion in cash common stock dividends last year. Today we announced a dividend of $1.65 per share for the quarter, a year-over-year increase of 27%. This dividend is payable on March 31.

Now just to go through guidance for 2022. Our FFO guidance is $11.50 to $11.70 per share. When looking at our '22 FFO guidance, it is important to note the following items as compared to '21 actual results. Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klepierre. Approximately $0.32 per share in gains related to our investment in Authentic Brands. These gains were partially offset by approximately $0.14 per share in debt extinguishment charges, resulting in an adjusted FFO of $11.44 per share for '21.

'21 also included a significant increase in overage and percentage rent compared to prior years and lease settlement income of approximately $0.10 higher than historical average. Our guidance reflects the following assumptions. Domestic property NOI growth of up to 2%; approximately $0.15 to $0.20 drag on FFO from additional investments in RGG and SPL, JCPenney and the Reebok integration costs of SPARC, all to fund future growth; the impact of a continued strong U.S. dollar versus the euro and yen compared to '21 levels and continued muted international tourism, no significant acquisition or disposition activity.

Finally, I really want to thank the entire Simon team for their tireless work that they continue to do for our retailers, shoppers and communities every day and for bouncing back in '21 after a very difficult 2020. Make no mistake about it, '21 was a great year. And I think Tom knows, but I think our FFO guidance was -- which was consistent with basically the analytic community around $9.60 per share and we reported $11.94 per share. So that's a heck of a year. I'm very excited about our plans for '22 and the future growth prospects of our company.

And we're ready for any questions.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

[Steve Sakwa, Analyst at Evercore ISI Group]

Thanks. Good afternoon, David and team. Thanks for the detail or at least the additional disclosure on the guidance. I guess, just sort of coming back to the leasing comment you made about the 15 million feet being kind of a record year for the last six years, what are your expectations for leasing activity in '22? And how that might tie into further occupancy gains? And then I also noticed that the leasing spread information you used to provide in the supplemental wasn't there anymore, and I was just wondering if you could comment on kind of pricing trends that you're seeing? Thanks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure. So I think we're very optimistic, Steve, about '22 leasing. A lot of new business with a lot of new tenants is the goal. We expect to increase occupancy compared to year end '21. And obviously, the last couple of years with COVID we've been -- obviously been working with our retailers. So we haven't quite had the level of pricing power that we'd like to see. We're starting to see that strengthen from our standpoint. And we're still looking for win-wins between us and our clients. But we feel better that we'll continue to drive rental growth over time.

And as you know, we took a bet that the world and bricks and mortar was not going to end. So we -- when we did deal with a lot of renegotiations that came about because of COVID, we got -- we tried to make it back on sales because we believed in our business. And that's why you've got to look at that what we're achieving on either percentage or average rent, which historically we haven't taken into account in our spreads. And one of the reasons why we have done away with the spreads that in fact that there is no industry uniformity, and more importantly, there is very few retail real estate companies that are doing it. But we bet on our company. We made the right bet. It produced the results that we wanted to see in '21, frankly above our expectations. And we know that the strength of our portfolio and the demand is there, so now we just got to execute it. I do think there is so much going on that I'd be remiss not to say it still takes a while to get stores open. And with all the activity, we'll see some of that in '22, but we're going to see a tremendous amount of great new stores in the '23 time period.

[Steve Sakwa, Analyst at Evercore ISI Group]

Great.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

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

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi, everyone. Maybe just a question on the guidance and the retailer contribution part. David, I know that you mentioned that the '22 guide include the $0.15 to $0.20 drag from additional investments this year. I guess, I was wondering if you could just go through kind of what contribution the retailers had in '21? What the guidance assumes for '22? And any more kind of background you can give on what's causing that drag? I realize that it's for future growth, but what the impact in '22 specifically guiding it?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. I mean, the drag is all about future investments. So we outlined a little bit on the call, but we're in a growth mode with Rue Gilt and shoppremiumoutlets.com. So we're acquiring customers, we're marketing more and we're building the technology out to serve those three platforms with great sales growth and marketplace growth, but that takes investment. So that's one element of it.

The second element of it, as you know, JCPenney is building out its beauty business as well as its digital business. So again, it's the belief in the brand that's going to create these unique opportunities and we're going to invest in doing that.

And then finally, the bigger -- the Reebok integration will reduce the operating earnings from SPARC Just temporarily in O2 as it deals with consolidating its operation. We now have an office -- deal hasn't closed yet, it's going to close at the end of the month. We have excess real estate. So we have to work through all of that. But the return for '23 on that will be much more than whatever the investment is.

So all of these have -- the payback on RGG stuff is 60 months. They track it by the nickel. Penney the same. I mean, very [Technical Issue] businesses. But you got to invest for future growth. That's what we're seeing. In terms of operational outside of that, Caitlin, we're basically more or less budgeting the same EBITDA NOI levels for our investments, other platform investments other than these investments that I just mentioned.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Got it. And just one quick thing. You mentioned the Reebok integration will reduce SPARC earnings in O2. Did you mean Q2?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

I meant '22. I'm sorry, '22.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Got it. Okay. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

No problem.

[Operator]

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

[Richard Hill, Analyst at Morgan Stanley]

Hey, good evening, David. I wanted to talk about the dividend for a moment. You've raised it for three consecutive times. I think we've discussed in the past that it's well below where you were in 2019 despite free cash flow being similar to where you were in 2019. Can you may be just elaborate on why not increase the dividend more here? I recognize in the previous answer you were talking about in the growth mode and investing in businesses. But is there a trajectory to get back up to $8.30 where you were I think prior to COVID?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. I mean, again, it would be my expectation over time that we'll reach those levels. I think it's just abundance of caution. But if you look at Q-over-Q, it's 27% increase. So I know sequentially it's not, but that's what we tend to do historically is we tend to be flat in Q1 area. We measure our taxable income. And as earnings percolate, we tend to raise with our taxable income. So I think we're really adopting what we've done historically. But our payout ratio is well, our liquidity is strong and I would expect hopefully that our dividend we'll continue to see the increase. It was dramatic increase from '20 to '21. So I'm hoping we'll continue a very positive trend.

[Richard Hill, Analyst at Morgan Stanley]

Got it. Thank you. And just one more question. If I think back to this time last year, you guided to -- initially guided to $9.50 to $9.75. You put up a really healthy number this year, we're at -- we see at $11.36 ex the one-timers you mentioned, not sure if we see highlight in that, but that's pretty close. Is there -- what would give us -- what would give you any confidence that this could -- that 2022 could surprise to the upside just like '21 or do you view this year as more baked, so to speak, than 2021?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, the year is never baked, right? So look, I think the big variable that is always there is basically sales, because we still have some COVID-oriented leases that have not rolled over, that we still are a little more dependent on sales than we would have said three, four years ago. So that is why we're a little more cautious because we don't, as I'd like to say, we're as good as we are. We're not -- we can't predict with certainty sales. But -- so I think I'm hopeful that when we talk to retailers, they still feel very good about the economy and what's going on. Obviously, there's a lot of volatility in the world today and we're not immune to that, so we just have to wait and see, but we are building off a terrific '21. So we'll see. I am hopeful that we'll continue to produce growth assuming that everything holds together externally with our economy and so on. So there is no certainty, but I feel pretty good about where we stand.

[Richard Hill, Analyst at Morgan Stanley]

Okay. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure.

[Operator]

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

[Michael Bilerman, Analyst at Citi Investment Research]

Great. Thank you, David. Good afternoon. David, I wanted to come back to sort of the growth that you're getting from a lot of these unique and differentiated investments that you're making and just sort of how it ties back to this year's earnings forecast, but also that growth in the future. You gave us a couple of pieces, but they're all a little bit different kind of all together. So I'm going to use one for now and maybe we can pivot off of that. But if you just look at your FFO from investments, which is on Page 29 of the supp, which I recognize includes Klepierre, but includes -- sorry, Page 28, but includes all of the other investments that you're making. You're looking at 2021 at about $550 million, about $1.46. You've now thrown out for this coming year the $0.15 to $0.20 drag from these investments that are being made. And I'm just trying to reconcile, how much is in the $11.60 a share for all of these, which are both retailer investments as well as Klepierre? What sort of range are we thinking about? That's obviously growth, but they're netted down by I guess $0.15 to $0.20 for these other investments. So I'm just trying to put it all together.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, I mean, it's pretty straightforward. We really did not hear you well, but just to clarify, what we did pick up. The NOI from investments is only Klepierre and it includes our small interest in HPS which is de minimis. Other platform or investments -- the other NOI from other platform or investments would include RGG, SPARC, JCPenney, our share of ABG. So that's that line, just to clarify. I did hear that. Guys, did you hear the question?

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

I didn't hear past that.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Okay. Does that help you?

[Michael Bilerman, Analyst at Citi Investment Research]

Let me -- I'll try to be clear, David.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Michael, if you went back to the office...

[Michael Bilerman, Analyst at Citi Investment Research]

I'm in the office, David.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

You might be able to sound a little clear, okay? So I don't know, maybe you can -- I'm happy if you text this or read it out loud, and we cannot hear you.

[Michael Bilerman, Analyst at Citi Investment Research]

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Slightly, yeah.

[Michael Bilerman, Analyst at Citi Investment Research]

All right. Well, I'll take slightly. But I'm just trying to get, on Page 28, you actually lift the FFO contribution, $550 million from everything, right, $1.46. So I'm just trying to triangulate what you earned in '21 and how that compares to the $11.60 in '22? You've given us a couple of nuggets of information, the $0.15 to $0.20 drag, but it doesn't net out to actually what's in guidance for these investments?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, again, the tax effect of that -- there is no surprise, our math is very simple. I'm sorry, we've made money in all of these investments. Now you have to pay attention to it. Unlike other people that make investments and lose money, we actually make investments that make money. These are the NOIs. They're not -- the tax line is below this. Let's just kind of -- this is like an EBITDA number that we tried to show the market. That's all that this is and it's there for your information. And again, the NOI from other platforms I described, the NOI from investments is Klepierre and HPS and we've footnote corporate and other NOI sources. So I don't know what else do you want...

[Michael Bilerman, Analyst at Citi Investment Research]

Yeah, because I'm looking at a different page.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

The guys are happy to take the question offline.

[Michael Bilerman, Analyst at Citi Investment Research]

Okay. Yeah, I was looking at Page 28 not the NOI page. That's where the confusion was coming from, David. Maybe just...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

All right. Page 28, okay.

[Michael Bilerman, Analyst at Citi Investment Research]

You see the FFO of investments, right? So that includes all of the FFO from all of these great investments you're making -- and this is not a negative question, David. This is a positive of stuff that you're doing...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. That includes everything lumped together and then take the tax impact. And again, it's NOI, so it's pre-interest, obviously FFO is not. But we're happy to write it through, okay?

[Michael Bilerman, Analyst at Citi Investment Research]

Well, that's exactly -- now we've gotten to the question, which is, that's the number we do know, right, so there is ambiguity.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

It's EBIT. So remember, retailers have depreciation that we don't add back and so on and so forth. But the guys will be happy to walk you through it.

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

We'll connect offline, Michael.

[Michael Bilerman, Analyst at Citi Investment Research]

Okay. David, can you just talk generally, in your opening comment and the press release is all about unlocking value, and you've already done some of that through the transactions. How do you think about the initiatives that you want to focus on this year? And what value is sitting in this platform for Simon shareholders?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, I mean, given our level of cash investment, if you were to look at it on a private equity basis, right, we've made 20x on our investments, and they're continuing to grow. And SPARC I think is a good example and RGG have great platforms that can continue to be a leader in their business. And ultimately, the market we'll see if we need to at some point in time, monetize these or highlight the value, but it's embedded here at multiples that the market is ascribing to us, but frankly, the external market is probably valuing it more than what it is today.

[Michael Bilerman, Analyst at Citi Investment Research]

Right. And that's where all the questions that I'm asking, David. These are positive things that you've done that we get asked by the investment community of trying to ask for more disclosure, to try to get to ascribe that value that you want. So that's -- it's coming from a good place. And usually, I'm good at math, but...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

[Michael Bilerman, Analyst at Citi Investment Research]

Okay. Thank you. Good bye.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

[Operator]

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

[Derek Johnston, Analyst at Deutsche Bank Aktiengesellschaft]

Hi, everybody, and good evening. So I'll abandon the retail investment question for now. But now in 4Q '19, pre-pandemic, David, the redev pipeline was $1.8 billion at its peak. Now it's $944 million in 4Q, and that's just a really modest increase from 3Q. So as you talk about record FFO and very healthy cash flow, how are you looking at capital allocation priorities going forward? Should we expect ramping redevelopment, some transformational, clearly some more retailer investments, dividends, buybacks? You mentioned no acquisitions. How do you view the priorities here?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, the good news is, our pipeline is kind of back to where it was in '19. However, remember, in '19, we finished some stuff, right? So naturally, that falls off. And then, we didn't add anything really until this year. But I think you'll see steady progress in adding -- and remember, we only add when we start construction on a project or we internally to prove it or we're about to. So we would expect to be able to add to that number this year. So you'll see that. I'd be disappointed if it didn't grow in size and stature, and mostly in mixed use.

So we still -- I would still say that's the number one priority. We're going to invest in our existing platforms that we have whether they're SPARC or ABG or RGG. So those are businesses that we have a lot of faith in and we'll continue to invest in those. We're still doing a lot of investment kind of in the -- in updating the technology aspects of our shopping centers that we'll continue to do. That's important to us. We expect to raise the dividend.

We've been really quiet on the acquisition front, and that's like -- that's perfectly fine with us. We'll see how the market transpires, but we have no real -- we feel really good about our portfolio. And if there's something that fits in nicely, reasonably priced, we'll take a look at it, but if not, c'est la vie. And then I think we're going to build another platform. It's not necessarily a retail platform, but we're in the midst of kind of working through some opportunities. Stay tuned.

[Derek Johnston, Analyst at Deutsche Bank Aktiengesellschaft]

Interesting. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Thank you.

[Operator]

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

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Hey, David. I'm torn because you guys said one question first, so I have two. But I'm going to restrain myself and just ask one, unless Tom gives me the go ahead. I'm going to go back to the retailer question. You guys made a lot of headway on your brands. You added $160 million of NOI, EBITDA, whatever you want to call it, from the retailer platform last year. And you guys seem to have a pretty quick turnaround of the brands.

So one, does it surprise you how quickly these brands have turned around given that there are a number of -- we won't mention retailers, but brands out there, retailers who have been trying to restructure for years and haven't been successful, whereas in short order you guys have? And two, does this give you a better insight into your tenant negotiations such that now you have much more informed view of when you're in negotiations with the tenants what their true potential is versus what they may be telling you at the table?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. So on the fast turnaround, I would say, yes. But remember, we bought these in bankruptcy, which most of them in bankruptcy. So that allows you to clear out a lot of the issues and gives you a kind of a clean slate to grow from. I'd say that the management team that we put together at SPARC is excellent. They know how to integrate. And between our oversight from ABG and SPG, we've got a good formula that's working. Their performance has absolutely no relevance or insight at all when it comes to our negotiation or our insight into how to deal with retailers. So that's just a flat out.

No, Alex. I could see how you might ask that question, but it really doesn't -- because each brand is there is unique and they don't necessarily have a direct competitor that would be helpful, and we just don't -- we don't think like that, because as you know, every space and every mall is different and market rents are all over the place. So simple answer to that is no.

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Okay. So big picture. Obviously, a lot of what's going on in retail and the crime and all these headlines is out there. My question for you is, is your sense from talking to the industry and obviously talking to local officials, is the view that it's on the industry to try and beef up security and solve this or do you sense that the local authorities are finally realizing they need to do more from their end?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, look, I think we are top-notch in this area, though unfortunately, as good as we are, we cannot avoid what's happened. So we're all subject to this. I think it -- I don't think it's an industry issue. I think it's a local jurisdiction issue and it's a nationwide issue and I believe the tide is turning. We are all over this. The safety of our consumers and obviously the retailers is priority number one. We're not immune to it as much as we would like to be. We have a very sophisticated operations center, intelligent center that deals with this.

If you ask the retailers, they would tell you that I think, Alex, that we're number one in this area, but we're not immune. I would love to be immune. But we, as a nation, have to address this, and it's happening obviously in a lot of different areas. I don't want to get into politics at all. But I don't think it's -- I don't think the industry can solve it. I do think it's got to be at the local and national level. And I do think we've got to hold everyone accountable that this kind of stuff cannot be tolerated. But believe me, we are all over it, but where we -- some of these things are just impossible to avoid. However, what you don't hear from us, Alex, is all the ones that we forwarded, dozens and dozens of multiple ones, and we do an excellent job, but it's -- we have to deal with some unfortunate consequences of these acts.

[Alexander Goldfarb, Analyst at Piper Sandler Companies]

Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure.

[Operator]

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

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, thanks. Just hoping to ask a little bit about rents and leasing spreads again. So the base rent was flat sequentially at just under $54. Do you think that's now bottomed or stabilized and it's headed upwards from here? And on the re-leasing spreads, I think you talked about $8 about being in the number for the deals maybe signed in the fourth quarter or at quarter end, not quite sure there. But when will that translate into the baseline rent? When will that kind of sunset out? And how are you guys thinking about internally on that spread number that's no longer disclosed? Like what's the expectation for what you generated in '21 and what your expectation is for '22?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Well, we -- first of all, we focus on NOI growth. So that's number one, and we expect to have NOI growth. So that's the first. I'd say to you -- I think you're not -- maybe we weren't clear, but the $54 is somewhat -- it's just the base minimum rent that our portfolio averages. It does not include overage or percentage rent. If you included that based on '21 results, that $54 would be $62, okay? So that's the that relationship there. And I don't -- I try to listen carefully to your question, but it just goes to show that the $54 is missing this component, and we thought it was material enough to point it out.

[Juan Sanabria, Analyst at BMO Capital Markets]

And so when do you think that $8 comes into the number? When does that $8 -- that's $8 assumption?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. That's all a function of lease expiration. So we tend to raise -- if someone is an overage rent or they have a percent rent deal that's expiring, we try to raise the base minimum rent or we try to capture as much in the base minimum rent from the overage that's generated. You don't always get all of it, but you do some of it. So it's -- it should eke up over time, but it's really a function of the big overage rent payers and when their leases expire.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Certainly.

[Operator]

Our next question comes from Floris Van Dijkum with Compass Point. Please proceed with your question.

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

Thanks. Thanks for taking my question guys. David, you just mentioned NOI growth, and obviously, you know that I've been -- I still think there's a lot of value in the business here. But again, you might be certainly joking...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

By the way, so do I. So do I, Floris.

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

No, no. I know you think there's a lot of value, and I'm trying to help you get that out. But the 2% -- walk me again, the 2% NOI growth that you have in your assumptions for '22. If you have your -- basically, you have fixed bumps in your leases typically of around 3%. You don't get it for all of them, but you're a little bit shy of 3% maybe. But all things set or spare, but everything else stays the same, occupancy stays the same. You should get around 2.5% to 3% NOI growth, yet you're only guiding for 2% growth.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah, I think it's very simple. The real simple answer is sales, and we do a very sophisticated model. If we have sales levels that are above this year, we will overachieve that number. But again, we're in February, and we tend to be -- try to be cautious on that number. But that's really -- and then there are increases in cost that we're dealing with as well for us. So for instance, I mean, security expenses are up based on -- we just had a discussion with Alex on that.

Obviously, we have wage inflation janitorial. So we have pressures on expenses just like everybody else. We've got no break on the real estate tax front from the local municipalities, even though we were closed for months in many cases in '20 -- '19 and '20, but our real estate tax expense keeps going up. So we have pressures there that we're just trying to be relatively thoughtful about how to deal with. And then the percent overage sales number going into every year is a little bit of the unknown, and we're trying to bake some conservatism into that thought process.

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

So David, I mean, just again -- but a lot of your costs would be recaptured through CAM. You've got fixed CAM that increases at inflation. So that would imply that you're fixed CAM...

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

No, no. We don't have CPI adjusted.

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

That's right. You have 3% bumps. You have 3% bumps. You're right.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah, and we have bumps. But if it goes up 6% and we're going up 3%, we lose 3%. So again, I mean, it's all factored in. But I would say there's a little bit of margin pressure. And again, hopefully, I've been clear on the sales front.

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

So David, so maybe if you can touch on one little area, which I looked at in your release, you have 6.8 million square feet of leases that are longer than a year, but that are sort of temporary tenants, specialty leasing, which are at an average rent of around, off the top of my head, $17. It's 10% of your small shop portfolio that is at a third your average rent that you're getting. What happens when those leases go to market or become full tenants? Theoretically, they should go up by 300%. Is that the right way to look at it?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. Look, I think that's a great opportunity for our company. We did a very good job. It's kind of a flex business. We're still under occupied. We still have a number of tenants like that that are important to the community, but as more permanent tenants come to the market. That's a great opportunity for the company.

Floris, this is a real interesting thing. A lot of that stuff is happening now. So think about it this way. In '21 -- in '20, we got decimated by COVID, right? We came back unbelievably strong in '21, much better than anyone would have predicted and reinforce our business model, I would venture to say. But we still have a lot of short-term leasing or what I'll call specialty leasing. But that as we re-lease that space, that comes in midstream, that comes in first quarter, second quarter, third quarter of '22 because as, remember, our retail base, a lot of it sat on the sidelines, all of '20 and didn't really start opening up open to buy in '21. And by the time you build out a store in a mall, it's a six to nine month process.

So as much given where we are today, I would say to you, and we never -- like this is solely anti the way I think, but we still have a transition year in '22. But it's not an excuse. I've never used that as an excuse. But believe me, as we continue to lease up to permanent retailers away from specialty, we're going to generate more income, but it's not all going to fall in '22. Now did I explain myself well, guys? Would you add to it?

Okay. So sometimes I'm inarticulate. So I mean -- and again, that's not an excuse, but that's how -- but '22 is going to be -- continue to be a transition year like

'21 was, but we kicked the crap out of '21. It was an unbelievable year. Spectacular based on where we were. Okay, Floris?

[Thomas Ward, Senior Vice President - Investor Relations at Simon Property Group]

Next question, Hector, please.

[Operator]

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

[Haendel St. Juste, Analyst at Mizuho Securities]

Hey, good evening. Thank you for taking the question. David, I've got a question on OCR. You mentioned OCRs earlier, something we haven't talked about in a while. And at 12.6%, you mentioned that's the highest level in five years. I guess, I'm curious, how important is OCR today in tenant conversations? Are they willing to pay or even consider some of these look back OCRs? And any color on where you think that OCRs might go near-term or do we ever get kind of back to the mid to upper teen levels? Thanks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. Look, I think it reflects an earlier comment, which is we are starting to see a little more pricing power as demand goes up and the fact that the overall business is better. So it's a good insurance policy and that the retailers are producing very positive results in our portfolio. We don't want to put them on the edge, but we've taken our lumps over the last few years. And now we're just trying to balance it a little bit better than what we've seen over the last couple of years. So it's a good indicator that we've got some room to go. That's all it is.

[Haendel St. Juste, Analyst at Mizuho Securities]

I got you. I got you. And if I could follow-up, I don't know if you mentioned it earlier or if you're willing to share. Are you still doing any of those shorter term leases that you were doing during COVID with the lower upfront rent threshold, but with the lower percentage rent thresholds so you can make out in the event of improving sales or is that an event of the past now?

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

It's essentially a thing in the past, though there's always a case here or there where we might have a deal in '23 for space, but they're not ready -- I'm sorry, they're not ready in '23. So we have a retailer in the space. So '22 might be an extension of that while we finalize the lease for '23. And that's a little bit what I was talking about with Floris as well.

[Thomas Ward, Senior Vice President - Investor Relations at Simon Property Group]

Hector, next question, please.

[Operator]

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

[Vince Tibone, Analyst at Green Street Advisors]

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

And we do have some baked in conservatism in that number. But again, it's -- we do this budgeting process late in the year. Actually, some people, they do it earlier than I'd like, but we -- it's always -- in the case of sales, it's an art versus a science. The good news though when we talk to retailers, they are planning up sales compared to '21, okay? And that's positive. And if they produce their own plan, we'll see the benefit of that.

[Vince Tibone, Analyst at Green Street Advisors]

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

[Vince Tibone, Analyst at Green Street Advisors]

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

[Brian J. McDade, Executive Vice President, Chief Financial Officer and Treasurer at Simon Property Group]

Yeah. Certainly, right there.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Okay. And then it really went away. So it's kind of back to where we were maybe four, five, six years ago.

[Vince Tibone, Analyst at Green Street Advisors]

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

[Thomas Ward, Senior Vice President - Investor Relations at Simon Property Group]

Hector, we have time for one more question.

[Operator]

Okay. Our final question comes from Mike Mueller with J.P. Morgan. Please proceed with your question.

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

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

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

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

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

Yeah. Your rent per square foot for malls and outlets is down year-over-year, but for the mills that's up year-over-year.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Yeah. In the mills, they include all of the boxes. We include all the boxes. I shouldn't say that. We include all the boxes. So every square footage. It's not whereas in the outlet mall, it's basically just the interior space, that's the department store. So that's -- so they have a few big tenants that may be driving the increase. But that business has been very healthy and we're very pleased with the results there.

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

Got it. That was it. Thank you.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Sure.

[Operator]

Ladies and gentlemen, we've reached the end of the question and answer session. And I'd like to turn the call back to Mr. David Simon, Chairman, for closing remarks.

[David Simon, Chairman, Chief Executive Officer and President at Simon Property Group]

Okay. Thank you. I know there's a few that are still looking to get some questions answered. So Brian and Tom will be available, of course, I am as well. And thanks for participating in the call today.

[Operator]

[Operator Closing Remarks]