Simon Property Group Q2 2023 Earnings Call Transcript

Participants

Corporate Executives

• Tom Ward, Senior Vice President of Investor Relations
• David Simon, Chairman, Chief Executive Officer and President
• Alexander Goldfarb, Analyst
• Brian McDade, Chief Financial Officer

Analysts

• Steve Sakwa, Evercore ISI
• Caitlin Burrows, The Goldman Sachs Group, Inc.
• Vince Tibone, Green Street
• Ronald Kamdem, Morgan Stanley
• Floris van Dijkum, Compass Point
• Jeff Spector, Bank of America Co.
• Mike Mueller, JPMorgan Chase & Co.
• Michael Goldsmith, UBS Group AG
• Juan Sanabria, BMO Capital Markets
• Greg McGinnis, Scotiabank
• Haendel St. Juste, Mizuho
• Linda Tsai, Jefferies Financial Group Inc.
• Craig Mailman, Smith Barney Citigroup

Presentation

[Operator]

Greetings and welcome to the Simon Property Group Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode, a brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Tom Ward, Senior Vice President of Investor Relations. Thank you, Mr. Ward. You may begin.

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

Thank you, Camilla, 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 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 maybe 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 filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call today 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]

Good afternoon. I'm pleased to report our second-quarter results. Second-quarter funds from operation were $1.08 billion or $2.88 per share. I'll walk through some variances for this quarter compared to Q2 of 2022. Domestic and international operations had a very good quarter and contributed $0.08 of growth, primarily driven by higher rental income, higher interest income, and other income of $0.04. Higher interest expense cost us $0.08 in the quarter-over-quarter comparison, a $0.05 lower contribution from our other platform investments and publicly-held securities compared to Q2 2022. FFO from our real-estate business was $2.81 per share in the second quarter compared to $2.78 per share in the prior year period and year-to-date that comparison is $5.65 per share in '23, compared to $5.58 in '22.

Our real-estate business is performing ahead of our plan and overcoming the headwinds from higher interest expense and we're also pleased with our OPI results in the quarter and continue to expect the business to meet our original 2023 guidance we provided at the beginning of the year. We believe the market value of our OPI platform is approximately $3.5 billion or roughly $10 per share. We generated $1.2 billion in free cash flow in the quarter and $2.1 billion year-to-date.

Domestic property NOI increased 3.3% quarter-over-quarter and 3.6% for the first half of the year. Portfolio NOI, which includes our international properties at constant currency grew 3.7% for the quarter and 3.8% for the first half of the year. Our mall and outlet occupancy at the end of the second quarter was 94.7%, an increase of 80 basis points compared to the prior year, the mills occupancy was 97.3% and TRG was 93.7%. Average base minimum rent for the malls and outlets was $56.27 per foot, an increase of 3.1% year-over-year.

This is an all-time high for our BMR and the mills rent increased 4.3% to an all-time high of $36.02 per foot. Leasing momentum continued across our portfolio. We signed more than 1,300 leases for more than 5.0 million square feet for the quarter and were up to 11 million square feet year-to-date. We have 1,100 deals in our pipeline, including renewals for approximately $470 million in occupancy cost, more than 30% of our total lease activity in the first half of the year was new deal volume.

We continue to see strong broad-based demand from the retail community across many categories. Reported retail sales per square foot in the second quarter was $747 per foot for our malls and outlets, the mills at $677 per foot. We also hosted our second annual National Outlet Shopping Day in June, it was very successful for shoppers and participating retailers. We generated more than 3 million shopper visits over that weekend. Feedback has been great.

We're also excited to continue to build on this annual event and we expect it to continue to get bigger and bigger each year. Turning to the balance sheet, we completed the refinancing of nine property mortgages during the first half of the year for a total of $820 million at an average rate of 6%, our balance sheet is strong. We have $8.8 billion of liquidity. Today, we're proud to announce our dividend of $1.90 per share for the third quarter. That's a year-over-year increase of 8.6%, the dividend will be payable on September 29. We have now paid over $40 billion in dividends since we've been public.

We're increasing our full-year guidance of 2023 from $11.80 per share to $11.95 per share to $11.85 and respectively $11.95 per share.

[Operator]

This is an increase of $0.05 at the bottom end of the range and $0.02 at the midpoint. Now, let me give you food for thought if I may, we have built a world-class portfolio over a long period of time since we've been public. Following our DeBartolo transaction in 1996, our portfolio consisted of 119 malls and 65 strip centers, primarily in the Midwest.

Since then, we have acquired 220 properties, developed more than 50 and disposed of approximately 250 properties. Of the original 184 properties in 1996, 37 remain in our portfolio today. So our high productive portfolio is the result of constant asset rotation. Finally, let me conclude by saying, our business is performing well and is ahead of our internal plan, tenant demand is excellent, occupancy is increasing, base minimum rents are at record levels, property NOI is growing, and again beating our internal expectations that we said at the beginning of the year and we are now, operator, ready for your questions.

Questions and Answers

[Operator]

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

[Steve Sakwa, Analyst at Evercore ISI]

Thanks. Good afternoon, David.

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

Good afternoon, Steve.

[Steve Sakwa, Analyst at Evercore ISI]

Good. I just wanted to follow up on your leasing comments in the pipeline, everything sounds really good. And maybe even getting better as the year unfolds. So, where do you ultimately think that occupancy in kind of the mall portfolio can ultimately settle out and are you seeing an accelerating trend in pricing power across the portfolio?

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

Steve. First of all, I think we will be north of 95% by year-end, and you know, I want to -- I don't like the word pricing power so much, you know, I think our asset rotation that I mentioned earlier has allowed us to create kind of a portfolio that's really unrivaled in our industry. And given our strong tenant relationships, we're in a good spot to find kind of the win-win that needs to happen when you lease as much space as we do. The physical environment in terms of bricks-and-mortar sales is as important as ever. That's been reinforced by essentially every retailer and any one that's in the e-commerce business, all look to that.

I think there was obviously a long period of time where many felt, many of the pundits felt that bricks-and-mortar just don't matter, that's the furthest thing from the truth. So, we continue to think our rollover by and large is going to be positive and we have the ability now with new tenant demand to replace retailers that aren't producing sales and which will allow us to generate higher rent. So, I do think we're pushing up rents. I think we're doing it hopefully thoughtfully by and large and we expect that trend to continue.

[Steve Sakwa, Analyst at Evercore ISI]

Thank you.

[Operator]

Thank you. And our next question comes from the line of Ms. Caitlin Burrows with Goldman Sachs. Please proceed with your question.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Hi, everyone. David, you gave those details on the asset rotation since 1996. So, I guess that's making me wonder and I'm guessing everybody else, should that be a suggestion to us that you're looking to get more active in asset recycling kind of near-term, medium-term, acquisitions, dispositions or was that just more a comment on kind of the Simon historical strategy.

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

Well. I would say we've been very active, right? So I think -- I think because of our size, it does get lost in translation that we're always recycling, always looking to improve the quality of the portfolio. So, I would think our trend would continue in that sense and we'll always recycle assets. We find to the extent that we can do that and generate more liquidity, we find our -- not just it's every asset that we have to the extent that we think there's a good trade to do, whether it's to sell or to buy, we're going to pursue that. And I think it's been an important component of our success over time.

At the same time, we've done it, you know, as we all know, we've done it in a way where others have done it in a way to generate the quickest short-term returns through a lot of leverage. We've done it as thoughtfully in terms of maintaining the balance sheet as anyone. So, that's been another key component of our ability to grow yet recycle. So, I don't think I'm signaling but maybe you have this epiphany, so maybe -- maybe it's possible, right, that we know there'll be some -- we will be more active on reallocating capital to different assets that we have today.

[Caitlin Burrows, Analyst at The Goldman Sachs Group]

Thanks.

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

Thank you. And our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

[Alexander Goldfarb, Analyst at]

Hey, good afternoon, David. And also thank you for moving your calls to avoid an overlap. I appreciate it. So question, there was a recent press article and not that article not which I'll let you opine if you want, but just talking about luxury sales. And my question is this, we all look at luxury as sort of like the ultimate, the driver of retail if you will, but my question is really, given how customer preferences have changed lifestyle, people changing how they live, sort of curious, when you look at the tenant landscape, are there any sectors that you would say are now, I guess, going back to Caitlin's early 90s example, are there any sectors now where you're like hey, 20, 30 years ago, this sector was nowhere and now it's 20% of retail or it's the absolute must-have. And I'm just sort of curious if luxury is still sort of that dominant place in retail or if it's more nichey, and it works in certain malls, but for the bulk of what really drives your cash flow to bottom-line, maybe it's other sectors. I'm just trying to understand how the face of retail has changed using your analogy of over the past 30 years, what the company looked like then in the Midwest versus now.

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

Yeah, look, I would say unquestionably the -- some of the best retailers in the world like Kering or LVMH Group have the best brands and they do the most volume, they build the best stores, they think longer-term -- over longer-term over any retailer that we've ever experienced, they're true to their business. So, we admire, what they do, we admire how they build their brand, how they we admire they brand maintain their brand, they have loyal customers. So there is no better companies to do business with. That believe. And we aspire to be more like than anything and I think we know-how they maintain their stores and how they treat their customers and how they're treated themselves.

So the luxury business space, it's growing, it's really important. It's worldwide. It's a great consumer that loves physical retail. That wants to go-shop and do other things at the at our centers. So we want to do as much business as we can with them they are still very focused, obviously, sales have flattened a little bit compared to Q2 of 22. And but if you look at where they are, and Tom and. Brian. I don't know off the top of my head, Alex, but they can -- were 20% 30% 40% above where we were in 2019, but I don't remember the exact number, but think they can give it to you later.

So, one of the interesting things is LVMH Group and I really, if you look at our 8-K there now in our top 10 tenants. We couldn't be more proud of that relationship and the brands that they have, so this is not a niche business. This is a growing business, it's. For exactly. The affluent shopper the established staff shopper, but also the affluent shopper. And the fact that we're -- we do so much business with them is something that we're extremely proud of and we will I don't like the word lean-in, but we will do as much as we can do to continue to foster those relationships and that is a huge differentiating point that we have with Simon Property Group.

So, it's all systems go there yes, sales will flatten, they will go up, they will go down. But their commitment to their customer. And what they do in the stores. I think it goes unabated and they really I admire the fact that they take. They're not a quarter-to-quarter Company, they take a much longer view. Of their brand and where they want to plant their flag and how they want to treat their customers, there true partners and great generally across-the-board we love doing business with them and it's not a niche and that business is growing, it's growing worldwide. And in fact if anything. We'd like to follow kind of where, where they're headed, because. We think there's great business to do together.

[Operator]

I hear you typing.

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

Sorry, is there other questions?

[Alexander Goldfarb, Analyst at]

No, I think Tom said and Federal is right after you guys. So, I thought my mic was already cut, so I didn't [Speech overlap]

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

We're Kidding -- we're only kidding. We'll talk to you later. Thanks, Alex.

[Alexander Goldfarb, Analyst at]

Thanks.

[Operator]

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

[Vince Tibone, Analyst at Green Street]

Hi, good afternoon. Could you discuss the current spread between leased and physical occupancy and then kind of the cadence and what visibility you (Speech overlap) store openings for leases that have been executed, but are not yet open?

[Brian McDade, Chief Financial Officer at Simon Property Group]

So Vince it's Brian, we're still hovering right around 200 basis points of unopened, that ebbs and flows, as you might imagine every month, given the velocity of our business. We do think we're going to carry that through year-end. And certainly, we do expect that we're going to continue to see openings throughout the balance of the year as retailers open later this month and into September and October.

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

And I would say, just on follow-up on that, Vince, is that, you know, a lot of the business that we, you know, have signed leases on and/or about to be signed is still and I don't, I mean, we can give you the exact number, I don't have it again at the top of my -- at the top of my tongue -- at the tip of my tongue, but there is a lot of the business that we've signed or about to be signed, it's really 24 and even 25 business. And especially, you know, when we're in that -- we're talking the restaurant business, you are talking, nine months build-out, you're talking permits that are required to get, it's a little more complicated getting restaurant permits, liquor license, et cetera. We've got some great restaurants going into [indecipherable], StanfordCrystal, Stanford, Boca, but you're literally talking about a year to get permitted, get opened, to some extent some of this was delayed also just equipment, because of the COVID and the -- all of that supply-chain issues associated with it. So, and again, when you're talking about our full-price business, build-outs are longer than you than tthen the outlet or the mills business.

So, the pipe on that sense is pretty good and not -- which is not in these numbers, but we also on that front have boxes that, you know, that are scheduled to open in '24, '25 that is obviously serious long-time, a year plus build-out. You know, a lot of business with Dick's, Primark, Lifetime Fitness et cetera that -- even Barnes is doing new deals. We were building a new store with Kohl's, stuff that just takes time, Mauer, Shields et cetera, even though they just recently opened in Wichita, to a great opening, which is one of our 37 by the way, just for fun fact. So you know, the build-out is frustrating, in that it does take time. But it's -- so we still expect some really interesting things to happen in '24 - '25 as these tenants opened and remember, in a lot of cases, the more interesting the retailer, the longer the build-out, there is a correlation there.

[Vince Tibone, Analyst at Green Street]

Yeah, that makes sense. That's all really helpful color. I appreciate that. My next question, I was hoping you could discuss how demand today is by retail format and geography. I'd be curious to hear any trends between malls and outlets and also between gateway markets and suburban centers.

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

Simply, I thought, you know, as I go back in time I think the -- I'm trying to go through COVID, I think the demand in the outlet business has picked up more, it was slower to pick up than the mall business, and I think it's finally picked-up to kind of where the mall business has been. So, I think demand from a product-type is kind of even now. And not -- and that's not to say malls has slowed down, it's just the outlet took a little bit longer to pick back up. Mills was somewhat unabated in that, and as you know, it's a combination of any and all. Regionally, by and large, you know, the super-regional suburban sites are -- have a high-level of interest across the board. We don't have a lot of City Center stuff. So it's -- we're not the right guy to ask, but I am happy that our portfolio is positioned in the high catchment areas in the suburbs.

And then finally regionally, as you might imagine, where you're seeing population growth, Texas, Tennessee, Florida, those kind of places are seeing a little bit more of the outsized demand. But again, in real estate, you know, you could still have the best location in kind of a micro-environment that does unbelievably well because, it still is the center of attention. So, you got to be careful on these geographic trends one way or another, it really is, as we all know, real estate is very location oriented, but I would say those are just kind of generic trends that hasn't changed all that much. But the suburbs continue to be as we said a few years ago, well ahead of most. We still felt like that was the place to be and we're happy to see that, not that we make a lot of predictions, but we're happy to see that prediction at least one of them came true.

[Vince Tibone, Analyst at Green Street]

Great, thank you.

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

Thank you.

[Operator]

Thank you. And our next question is from Ronald Kamdem with Morgan Stanley. Please proceed with your question.

[Ronald Kamdem, Analyst at Morgan Stanley]

Great. Just one quick one, just thinking about the growth function of the business, you talked about getting to 95% occupancy by the end of the year, obviously that annualizes in 2024. So when I think about the occupancy boost, the rent bumps, re-leasing spreads, it doesn't seem like a stretch to get to a 3% plus number next year in growth. So, I'm trying to understand what are some of the moving pieces we should be thinking about as we're building out the growth function of the business in '24?

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

Well. I think it's all, you know, it's all of the likely suspects, it's lease-up, it's renewal spreads, it's new business, obviously it's overage or present sales and sales activity. So, there's nothing new there. I mean, it's all the stuff that has allowed us to grow our comp NOI over a long period of time through a lot of volatility, COVID, recession -- you know, real-estate recessions, e-commerce, proliferation of exactly[phonetic] other. So it's all of those likely suspects. I mean I think we feel generally positive about our comp -- our ability to grow comp NOI, but it's all the likely suspects and it's all the same metrics that we have to produce to generate that. And we still have the ability even as we get up to 95% thereabouts, we still have the ability to -- we can't lose sight of, we have the ability to replace retailers with better ones that will just common sense will be able to pay higher rent, because they'll be more productive.

It's really that simple. So -- but, Ron, it's all the same stuff and you know -- and, you know, we're focused on hitting all of those cylinders certainly to finish this year but also in '24 - '25, and the added benefit that we have in '24 - '25, is that we've got a lot in the pipeline that will finally open.

[Ronald Kamdem, Analyst at Morgan Stanley]

Helpful. Thank you.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Floris van Dijkum with Compass Point. Please proceed with your question.

[Floris van Dijkum, Analyst at Compass Point]

Thanks. Hey, good afternoon guys. I had -- unfortunately I have to limit it to one. So, I won't focus on the not less important OPI stuff, but maybe if you can talk a little bit more about the 200 basis points of signed not open, presumably that's higher in your mall portfolio than your outlets. And maybe if you could also quantify in terms of dollar amount or NOI impact, I know that a lot of those leases and that SNO there's a lot of luxury tenants, which typically pay significantly higher rents, so presumably, it has a greater impact on your NOI and ABR than the percentage just in terms of occupancy.

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

Look, I -- we don't want to get into that level of detail. We certainly will for 24 as we outlined what are comp NOI growth is, but you're 100% right that it is much easier and quicker to open an outlet store. The build-out, it can be anywhere between 30 and 90 days and the mall generally can be six months plus. And then when you get to complicated tenants or where the build-out is expensive, you're talking nine months plus restaurants in that area. So, but we do -- and it goes back to, I think, Floris, you were one of the original analysts that was very focused on when we're going to get back to '19 levels, and you know I'm happy to say that we will be back.

We better be back, okay, but we will be back there in '24, and a lot of that really at the end of this year we annualize it. So, it really is a function of getting those retailers opened. But specific numbers, I mean I'll -- if the guys want to talk offline and go through it, I'm certainly happy to do that, but that's -- I think it's better answered as we go through 24, our comp NOI plan with you early next year.

[Floris van Dijkum, Analyst at Compass Point]

Thanks, David.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Jeff Spector with Bank of America. Please proceed with your question.

[Jeff Spector, Analyst at Bank of America]

Hi, good afternoon. A follow-up question, David, on your comment on you potentially allocating money or investments into other assets. I mean you've been doing that really since world financial crisis, investing in the best properties you've been intensifying assets with apartments, et cetera. Is there anything else that you're thinking of changing that you noticed a change, let's say, between the difference in the assets you own or what you're seeing out in the retail landscape or we're really sticking with those programs as well?

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

I think Jeff, we're going to more or less stick to our programs but what we've done historically, I think it's -- you know, it's been the right strategy. You know, we'll nick and knack, I mean, we've had -- you know, we've had good experience by and large, not perfect, but good experience, experimenting here and there, but our core business is high-quality retail real estate. We're not moving away from that by any stretch of imagination. We have lots of levers in that category to pull in terms of how we want to allocate capital, do you want to put it more here versus there, do we want to sell this and reinvest that? So, I think that if I had the ability to express it, we think about that all of the time, that's we never really talk about it, but as we -- the sole purpose of going through that asset rotation was to tell you that we do think about this stuff all-the-time and beyond just think about, we actually do stuff about it. So, and sometimes communicating that to investors and analysts is important to know that we're going to reallocate capital where we think the growth is. And we're not afraid you know to sell or buy or hold or whatever kind of we think it's the right thing to do. So that's really and I wouldn't make -- this is not like, we're not trying to like -- here we go sometimes big around the corner. It's just -- we do, we've done this and we just wanted to point it out.

[Jeff Spector, Analyst at Bank of America]

Great, thank you.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Mike Mueller with JPMorgan. Please proceed with your question.

[Mike Mueller, Analyst at JPMorgan Chase & Co.]

Yeah, hi. Can you give us a sense as to how rent spreads compare when you move from mall and outlet portfolio to TRG to the mills.

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

Well. I don't want to really talk about TRG so much, but I would say, the spreads are -- when you look at the mills, outlets or malls, it's all pretty decent. We still see our occupancy cost now is around 12%, right? So, you know, we're feeling better about our ability to generate positive rent spreads. It's not always going to happen in every space, in every mall or outlet. But we're seeing it pretty much across the board. And as again, I would say to you from what might shift is we're starting -- where I thought our outlet business was a little slower coming out of COVID, we are seeing a much better pick-up over the last year or so there and so we're optimistic that it's going to continue as well.

[Mike Mueller, Analyst at JPMorgan Chase & Co.]

Okay, thank you.

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

Sure.

[Operator]

Thank you. And our next question comes from the line of Michael Goldsmith with UBS. Please proceed with your question.

[Michael Goldsmith, Analyst at UBS Group]

Good afternoon, and thanks a lot for taking my question. In your opening remarks, you talked about the deals in the pipeline and that 30% of lease activity in the first half was new deal volume, how does that compare to the past and what does this indicate, this indicates that there is greater interest for new concepts too that are interested in leasing or what -- or is there some other meaning behind this data point that you provided. Thank you.

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

I just think it most importantly reinforces the importance of our product and it reinforces how retailers feel about our -- the mall and the outlet business. So, it's a great sign. I mean. It's a great sign that we have new concepts and I would say generally that 30% has really developed over the last 18 months. And whether it's direct-to-consumer, whether it's the luxury, whether it's a restaurant business, whether it's entertainment, we're seeing entertainment pickup like we did pre-COVID. So I think it's a testament to the product, the new retailers that want to open new stores in our existing product is a great sign and a great testament and that level is certainly much higher than I've seen since I mean it goes -- I'm going to say almost seven, eight years because, you know the 2020 -- I'm sorry, in 2019 we probably didn't have that level of percentage of new tenants. So it's clearly higher than it was in the '19, '18, '17 level and kind of goes back to where we were in the '14, '15, '16 levels. So it's a good sign for sure.

[Michael Goldsmith, Analyst at UBS Group]

Thank you.

[Operator]

Thank you. And our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

[Juan Sanabria, Analyst at BMO Capital Markets]

Hi, good afternoon. A Two part question, one, it looks like there is a $0.10 or $0.11. gain in the P&L. I was just curious if you could talk a little bit about what that is. And if that was assumed in the guidance, the prior guidance. And then secondly, if you have any comments on the prior quarter's comments on domestic property NOI is at least 3%. Thank you.

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

Thank you. No, no, no. I know that, but what did he say 2% -- 3%, let me start there, So, yeah we're feeling very comfortable that we will be above the 3%. The gain -- the after-tax gain is associated with the ABG raising of primary capital which we get diluted down. So it's a -- we have a dilution gain after tax, it was $0.07. Yeah, there's $0.03 of tax in the tax line, Michael for that transaction.

[Juan Sanabria, Analyst at BMO Capital Markets]

Okay, that wasn't in the prior guidance, I'm assuming, correct?

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

Well, we didn't -- we give a pretty big range and it really wasn't in our guidance, so much to speak because that's really out of our control.

[Juan Sanabria, Analyst at BMO Capital Markets]

Thank you. Thank you. And our next question is from Greg McGinnis with Scotiabank. Please proceed with your question. Hey, good afternoon. So quick two-parter on Taubman from me, NOI was down 3% from last quarter while occupancy was up 40 basis points. Just curious what the drivers were at that decline and in line with your comments on asset recycling, can you remind us the process by which you would recapture the remaining 20% of that investment and whether we planning to do so or maybe that's one of the assets that you might be looking to recycle.

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

Well, I'm not going to comment on that. So there are puts and calls associated with Taubman and over basically a five-year period. They have the right to kind of slowly put. 20% of their interest to us and then we eventually have a call associated with it. So that's that. And Brian, why don't you go through the -- it really was more of a function of kind of the percent rent or overage rent that they had in Q2 of last year, but you can -- do you have any other comment on it.

[Brian McDade, Chief Financial Officer at Simon Property Group]

Yeah Greg, that's exactly what it was. You can see, you know, on a year-to-date basis, we're still ahead, but they did have a higher percentage rent contribution in Q2 of last year than they did this year.

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

The other thing on Taubman, if you -- on TRG, so our FFO contribution this quarter versus last quarter is lower and it's primarily three things. Number one is we've got D&O insurance reimbursement in Q2 of '22. That's number one. Number two is, we also had a land sale. And then obviously, number three is the higher interest expense. So, there is a little more exposure to floating-rate debt there. And I think the spread difference between our FFO contribution from TRG to Q2 of '22 over '23 was how many cents $0.07 something like that, $0.07 okay, see I still remember numbers. So if you go through -- so our FFO contribution from Taubman TRG, where we own 80%, was $0.07 lower this quarter than Q2 of last quarter of '22. So, that might be helpful to you. Those are the order of magnitude, if there are any details on that, you know, call Tom or Brian. But that's general. So we had a lower contribution. Is that the right number, Adam? Okay, thank you. That's the right number, so there's really not much to ask.

[Greg McGinnis, Analyst at Scotiabank]

Great, thanks.

[Operator]

Thank you. And our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.

[Haendel St. Juste, Analyst at Mizuho]

Hey, good evening out there.

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

We are not acting to be technical, we're really not out there, we're actually in New York City today. So I know Indiana's considered out there which I will not comment on, but we're actually right here. I don't know where you are, but we're right here in New York City.

[Haendel St. Juste, Analyst at Mizuho]

I'm not too far from you.

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

Alright.

[Haendel St. Juste, Analyst at Mizuho]

So can you talk about the outlook for retail sales in the back half of the year, given that the macro and the expiration of the students loan payments and what do you think that will do or impact that will have on the business and maybe some commentary also on a year-to-date bad debt, how that's trending and early thoughts on potential improvement on that line-item in 2024? Thanks.

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

Yeah. I would say we're actually optimistic on the back half of this year, because comps or sales I should say in the second half of '22 really started to decelerate because of the, you know, obviously, the increase in interest rates, gas prices, inflation. So I think across the board, our comps get easier for our retailers in the second half. So, we're actually optimistic and I think generally the economy as we all know is -- seems to be relatively stable, obviously, it's a very uncertain world. So, anything can happen, but we're actually optimistic on sales for the second-half and we expect it to comp up on. With respect to bad debt, we're not seeing -- I mean, it continues to be lean and mean. And it's a little more than maybe last year, but it's like it's still comparatively historical lows.

[Haendel St. Juste, Analyst at Mizuho]

Okay, thank you.

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

Thank you.

[Operator]

Thank you. And our next question comes from the line of Linda Tsai with Jefferies. Please proceed with your question.

[Linda Tsai, Analyst at Jefferies Financial Group]

Hi, thanks for taking my question. In terms of 3% NOI growth, is that the level you think you could sustain next year?

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

I would hope so, yes.

[Linda Tsai, Analyst at Jefferies Financial Group]

Any color around that?

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

Not one of my qualities, but there is -- that was the most succinct answer in all of today. Did you have another question Linda?

[Linda Tsai, Analyst at Jefferies Financial Group]

Sure. I guess. On page 19, you also broke out mixed use and franchise operations income and also the same line item for expense, maybe just a little more color.

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

Yeah I think. Brian and Tom felt because we're doing -- and these are only consolidated assets. So, we have a -- we have a big franchise operation with Starbucks in terms of our -- where we franchise in Starbucks location, plus obviously we're building hotels and it was all lumped into the other income, other expense and we thought, instead of having all the questions on why is this number growing and this number growing, we kind of we just felt like it would be better to separate it. For your -- believe it or not, for your benefit.

[Linda Tsai, Analyst at Jefferies Financial Group]

And then how should we model that going forward?

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

Look. I think the hotel business is pretty straightforward in that, we're building it, we have certain returns and I think we have pretty much outlined our returns in our 8-K, so I think that's pretty, obviously, it takes time for apartments or hotels or any of mixed-use to stabilize, but I think that will be pretty easily and the end of the day the Starbucks business is not over. It's not even material. So, you know, there was some profit embedded in there, but it's, you know, we view it more as an amenity that we can make some margin on and it's grown a little bit bigger than what it was historically because we took over some of the operations during COVID and so that's not an overly material number and we can kind of give you order of magnitude of revenue and expense. The only problem this year is really some of these just came on board, so I'd say to you in '24, we will be the kind of the first full year and that will probably be -- we can certainly outline what it is, but the net profit is not overly important. Did that help?

[Linda Tsai, Analyst at Jefferies Financial Group]

Yeah, thanks Sure.

[Operator]

Thank you. And our next question comes from Craig Mailman with Citi. Please proceed with your question.

[Craig Mailman, Analyst at Smith Barney Citigroup]

Good afternoon, David. Just a quick clarification on one of the earlier questions about the $0.07 net gain, you know, you guys raised guidance here by $0.05 at the midpoint. Could you just run through if there are any other puts and takes that moved around with guidance this quarter, or maybe this wasn't the sole driver, but maybe something operational, and this could have offset something else. Just trying to get a sense, just as the recent guidance went up and had this not happened, you guys would have ended-up kind of lowering the range here on the margin.

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

No I mean. I think we're always pretty conservative. So, we'll see how the -- how the -- we're always trying to beat and improve our numbers. I think we have as good a history of anybody to do that. And again, we always, I know that it might frustrate folks, but there's always puts and takes in a company of our size. I mean we have $80 billion of assets, we're not a small strip center company that's got, there is going to be some volatility, we've got a $3.5 billion asset portfolio. But so far this year, it has thrown off zero earnings, FFO essentially it's mostly back-half back -- back-end weighted.

Again, we have $3.5 billion of value, market doesn't value, it's not in our earnings. I think the number to look at are the number we gave you, which is our kind of FFO, real-estate earnings. That was a 281 if I remember, that was hurt by $0.08 of rising interest rates, that's 289. No. I think we give you comp NOI, you're going to have some volatility because of OPI. I think OPI is really simple, $3.5 billion. It's going to make $0.50, $0.60. And you now -- and it's on our books for a lot less and again in terms of investments, and monetization and everything else associated with that, we're always going to do the right thing.

So, that's really it. I think, you know, obviously, overage rent has stabilized. So, it's a little more conservative. We want to make sure that we're conservative as we look at the year. If sales do grow on the back-end weighted that we think, will beat our overage number, which means we will beat our guidance. But we don't have a crystal ball, but we've been -- we've raised our guidance from the beginning of the year. That's the important thing we've had headwinds. With that rising rates went up higher than we thought, it's probably the biggest -- the biggest headwind and then second, the OPI side has been more back-end weighted than we originally anticipated. And that's simple as that.

The other thing to remember is, so ABG just raised money at, you know, basically a $20 billion enterprise value. Because of their growth, we get -- we own 12% of the company, we get zero funds from operation contribution from them because of all of their one-time charges. We had the same situation in Penny and that's why we're giving you this real-estate FFO number, put a multiple on it, it's too low, whatever multiple you think it is, I would add a couple of 100 basis points, it's too low. Then add $10 a share. And that's our NAV and then, enjoy the rest of the summer. That's how. I would think about it. Are you still there?

[Craig Mailman, Analyst at Smith Barney Citigroup]

I am, thanks, David.

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

Okay, you're buying that argument.

[Craig Mailman, Analyst at Smith Barney Citigroup]

We just talked about it.

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

Alright, perfect. Thank you for listening. Okay, so I think we're out of questions and I owe it to Dawn Wood. Now, I want to tell you story, okay? So we -- Don initially stole our 5'0 clock time period. So, we were not very happy and we said we'll do it together. And then I said you know what, we're -- We love Don, we want to be friendly. So not only do we move our time. But we gave Don the option of whether he wanted to do 4: 30 or 5:30 and he chose 5:30. So, if you don't like our time or you don't like his time, blame Don. But I'll hand it over to Don. I feel like Ed McMahon and Don is Johnny Carson. Thank you.

[Operator]

[Operator Closing Remarks]