Simon Property Group, Inc.

Greetings and welcome to the Simon Property Group fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

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 Roy, 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 filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour. For those who would like to participate in the question and answer session, we ask that you please respect our request to limit yourself to one question. Please introduce David Simon.

We had a very busy and productive quarter to end 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 a 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 10 cents 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 increase 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 costs 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 UK and a premium outlet in South Korea. Construction continues on our 10th outlet in Japan, opening this fall, and Normandy, France, opening 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 platformer investments. They produced terrific results in 2021, namely JCPenney, Spark, ABG, and RGG, which is Rue Gilt Group. 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 Mark 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. Spark Group will be The operating partner for Reebok in the US. It's a tremendous opportunity for Spark to develop sportswear and footwear expertise. The Reebok integration will require additional investment by Spark 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 balance revolving credit facility with lower pricing grid for five years. We issued $2.75 billion of senior notes, 750 million euro notes, completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.14%. repaid more than $4 billion in 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 cents 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, is important to note the following items as compared to 21, actual results. Approximately 32 cents per share gain related to the reversal of a deferred tax liability at Clay Pierre. Approximately 32 cents per share in gains related to our investment in authentic brands. These gains were partially offset by approximately 14 cents 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 10 cents higher than historical average. Our guidance reflects the following assumptions. Domestic property NOI growth of up to 2%. Approximately 15 to 20 cents drag on FFO from additional investments in RGG and SPO, JCPenney, and the Reebok integration cost of SPARC all to fund future growth, the impact of a continued strong US 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.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. In the interest of time, please limit yourselves to one question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.

Thanks. Good afternoon, David and team. Thanks for the detail or at least the additional disclosure on the guidance. I guess just sort of tying 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 that 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.

Sure. So I think, you know, 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, you know, obviously been working with our retailers, so we haven't quite had – you know, 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, you know, we feel better that we'll continue to drive rental growth, you know, over time. And As you know, we took a bet that the world in bricks and mortar was not going to end. So when we did deal with a lot of renegotiations that came about because of COVID, 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. you know, what we're achieving on the either percentage or overage 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 and the fact that there's no industry uniformity, and more importantly, there's very few retail real estate companies that are doing it. But... You know, 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, you know, the strength of our portfolio and the demand is there. So, you know, now we just got to execute it. I do think there's 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.

Great.

Thank you.

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

Hi, everyone. Maybe just a question on the guidance and the retailer contribution part. David, I know that you mentioned that the 22 guide includes the 15 to 20 cent 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. Realize that it's for future growth but what the impact in 22 is and what's specifically driving it.

Well, 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 La La 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. 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 is 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 Spark just temporarily in 02. as it deals with consolidating its operation. You know, 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, you know, the return for 23 on that, you know, will be much more than whatever the investment is. So all of these have the payback on RGG stuff is, 16 months, they track it, you know, they track it by the nickel, penny, the same. I mean, very sophisticated businesses. But, you know, you've 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, you know, our other platform investments other than these investments that I just mentioned.

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

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

Okay. Thank you.

No problem.

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

Hey, good evening, David. I want 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 maybe just elaborate on why not increase the dividend more here? Yeah, I recognize in the previous answer you were talking about in 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?

Yeah, I mean, again, it would be my expectation over time that we'll reach those levels. I think it's just a bunch... abundance of caution, but if you look at Q over Q, it's a 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 the 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 low. Our liquidity is strong. And I would expect, hopefully, that our dividend will continue to see the increases. Now, it was a dramatic increase you know, from 20 to 21. So, you know, I'm hoping we'll continue a very positive trend.

Got it. Thank you. And just one more question. If I think back to this time last year, you guided to, initially guided to 950 to 975. You put up a really healthy number this year. We're at, we see at 1136, X the one-timers you mentioned. I'm not sure if we see eye to eye on that, but it's pretty close. You know, we'll, What would give you any confidence that 2022 could surprise to the upside, just like 2021? Or do you view this year as more baked, so to speak, than 2021?

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

Okay. Thank you.

Sure.

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

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 know you give us a couple of pieces uh but they're all a little bit different to tie them all together so i'm just going to use one for now and maybe we can pivot off of that but if you just looked at your ffo from investments which is on page 29 of the sup which i recognize includes the club pierre but includes um sorry page 28 but includes all of these other investments that you're making you're looking at 2021 at about 550 million dollars about 46. uh You've now thrown out for this coming year this $0.15 to $0.20 drag from these investments that are being made. And I'm just trying to reconcile, well, how much is in the $11.60 a share for all of these, which are both retailer investments as well as a club here? What sort of range are we thinking about that's obviously gross but then netted down by, I guess, $0.15 to $0.20 for these other investments? I'm just trying to put it all together.

Well, I mean, it's pretty straightforward, but we really did not hear you well. But just to clarify what we did pick up, the NOI from investments is only Clay Pierre, and it includes our small interest in HBS, which is de minimis. Other platform or investment, okay, are – The other NOI from other platform investments would include RGG, Spark, JCPenney, or share of ABG. So that's that line, just to clarify. I did hear that. Guys, did you hear the question? I didn't hear past that. Okay. Does that help you? No, I'll try to be clear, David. Michael, if you went back to the office... I'm in the office, David. I'm in the office. You might be able to sound a little clearer, okay? So I don't know. Maybe you can... I'm happy if you text it. We'll read it out loud. But we cannot hear you.

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

Slightly.

All right. Well, I'll pick slightly. But I'm just trying to get – on page 28, you actually list the FFO contribution, right? $550 million from everything, right? 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 15 to 20 cent drag, but it doesn't net out to actually what's in guidance for these investments.

Well, again, the tax effect of that, there's no surprise. Our math is very simple. I'm sorry we've made money in all 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 NOI. The tax line is below this. This is like an EBITDA number that we try 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've described, the NOI from investments is Claypeer and HBS, and we footnote corporate and other NOI sources. So I don't know what else you want. Because I'm looking at a different page. The guys are happy to take the question offline.

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

Maybe just –

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

Yeah, that includes everything lumped together and then takes a tax impact. And again, it's NOI, so it's pre-interest tax. You know, then obviously FFO's not. But we're happy to walk you through.

Well, and that's exactly, now we've gotten to the question, which is that's the number we do know, right? So there's no ambiguity.

And it's even. So remember, retailers have, you know, depreciation that we don't add back and, you know, so on and so forth. But the guys will be happy to walk you through it. We'll connect offline, Michael.

Okay. David, can you just talk generally, you know, your opening comment in the press release was 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?

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

Right, and that's where it's 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 it's coming from a good place, and usually I'm good at math, but I haven't been able to put them.

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

Okay. Thank you. Goodbye.

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

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

Hi, everybody, and good evening. So I'll abandon the retail investment question for now. But, you know, in 4Q19 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, you know, 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?

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 approve 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. 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 Spark or ABG or RGG, so those platforms, 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 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 perfectly fine with us. We'll see how the market transpires, but 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.

Interesting. Thank you.

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

Hey, David. I'm torn because you guys said one question per, 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 brand. You added $160 million to of NOI, EBITDA, whatever you want to call it, from the retailer platform last year. And you guys seem to have 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 a 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?

Yeah. So on the fast turnaround, I would say yes. But remember, we bought these in bankruptcy, which you know, most of them in bankruptcy. So, you know, that allows you to, you know, clear out a lot of the issues and gives you a, you know, kind of a clean slate to grow from. I'd say that the management team that we put together at Spark 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. 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 that is there is unique, and they don't necessarily have a direct competitor that would be helpful. We don't think like that. Because as you know, every space and every mall is different and, you know, market rents are all over the place. So a simple answer to that is no.

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

Uh, he's, he's got a, he's, he's got a puppy dog look toward me. So based on that, I will, we will allow you. Thank you. Okay.

So big picture, uh, 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?

Well, look, I think we are, you know, top notch in this area, though, unfortunately, as good as we are, we cannot, you know, 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 you know, operations center, intelligence center that deals with this. If you ask the retailers, they would, you know, they would tell you that I think, Alex, that, you know, we're number one in this area. But, you know, we're not immune. I would love to be immune. But we, as a nation, have to address this And it's happening, you know, obviously in a lot of different areas. I don't want to get into politics at all. But 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, you know, we've got to hold – you know, everyone accountable that, you know, this kind of stuff cannot be tolerated. But believe me, we are all over it, but we're, you know, some of these things are just impossible, you know, to avoid. However, what you don't hear from us, Alex, is all the ones that we thwarted, you know? Dozens and dozens of multiple ones, and we do an excellent job, but we have to deal with some unfortunate consequences of these acts.

Thank you.

Sure.

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

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 releasing spreads, I think you talked about $8 being in the number for the deals, maybe $5 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? What's the expectation for what you generated in 21 and what your expectation is for 22?

Well, 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, you know, 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, That's the relationship there. And I don't, you know, 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.

And so when do you think that $8 comes into the number? When does that $8 come? Well, that's all a question...

Yeah, that's all a function of lease expiration. So we tend to raise, if someone is in 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 should eke up over time, but it's really a function of the big overage rent payers and when their leases expire.

Thank you. Certainly.

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

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, you know, again, you might be slightly guilty.

By the way, so – So do I. So do I, Flores. Okay.

No, no. I know you think there's a lot of value. And I'm trying to help you get that out. But, you know, 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, in your leases typically of around 3%. You know, you don't get it for all of them. So you're a little bit, a little bit shy of 3% maybe, but you know, all things, et cetera, spare of us, everything else stays the same. Occupancy stays the same. Um, you should get around, you know, two and a half to 3% NOI growth yet. You're only guiding for 2% growth.

Yeah. I think it's very simple. The real simple answer is, um, you know, sales, and we do a very sophisticated model. If we have sales levels that are above this year, we will overachieve that number. But, you know, again, we're in February, and we tend to be, you know, try to be cautious on that number. But that's really, you know, and then there are increases in cost, you know, that we're dealing with. you know, as well for us. So, for instance, I mean, security expenses are up, you know, based on, you know, we just had a discussion with Alex on that. Obviously, you know, we have wage inflation, janitorial. So, you know, we have pressures on expenses just like everybody else. We got no break. on the real estate tax front from the local municipalities, even though we were closed for months in many cases in 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 you know, 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.

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

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

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

Yeah, and we have bumps, but, you know, if it goes up 6% and we're going up 3%, we lose 3%. So, you know, and so, again, I mean, it's all, you know, 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.

David, so maybe if you can touch on one little area, which I looked at in your lease, 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 bucks. 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?

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. Fourth, this is a real interesting thing. A lot of that stuff is happening now. You know, 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, you know, reinforced 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 release that space, that comes in midstream. That comes in first quarter, second quarter, third quarter of 22. Because remember, our retail base, a lot of it sat on the sidelines, all of 22. and didn't really start opening up open to buy in 21. And by the time you build out a store and 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 so anti the way I think, but we still have a transition year in 22 that 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, you know, 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? Yeah, I think you did a great job. Okay, so sometimes I'm inarticulate. And again, that's not an excuse, but 22 is going to 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, Forrest?

Next question, Hector, please.

Our next question comes from Handel St. Just with Mizuho. Please proceed with your question.

Hey, good evening. Thank you for the question. David, I 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 today? 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 back to those mid-to-upper team levels? Thanks.

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, you know, you know, the overall business is better. So, you know, it's a good insurance policy in that, you know, the retailers are producing very positive results in our portfolio. You know, we don't want to put them, you know, on the edge. But, you know, we've taken our lumps over the last few years, and now we're just trying to, you know, 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.

I got you. I got you. And if I could follow up, I don't know if you mentioned it earlier or if you'd be 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 a lower percentage rent threshold so you can make it in the event of improving sales? Or is that an event of the past now?

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

Hector, next question, please.

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

Hi, good evening. I wanted to follow up on Floris' question. I believe you mentioned that if 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 the base case is actually a decline in sales compared to last year. So I'm trying to just get a little more color there would be helpful.

Well, we do it, we really do it, I don't know why, but we do 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 costs, if you kept our expenses flat, we would see a better you know, more robust NOI, you know, portfolio NOI growth. The simple answer is that. And we do have some baked-in conservatism in that number. But again, you know, it's, you know, we do this, you know, we do this budgeting process late in the year. Actually, to some people, they do it earlier than I'd like, but we You know, 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.

But, so... Is it fair to say that your forecasting fails to be negative? Maybe that's the base case of guidance, or am I misreading into that?

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

Okay, that's helpful. If I could maybe try to squeeze one more quick one in there. I'm just curious for, like, the overdraft component. How much was overdrenched? in terms of total lease income? What percentage was that for this last year?

We don't give that out, but if we do, I'll ask the guys if they want to give it out. We tend not to do that. I would say it was similar to what we would used to see from when we had big international tourism and our big international Properties from a percent point of view? Okay. Guys, is that right? Okay. And then it really went away. So it's kind of back to where we were maybe four, five, six years ago.

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

Hector, we have time for one more question.

Okay. Our final question comes from Mike Muller with JP Morgan. Please proceed with your question.

Yeah, hi, 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?

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

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

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, not the department stores. 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.

Got it. That was it. Thank you.

Sure.

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.

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.

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