Simon Property Group, Inc.

Greetings. Welcome to the Simon Property Group second quarter 2022 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. Please note, this conference is being recorded. I will now turn the conference over to your host, Tom Ward, Senior Vice President of Investor Relations. You may begin.

Thank you, Kyle, and thank you everyone for joining us this evening. Presenting on today's call is David Simon, Chairman, Chief Executive Officer, and President. Also on the call are Brian McDade, Chief Financial Officer, and Adam Roy, Chief Accounting Officer. A quick reminder that statement 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 8K 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 the request to limit yourself to one question. I'm pleased to introduce David Simon.

Thank you. Pleased to report our second quarter results. Second quarter funds from operations were $1.1 billion or $2.96 per share prior to a non-cash unrealized loss of 5 cents from a mark to market in fair value of publicly held securities. Let me walk you through the big variances for this quarter compared to Q2 of 2021. Our domestic operations had an excellent quarter and contributed 13 cents of growth driven by higher rental income of nine cents, strong performance in Simon Brand Ventures and short-term leasing of five cents. TRG contributed four cents of growth and they were partially offset by higher operating costs of approximately five cents. Our international operations posted strong results in the quarter and increased 10 cents, lower interest rate or interest expense contributed 3 cents, and these 26 cents of positive contributions were partially offset by the headwind from a strong U.S. dollar of 3 cents and a 19 cent lower contribution from our other platform investments, principally from JCPenney and a couple of brands within Spark. These included costs associated with JCPenney's launch of new brands, the recent Reebok transaction and the integration costs associated with that, and a softening of sales from our value-oriented brands due to inflationary pressures on that consumer. We generated $1.2 billion in free cash flow in the quarter, which was $200 million higher than the first quarter of this year, and we had generated $2.2 billion for the first six months of the year. Domestic property NOI increased 3.6% year-over-year for the quarter and 5.6% for the first half of the year. Portfolio NOI, which includes our international properties, grew 4.6% for the quarter and 6.7% for the first six months. Occupancy at the end of the second quarter was 93.9, an increase of 210 basis points, and TRG was at 93.4%. The number of tenant terminations this year has been at record low levels. Average based rent increased average base minimum rent increase for the third quarter in a row, and was at $54.58. Leasing momentum accelerated across our portfolio. We signed nearly 1,300 leases for more than four million square feet in a quarter, have signed over 2,200 leases for more than seven million square feet through the first half of the year, and we have a significant number of leases In our pipeline, nearly 40% of our total leasing activity in the first six months of the year has been new deal volume. This is up approximately 25% from last year. Retail sales continued. Mall sales volumes for the second quarter were up 7%. Our reported retailer sales per square foot reached another record. in the second quarter at $746 per square foot for the malls and the outlets combined, which was an increase of 26%. $674 for the mills, a 29% increase. TRG was at $1,068 per square foot, a 35% increase. We began our National Outlet Shopping Day, which was very successful for shoppers and participating retailers, offering a timely, first-of-its-kind power shopping experience. More than 3 million shoppers visited our premium outlets and mills over the shopping weekend. Feedback following the event has been tremendous from both our retailers and consumers. We're already planning next year's event which we expect to be bigger so please stay tuned on on that our occupancy costs at the end of the quarter are the lowest they've been in seven years 12.1 percent of q2 of 2022. now our other platformer investments let's talk about it we were pleased with the results of our um of our investments in the platform for the second quarter They contributed approximately 21 cents in FFO, even though we were down from last year's terrific results, primarily, as I mentioned, continued investment and the inflationary pressures that have developed. Based on our distributions, based upon our cash distributions received, we have no cash equity left. investment in Spark and JCPenney. And in fact, we have parlayed our Spark investment into our investment in ABG that is now worth over $1 billion. There will be a little more volatility from quarter to quarter when it comes to Spark and JCPenney, but please keep in mind this in the proper perspective. It's all upside from here. During the quarter, we also, as I mentioned, had our mark on our SOHO and lifetime holdings of five cents. A reminder on that, it's a non-cash mark, and we would expect that those companies would bounce back. We completed the refinancing of 14 property mortgages during the first half of the year. for a total of $1.6 billion and an average interest rate of 3.75%. We reduced our share of total indebtedness by more than 650 million. And once again, our balance sheet's strong. We have $8.5 billion of liquidity, $8.5 billion. Today, we announced our dividend of $1.75 per share for the third quarter, a year-over-year increase of 17%. This will be payable at the end of the third quarter, September 30th. During the quarter, we repurchased 1.4 million shares of our common stock for $144 million. And let me point out, while other companies in our sector are paying little or no dividends, and issuing equity, we are repeatedly raising our dividend and buying our stock back. We have now returned more than $37 billion of capital to our shareholders since we've been public, $37 billion. Given our current view of the remainder of the year, we are increasing our full year 2022 comparable FFO guidance from $11.60 to $11.75 per share to the new range of $11.70 to $11.77 per share, which compares to a comparable number of last year of $11.44 cents per share. This is an increase of 10 cents at the bottom end of the range and 6 cents at the midpoint of the range. The guidance comes in the face, obviously, of a strong U.S. dollar, rising interest rates, and the inflationary pressures that are out there in the marketplace. So let me conclude. I'm pleased with our second quarter results. Our business is strong. The higher income consumer is in good shape. Brick and mortar stores are where the shoppers want to be. Outpacing e-commerce across the world and the broad retail spectrum. Demand for our space is extremely strong. Worldwide retailers need to grow and they're doubling down on the U.S. International tourism is returning. Domestic tourism is strong. Our redevelopment pipeline is growing with exciting projects. In addition to our newly announced premium outlet, new developments and expansions, we are experienced at managing our business through volatile periods, including leveraging our existing platform for operating efficiencies, allocating capital appropriately, managing risks. We are not over our skis in any aspect of our business. I encourage you to look at our track record. We outperform in these kinds of periods, and we also do some of our best work as well. So thank you, operator. We're ready for any questions at this moment.

At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. In the interest of time, we ask that you please limit 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 is from Craig Mailman with Citigroup. Please proceed with your question.

Hey, it's actually Michael Billerman here with Craig. Good afternoon, David. David, I was wondering if you can talk a little bit about sort of that inflationary pressure that's on the retailers that you're starting to experience firsthand. And obviously, your knowledge base of the retailer environment is significant. But now actually being on both sides, what can you do as a landlord to help your tenants through this period of time where they are dealing with a lot of inflationary pressures and more inventory, because arguably I know from a landlord perspective, you want your rent to inflate and that just makes matters worse. So can you just talk a little bit about the things that you can do to take share and really leverage what you're learning on the retailer side for the benefit of shareholders?

Well, thank you, Michael, for that question. So look, we're not we're not presumptuous to tell any retailer under any circumstance how to run their business. So it's really entirely up to them on how they see fit, how to manage inventory, et cetera. And just our own experience, within Spark we have several brands and we did see some softness in the more value-oriented brands And again, we do think that's pressure on the consumer with respect to food, housing, obviously gas. And they reined it in. But again, I think the important thing to keep in mind, Michael, is even with that said, we were profitable. We had an unbelievably strong year last year with penny and and Spark, we're still projecting really high EBITDA growth for these companies. And even though they're obviously their consumers being cautious, back to school so far is off to a good start. Our traffic is actually pretty good. And I think just from our own operating experience, You know, the Spark management team and the penny, I think, do what a lot of retailers do. You know, they rein in discretionary capital. They watch the overhead. They really don't close stores because stores are profitable to them. They watch marketing expenses, you know, that – You know, they're very focused on the payback when it comes to return on investment with digital spending. So, you know, I think the JCPenney and Spark team, you know, will do kind of similar to what others, but we would never, you know, we would never tell a retailer what they should do. If they want to compare notes, we're happy to do that, but that's just not our style. And again, and we try to, you know, it's really important. This other business that we're in is not our, you know, it's a very small part of our business. It's, you know, it's under, you know, 10% at the end of the day. We have no cash in it. So I've got, I'm just talking, you know, cash on cash, return, let's go simple math. I've taken distributions, cash distributions in both Spark and Penny that basically has me at a zero net investment. And it will, you know, they'll have volatility with the earnings like any other retailer. And, you know, that's just the way of the world. And it's all left side, frankly. And these businesses are importantly, and this is very important, they're very well positioned they're very well positioned to whether if this continues, which we kind of expect it to, they're very well positioned to weather any storm because, as a simple example, JCPenney has a billion three in liquidity, you know, just to throw that out there. So I hope that answers your question.

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

Hey, good afternoon. Good afternoon out there. David, a question on following up on the retailer platform income. The NOI this year was like $116 million in the year. Last year was $195 million. So is this some of the volatility that you're talking about? And just curious what drove that mark. And if I can do a footnote for a sort of quasi second question, you mentioned something about the value brands in your retailer platform having trouble, but the other brands, you know, we're doing well, maybe just a little bit more comment on that.

Yeah. Look, Alex, it was 19 cents for the quarter. So we can spend a lot of time on it. But the reason I went through with you is because, um, You know, we have no cash investments in these businesses, so I'm happy to go through it, but let's put it in perspective, please. The point is, yeah, so let's just talk about Spark. Spark, Nautica, Brooks Brothers, Lucky did great, above budget. Eddie Bauer, above budget. The only softness we really saw was a little bit in the teen market at Arrow, a little bit in the fast fashion business in F21, and a little bit in JCPenney. And we also, as we told everyone at the beginning of the year, we had... significant integration cost at Spark with respect to the Reebok transaction. So that, and obviously that closed and we saw some of that in the second quarter. So that's the status. Everything, we also had a management change at F21 which we think will be for the better. That happened I believe at the beginning of the year. We've got our, we also had our new CEO at Tenney, which also happened last year. So they're absolutely greatly positioned. We've got all the confidence in the world, and it's a retailer, and there will be ups and downs, 19 cents out of $2.96. Okay? That's the math. And no investment, no cash investment. Okay? Okay. So I think I answered it, but if there's something you'd like me to dwell on more than I did, I'm happy to do. Well, I guess that's the one question, right? So it's over, right? Go ahead, Alex. I'll let you, because I like you. Go ahead. What else you got?

Okay. Well, then I'll ask you one other question. You guys are always financially savvy and you buy back stock. I'm imagining that buying back debt is not attractive just given where your outstanding debt coupons are? Or has the disruptions in the debt markets given you opportunity to buy certain pieces of paper?

Well, we unencumbered, you know, the reason we have lower interest expense is because we unencumbered assets. We have that flexibility. So we don't like the mortgage market, unlike some others. We just write a check. And that's why we have lower interest expenses. compared to last year, and I did the Q over Q, because we can write a check and just unencumber it at a lower cost. So we look at that all the time. And that may not be buying debt back, but it's more or less the same thing, ends in the same result.

Thank you.

My pleasure.

Our next question is from Steve Sokwa with Evercore ISI. Please proceed with your question.

Yeah, thanks. Good afternoon. David, I was wondering if you could provide a little bit more color on the leasing pipeline. It was nice to see the occupancy up as much as it was from Q1 to Q2. But could you talk a little bit more about the pipeline, the types of tenants? And, you know, when you sort of look at the demand, you know, if you sort of were to try and bifurcate, you know, the portfolio maybe by sales, you know, I guess how different is the demand for the really strong centers versus maybe centers in the middle and the lower end of the portfolio?

Well, again, you know, our lower end is, it's just not, you know, just to get, it's a good question because we don't put these numbers in. But, you know, our EBITDA weighted, this excludes TRG, but our EBITDA weighted sales are $954 a foot. um our average base rent actually increased 70 basis points you know at 73 41 versus 72.87 um so you know and that's what's thriving our ny right because it's the bigger property so yeah you know look um it is across the board it's also across the retail type, it's restaurants, it's entertainment, it's obviously the high-end folks. And I don't like naming retailers. Rick does, but it would always bother me and he's not here to do it. But we have value-oriented retailers that are on very much aggressive opening opening program. So it really is across the board. You know, only the best properties get the high-end folks. We're seeing a big rebound in Vegas. Florida is on fire. California is finding its sea legs. You know, Westchester and Roseville Field are all coming back as the suburbs. So Midwest has been stable. So we're seeing it across the board by retailer, by price point, by geography, by mix, pretty much across the board. And so, you know, I mean, it's not really granular and you probably wanted names, but, you know, and we have not seen, thankfully, even with what's going on in the world, we really haven't seen anyone back out of deals of note at all. And I said this last quarter, I said it this quarter in my prepared remarks, the U.S. is the, let's hope the U.S., we don't screw it up, but the U.S. is you know, the bastion of growth for the world, you know, compared to, you know, because we know China's, you know, the way COVID is dealt with there, that's going to have ebbs and flows. And, you know, I think our economy is still pretty healthy, consumers in good shape. You know, I think the growth will continue in the U.S. And I think the future is bright here.

Our next question is from Adam Kramer with Morgan Stanley. Please proceed with your question.

Hey, David. Good afternoon. I just wanted to drill in a little bit more on capital allocation. You know, obviously raised the dividend here again, was active on the buyback in the quarter in just a couple months. And, you know, I put out these kind of press releases as well about some of the kind of the new and renewed development projects. So just wanted to kind of Now, maybe here you kind of maybe rank or just kind of discuss the different options for capital allocation here. And, you know, I know external growth is always maybe an option as well. You talked about it last quarter. But maybe if you could just kind of rank the different options here with your capital and excess free cash flow.

Well, look, as a REIT, it'll always be, you know, the dividend. But so that would, you know, I mean, it's hard to rank it, but I think... clearly the dividend, you know, we have to pay out 90, you know, to 95% of our taxable income. There's a difference if you pay out 90 technically versus 95. But you've got to pay out 95% of your taxable income. We're fortunate to be highly, you know, we have taxable income. So we pay out close to them. You know, we're at 100% of our taxable income. That's growing, so that's going to be paid out in cash. Obviously, you know, we've modified that twice in our history. One was COVID, obviously, when we were shut down, and two was in the Great Recession. So that always will rank number one. Two is, you know, our stock is just – You know, we look at other REITs, we look at other S&P 500 companies, we look at our balance sheet, we look at the fact that we're a cash flow company that generates cash, return on equity. We make deals like Spark that, you know, gets all our money back and we have free cash flow. You know, we can't figure out our value, so the reality is a market, you know, we have refuted e-commerce taking the malls down. We have withstood COVID. Our business is strong, growing in the enclosed ball business. In the enclosed ball business, it's strong, yet we have naysayers out there that don't believe it. But we believe it, so our stock is cheap and we're going to keep buying stock back. And then I think we have a duty to make our properties as you know, as efficient and as, you know, as attractive as we can to the consumer. I mean, obviously, we have to do it with a remind, you know, we have to do it with a return on investment methodology, i.e., if we had a property and we spent all this money on it and got no return, we wouldn't do it. But where we can do that, that's what we should do, and we will do that. And then the external stuff, I don't really care about. You know, if it's there and it makes sense, we'll do it. We have the flexibility to do it. But I'd rather do the dividend, buy our ridiculously cheap stock back, make our existing portfolio better, and then every once in a while we'll have – you know, great new development to do that we'll do it because that also is a core competency of ours, you know, that we, that, you know, we'll do. And that's, that's how I look at it.

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

Hi everyone. Good evening. Uh, yeah, so on real estate, um, Phipps Plaza, slated for an October open or relaunch, let's say. So, David, I believe you took roughly a million in NOI offline to develop. So, you know, upon stabilization, you know, what NOI contribution from this project is expected? And really, should we look at this as one of the key earnings accretion blueprints looking ahead with other mixed-use projects? Thanks.

Yes, thank you. I'm happy to focus on real estate. And look, I mean, that's a fantastic story because, you know, we took an old department store. It had, you know, Belks. It was an underperformer, had 14 acres. We couldn't redevelop it. We're going to spend around, you know, $350 million, and we're going to get about a $35 million of NOI, just on that. But more importantly, well, I shouldn't say more importantly, in addition to that, and, you know, eventually we'll show everybody what we did, but the leasing momentum that we have created there in terms of re-tenanting, re-leasing FIPS is staggering. So FIPS... you know, again, we don't really disclose that, but my guess is the existing property will increase by roughly 30% NOI when we're done with it, if not more, without, you know, without that, not including the incremental investment I just mentioned, but because of all the re-tenanting, and more importantly, we will have all of the best brands when we're done with it and that's ongoing that won't all be done probably until 24 because some of the other existing retailers have leases and they're coming over after that but we're taking a you know a quiet mall and making it you know and it's going to be I think the hub of activity in a great area in Buckhead Um, and a lot of good stuff's happening in Lenox at the same time. But yes, the, the, the simple answer to your question is I would hope to do that in Brea, you know, Roth Park, you know, go down the list. But yeah, we, we have a ton of those opportunities and, you know, the mixed use, um, you know, most, most of our real estate is really well located. Um, And adding the mixed-use components, especially residential, really does add a lot of synergy, a lot of mojo to the property. So we hope for that to continue. Thanks. Sure.

Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question.

Hey, David. Hopefully an easy two-parter for you, but how has the broader economic environment adjusted the process for adding projects to the development pipeline, and how have increases in construction costs and labor shortages impacted pipeline returns and timelines?

You know, let me talk timelines. The biggest issue that we're having on timelines is in what I call in the restaurant industry in that some of the equipment required to open restaurants does have a backlog. The storefront improvement is increasing. Obviously tenants are very, very focused on that, not affecting timing, but it is something that we're watching It has not affected deal flow or deal economics. And I do think the good news when it comes to at least materials, we are at a lower level than we were a few months ago. So on a timing side, it's really just equipment for restaurants. On our return development, Not, nothing, you know, yeah, we have a little bit more here and there, but nothing that is going to, you know, ultimately decide to go from, you know, a goal project to a negative. If anything, in a lot of these cases, we're planning on higher income, so they seem to be getting basically the same returns, but we're not, nothing's changed dramatically that would, you know, suddenly scratch a project.

I could just add just real quick to that. What about now that you have a, you know, lower priced stock, so investment in the stock versus, you know, redevelopment expense?

I think we can do both. I think we can. And again, I mean, some of these things, you know, we really want folks to focus on others in our sector, you know, when you put us in perspective, you know, we're buying stock back, we're not issuing equity, and we're raising our dividend. I don't, there are very few, and you can define the sector any way you want, and I don't want, but there's not many, you know, we're just built a little bit differently, even though, you know, we may be in the same industry, we're built differently, okay? And So that's the important point, and that's why we really try to emphasize it, much like we emphasize Spark about some of the mathematical differences about our company beyond just, oh, we're in the same business. It is math. At the end of the day, you gotta run your business so the math works. But yeah, I like buying our stock back, but you know, Like I said, I do think we have a duty to continue to invest in our portfolio as long as we see the right return on investment on that.

Thanks, David.

Sure.

Our next question is from Mike Muller with J.P. Morgan. Please proceed with your question.

Yeah, hi. The year-over-year ABR per square foot comp at TRG looks pretty strong at about up 5%. Is there anything out of the ordinary driving that?

No, I just think we've worked well together and, you know, the portfolio is in great shape and, you know, and driving, you know, and we're driving growth out of it collectively. So it's all good.

Okay. Thank you.

Thank you.

Our next question is from Flores Vendicom with Compass Point. Please proceed. Please proceed with your question.

Thanks for taking my question, guys. Last quarter, you indicated your signed not open pipeline was around 200 basis points, I believe, and it was a little bit higher in the malls than the outlets. I was curious if you can give an update on that. And also, maybe, David, you've got these retailers. Are you, you know, everybody's been talking about a glut of inventory. Will you create outlet stores for some of your retailers? And where else are you seeing some of the demand for the outlets coming from? Is there more luxury potentially that's coming to the outlets or homewares? Or what other segments do you think will expand into the outlet business?

Well, let Brian answer this. That was very clever to get two questions right. But let Brian answer the first, and then I'll take a shot at the second part. Flores, we're still hovering right around 200 basis points in the second quarter. Okay. And then I would say, you know, there's no – I mean, some of these big, big retailers had a glut of inventory, right? The luxury guys do not have a glut of inventory. That's not happening. To the extent that the Spark brands, by and large, are already in a lot of outlets, some of ours, a lot are not ours. There's really no change in plan. Maybe there's been a few You know, some of the brands, not just Spark, but elsewhere, had a few pop-ups, but that ebbs and flows. I don't think, Flores, there's any real interesting dynamic going on that. You know, and there's not a lot of folks with a glut of inventory, as far as I can see. I mean, yeah, obviously some bigger folks, but most of those guys want to flush it through their existing system. And there is no, the higher end folks, there's no glut of inventory that we see.

Thanks, David.

Thank you.

Our next question is from Vince T. Boney with Green Street. Please proceed with your question.

Hi, good evening. Could you drill down a little more on sales trend during the quarter? Did sales start to slow down at all in the back half of the quarter as inflation accelerated and recession fears increased?

No, no, not really. So it was, I mean, not really. We didn't really, in fact, in July, In a lot of cases, we saw a little bit better results recently. So, you know, no real trend there, Vince.

No, it's good to hear. It's helpful. And then just maybe one follow-up to that. Are you seeing any difference in tenant sales performance between the higher end and luxury tenants versus the more mainstream brands? Presumably the latter would be more impacted by the inflation issues.

I would absolutely, you know, we definitely have seen that, you know, where the value-oriented retailers or, you know, there's no question the consumer that, you know, is pressed on discretionary income is dealing with a, you know, very difficult situation with food uh, food, obviously gas, um, you know, and, and dwelling. So, um, and, and, you know, they, you know, they're, they're reigning in their, their spend. So there's no question about that. Um, but we're, we're, and we're, but we're having really seen that at all. Um, and you know, kind of the better brands and like I mentioned earlier, spark, you know, like the Brooks Brothers, the Luckys of the world are doing very well, but where you do see it a little bit is, you know, in the value-oriented retailer or the younger consumer, you know, that suddenly, you know, gas is, you know, taking a lot out of their pocketbook.

Great. Thank you. Appreciate it.

Thank you.

Our next question is from Craig Schmidt with Bank of America. Please proceed with your question.

Great, thanks. Domestic same-story NOI was up 3.6% compared to 7.5%. It looks like a lot of it was due to the tougher comps in second quarter. And in that case, it seems like the comps only get more difficult third and fourth quarter. Is that why the same-story NOI number might actually be going down? for the second half of the year, or is it the macro factors?

No, I mean, Craig, uh, we were really clear. We're actually outperforming what we thought, you know, we, you know, Q1 of, um, uh, Q1 of last year, uh, had the big benefit of going up against COVID. Right. So now we were really, really clear what we saw overall and we've been outperforming and, you know, I think we'll outperform our initial guidance of 2%, but, um, um, but, but that's, you know, nothing, nothing other than that. Um, we're normal seasonality of the business, Greg. Yeah. I mean, this is, this is better than our plan and it's consistent. with our plan, even though the trend is above our plan.

So the, your, your leasing year to date, if you will, is strong enough that you think that, um, has it continued in July? Um, and do you think it could continue despite some of the macro factors?

Well, I said that several times. Yes. The answer is where are, we have not, our pipeline is as strong as it's been. We're doing a bunch of new deals. Now, Craig, you know, when you sign a lease, the store doesn't open tomorrow in a lot of cases. And this is really, really important for everyone to understand. We're very optimistic because a lot of the leasing that we've done really doesn't open until 23, 24. So not only are we outperforming our budget this year, off a strong last year, but we actually feel really good that as we get these stores open that we leased to over the last six, nine months, that, you know, that will continue to fuel positive comp NOI. Thank you, Craig.

Thank you.

Our next question is from Michael Goldsmith with UBS. Please proceed with your questions.

Good evening. Thanks a lot for taking my question. On the guidance, the low end of the range has come up, the high end relatively flat at a time when you're seeing softening of sales at your lower income brands. So my question is, What's implied for the performance of the base business in the second half kind of relative to what you saw in the domestic and international operations in the second quarter? Maybe said another way, how sensitive is your performance to the macro environment and what's the outlook for percentage rents?

Well, it's a very, you know, look, I think we feel really positive about the portfolio performance the results that will generate from the portfolio, and again, the higher income consumer is still spending money. And if anything, I think if you go back in history, and actually Tom did a very good piece on that. If any of you are interested, you can call Tom. He'll go through it with you. Our business and our industry actually tend to outperform during recessionary environments, to the extent that we get there, and maybe we're in one, maybe we're not, I'll stay out of that political definition. Primarily because the big ticket items suddenly go toward what we sell at our property. And that's somewhat of an insurance policy And it's historically always proved to be very positive. So even in every recession, other than COVID, when we were told to shut down, our cash flow from our properties was flat. It did not decrease. So Tom has a great paper on it. If you're interested, we'll charge you, but we'll give you the data. I think the same case will be here. If we do get into a full-blown recession, our cash flow will be positive. It won't maybe grow as high. We'll have some exposure on sales, but we do see the big tickets kind of go away and they move toward the items that we sell on our properties. And again, I think you asked something about Spark. You know, again, it's really just a couple of the brands. It's also going against a great year. And again, let's have a bigger picture view of that business.

Thank you.

Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question. Hi, good afternoon.

Just wanted to ask with regards to the month-to-month leases that are still on the books, they're a little bit higher than the historical average. Should we expect that to stay there, or are you still comfortable kind of looking out for higher rents, or how are you thinking in the current context?

Yeah, I think that's more a function of documentation than deal-making, in that we don't put that done until it's signed. And a lot of our bigger renewals have been done over the last two, three, four months. And all that's being documented. So I would expect that that number would continue to go down. But we have no, you know, we have no fear in that number.

Thank you.

Thank you.

Our next question is from Hondell St. Juiced with Mizuho. Please proceed with your question.

Hey there. Good afternoon. Dave, I got a question on a follow-up on the seasonality of NOI the first half of this year. Second quarter, NOI is lower than the first quarter based on supplementals in both periods, which is unusual. How are operating expenses impacting typical seasonality? And what's embedded in the 5% St. Louis guide profit this year? Thanks.

Yeah, we didn't gather your first question.

Could you please repeat it? First question is on the impact of seasonality and the sequential NOI for 1Q to 2Q. 2Q looked lower than 1Q, which is unusual. And so I was actually asking how operating expenses... I think... I don't... Yeah, I don't think the NOI was lower...

quarter over quarter, sequentially quarter over quarter. We do have a lot of companies hit an overage rent in the first quarter because their leases end in January 31. So you pick some of that up in Q1, but that's not, that would, be the only reason.

And on OPEX, any color on how it might be impacting seasonality? What's your expectation? Again, I'm sorry, but your connection is really not so good.

We're not really seeing much inflation just yet in operating expenses. As you think about us, we've got long-term contracts that protect us from material increases. We did increase our operating expenses five cents. We did hit a negative five cents for the quarter debt.

Our next question is from Key Bin Kim with Truist Securities. Please proceed with your question.

Thanks. Just to follow up on Handel's question, your NOI from Clayfear and HVS also increased pretty significantly in 2Q over Q1. I was just curious about how much of that is sustainable in a run rate perspective or if there's some one-time items.

Well, no. Clay Pierre was shut down last quarter, so this is kind of more now. I mean, last year at this quarter. They're still not firing on all cylinders, so we'd expect future growth here. Comparing to Q2 of 21 compared to Q2 of 22, Q2 of 21 they were under a lot of restrictions and in some cases closed. And HBS is so small it's insignificant. But there's no real change there. It's a lease that pays a certain amount of rent every month. So there's very little growth other than the normal step ups. Very small. The change is okay.

I actually meant sequentially. I actually meant to sequentially increase by, I think, $10 million as well.

Well, you know, we did a restructuring, so, you know, that's part of it. And they're doing better, quite honestly. They've announced results and strong results. So I think you're seeing that starting to come to our results as well.

Okay, and I'm not sure if I missed it or not, but any kind of commentary you can share on what the lease spreads look like in 2Q? And given that you're close to 94% occupancy, as you continue to increase with that, what kind of pricing power do you expect to gain when you start to reach 95% or 96% occupancy?

Well, rents are all moving in the right direction, and our spreads are moving in the right direction, too.

Okay, thank you.

Thank you.

Our next question is from Linda Tsai with Jefferies. Please proceed with your question.

Hi, thanks for taking my question. On the guidance, original guidance was domestic NOI of 2% growth, and year-to-date it's 5.6%. So is there any update to the 2%?

As we've said for several years, we do not update that. You know, we give you our best guess. At the beginning of the year, it's all part of our plan. We disclose what we think the number is, but we do not update it quarter to quarter other than, as we've said, you know, we're pretty confident we're going to beat our initial expectations.

Got it. And then could you talk about what you're most focused on from an ESG perspective in 2022 and, you know, what are some initiatives where we might see some progress?

Well, I don't have enough time to go through it, but obviously it's across the enterprise, and obviously from an operating point of view, a lot of it continues to be focused on reducing our carbon footprint and giving back to the communities, which we do in in a lot of different ways, but that's a very long, please read our report. If you don't have it, there's a link I'm sure Tom can give it to you, but it's certainly focused on, the big item is focusing on reducing our carbon footprint.

Thank you.

Thank you. Oh, sorry.

We have reached the end of the question and answer session, and I will now turn the call over to Mr. David Simon for closing remarks.

Okay, thank you. I believe that's our allotted time. So, you know, thanks for everybody's questions, and any follow-up, please call Tom and Brian. Thank you.

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