Simon Property Group - Q2 2023

Transcript

Operator (participant)

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. 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. 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 (SVP of Investor Relations)

Thank you, Camilla. 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. 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 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, CEO, and President)

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.

Year to date, that comparison is $5.65 per share in 2023, compared to $5.58 in 2022. 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 million sq ft for the quarter, and we're up to 11 million sq ft 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 $677 per foot. We also hosted our second annual National Outlet Shopping Day in June, 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, 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 29th. 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. This is an increase of $0.05 at the bottom end of the range and $0.02 at the midpoint. Let me give you food for thought, if I may. We have built a world-class portfolio over our 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.

Our high productive portfolio is a 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 set at the beginning of the year. We are now, operator, ready for your questions.

Operator (participant)

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Thank you. Our first question comes from the line of Mr. Steve Sakwa with Evercore ISI. Please proceed with your question.

Steve Sakwa (Senior Managing Director)

Thanks. Good afternoon, David.

David Simon (Chairman, CEO, and President)

Thank you for going, Steve.

Steve Sakwa (Senior Managing Director)

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

David Simon (Chairman, CEO, and President)

Steve, first of all, I think we'll be north of 95% by year-end. You know, 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, you know, a portfolio that's really unrivaled in our industry. Given our strong tenant relationships, we're in a good spot to find kind of the win-win that, 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 anyone 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, you know, the furthest thing from the truth. We, we continue to think our, you know, rollover, by and large, is gonna be positive. And we have the ability now, with new tenant demand, to replace retailers that... you know, aren't producing sales, and which will allow us to, to generate higher rents. 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 (Senior Managing Director)

Thank you.

Operator (participant)

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

Caitlin Burrows (VP)

Hi, everyone. David, you gave those details on the asset rotation since 1996. 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, CEO, and President)

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

At the same time, we've done it, you know, as, 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. You know, we've done it as, as thoughtfully in terms of maintaining the balance sheet as anyone. You know, that's been, that's been another key component of our ability to grow, yet recycle. I don't think I'm signal- signaling, but maybe, you know, you have these epiphanies, so maybe, you know, maybe i- it's possible, right? That, you know, there'll be some... We'll be more act- active on reallocating capital to different assets than we have today.

Caitlin Burrows (VP)

Thanks.

Operator (participant)

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

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Hey, good afternoon down there, David. Also thank you for moving your call to avoid an overlap. I appreciate it. Question, there was a recent press article, and not that article, not, which I'll let you opine if you want, but, you know, just talking about luxury sales.

My question is this: you know, we all look at luxury as sort of like the ultimate, the driver of retail and, you know, if you will, but my question is really, you know, given how customer, you know, preferences have changed, lifestyle, people, you know, changing how they live, you know, sort of curious, when you look at the l- tenant landscape, you know, are there any sectors that you would say are now, you know, I guess, going back to Caitlin's early 1990s example, are there any sectors now where you're like, "Hey, 20, 30 years ago, this sector was nowhere, and now it's, you know, 20% of retail, or it's the absolute must-have."

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, you know, your analogy of over the past 30 years, what the company looked like then in the Midwest versus now.

David Simon (Chairman, CEO, and President)

Yeah, look, I, I would say, unquestionably, some of the best retailers in the world, like a Kering or an LVMH group, have the best brands. They do the most volume. They build the best stores. They think longer term, you know, over longer term over any retailer that we've ever experienced. They're true to their business. We admire what they do. We admire how they build their brand. We admire how they maintain their brand. They have loyal customers. There's no better companies to do business with that believe. We aspire to be more like them than anything. I think, you know, how, you know, how they maintain their stores and how they treat their customers and how they're true to themselves.

The, the luxury business is here to stay, 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 our centers. We wanna do as much business as we can with them. They're, you know, they're still very focused. Obviously, sales have flattened a little bit compared to Q2 2022. 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. We're 20%, 30%, 40% above where we were in 2019, but I don't remember the exact number, but they can, they can give it to you later.

You know, one of the interesting things is LVMH group, and, you know, if you look at our 8-K, they're in number, they're now our top, in our top 10 tenants. We couldn't be more proud of that relationship and the brands that they're, that they have. This is not a niche business, this is a growing business. It's for exactly the affluent shopper, the established shopper, but also the affluent shopper. The fact that we're, you know, we do so much business with them is something that we're extremely proud of, and we will, we will, I don't like the word lean in, but we will do as much as we can to, you know, to continue to foster those relationships.

That is a huge differentiating point that we have at Simon Property Group. It's all systems go there. Yeah, sales will flatten, they'll go up, they'll go down, but their commitment to their customer and what they do in their stores, I think, goes unabated. They really, I admire the fact that they take... You know, they're not a quarter-to-quarter company. They take a much longer view of their brand and where they wanna plant their flag and how they want to treat their customers. No, they're, they're, they're true partners and great, generally, across the board. We love doing business with them. It's not a niche, and that business is growing, it's growing worldwide.

In fact, if anything, you know, we'd like to follow kind of where, where they're headed because, you know, we think there's great business to do together. I hear you typing.

Brian McDade (CFO)

Oh, sorry, I thought-

David Simon (Chairman, CEO, and President)

Is that a little back with another question?

Brian McDade (CFO)

No, I'm, no, I think Tom said, "And, and Federal's right after you guys." I thought my mic was already cut, so I didn't know you could hear me.

David Simon (Chairman, CEO, and President)

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

Alexander Goldfarb (Managing Director and Senior Research Analyst)

Thanks.

Operator (participant)

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

Vince Tibone (Managing Director)

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

Brian McDade (CFO)

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, you know, the velocity of our business. We do think we're gonna carry that through year-end. And certainly, we do expect that we are gonna continue to see openings throughout the balance of the year, you know, as retailers open later this month and into September and October.

David Simon (Chairman, CEO, and President)

I would say-

Vince Tibone (Managing Director)

Go ahead.

David Simon (Chairman, CEO, and President)

I would say, just on follow-up on that, Vince, is that, you know, a lot of the business that we, you know, have, have signed leases on and/or about to be signed is still. I don't-- I mean, we can give you the exact number. I'll have it again at the top of my, you know, at the top of my tongue, but at the tip of my tongue. There is a lot of the business that we've signed or about to be signed, is really 2024 and even 2025 business. Especially, you know, when we're in the-- we're talking the restaurant business, you know, you're talking nine months build out, you're talking permits that are required to get... You know, it's a little more complicated, getting restaurant permits, liquor license, et cetera.

We've got some great restaurants going into Forum, Crystal, Stanford, Boca, you know, you're literally talking about one year to get permitted, get opened. To some extent, some of this was delayed also with just equipment because of the, you know, COVID and the, and the, you know, all of the, all of the supply chain issues associated with it. And again, you know, when you're talking about our full price business, build outs are longer than, you know, than the outlet or The Mills business. The pipe on that sense is pretty good. Which is not in these numbers, we also, on that front, have boxes that, you know,

that are, you know, scheduled to open in 2024, 2025, that is, you know, obviously serious, long time, long, long, you know, one year plus build out. You know, a lot of business with Primark, Life Time, et cetera, that, you know, even Barnes is doing new deals. You know, we're building a new store with Kohl's, you know, stuff that just takes time, Von Maur, you know, to, to Scheels, et cetera, even though they just recently opened in Wichita, to a, to a great opening, which is one of our 37, by the way, just for a fun fact. You know, the build out is frustrating in that it does take time, but, you know, but it's, but it.

We still expect some, some, really interesting things to happen in 2024, 2025 as these, these tenants open. Remember, in a lot of cases, the more interesting the retailer, the longer the build out. There is a correlation there.

Vince Tibone (Managing Director)

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

David Simon (Chairman, CEO, and President)

Simply, I thought, you know, as I go back in time. You know, I'm trying to go through COVID. I think the demand in the outlet business has picked up more, you know, 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. I think demand from a product type is kind of even now. That's not to say malls have slowed down, it's just the outlet took a little bit longer to pick back up. Mills was somewhat unabated in that. As you know, it's a combination of any and all.

Regionally, you know, by and large, you know, the, the, the, the, the super regional suburban sites are have a high level of interest across the board. We don't have a lot of, you know, city center stuff, so it, it's, we're not the, we're not the right guy to ask. It, I, I am happy that our portfolio is positioned in the, you know, the, you know, the, the, the high catchment areas in the, you know, in the suburbs. Then finally, regionally, as you might imagine, where you're seeing population growth, Texas, Tennessee, Florida, those kind of places, you know, are seeing a little bit more of the outsized demand.

Again, in real estate, you know, you could still have the best location in, you know, kind of a microenvironment that does unbelievably well because, you know, it still is the center of attention. 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. I would say those are just kind of generic trends. Hasn't changed all that much. The suburbs continue to be, you know, as we said, a few years ago, well ahead of most. You know, we still felt like that was the, that was the place to be, and we're, 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 (Managing Director)

Great. Thank you.

David Simon (Chairman, CEO, and President)

Thank you.

Operator (participant)

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

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Great. Just one, one quick one. Just thinking about the growth function of the business. You talk about getting a 95% occupancy by the end of the year. Obviously, that, that annualizes in 2024. When I think about the occupancy boost, the rent bumps, re-leasing spreads, it, it doesn't seem like a stretch to get to a 3%+ number next year in growth. 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 2024?

David Simon (Chairman, CEO, and President)

Well, I, I think it's all, you know, it's all of the likely suspects. It's lease up, it's, you know, renewal spreads, it's new business. Obviously, it's overage, or percent sales and sales activity. There, there's nothing new there. I mean, it's all the stuff that has allowed us to, you know, to grow our, you know, 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 this, that, and the other. It's all of those likely suspects. I mean, I think we feel, you know, generally positive about our comp, our ability to grow comp NOI. It's all the likely suspects, and it's all the same, you know, metrics that we have to, we have to produce to generate that.

You know, we still have the ability, even as we get up to 95%, thereabouts, we still have the ability to, you know, which we can't lose sight of, we have the ability to replace retailers with, with, with better ones that will, in, in, you know, just common sense, will be able to pay higher rent because they'll be more productive. It's really that simple. Ron, it's all the same stuff, and, you know, we're focused on hitting all of those cylinders, certainly, to finish this year, but also in 2024, 2025. You know, the added benefit that we have in 2024, 2025 is that we've, you know, got a lot in the pipeline that will finally, finally open.

Ronald Kamdem (Managing Director and Head of US REITs and CRE Research)

Helpful. Thank you.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

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

Floris van Dijkum (Managing Director and Senior REIT Analyst)

Thanks. Hey, good afternoon, guys. Unfortunately, I have to limit it to one, so I won't focus on the less important OPI stuff. 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. Maybe if you could also quantify in terms of dollar amount or NOI impact. I know that a lot of those leases and, and, and that SNO, there's a lot of luxury tenants, which typically pay significantly higher rent. Presumably, it has a greater impact on your, on your, you know, your NOI and ABR, than, than your, you know, than the percentage just in terms of occupancy.

David Simon (Chairman, CEO, and President)

Look, I th-- we don't want to get into that level of detail. We certainly will for 2024 as we outline what our comp NOI growth is. You're, you're 100% right, that, that the, you know, it is much easier and quicker to open an outlet store, the, you know, the build out 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, you know, where the build out is expensive, you're talking nine months plus restaurants in that ar- area. But we do. You know, and it goes back to, I think, Floris, you were, you were one of the original analysts that was very focused on when we're gonna get back to 2019 levels.

You know, I'm happy to say that we will be back. We better be back, okay? We will be back in there in 2024, and a lot of that, really, at the end of this year, we annualize it. You know, it really is a function of getting those retailers open. The specific numbers, I mean, I'll if, if the guys wanna talk offline and go through it, I'm certainly happy to do that. That's I think it's better answered as we go through 2024, our comp NOI plan with you, you know, early next year.

Floris van Dijkum (Managing Director and Senior REIT Analyst)

Thanks, David.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

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

Jeff Spector (Managing Director)

Great. Good afternoon. A follow-up question, David, on your comment on 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 densifying assets with apartments, et cetera. Is there anything else that you're thinking of changing, that you've 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 you're really sticking with those programs as well?

David Simon (Chairman, CEO, and President)

I think, Jeff, we're gonna more or less stick to our programs. 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, we've had, you know, we've had good experience, by and large, not perfect, but good experience, you know, experimenting here and there. Our core business is high-quality retail real estate. We're not moving away from that by any stretch of the imagination. We have lots of levers in that category to, to pull in terms of how we wanna allocate capital. Do we wanna put it more here versus there? You know, do we wanna sell this and reinvest that?

You know, I think that, if I had the, the ability to express it, we think about that all of the time. That's. We never really talk about it, but as we, you know, the, the sole purpose of going through that asset rotation was to tell you that we do think about this stuff all the time, beyond just think about it, we actually do stuff about it. You know, sometimes communicating that to investors and analysts is important to know that we're, you know, we're gonna reallocate capital where we think the growth is, we're not afraid to, you know, to sell or buy or hold or whatever, you know, whatever kind of we think is the right thing to do. That, that's really it.

I wouldn't make, you know, this is not like, we're not trying to like, here we go, something, something's big around the corner. It just, you know, we've done this, and, you know, we just wanted to point it out.

Jeff Spector (Managing Director)

Great. Thank you.

David Simon (Chairman, CEO, and President)

Sure.

Operator (participant)

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

Mike Mueller (Equity Research Analyst)

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

David Simon (Chairman, CEO, and President)

Well, I don't wanna really talk about TRG so much, but I would say, you know, I mean, it goes, I'm gonna say almost seven, eight years. Because, you know, the 2020, I'm sorry, in the 2019, we probably didn't have that level of percentage of new tenants. it's clearly higher than it was in the 1918, 1917 level, and it kind of goes back to where we were in the 2014, 2015, 2016 level. it's a, it's a good sign, for sure.

Mike Mueller (Equity Research Analyst)

Thank you.

Operator (participant)

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

Juan Sanabria (Managing Director of U.S. Equity Research)

Hi, good afternoon. Two-part question. One, it looks like there's a $0.10 or $0.11 gain in the P&L. Just curious if you could talk a little bit about what that is and if that was assumed in the guidance, the prior guidance? Secondly, if you have any comments on the prior quarter's comments on domestic property NOI of at least 3%? Thank you.

David Simon (Chairman, CEO, and President)

Um, let me, the, uh-

Adam Roy (Chief Accounting Officer)

Gain.

David Simon (Chairman, CEO, and President)

No, no, no, I know that, but the two... What did you say? 2%?

Adam Roy (Chief Accounting Officer)

3%.

Juan Sanabria (Managing Director of U.S. Equity Research)

3%.

David Simon (Chairman, CEO, and President)

3%. Oh, let, let, let me start there. Yeah, we're feeling very, you know, comfortable that we'll, you know, we'll, we'll be above the 3%. The gain, the after-tax gain is associated with the ABG raising of capital, primary capital, which we get diluted down, so it's a, you know, we have a dilution gain. After tax, it was $0.07.

Adam Roy (Chief Accounting Officer)

Yeah. Yeah, there's $0.03 of tax in the tax line, Michael, for that transaction.

Juan Sanabria (Managing Director of U.S. Equity Research)

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

David Simon (Chairman, CEO, and President)

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

Juan Sanabria (Managing Director of U.S. Equity Research)

Thank you.

Operator (participant)

Thank you. Our next question is from Greg McGinniss with Scotiabank. Please proceed with your question.

Greg McGinniss (Director)

Hey, good afternoon. 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 of that decline. 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? Whether you're planning to do so, or maybe that's one of the, the assets that you might be looking to recycle.

David Simon (Chairman, CEO, and President)

Well, I'm not gonna, I'm, I'm not gonna comment on that. There, there are puts and calls associated with Taubman 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. That's that. Brian, why don't you go through the... It, it really was more of a function of kind of the percent rent or overage rent that they had in-

Adam Roy (Chief Accounting Officer)

Yeah

David Simon (Chairman, CEO, and President)

Q2 of last year.

Adam Roy (Chief Accounting Officer)

Yeah.

David Simon (Chairman, CEO, and President)

Do you have any other comment on it?

Adam Roy (Chief Accounting Officer)

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, CEO, and President)

The other thing on Taubman, on TRG, our FFO contribution this quarter versus last quarter is lower, and it's primarily three things. Number one is, we got D&O insurance reimbursement in Q2 of 2022. That's number one. Number two is, we also had a land sale, obviously, number three is the higher interest expense. There's a little more exposure to floating rate debt there. I think the spread difference between our FFO contribution from TRG to Q2 of 2022 over 2023 was how many cents? $0.07, something like that?

Adam Roy (Chief Accounting Officer)

Yeah, $0.07.

David Simon (Chairman, CEO, and President)

$0.07. Okay, see, I still remember numbers. Our FFO contribution from Taubman TRG, where we own 80%, was $0.07 lower this quarter than Q2 of last quarter, of 2022. That might be helpful to you. Those are the order of magnitude. If there's any details on that, you know, call Tom or Brian. That's generally it. We had a lower contribution. Is that the right number, Adam?

Adam Roy (Chief Accounting Officer)

Yeah.

David Simon (Chairman, CEO, and President)

Okay, thank you. That's the right number. There's really not much to ask.

Greg McGinniss (Director)

Okay, thanks.

Operator (participant)

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

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Hey, good evening out there.

David Simon (Chairman, CEO, and President)

Good morning.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Can you talk about-

David Simon (Chairman, CEO, and President)

We're not actually... To be technical, we're really not out there. We're actually in New York City today. You know, I know Indiana is considered out there, which, you know, I, 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 (Managing Director and Senior Equity Research Analyst)

I'm not too far from you.

David Simon (Chairman, CEO, and President)

All right, cool.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

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 student loan payments, and what you think that'll do or impact that'll have on the business, and maybe some commentary also on 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, CEO, and President)

Yeah. I, I would say we're actually optimistic on the back half of this year because, you know, comps, or sales, I should say, in the second half of 2022, really started to decelerate, you know, because of the, you know, obviously, the, the, increase in interest rates, gas prices, inflation. I think across the board, our comps get easier for our retailers in the second half. We're actually optimistic, and I think generally, the economy, as we all know, is, you know, seems to, you know, relatively stable. Obviously, it's a very uncertain world, so, you know, anything can happen. We're actually optimistic on sales for the second half. We expect it to, you know, to comp up on...

With respect to bad debt, we're not seeing, I mean, it continues to be lean and mean.

Yeah.

you know, it's a little more than maybe last year, but it's like, it's still comparatively historical lows.

Yeah.

Haendel St. Juste (Managing Director and Senior Equity Research Analyst)

Okay, thank you.

David Simon (Chairman, CEO, and President)

Thank you.

Operator (participant)

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

Linda Tsai (Senior Equity Research Analyst)

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, CEO, and President)

I would hope so, yes.

Linda Tsai (Senior Equity Research Analyst)

Any color around that?

David Simon (Chairman, CEO, and President)

Which is not, not one of my qualities. There, that was the most succinct answer I've had all day. Did you have another question, Linda?

Linda Tsai (Senior Equity Research Analyst)

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, CEO, and President)

Yeah, I, I think Brian McDade and Tom Ward felt because we're doing. These are only consolidated assets, so you know, we have a big franchise operation with Starbucks in terms of our, you know, our, you know, where we franchise some Starbucks location, plus, obviously, we're building hotels. You know, and it was all lumped into the other income, other expense, and we thought instead of having all the questions on, you know, why is this number growing and this number growing, we kinda, we just felt like it would be better to separate it.

Yeah.

For your, believe it or not, for your benefit.

Linda Tsai (Senior Equity Research Analyst)

Then how would we model that going forward?

David Simon (Chairman, CEO, and President)

Look, I think the hotel business is pretty straightforward in that, you know, we're building it, we have certain returns, and I think, you, you know, we, we pretty much outline our returns in our 8-K, so I think that's pretty. You know, obviously, it takes time for apartments or hotels or any mixed use to, you know, to stabilize, but I think that that will be pretty easily. In the end of the day, the Starbucks business is not over. It's not even material, so, you know, there's 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.

That's not an overly material number. I, you know, we can kind of give you order of magnitude of revenue and expense. The only problem this year, it really, some of these just came on board, so, you know, I'd say to you in 2024 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. If that helps?

Linda Tsai (Senior Equity Research Analyst)

Yes, thanks.

David Simon (Chairman, CEO, and President)

Sure. Okay. Thank you.

Operator (participant)

Our next question comes from Craig Mailman with Citi. Please proceed with your question.

Craig Mailman (Director and Equity Research Analyst)

Good afternoon. Da-David, just a, 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 were any other puts and takes that moved around with guidance this quarter, where maybe this wasn't the sole driver, but maybe something operational and, you know, this could have offset something else? Just trying to get a sense that, was this the reason 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, CEO, and President)

No, I mean, I think we're always pretty conservative. You know, we'll see how the, how the... You know, we're always trying to beat and improve our numbers. I think we have as good a history as anybody to do that. And, again, we, we always I know it might frustrate folks, but, you know, there's always puts and takes in a company our size. I mean, we have $80 billion of assets. We're not a small strip center company that's got... You know, there, there's gonna be some volatility. We've got a $3.5 billion asset portfolio, that so far this year, has thrown off zero earnings. You know, 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 is our the number we gave you, which is our kind of FFO real estate earnings. You know, that was at $2.81, if I remember. That was hurt by $0.08 of rising interest rates. That's $2.89. You know, I think, you know, we give you comp NOI, you're gonna have some volatility because of OPI. I think OPI is really simple. $3.5 billion, you know, it's gonna make $0.50-$0.60, you know, and it's on our books for a lot less. Again, you know, in terms of investments and monetization and everything else associated with that, we're always gonna do the right thing. That's really it. I think, you know, obviously, overage rent has stabilized, so it's a little more conservative.

We wanna make sure we're conservative as we look at the year. If sales do grow on the back-end weighted, that we think, you know, we'll beat our overage number, which will mean we'll beat our guidance. You know, we don't have a crystal ball, but, you know, we've been, we're, we're-- 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, is probably the biggest, the biggest headwind, and then second, you know, the OPI side has been more back-end weighted than we originally anticipated. That's simple as that. The other thing to remember is, ABG just raised money at, you know, basically a $20 billion enterprise value, because of their growth.

We own 12% of the company. We get 0 FFO contribution from them because of all of their one-time charges. We had the same situation in Penny, that's why we are giving you this real estate FFO number. Put a multiple on it. It's too low. Your Whatever multiple you think it is, I would add a couple hundred basis points. It's too low. Add $10 a share, and that's our NAV, and then, you know, enjoy the rest of the summer. That's how I would think about it. Are you still there? Okay.

Craig Mailman (Director and Equity Research Analyst)

I am. Thanks, David.

David Simon (Chairman, CEO, and President)

Okay. You buy that argument?

Craig Mailman (Director and Equity Research Analyst)

You know, we, we can talk about it.

David Simon (Chairman, CEO, and President)

All right, perfect. Thank you for listening. I think we're out of questions, and I owe it to Don Wood. I want to tell you a story, okay? Don initially stole our 5:00 time period, so we were not very happy, and we said, we'll do it together. I said: You know what? we love Don. We want to be friendly. Not only did 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. If you don't like our time or you don't like his time, blame Don. I'll hand it over to Don. I'm like, I feel like Ed McMahon, and Don is Johnny Carson. Thank you.

Operator (participant)

Thank you. This concludes today's teleconference. You may disconnect your line.