Simon Property Group Inc. Q2 FY2021 Earnings Call

Thank you for standing by, and welcome to the Q2 2021 Simon Property Group Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. Operator instructions: Please be advised that today's conference is being recorded. Operator instructions: I would now like to hand the conference over to your host, Senior Vice President, Investor Relations, Tom Ward. You may begin.

Thank you, Lateef. And thank you all 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 Reuille, Chief Accounting Officer. Before we begin, 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 in 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. Please note, our 8-K filing is still in process with the SEC. However, it has not yet been accepted to date. In the meantime, as mentioned previously, the 8-K has been posted to our website. Now, for those of you 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 and one follow-up question, so we might allow everyone with interest the opportunity to participate. For our prepared remarks, I'm pleased to introduce David Simon.

Good evening. I'm pleased to report our business is solid and improving; demand for space in our well-located properties is increasing. I will turn to some highlights. Our profitability and cash flow have significantly increased. Second-quarter funds from operations were $1.22 billion, or $3.24 per share. Our domestic operations had an excellent quarter. Our international operations continue to be affected by governmental closure orders and capacity restrictions, which cost us roughly $0.06 per share for this quarter compared to our expectations due to the equivalent of two and a half months of closures. As we said in the press release, our quarter results included a non-cash gain of $118 million or $0.32 per share from the reversal of a deferred tax liability at Klepierre. We generated over $1 billion in cash from operations in the quarter, which was $125 million more than the first quarter. And additionally, compared to the second quarter of last year, our cash flow from operations was break-even due to the lockdown. Domestic and international property NOI combined increased 16.6% year-over-year for the quarter and 2.8% for the first half of the year. Remember, the first quarter of 2020 was relatively unaffected by the COVID-19 pandemic. These growth rates do not include any contribution from the Taubman portfolio or lease settlement income. Malls and outlets occupancy at the end of the second quarter was 91.8%, an increase of 100 basis points compared to the first quarter. We continue to see demand for space across our portfolio from healthy local, regional, and national tenants, entrepreneurs, restaurateurs, and mixed-use demand, increasing day by day. Our team is active in signing leases with new and exciting tenants. The average base minimum rent was $50.03. Our average base rents were impacted by the initial lower base rents we agreed to in addressing certain tenant COVID negotiations in exchange for lower sales breakpoints. If variable rents that were recognized in the first half of the year were included, it would add approximately $5 per square foot to our average base minimum rent. Leasing spreads declined again due to the mix of deals that are now included, as well as the activity that has fallen out of the spread given its rolling 12-month nature and metric. New leasing activity that has affected the spread includes large-footprint entertainment, fitness, and large-scale retailers. These big-box deals reduced our opening rate as they are included in our spread metric. As a reminder, the opening rate included in our spread calculation does not include any estimates for percentage rent-based income based on sales, as I mentioned earlier. Leasing activity accelerated in the quarter. We signed nearly 1,400 leases for approximately 5.2 million square feet, and have a significant number of leases in our pipeline. Through the first six months, we signed 2,500 leases for 9.5 million square feet. Our team executed leases for 3 million more square feet, or approximately 800 more deals, compared to the first six months of 2019. We have completed nearly 90% of our expiring leases for 2021. We recently had a deal committee, and what I'm told by my leasing folks is that was the most active deal committee they've had in several years. Now, retail sales continue to increase. Total sales for the month of June were equal to June 2019 and up 80% compared to last year, and were approximately 5% higher than May sales. If you exclude two well-known tenants, our mall sales were up 8% compared to June 2019. Multiple regions in the U.S. recorded higher sales volume in June and for the second quarter compared to our 2019 levels. We're active in redevelopment and new development. We opened West Midlands Designer Outlet, and we started construction in the western Paris suburb for our third outlet in France. At the end of the quarter, new development and redevelopment was underway across all our platforms. For our share of $850 million, our retail investments posted exceptional results. All of our global brands within SPARC Group outperformed their budget in the quarter on sales, gross margin, and EBITDA, led by Forever 21 and Aeropostale, SPARC's newest brand; Eddie Bauer also outperformed our initial expectations. We're also very pleased with JCPenney results. They continue to outperform their plan. Their liquidity position is growing, now $1.4 billion, and they do not have any outstanding balance on their line of credit. Penney will launch several private national brands later this year, as well as their new beauty initiative. Taubman Realty Group is operating their 2021 budget at a level above debt service and above our underwriting. Our portfolio shows resilience as sales are quickly returning to pre-pandemic levels. Year-to-date through June, retail sales are 13% higher than the first half of 2019. As you would expect, we've been very active in the capital markets. We refinanced 13 mortgages in the first half of the year for a total of $2.2 billion, our share of which is $1.3 billion, at an average interest rate of 2.9%. Our liquidity is more than $8.8 billion, consisting of $6.9 billion available on our credit facility and $1.9 billion of cash, including our share of JV cash; our liquidity is net of $500 million of U.S. commercial paper that was outstanding at quarter-end. Dividend: we paid $1.40 per share in cash on July 23rd for the second quarter. That was a 7.7% increase sequentially and year-over-year. Today, we announced our third-quarter dividend of $1.50 per share in cash, which is an increase of 7.1% sequentially and 15.4% year-over-year. The dividend is payable on September 30. Going forward, we are returning to our historical cadence of declaring dividends as we announce our quarterly earnings. Now, guidance. Given our results for the first half of the year, as well as our view for the remainder of 2021, we are increasing our full-year 2021 FFO guidance range from $9.70 to $9.80 per share to $10.70 to $10.80 per share. This is an increase of $1 per share at the midpoint, and the range represents approximately 17% to 19% growth compared to 2020 results. Before we open it up to Q&A, I wanted to provide some additional perspective. First, we expect to generate approximately $4 billion in FFO this year. That will be approximately a 25% increase compared to last year and just 5% below our 2019 number. To be just 5% below 2019, given all that we have endured over the last 15 to 16 months, including significant restrictive governmental orders that forced us to shut down, is a testament to our portfolio and the Simon team. Second, we expect to distribute more than $2 billion in dividends this year. Keep in mind, we did not suspend our dividend at any point during the pandemic and in fact, we have increased our dividend twice already this year. Now, just a point on valuation, and I tend not to talk about it, but I felt it was appropriate today. Our valuation continues to be well below our historical averages when it comes to FFO multiples compared to other retailers and the S&P 500. Our dividend yield is higher than the S&P 500 by more than 250 basis points, treasuries by 325 basis points, and the REIT industry by 150 basis points. As I mentioned, our dividend is growing. Our company has a diverse product offering that possesses many multiple drivers of earnings growth, accretive capital investment opportunities, and a balance sheet to support our growth. We are increasing our performance, profitability, cash flow, and return to our shareholders. And we're ready for questions.

Thank you. Operator instructions: Our first question comes from the line of Steve Sakwa of Evercore ISI. Your line is open.

Thanks. Good afternoon, David. I wanted to just start on the occupancy trend, which was up pretty nicely from 1Q to 2Q. And you talked about the leasing activity that you had in the quarter and the pipeline. Could you just maybe share with us what your expectations are for occupancy by the end of this year, and what's embedded in the guidance?

Well, the guidance is affected by the continuing uptrend. We expect our occupancy by year-end to increase from the levels that we have right now. I don't have a specific number that I am going to give you, but as I mentioned to you, Steve, talking to my heads of leasing, we are—maybe this is an overstatement— we're tickled pink by the demand from new retailers and tenants that are surfacing. There are many opportunities with restaurants, mixed-use developments, and I mentioned to you our deal committee had more deals than it's had in a few years. Look, we still have a hole to dig out of because of the bankruptcies that we had to confront with the pandemic. But I'm very pleased with the activity, the mojo that we have in leasing, the work our personnel are doing there, and the creativity. It's pretty encouraging.

Okay. And maybe just as a follow-up, just on the leasing commentary. I know that you guys had to make some accommodations to the retailers and you lowered the base rent and took more percentage rent. Given that sales seem to be coming back very quickly, do you sense that that dynamic is changing at all as you’re having these current discussions about future leasing? Or do you still anticipate having to have a kind of lower base and take more upside going forward?

Look, it's tenant by tenant. The strategy we adopted at the height of the pandemic is playing out better than we expected. We made the right move. We got the renewals done. We accommodated the vast majority of retailers, assuming they were reasonable in their approach. We kept our properties functioning. We bet on the rebound, and we're seeing the benefits of that. As I look back, I'm not certain I would change a lot. There will always be a few situations where we'll bet on retailers because we have confidence in our properties and the retailers we're doing business with. I think physical retail, despite what some pundits say, is here to stay. People really like to shop in the physical world. Don't believe everything you hear on television. We've got the evidence.

That's it for me. Thanks.

Thank you. Your next question comes from Alexander Goldfarb of Piper Sandler. Please go ahead.

Good afternoon, David. You guys have had a really good quarter—amazing to see guidance up by a buck. But continuing on Steve's question, it's amazing on the dividend rebound, the leasing activity, and everything else. When people look at some negatives, they see negative 22% re-leasing spreads, and that negative spread is widening. I understand you did deals to get the Company through, makes sense. But from an expectation standpoint, what do you think the cadence is over the next few quarters of this spread, and how do we relate that to the cash flow growth and everything else that's going on? There's a disconnect between your cash flow recovery and this negative spread metric.

Alex, stats don't mean as much to me as they do to you because I look at cash flow growth. There's a lot that goes into cash flow growth—much more than spreads. The sole reason the spread is down to 22% is because of the mix and the COVID deals we did. The mix is such that we had a lot of boxes that rolled out that were low rent, and we got the benefit of that. Now those are out of our 12-month numbers. The new leasing we're doing is in it, and that's the sole reason. If you do a deal with a big-box tenant that pays $15 a foot but the expiration of that box was 15 months ago with $3 a foot, you may have made a $12 spread, but because of how our rolling calculation works, you don't see it. It's not space-by-space. If I get to space-by-space, the trend would not be anywhere near that. We had a lot of boxes that were pre-COVID at low rents. We didn't do much box leasing for the last 12 to 14 months because of the pandemic. That's the sole reason. It's the math and the mix.

Yeah. I do. I wasn't about to volunteer Tom to rehash space-by-space. But I do understand what you're saying.

This is not space-by-space. If you compare over a longer period, we've got a positive spread. It should make sense—it's the math.

No, I can see the math as evidence in the earnings growth and cash flow growth. You've explained it well. When understanding this, it's clear. The next question is on the rise of the COVID Delta variant. You're seeing tremendous leasing and restaurant demand. Your malls and outlets are throughout the country. From your view and what your managers and tenants are saying, do most people accept COVID as part of life and therefore it doesn't interfere with shopping and restaurants, or is there a concern that people may start to pull back from the increased activity we've seen this year?

That's a very good question. I'll give you my personal view. I checked our properties in Delta hotspots. We have malls in some of those areas. For example, in Springfield, Missouri, which is a market we own, I checked whether we've seen an uptick in COVID cases at the mall. We get reports from retailers and our staff. The reality is we haven't seen an uptick in COVID cases among mall staff or retailers. The mall is safe. Even though some counties are discussing indoor restrictions, we've seen no evidence of increased cases tied to mall operations. In Florida, where there are upticks, we have not seen increases in our enclosed malls among staff or management. I personally think people will deal with Delta. I'm hopeful people will get vaccinated. We're not going to mandate vaccines; we'll encourage them. We will keep being as safe as possible, and where we need to mask up, we'll mask up. Consumers have dealt with this and are moving forward. I'm hopeful we won't return to lockdowns. Looking at various countries, COVID trends tend to revert to the mean. Let us do our business, mask up if needed; the mall is safe.

Thank you, David.

Thank you. Our next question comes from Rich Hill of Morgan Stanley. Your question, please.

Good afternoon, David. I want to focus on the income from unconsolidated entities. If I'm reading it right, you had a healthy increase in that line item to around $348.5 million versus $15 million last quarter, despite depreciation and amortization being approximately flat year-over-year. That suggests something healthy is happening. Can you give more transparency on what's driving that beyond what you said in the prepared remarks?

We're always transparent. The Klepierre deferred tax gain ran through that line, and our retail investments also run through that. Those are the two major pieces of the increase, along with positive operations in our joint venture properties—especially Taubman. We also had increased depreciation and amortization associated with it, but that's not overly material to the big increase.

That's it.

Okay. Fellas agree with my assessment.

Thank you. I'll follow up offline with Brian and Tom on that. I do want to come back to guidance on core NOI—previously it was maybe 4 to 5%, closer to 5%. You obviously had a big quarter. How do you feel about that now, and do you see potential for upside from that 5%?

Yes, we should outperform that.

Okay, that's my two questions. I'll get back in the queue. Thanks, David.

The next question comes from Michael Bilerman of Citi. Please go ahead.

Great. Just two quick ones. First, on the dollar increase to guidance, can you break that down into major buckets? The buck increase implies roughly $380 million more. I assume part is the $0.32 deferred tax liability reversal, which leaves about $0.68 unexplained. Can you bucket it into retailer investments, core, and others?

You're right. $0.32 of that is because of the deferred tax, and the remaining $0.68-plus is from core-plus retail. We're not going to provide a detailed breakout of which is which. The good news is our core is beating our initial budget, and retail is in the same spot, performing better than expected.

Your original retailer investment guide was like $0.15 to $0.20. It appears you may have exceeded that just this quarter, so that's what I was trying to get at since that line is more volatile.

That's fair. We won't break out the beat beyond the $0.32 deferred tax item. The rest is retail and core, and I hope it will be more than that.

Right. And is a retailer component supporting the line?

I mean, it's the retailer multiples—retail is part of the core. What's core and what's non-core is a longer discussion.

Understood. Second question: given your perspective now, you are increasingly involved as an owner/operator in retail through investments. I'm curious what you're seeing from the retailers you own in terms of turning their businesses around versus your role as landlord. What are you doing at the retailer level to bring people into the assets, and how are you addressing the omnichannel world relative to being a landlord?

That's a long answer, but the short version: the retailers we acquired would likely be gone if we hadn't invested. I'm most proud that we've kept companies alive that otherwise would have been liquidated. By focusing on the business, cash flow, and the consumer with patient capital, we could stabilize and turn these businesses around. SPARC operations employ thousands of people; combined with Penney, it's well over 50,000 to 60,000 people. Don't underestimate that. We saved companies that were essentially roadkill. ABG has been a great partner, adding marketing and sourcing expertise; Brookfield has also been a terrific partner. Regarding omnichannel, many of these companies lacked the capital to invest; the store is very important. In many cases, physical stores are critical to the omnichannel strategy, particularly for the retailers we own. These companies are surviving and prospering because of their physical footprint, not only e-commerce.

If I have a vote, there's a difference between retailer earnings and core Simon earnings—you're running different business models. The market will price it as it sees fit, but having the detailed components is helpful.

Traditionally you're right. If you look at where retailer multiples are compared to ours, it's a different debate. We hear you and we understand the issue. We'll see the materiality over time and address how to provide information that makes sense.

Okay. I appreciate the time, David. Have a good one.

Thank you. Our next question comes from Caitlin Burrows of Goldman Sachs. Your question, please.

Hi. I was wondering about conversations you're having with retailers. In the past, and even last quarter, some retailers were giving you a hard time on rent payment or rent negotiations. Can you provide an update on how those conversations are going, and whether that is impacting lease termination fees?

We're really down to a couple of folks; it's winding down. Everybody has lived up to their COVID deal in most cases. Other than one or two, it's business as usual—how do we grow strategically. It was tough for everyone during the unprecedented events, but I think it's mostly behind us. Our collection rates are getting back to normal; we have two or three folks still out there, but if they stay out there, we will handle it. It's pretty much behind us unless something unexpected occurs.

Got it. And a quick one on other income: lease settlement income was up in the quarter and other income was up. Can you give some detail on those line items?

Lease settlement income was up a few million dollars, not material—maybe a couple of cents. We sold one residential property at a gain, and we had a significant increase in Simon Brand Ventures, which probably was the bigger grower of that number.

Caitlin, we saw a substantial increase in Simon Brand Ventures, our gift card business, and some activity in our mall food operations, which were largely non-existent in the second quarter of last year.

Got it. Okay, thanks.

Thank you. Our next question comes from Derek Johnston of Deutsche Bank. Your line is open.

Hi, everybody. What do you need to see to green-light additional transformational mixed-use projects, especially at Taubman assets which make sense? Northgate never skipped a beat and Phipps Plaza looks back on track. I recall the office component being temporarily shelled—what do you need to see to ramp additional transformational projects, and is there a laddered development program or material ongoing entitlement requests you can share?

Phipps is all systems go. We expect to finish everything by the end of 2022: the new Class A office, Nobu Hotel, Life Time athletic club. We did pause during COVID but restarted a few months ago. We're finishing those projects and I'm excited about that. We took about a 12-month hiatus and we're back at it. In some cases we may decrease new retail square footage, but it's more mixed-use than ever. Permitting has restarted on projects like Brea in Orange County and Stoneridge in Northern California; plans have adjusted but redevelopment of old department store boxes is active across the board. With Taubman, there are opportunities but not a plethora of empty boxes—it's great real estate and we're working it. I think our properties, especially in suburban markets, will be appreciated going forward and will be centers of activity.

Okay, great. Quick follow-up: the 13-story Class-A office building—Life Time is in a separate building, correct? Are you pre-leased to Life Time or others, or building spec because you feel better in general?

Life Time is its own separate building built on top of a world-class food hall we're doing with C3. Inside Life Time athletic they will have co-working, but the office building is separate. We're building the 13-story office spec, although we just signed our first 90,000 square foot lease. The short answer is yes, we're moving ahead.

Thank you.

Thank you. The next question comes from Craig Schmidt of Bank of America. Please go ahead.

Thank you. Looking at the guidance for 2021, you'll have recovered half of the loss from your previous peak on FFO per share. Thinking about the second half, is that going to be harder to recover or easier?

I didn't fully catch your connection earlier, Craig. If you're asking quarter-over-quarter, the brunt of COVID abatements and relief occurred in Q2 and Q3 of last year. The comparison of Q3 2021 versus Q3 2020 should show a pretty big gap; by Q4 we had dealt with most of the items. If that's your question, I hope that helps.

Great. And do you foresee any changes in the REIT rules that might allow you to grow your retail or other businesses beyond previous limitations?

It's hard to know, but I'm hopeful. There are limitations—our retail investments are in a taxable REIT subsidiary (TRS), and that P&L shows a significant tax expense. The rules were written long ago; given the benefits our investments have provided to working families and employment, I hope lawmakers see the value in updating arcane rules. There's hope, but no certainty.

Understood. Thanks.

Our next question comes from Floris van Dijkum of Compass Point. Your line is open.

Thanks for taking my question. David, I have a feeling of déjà vu, a bit like after the great financial crisis. Maybe if you can—it's regarding tenant sales. Very encouraged by your statement that retail sales in June equaled 2019 levels and were up 5% from May. Can you give more breakdown, particularly as it comes out of the first quarter? Also, did I hear you correctly that Taubman sales were 13% ahead of 2019 levels?

Correct, Taubman sales were 13% ahead of 2019 levels. It's hard to make predictions, but the important takeaway is that physical shopping matters; people like to shop in person. We're not back to all cylinders yet—tourist centers remain impacted and parts of the country like California were slower to reopen—but the data is encouraging. The outperformance spans luxury and lower-AUV brands like Aeropostale and Forever 21, which is encouraging across the board.

Great. If I can follow up, you talked about lease spreads not being like-for-like. If your average sales get to 2019 levels, what's the impact on effective rent relative to reported rents?

That's complicated and retailer-by-retailer. For the first six months, our estimate is that had we not lowered breakpoints for COVID relief, we would have seen about $5 more per square foot in base rent—that gives some indication. Spreads are affected by mix; focus on cash flow growth, which is driven by sales growth and occupancy. The spread metric can look worse because of mix, but cash flow improved materially.

Thanks, David. Appreciate it.

Thank you. Our next question comes from Mike Mueller of JPMorgan. Your line is open.

So Q2 looks like it implied about $292 million without the deferred tax reversal. If your full-year guidance implies about a $250 million quarter average for the balance of the year, what level of income in Q2 won't recur into the back half? Any nonrecurring items besides the Klepierre deferred tax gain?

The only clear non-recurring item is the Klepierre deferred tax gain. We can't predict future variability in retailer investments and other items, and there will always be nonrecurring items like lease settlements, property sales, etc., that ebb and flow. But the deferred tax reversal is the one-time gain of $0.32 per share.

Were there any prior period collections in Q2 that were significant?

We saw no recovery, Michael.

Yes.

Got it. Thank you.

Thank you. Our next question comes from Vince Tibone of Green Street. Your line is open.

Hi. It seems variable rent is growing in the portfolio. Could you help frame how much this is shifting? For leases you're negotiating today, what's the split between contractual rent and expected variable rent? How is that different from before the pandemic?

If we're willing to bet on a property's prospects and a retailer is cautious, we're willing in some cases to accept lower base rent in exchange for upside. It's not the majority—it's certain lease rollovers. On average about 12% of space rolls over each year. Last year had more because of bankruptcies where leases roll by default. We made lower breakpoints in some cases to get income backups with sales. Going forward we're pretty much back to trying to get appropriate base rent with natural breakpoints for percentage rent. We have not yet seen the former large overage rent from outlet portfolios due to reduced foreign tourism; that will come back as tourism recovers and will manifest in additional percentage rent.

Thank you. It sounds temporary rather than a secular shift. One more: you were active in the mortgage market recently—color on recent trends and ability to get non-recourse financing on high-quality malls today?

It's significantly improved, but not easy. Retail is still a tougher market. That said, we have an unsecured market and don't necessarily need mortgages as much. Sponsorship matters. The mortgage market has improved but is not back to where it should be.

Thanks for the color.

Thank you. Your next question comes from Ki Bin Kim of Truist. Your line is open.

Thanks. Can you talk about the retailer investments—$195 million of NOI? I would've thought that level of income would load toward the fourth quarter given seasonality. You previously guided to $260 million of EBITDA—should we expect a similarly strong quarter in Q4, or was there something unique this quarter?

You're right that retail investments are typically back-end weighted and we budgeted that ramp. We outperformed in the first six months; we budget for ramp-up in the second half as well. There wasn't necessarily a one-time item other than the dramatic outperformance of our retail investments in the first six months.

Okay. And what's your latest on acquisitions? Any opportunities compared to your internal hurdles?

There really isn't much to report—no action of note. We're not actively pursuing large acquisitions at the moment.

Okay, thanks.

Thank you. Our next question comes from Linda Tsai of Jefferies. Your line is open.

Hi. With buy online and pickup in-store trends, how do you think retailers are considering occupancy cost ratios? Is this similar to the approach of the retailers you own?

If a sale occurs through buy online pickup in-store, that sale counts toward our sales calculation. It's included in occupancy cost discussions—it's not excluded.

Got it. Any sense of how comps have trended for your retailer investments in recent months relative to 2019 levels?

Generally, they're above 2019 levels, except JCPenney which is still below because their business was more affected and went through bankruptcy in 2020. The rest of our retail investments are above 2019 levels pretty handily.

Thanks.

Thank you. Our next question comes from Haendel St. Juste of Mizuho. Your line is open.

Hey, good evening. On leasing: shorter-term deals and percentage rent deals are somewhat more prevalent. Over the next couple of years and especially 2023 to 2025, do you assess a higher likelihood that leases remain shorter-term and more percentage rent, or will they revert to longer-term fixed rent structures? Also, any color on average lease terms you're signing recently?

Term hasn't changed significantly. Short-term deals are used when fair market value is uncertain. Retailers are cautious due to the pandemic, but once they invest in their stores they prefer long-term leases. Short-term leases are used strategically—to test concepts, to reposition space, or to bridge to a better long-term tenant. I don't think the industry has fundamentally moved to short-term as the new normal. Good retailers who invest in stores want longer-term certainty to support their investments and omnichannel capabilities.

I was also wondering whether the schedule of expirations that have shorter-term leases signed over the last year or two could create a larger anniversary of expirations in 2023 to 2025—do you view that as a concern?

Because of the quality of our portfolio, I'm not concerned. We may be negotiating from a stronger position because our properties and sales look good. Short-term deals are often a deliberate bet on the future and we've generally been right in those bets, though not always. We make those judgments carefully.

Understood. One follow-up: on leasing spreads and the newer leases with lower percentage rent thresholds, can you provide a figure net of those newer leases?

We could construct many different ways to present the data if we wanted to paint a more favorable picture, but we put all the items into the metric and the number is the number. Spreads are not what's driving our business; cash flow growth is.

Okay, thank you.

Thank you. Our next question comes from Greg McGinnis of Scotiabank. Your line is open.

Hey, David, hi team. One concern is potential longer-term drag from lower-quality assets if they remain primarily retail. How are you thinking about investing or not investing across different quality bands to extract long-term value from those assets?

It's not much of an issue for us—it's a de minimis number. If a business is profitable and meets our cash flow objectives, we may not invest if growth isn't there, but it's a marginal issue. We should do a better job explaining portfolio quality and breadth; anyone concerned should call us and we'll walk them through the assets. If you did that, it likely wouldn't be a material concern; on the margin it might be $0.03 to $0.05.

Appreciate that. Could you touch on operating performance differences between higher-end and lower-end assets? We used to get NOI-weighted numbers.

Occupancy in EBITDA-weighted terms is about 93% versus 91.8% overall. Average base minimum rent is higher in higher-quality assets; spreads are roughly similar and total rents are similar. Sales are relatively consistent on a percent basis. The rolling 12 is affected by downtime but the most important number is occupancy and it's a bit better in higher-quality assets.

Okay. I'm trying to understand if there will be a higher level of dispositions post-pandemic as the retail market evolves and how the portfolio is addressing that.

We've been selling; we sold a residential asset at a sub-4% cap rate. A couple of retail properties are earmarked for sale, but the markets are not quite there yet. We'll see how things progress.

Thank you. Our next question comes from Juan Sanabria of BMO Capital Markets. Please go ahead.

Hi. On the guidance—given your outperformance on retail investments and Klepierre one-time item—should we think the guidance implies conservatism built into the back half, given volatility on the retail side? Or is there another reason for the implied sequential decline in the back half from a clean Q2 run rate?

We beat our first quarter and second quarter. We hope to beat third and fourth as well, but we're in the midst of those periods. We feel pretty good about our positioning, and we set guidance conservatively to reflect remaining uncertainty.

Follow-up: mall operating hours—are those back to pre-pandemic levels, and if not, why?

They're inching back to normal. We might be an hour short Monday through Wednesday, but by Thursday through Saturday we're pretty much back to normal. It's something we monitor closely with retailers and it's increased materially since the early reopening days.

Is that due to labor availability or something else?

It's largely back to normal; retailers have varied preferences, but overall operating hours have increased and we're monitoring and managing it with them.

At this time, I would like to turn the call over to David Simon for closing remarks.

All right. Thank you. Have a great rest of your summer and we'll talk soon. Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.