Greetings, and welcome to the Simon Property Group fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.
Thank you, Hector. Good evening, and thank you for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer, and President. Also on the call are Brian McDade, Chief Financial Officer, and Adam Reuille, Chief Accounting Officer. A quick reminder that statements made during this call may be deemed forward-looking statements within the meaning of the Safe Harbor of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially due to a variety of risks, uncertainties, and other factors. We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.
Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com. Our conference call this evening will be limited to one hour. For those who would like to participate in the question-and-answer session, we ask that you please respect our request to limit yourself to one question. I'm pleased to introduce David Simon.
We had a very busy and productive quarter to end a very successful year. We recorded occupancy gains, record retail sales, and demand for our space from a broad spectrum of tenants is robust, and our other platform investments had strong results. We generated nearly $4.5 billion in funds from operations in 2021 or $11.94 per share. The $4.5 billion is a record amount for our company for a year. Coming off a difficult year of 2020, these results are a testament to our relentless focus on operations, cost structure, active portfolio management, smart investments, coupled with a coherent strategy. Fourth quarter funds from operations were $1.16 billion or $3.09 per share.
Included in the fourth quarter results was a net loss of $0.10 per share from a loss on extinguishment of debt and a write-off of pre-development cost, partially offset by an after-tax gain on the sale of equity interest. Our domestic operations had another excellent quarter to conclude the year. Our international operations improved in the quarter. Domestic property NOI increased 22.4% year-over-year. I'm sorry, for the quarter, and 12% for the year, including our share of NOI from TRG and our international properties. Portfolio NOI increased 33.6% for the quarter and 22.3% for the year. Mall and outlet occupancy at the end of the fourth quarter was 93.4%, an increase sequentially of 60 basis points and 260 basis points year-over-year.
Average base minimum rent was $53.91. Add $8 to that if you included variable rent. For the year, we signed more than 4,100 leases for a total of more than 15 million sq ft. This was the highest amount of leasing activity we have done over the last six years. Reported retail sales continued in the fourth quarter. Mall sales for the fourth quarter are up 8% compared to the fourth quarter of 2019, and up 34% year-over-year. Reported retail sales per sq ft reached a record level for 2021 at $713 per foot for our mall and outlet business and $645 for The Mills.
These results obviously are impressive, particularly given the lack of international tourism for 2021. Occupancy costs at the end of 2021 are the lowest they've been in five years at 12.6% year-end. We opened two new developments in 2021, one in the U.K. and a premium outlet in South Korea. Construction continues on our 10th outlet in Japan, opening this fall, and Normandy, France, opening in the spring of 2023. We completed five significant redevelopments. We added densification components with the opening of two hotels and the completion of an NHL headquarters and practice facility. Progress continues on the densification of Phipps Plaza, which will open this fall. We have a significant pipeline of redevelopment projects which will be funded from our internally generated cash flow. Let me turn to our other platform investments.
They produced terrific results in 2021, namely JCPenney, SPARC, ABG, and RGG, which is Rue Gilt Groupe. JCPenney's results were impressive. Their liquidity position is growing, now at $1.6 billion. The company de-levered their balance sheet, has no borrowings on their line of credit. CEO Marc Rosen strengthened his management team with a new CIO and Chief Digital Officer. RGG, including our Shop Premium Outlets marketplace, growth continues, and we expect continued investment in 2022 to drive customer acquisition and sales growth. SPARC Group will be the operating partner for Reebok in the U.S. It's a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach.
TRG, Taubman Realty Group, which we own 80%, posted great operating metrics and results, which also beat our underwriting. Reported retail sales was $942 per sq ft, a 31% increase year-over-year. Occupancy also increased 210 basis points for the year. Now turning to the balance sheet. We've been active in the debt markets. We amended and extended our $3.5 billion revolving credit facility with lower pricing grid for five years. We issued $2.75 billion of senior notes, EUR 750 million notes, completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.14%, repaid more than $4 billion in debt, and delevered by $1.5 billion.
With the recent January notes offering, our liquidity stands at $8 billion. Now, just to turn to dividend, we paid out $2.7 billion in cash common stock dividends last year. Today, we announced a dividend of $1.65 per share for the quarter, a year-over-year increase of 27%. This dividend is payable on March 31. Now just to go through guidance for 2022. Our FFO guidance is $11.50-$11.70 per share. When looking at our 2022 FFO guidance, it is important to note the following items as compared to 2021 actual results. Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klépierre. Approximately $0.32 per share in gains related to our investment in Authentic Brands Group.
These gains were partially offset by approximately $0.14 per share in debt extinguishment charges, resulting in an adjusted FFO of $11.44 per share for 2021. 2021 also included a significant increase in overage and percentage rent compared to prior years, and lease settlement income of approximately $0.10 higher than historical average. Our guidance reflects the following assumptions. Domestic property NOI growth of up to 2%. Approximately $0.15-$0.20 drag on FFO from additional investments in RGG and SPO, JCPenney, and the Reebok integration cost of SPARC, all to fund future growth, the impact of a continued strong US dollar versus the euro and yen compared to 2021 levels, and continued muted international tourism, no significant acquisition or disposition activity.
Finally, I really wanna thank the entire Simon team for their tireless work that they continue to do for our retailers, shoppers, and communities every day, and for bouncing back in 2021 after a very difficult 2020. Make no mistake about it, 2021 was a great year. I think Tom knows, but I think our FFO guidance was, which was consistent with basically the analyst community, around $9.60 per share, and we reported $11.94 per share. That's a heck of a year. I'm very excited about our plans for 2022 and the future growth prospects of our company, and we're ready for any questions.
Thank you. At this time, we'll be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. In the interest of time, please limit yourselves to one question. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Steve Sakwa with Evercore ISI. Please proceed with your question.
Thanks. Good afternoon, David and team. Thanks for the detail, or at least the additional disclosure on the guidance. I guess, just sort of tying back to the leasing comment you made about the 15 million sq ft being kind of a record year for the last six years. You know, what are your expectations for leasing activity in 2022, and how that might tie into further occupancy gains? I also noticed that the leasing spread information that you used to provide in the supplemental wasn't there anymore, and I was just wondering if you could comment on kind of pricing trends that you're seeing. Thanks.
Sure. I think, you know, we're very optimistic, Steve, about 2022 leasing. A lot of new business with a lot of new tenants is the goal. We expect to increase occupancy compared to year-end 2021. Obviously, the last couple years with COVID, we've been working with our retailers, so we haven't quite had the level of pricing power that we'd like to see. We're starting to see that strengthen from our standpoint. We're still looking for win-wins between us and our clients. You know, we feel better that we'll continue to drive rental growth, you know, over time.
As you know, we took a bet that the world and bricks and mortar was not going to end, so we, you know, when we did, you know, deal with a lot of renegotiations that came about because of COVID, you know, we got, you know, we tried to make it back on sales 'cause we believed in our business. That's why you've gotta look at that, you know, what we're achieving on the either percentage or overage rent, which historically we haven't taken into account in our spreads. One of the reasons why we have done away with the spreads, that and the fact that there's no industry uniformity, and more importantly, there's very few retail real estate companies that are doing it. You know, we bet on our company.
We made the right bet. It produced the results that we wanted to see in 2021, frankly, above our expectations. The strength of our portfolio and the demand is there, so now we just gotta execute it. I do think there's so much going on that I'd be remiss not to say it still takes a while to get stores open. With all the activity, we'll see some of that in 2022, but we're gonna see a tremendous amount of great new stores in the 2023 time period.
Great.
Thank you.
Our next question comes from Caitlin Burrows with Goldman Sachs. Please proceed with your question.
Hi, everyone. Maybe just a question on the guidance and, the retailer contribution part. David, I know that you mentioned that the 2022 guidance includes the $0.15-$0.20 drag from additional investments this year. I guess I was wondering if you could just go through, kind of what contribution, the retailers had in 2021, what the guidance assumes for 2022, and any more kind of, background you can give on what's causing that drag. I realize that it's for future growth, but what the impact in 2022 is and what's specifically driving it.
Well, yeah. I mean, the drag is all about future investments. We outlined a little bit on the call, but we're in a growth mode with Rue La La, Gilt and shoppremiumoutlets.com. So we're acquiring customers, we're marketing more, and we're building the technology out to serve those three platforms with great sales growth and marketplace growth, but that takes investment. So that's one element of it. Second element of it, as you know, JCPenney is building out its beauty business as well as its digital business. So again, it's the belief in the brand, you know, that's going to create the, you know, these unique opportunities, and we're gonna invest in doing that.
Finally, the Reebok integration will reduce the operating earnings from SPARC, just temporarily in 2022 as it deals with consolidating its operation. You know, we now have an office. Deal hasn't closed yet. It's gonna close at the end of the month. We have excess real estate, so we have to work through all of that. You know, the return for 2023 on that, you know, will be much more than whatever the investment is. All of these have the payback on RGG stuff is 16 months. They track it, you know, they track it by the nickel, penny, the same. I mean, very sophisticated businesses, but, you know, you got to invest for future growth. That's what we're seeing.
In terms of operations outside of that, Caitlin, we're basically more or less budgeting the same EBITDA, NOI levels for our investments, you know, our other platform investments other than these investments that I just mentioned.
Got it. Just one quick thing. You mentioned the Reebok integration will reduce SPARC earnings in Q2. Did you mean Q2?
I meant 2022. I'm sorry, 2022.
Got it. Okay. Thank you.
No problem.
Our next question comes from Rich Hill with Morgan Stanley. Please proceed with your question.
Hey, good evening, David. I wanted to talk about the dividend for a moment. You've raised it for three consecutive times. I think we've discussed in the past that it's well below where you were in 2019, despite free cash flow being similar to where you were in 2019. Can you maybe just elaborate on, you know, why not increase the dividend more here? Yeah, I recognize in the previous answer you were talking about in growth mode and investing in businesses. You know, is there a trajectory to get back up to $8.30 where you were, I think, prior to COVID?
Yeah. I mean, again, it would be my expectation over time that we'll, you know, we'll reach those levels. I think it's just abundance of caution. But, you know, if you look at Q-over-Q, it's a 27% increase. So I know sequentially it's not, but that's what we tend to do historically, is we tend to, you know, be flat in the Q1 area. We measure our taxable income, and as earnings percolate, we tend to raise with our taxable income. So I think we're really adopting what we've done historically. But our payout ratio is low. Our liquidity is strong, and I would expect hopefully, you know, that our dividend, you know, will continue to see the increases. Now it was dramatic increase, you know, from 2020 to 2021. You know, I'm hoping we'll continue a very positive trend.
Got it. Thank you. Just one more question. If I think back to this time last year, you initially guided to $9.50-$9.75. You put up a really healthy number this year. We see it at $11.36 ex the one-timers you mentioned. Not sure if we see eye to eye in that, but that's pretty close. You know, what would give you any confidence that 2022 could surprise to the upside just like 2021? Or do you view this year as more baked, so to speak, than 2021?
Well, the year's never baked, right? Look, I think the big variable that is always there is basically sales, you know, because we still have some COVID-oriented leases that have not rolled over, that we still are a little more dependent on sales than we would have said three, four years ago. That is why we're a little more cautious because, you know, as I'd like to say, we're as good as we are. We're not. We can't predict with certainty sales. I think I'm hopeful that when we talk to retailers, they still feel very good about the economy and what's going on.
Obviously, there's a lot of volatility in the world today, and we're not immune to that, so we just have to wait and see. You know, we are building off a terrific, you know, terrific 2021, so we'll see. You know, I am hopeful that, you know, we'll continue to produce growth, assuming that, you know, the everything holds together externally. You know, with our economy and so on. You know, we'll. There's no certainty, but I feel pretty good about where we stand.
Okay. Thank you.
Sure.
Our next question comes from Michael Bilerman with Citi. Please proceed with your question.
Great. Thank you, David. Good afternoon. David, I wanted to come back to sort of the growth that you're getting from a lot of these unique and differentiated investments that you're making, and just sort of how it ties back to this year's earnings forecast, but also that growth in the future. You know, you give us a couple of pieces, but they're all a little bit different to tie them all together. I'm just gonna use one for now, and maybe we can pivot off of that. If you just looked at your FFO from investments, which is on page 29 of the sup, which I recognize includes the Klépierre, but includes. Sorry, page 28, but includes all of these other investments that you're making, you're looking at 2021 at about $550 million, about $1.46.
You've now thrown out for this coming year, this $0.15-$0.20 drag from these investments that are being made. I'm just trying to reconcile, well, how much is in the $11.60 a share for all of these, which are both retailer investments as well as Klépierre. What sort of range are we thinking about, that's obviously gross, but then netted down by, I guess, $0.15-$0.20 for these other investments? I'm just trying to put it all together.
Well, I mean, it's pretty straightforward, but we really did not hear you well. Just to clarify what we did pick up, the NOI from investment is only Klépierre, and it includes our small interest in HBS, which is de minimis. Other platform or investment
Oh, contribution.
Okay.
The EBITDA.
The other NOI from other platform investments would include RGG, SPARC, JCPenney, our share of ABG. That's, you know, that's that line, just to clarify. I did hear that. Guys, did you hear the question?
I didn't hear past that.
Okay. Does that help you?
No, no. I'll try to be clear, David.
Michael, if you went back to the office.
I am in the office, David. I'm in the office.
You might be able to sound a little clearer, okay? I don't know. Maybe you can. I'm happy if you text it, we'll read it out loud, but we cannot hear you.
Well, I'm in the office. How about if I pick up my phone? Is that better for you, David?
Slightly, yeah.
I'm just trying to get you on page 28. You actually list the FFO contribution, right? $550 million from everything, right? $1.46. I'm just trying to triangulate what you earned in 2021 and how that compares to the $11.60 in 2022. You've given us a couple of nuggets of information, the $0.15-$0.20 drag. It doesn't net out to actually what's in guidance for these investments.
Well, again, the tax effect of that. Let's. There's no surprise. Our math is very simple. I'm sorry we've made money in all these investments. Now you have to pay attention to it. Unlike other people that make investments that lose money, we actually make investments that make money. These are the NOI. They're not. The tax line is below this. This is like an EBITDA number that we try to show the market. That's all that this is, and it's there for your information. The NOI from other platforms I've described. The NOI from investments is Klépierre and HBS, and we footnote corporate and other NOI sources. I don't know what else-
Yeah.
you want.
Because I'm looking at a different page.
The guys are happy to take the question offline.
Okay. Yeah, I was looking at page 28, not the NOI page. That's where the confusion was coming from, David. Maybe just.
Page 28. Okay.
You see the FFO of investments, right? That includes all of the FFO from all these great investments you're making. This is not a negative question, David, but this is a positive of stuff that you're doing.
Yeah, that includes everything lumped together and then takes a tax impact. Again, it's NOI, so it's pre-interest. You know, then obviously FFO's not, but we're happy to walk you through it.
Right.
Okay?
Well, that's exactly. Now we've gotten to the question, which is that's the number we do know, right? There's no ambiguity.
It's EBIT. Remember, retailers have, you know, depreciation that we don't add back.
Yep.
you know.
Of course.
So on and so forth. The guys will be happy to walk you through it.
Yeah.
We'll connect offline, Michael.
Okay. David, can you just talk generally, you know, your opening comment in the press release was all about unlocking value, and you've already done some of that through the transactions. How do you think about the initiatives that you wanna focus on this year, and what value is sitting in this platform for Simon shareholders?
Well, I mean, you know, given our level of cash investment, you know, if you were to look at it, you know, on a private equity basis, right? You know, we've made 20x on our investments. You know, and they're continuing to grow. SPARC, I think, is a good example, and RGG have great platforms that can continue to, you know, be a leader in their business.
Right.
Ultimately, you know, the market, you know, we'll see if we need to at some point in time, you know, monetize these or, you know, highlight the value. But it's embedded here, you know, at multiples that the market is ascribing to us. But frankly, the external market is probably valuing it more than you know than what it is today.
Right. That's where it's all the questions that I'm asking, David. These are positive things that you've done that we get asked by the investment community about trying to ask for more disclosure to try to get to ascribe that value that you want. It's coming from a good place. Usually I'm good at math.
Well, well, I never.
I haven't been able to.
I never suggested you weren't. I'm just having a hard time hearing you.
Okay.
That was the only negative comment. Okay?
Okay. Thank you. Goodbye.
Sorry about that. Again, we're happy to walk you through it, you know, so it can help you understand what we're doing.
Our next question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi, everybody, and good evening. I'll abandon the retail investment question for now. You know, in Q4 2019 pre-pandemic, David, the redev pipeline was $1.8 billion at its peak. Now it's $944 million in Q4, and that's just a really modest increase from Q3. You know, as you talk about record FFO and very healthy cash flow, how are you looking at capital allocation priorities going forward? Should we expect ramping redevelopment, some transformational, clearly some more retailer investments, dividends, buybacks? You've mentioned no acquisitions. How do you view the priorities here?
Well, the good news is our pipeline is kind of back to where it was in 2019. However, remember in 2019 we finished some stuff, right? Naturally, that falls off. Then we didn't add anything really until this year. I think you'll see steady progress in adding. Remember, we only add when we start construction on a project or we internally approve it or we're about to. We would expect to be able to add to that number this year. You'll see that I'd be disappointed if it didn't grow, you know, in size and stature, and mostly in mixed use. I would still say that's the number one priority.
We're going to invest in our existing platforms that we have, you know, whether they're SPARC or ABG or RGG. Those are businesses that we have a lot of faith in, and we'll continue to invest in those. We're still doing a lot of investment kind of in the you know, in updating the technology aspects of our shopping centers that we'll continue to do. That's important to us. We expect to raise the dividend. We've been really quiet on you know, the acquisition front, and that's like you know, that's perfectly fine with us. You know, we'll see how the market transpires.
You know, we have no real, you know, we feel really good about our portfolio, and if there's something that fits in nicely, reasonably priced, we'll take a look at it. If not, c'est la vie. I think we're going to build another platform. It's not necessarily a retail platform, but we're in the midst of kinda working through some opportunities. Stay tuned.
Interesting. Thank you.
Thank you.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey, David. I'm torn 'cause you guys said one question per, so I have two, but I'm gonna restrain myself and just ask one unless Tom gives me the go ahead. I'm gonna go back to the retailer question. You guys made a lot of headway on your brands. You added $160 million of NOI, EBITDA, whatever you wanna call it, from the retailer platform last year, and you guys seem to have pretty quick turnaround of the brands. One, does it surprise you how quickly these brands have turned around given that there are a number of. We won't mention retailers, but brands out there, retailers who have been trying to restructure for years and haven't been successful, whereas in shorter you guys have.
Two, does this give you a better insight into your tenant negotiations such that now you have much more informed a view of when you're in negotiations with the tenants, what their true potential is versus what they may be telling you at the table?
Yeah. On the fast turnaround, I would say yes. Remember, we bought these in bankruptcy, which, you know, most of them in bankruptcy. You know, that allows you to clear out a lot of the issues and gives you a you know, a kind of a clean slate to grow from. I'd say that the management team that we put together at SPARC is excellent. They know how to integrate. And between our oversight from ABG and SPG, you know, we've got a you know, a good formula that's working. Their performance has absolutely no relevance or insight at all when it comes to our you know, our negotiation or our insight into you know, how to deal with retailers.
You know, that's just a flat out no, Alex. I could see how you might ask that question, but it really doesn't because each brand that is there is unique and, you know, they don't necessarily have a direct competitor that you know that would be helpful. We just don't think like that because as you know, every space and every mall is different, and, you know, market rents are all over the place. Simple answer to that is no.
Okay. Tom, will you allow me a second, or are there a lot of questions you gotta move on?
He's got a puppy dog look toward me, so based on that, we will allow you. Thank you.
Okay.
Go ahead.
Big picture, you know, obviously a lot of what's going on in retail and the crime and all these headlines is out there. My question for you is your sense from talking to the industry and obviously talking to local officials, is the view that it's on the industry to try and you know, beef up security and solve this? Or do you sense that the local authorities are finally realizing they need to do more from their end?
Well, look, I think we are, you know, top-notch in this area, though unfortunately, as good as we are, we cannot, you know, avoid what's happened. We're all subject to this. I don't think it's an industry issue. I think it's a local jurisdiction issue, and it's a nationwide issue, and I believe the tide is turning. We are all over this. The safety of our, you know, consumers and obviously the retailers is priority number one. We're not immune to it as much as we would like to be. We have a very sophisticated, you know, operations center, intelligence center that deals with this.
If you ask the retailers, they would tell you that I think, Alex, you know, we're number one in this area, but you know, we're not immune. I would love to be immune. We as a nation have to address this, and it's happening, you know, obviously in a lot of different areas. I don't want to get into politics at all, but I don't think the industry can solve it. I do think it's gotta be at the local and national level. I do think you know, we've gotta hold everyone accountable that this kind of stuff cannot be tolerated.
Believe me, we are all over it, but, you know, some of these things are just impossible, you know, to avoid. However, what you don't hear from us, Alex, is all the ones that we thwarted, you know? Dozens and dozens of multiple ones. We, you know, do an excellent job, but it's, you know, we have to deal with some unfortunate consequences of these acts.
Thank you.
Sure.
Our next question comes from the line of Juan Sanabria with BMO Capital Markets. Please proceed with your question.
Hi, thanks. I was just hoping to ask a little bit about rents and leasing spreads again. The base rent was flat sequentially at just under $54. Do you think that's now bottomed or stabilized and it's headed upwards from here? On the leasing spreads, you, I think, talked about $8 being in the number for the deals maybe signed in the fourth quarter or at quarter end, not quite sure there. What, when will that translate into the baseline rent? When will that kind of sunset out? How are you guys thinking about internally on that spread number that's no longer disclosed? Like, what's the expectation for what you generated in 2021 and what your expectation is for 2022?
Well, you know, first of all, we focus on NOI growth, so that's number one. We expect to have NOI growth. That's the first. I'd say to you, I think you're not. Maybe we weren't clear, but the $54 is somewhat, you know, it's just the base minimum rent that our portfolio averages. It does not include overage or percentage rent. If you included that based on 2021 results, that $54 would be $62. Okay? That's the relationship there. I don't, you know, I try to listen carefully to your question, but it just goes to show that the $54 is missing this component, and we thought it was material enough to point it out.
When do you think that $8 comes into the number?
Well, that's all a function.
that $8 sunset?
Yeah. That's all a function of lease expiration. You know, we tend to raise if someone is in overage rent or they have a percent rent deal that's expiring, you know, we try to raise the base minimum rent or, you know, we try to capture as much in the base minimum rent from the overage that's generated. You don't always get all of it, but you do some of it. It's, you know, it should inch up over time, but it's really a function of the big overage rent payers and when their leases expire.
Thank you.
Certainly.
Our next question comes from Floris van Dijkum with Compass Point. Please proceed with your question.
Thanks for taking my question, guys. David, you just mentioned NOI growth. You know, obviously, you know that I'm, you know, I've been. I still think there's a lot of value in the business here. You know, again, you know, you might be slightly guilty of-
By the way, so do I. So do I, Floris. Okay? So
No, I know you think there's a lot of value, and I'm trying to help you get that out.
Yeah.
You know, the 2% NOI growth that you have in your assumptions for 2022, if you have your. Basically, you have fixed bumps in your leases typically of around 3%. You know?
Yeah.
You don't get it for all of them, but you're a little bit shy of 3% maybe. You know, all things ceteris paribus, everything else stays the same, occupancy stays the same, you should get around, you know, 2.5%-3% NOI growth, yet you're only guiding for 2% growth.
Yeah.
And-
I think it's very simple. The real simple answer is, you know, sales. We do a very sophisticated model. If we have sales levels that are above this year, we will overachieve that number. You know, again, we're in February, and we tend to be, you know, try to be cautious on that number. That's really, you know. Then there are increases in cost, you know, that we're dealing with, you know, as well for us. For instance, I mean, security expenses are up, you know, based on, you know, we just had a discussion with Alex on that. Obviously, you know, we have wage inflation, janitorial. You know, we have pressures on expenses just like everybody else.
We got no break, you know, on the real estate tax front from the local municipalities, even though we were closed, you know, for months in many cases in 2019 and 2020. Our real estate tax expense keeps going up. You know, we have pressures there that we're just, you know, we're just trying to be relatively thoughtful about, you know, how to deal with. The percent overage sales number going into every year is a little bit of the unknown, and we're trying to bake some conservatism into that thought process.
David, I mean, just, you know, again, but a lot of your costs would be recaptured through CAM. You've got fixed CAM that increases at inflation, so you're, you know, that would imply that your fixed CAM is going up by about-
Well, no. We don't have CPI adjusted.
Yeah, that's right. You have 3% bumps.
Yeah.
You're right. You're right.
Yeah, and we have bumps. You know, if it goes up 6% and we're going up 3%, we lose 3%, so-
Yeah.
You know. Again, I mean, it's all, you know, it's all factored in, but I would say there's a little bit of margin pressure. Hopefully I've been clear on the sales front.
David, maybe if you can touch on one little area which I've looked at in your lease. You have 6.8 million sq ft of leases that are longer than a year, but that are sort of temporary tenants. Specialty leasing, which are at an average rent of around, off the top of my head, $17. It's 10% of your small shop portfolio that is at a third your average rent that you're getting.
Yep.
What happens when those leases go to market or become full tenants? Theoretically, they should go up by, you know, 300%. Is that the right way to look at it?
Yeah. Look, I think that's a great opportunity for our company. You know, we did a very good job. You know, it's kind of a flex business. We're still under-occupied. We still have, you know, a number of tenants like that that are, you know, important to the community. But you know, as you know, more permanent tenants come to the market, that's a great opportunity for the company. Floris, this is the real interesting thing. A lot of that stuff is happening now, you know, so think about it this way. In 2020, we got decimated by COVID, right?
We came back unbelievably strong in 2021, much better than anyone would have predicted, and you know, reinforced our business model. I would venture to say. We still have, you know, a lot of short-term leasing or, you know, what I'll call specialty leasing. That, as we re-lease that space, comes in midstream. That comes in first quarter, second quarter, third quarter of 2022. Because, as you remember, our retail base, a lot of it sat on the sidelines all of 2020 and didn't really start opening up, open to buy in 2021. By the time you build out a store in a mall, it's a six to nine month process. Given where we are today, I would say to you, and we never...
This is so antithetical to the way I think, but we still have a transition year in 2022, but it's not an excuse. I've never used that as an excuse. Believe me, as we continue to lease up to permanent retailers away from specialty, you know, we're gonna generate more income, but it's not all gonna fall in 2022. Now, did I explain myself well, guys? Would you add to it? No. Okay. I think you did a great job. Okay. Sometimes I'm inarticulate. I mean, yeah. Again, that's not an excuse, but that's how 2022 is going to continue to be a transition year, like 2021 was. You know, we kicked the crap out of 2021. It was an unbelievable year, spectacular based on where we were. Okay, Floris?
Next question, Hector, please.
Our next question comes from Haendel St. Juste with Mizuho. Please proceed with your question.
Hey, good evening. Thank you for taking the question. David, I got a question on OCR. You mentioned OCRs earlier, something we haven't talked about in a while. At 12.6%, you mentioned that's the highest level in five years. I guess I'm curious, how important is OCR today in tenant conversations? Are they willing to pay or even consider some of these look-back OCRs? And any color on where you think that, OCRs might go near-term, or do we ever get kind of back to those mid- to upper-teen levels? Thanks.
Yeah. Look, I think it reflects an earlier comment, which is we are starting to see a little more pricing power as demand goes up and the fact that the overall business is better. So, you know, it's a good insurance policy in that the retailers are producing very positive results in our portfolio. You know, we don't wanna put them on the edge. But, you know, we've taken our lumps over the last few years, and now we're just trying to balance it a little bit better than what we've seen over the last couple of years. It's a good indicator that we got some room to go. That's all it is.
I got you. If I could follow up, I don't know if you mentioned it earlier or if you'd be willing to share. Are you still doing any of those shorter-term leases that you were doing during COVID with the lower upfront rent threshold, but with the lower percentage rent threshold so you can make out in the event of improving sales, or is that an event of the past now?
It's essentially a thing of the past, though there's always a case here or there where, you know, we might have a deal in 2023 for space, but they're not ready in 2023 so we have a retailer in the space, so 2022 might be an extension of that, you know, while we finalize the lease for 2023. That's a little bit what I was talking about with Floris as well.
Hector, next question, please.
Our next question comes from Vince Tibone with Green Street. Please proceed with your question.
Hi, good evening. I wanted to follow up on Floris's question. I believe you mentioned that if tenant sales repeated 2021 levels, you would likely exceed the 2% guidance for domestic property NOI. I just wanna get a better understanding of maybe what sales levels you have baked into current guidance. It would seem that your base case is actually decline in sales compared to last year. Trying to just get a little more color there would be helpful.
We do it, we really do it, I don't know why, but we do it tenant by tenant. The simple thing is if we do see sales above this year, you know, we would hopefully, you know, putting aside the comment about rising expense costs, if you kept our expenses flat, we would see a better, you know, more robust NOI, you know, portfolio NOI growth. The simple answer is that. We do have some baked in conservatism in that number. Again, you know, it is. You know, we do this budgeting process late in the year. Actually, to some people, they do it earlier than I'd like.
We, you know, it's always, it's in the case of sales, it's an art versus a science. The good news, though, when we talk to retailers, they are planning up sales compared to 2021, okay? That's positive, and if they produce their own plan, we'll see the benefit of that.
Is it fair to say that you're forecasting sales to be negative? Maybe that's the base case of guidance or am I misreading into that?
I would say at around the 2% level, it's relatively flat.
Okay. That's helpful. If I could maybe try to squeeze one more quick one in there. I'm just curious for, like, the over rent component, how much was over rent in terms of total lease income? Like, what percentage was that for this last year?
We don't give that out, but if we do, I'll ask the guys if they wanna give it out. We tend not to do that. But you know, I would say it was similar to what we used to see from, you know, when we had big international tourism at our big international properties from a percentage point of view. Okay. Guys, is that right?
Yes. That's exactly right.
Okay. It really went away. It's kinda back to where we were maybe four, five, six years ago.
That's really helpful. Thank you for the time.
Mm-hmm.
Hector, we have time for one more question.
Okay. Our final question comes from Michael Mueller with JP Morgan. Please proceed with your question.
Yeah. Hi. Quick one. Rent per sq ft was lower year-over-year in the Malls, Outlets, but it was higher in the Mills. I'm curious what's driving that dynamic.
I'm sorry. Could you repeat? You broke up there for a second.
Yeah. Your rent per square foot for malls and outlets is down year-over-year, but for the malls, it's up year-over-year.
Yeah. In the malls, they include all of the boxes. We include all the boxes. Shouldn't say that. We include all the boxes. Every square footage, it's not. Whereas in the outlet mall, it's basically just the, you know, the interior space, not the department stores. That's so if they have a few big tenants, that may be driving the increase. That business has been very healthy, and we're very pleased with the results there.
Got it. That was it. Thank you.
Sure.
Ladies and gentlemen, we've reached the end of the question- and- answer session, and I'd like to turn the call back to Mr. David Simon, Chairman, for closing remarks.
Okay. Thank you. I know there's a few that are still looking to get some questions answered, so Brian and Tom will be available. Of course, I am as well. You know, thanks for participating in the call today.
This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.