Greetings. Welcome to the Simon Property Group Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Tom Ward, Senior Vice President of Investor Relations. You may begin..

Thank you, Kyle, and thank you, everyone, for joining us this evening. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President; also on the call are Brian McDade, Chief Financial Officer; and Adam 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, and actual results may differ materially due to a variety of risks, uncertainties and other factors.

We refer you to today's press release and our SEC filings for a detailed discussion of the risk factors relating to those forward-looking statements. Please note that this call includes information that may be accurate only as of today's date.

Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included within the press release and the supplemental information in today's Form 8-K filing. Both the press release and the supplemental information are available on our IR website at investors.simon.com.

Our conference call this evening will be limited to 1 hour. [Operator Instructions] I'm pleased to introduce David Simon..

Thank you. Pleased to report our second quarter results. Second quarter funds from operations were $1.1 billion or $2.96 per share prior to a noncash unrealized loss of $0.05 from a mark-to-market and fair value of publicly held securities. Let me walk you through the big variances for this quarter compared to Q2 of 2021.

Our domestic operations had an excellent quarter and contributed $0.13 of growth driven by higher rental income of $0.09, strong performance in Simon Brand Ventures and short-term leasing of $0.05. TRG contributed $0.04 of growth, and they were partially offset by higher operating costs of approximately $0.05.

Our international operations posted strong results in the quarter and increased $0.10. Lower interest rate -- interest expense contributed $0.03, and these $0.26 of positive contributions were partially offset by the headwind from a strong U.S.

dollar of $0.03 and a $0.19 lower contribution from our other platform investments, principally from JCPenney and a couple of brands within SPARC.

These costs include --these included costs associated with JCPenney's launch of new brands, the recent Reebok transaction and the integration costs associated with that and a softening of sales from our value-oriented brands due to inflationary pressures on that consumer.

We generated $1.2 billion in free cash flow in the quarter, which was $200 million higher than the first quarter of this year. And we have generated $2.2 billion for the first 6 months of the year. Domestic property NOI increased 3.6% year-over-year for the quarter and 5.6% for the first half of the year.

Portfolio NOI, which includes our international properties, grew 4.6% for the quarter and 6.7% for the first 6 months. Occupancy at the end of the second quarter was 93.9%, an increase of 210 basis points and TRG was at 93.4%. The number of tenant terminations this year has been at record low levels.

Average base rent increased -- average base minimum rent increased for the third quarter in a row and was at $54.58. Leasing momentum accelerated across our portfolio.

We signed nearly 1,300 leases for more than 4 million square feet in the quarter, have signed over 2,200 leases for more than 7 million square feet through the first half of the year, and we have a significant number of leases in our pipeline. Nearly 40% of our total leasing activity in the first 6 months of the year has been new deal volume.

This is up approximately 25% from last year. Retail sales continued. Mall sales volumes for the second quarter were up 7%. Our reported retailer sales per square foot reached another record in the second quarter at $746 per square foot for the malls and the outlets combined, which was an increase of 26%, $674 for the mills, a 29% increase.

TRG was at $1,068 per square foot, a 35% increase. We began our national outlet shopping day, which was very successful from shoppers and participating retailers offering a timely first-of-its-kind power shopping experience. More than 3 million shoppers visited our premium outlets and mills over the shopping weekend.

Feedback following the event has been tremendous from both our retailers and consumers. We're already planning next year's event, which we expect to be bigger. So please stay tuned on that. Our occupancy cost at the end of the quarter are the lowest they've been in 7 years, 12.1% in Q2 of 2022. Now our other platform of investments, let's talk about it.

We were pleased with the results of our investments in the platform for the second quarter. They contributed approximately $0.21 in FFO, even though we were down from last year's terrific results, primarily, as I mentioned, continued investment and the inflationary pressures that have developed.

Based on our distributions -- based upon our cash distributions received, we have no cash equity investment in SPARC and JCPenney. And in fact, we have parlayed our SPARC investment into our investment in ABG that is now worth over $1 billion.

There will be a little more volatility from quarter-to-quarter when it comes to SPARC and JCPenney, but please keep in -- this in the proper perspective. It's all upside from here. During the quarter, we also, as I mentioned, had our mark on our SoHo and Lifetime Holdings of $0.05.

A reminder on that it's a noncash mark, and we would expect that those companies would bounce back. We completed the refinancing of 14 property mortgages during the first half of the year for a total of $1.6 billion at an average interest rate of 3.75%. We reduced our share of total indebtedness by more than $650 million.

And once again, our balance sheet is strong. We had $8.5 billion of liquidity. $8.5 billion. Today, we announced our dividend of $1.75 per share for the third quarter, a year-over-year increase of 17%. This will be payable at the end of the third quarter, September 30.

During the quarter, we repurchased 1.4 million shares of our common stock for $144 million. And let me point out while other companies in our sector are paying little or no dividends and issuing equity, we are repeatedly raising our dividend and buying our stock back.

We have now returned more than $37 billion of capital to our shareholders since we've been public. $37 billion.

Given our current view of the remainder of the year, we are increasing our full year 2022 comparable FFO guidance from $11.60 to $11.75 per share to the new range of $11.70 to $11.77 per share, which compares to a comparable number of last year of $11.44 per share.

This is an increase of $0.10 at the bottom end of the range and $0.06 at the midpoint of the range. The guidance comes in the face, obviously, of a strong U.S. dollar, rising interest rates and the inflationary pressures that are out there in the marketplace. So let me conclude. I'm pleased with our second quarter results. Our business is strong.

The higher income consumer is in good shape, brick-and-mortar stores are where the shoppers want to be, outpacing e-commerce across the world and the broad retail spectrum. Demand for our space is extremely strong. Worldwide retailers need to grow, and they're doubling down on the U.S. International tourism is returning. Domestic tourism is strong.

Our redevelopment pipeline is growing with exciting projects. And in addition to our newly announced premium outlet, new developments and expansions, we are experienced at managing our business through volatile periods, including leveraging our existing platform for operating efficiencies, allocating capital appropriately, managing risks.

We are not over our skis in any aspect of our business. I encourage you to look at our track record. We outperform in these kinds of periods, and we also do some of our best work as well. So thank you, operator. We're ready for any questions at this moment..

[Operator Instructions] Our first question is from Craig Mailman with Citigroup. Please proceed with your question..

It's actually Michael Bilerman here with Craig. David, I was wondering if you can talk a little bit about sort of that inflationary pressure that's on the retailers that you're starting to experience first-hand and obviously, your knowledge base of the retailer environment is significant.

But now actually being on both sides, what can you do as a landlord to help your tenants through this period of time where they are dealing with a lot of inflationary pressures and more inventory because arguably, I know from a landlord perspective, you want your rent to inflate and that just makes matters worse.

So can you just talk a little bit about the things that you can do to take share and really leverage what you're learning on the retailer side for the benefit of shareholders?.

Well, thank you, Michael, for that question. So look, we're not presumptuous to tell any retailer under any circumstance how to run their business. So it's really entirely up to them on how they see fit, how to manage inventory et cetera. And just our own experience within SPARC, we have several brands.

And we did see some softness in the more value-oriented brands. And again, we do think that pressure on the consumer with respect to food, housing, obviously, gas, and they reined it in. But again, I think the important thing to keep in mind, Michael, is even with that said, we were profitable.

We had an unbelievably strong year last year with Penney and SPARC. We're still projecting really high EBITDA growth for these companies. And even though they're -- obviously, their consumers being cautious, back-to-school so far is off to a good start. Our traffic is actually pretty good.

And I think just from our own operating experience, the SPARC management team and the Penney, I think, do what a lot of retailers do. They rein in discretionary capital. They watch the overhead. They really don't close stores because stores are profitable to them.

They watch marketing expenses that -- they're very focused on the payback when it comes to return on investment [Indiscernible] digital spending. So I think the JCPenney and SPARC team will do kind of similar to what others, but we would never tell a retailer what they should do.

If they want to compare notes, we're happy to do that, but that's just not our style. And again,-- and we try to -- it's really important. This other business that we're in is not our -- it's a very small part of our business. It's under 10% at the end of the day. We have no cash adjustment in it.

So I've got -- I'm just talking cash-on-cash return, let's go simple math. I've taken distributions, cash distributions in both SPARC and Penney that basically has me at a zero net investment. And it will -- they'll have volatility with the earnings like any other retailer, and that's just the way of the world. And it's all upside, frankly.

And these businesses are importantly, and this is very important, they're very well positioned. They're very well positioned to weather if this continues, which we kind of expected to. They're very well positioned to weather any storm because as a simple example, JCPenney has $1.3 billion of liquidity, just to throw that out there.

So I hope that answers your question..

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

David, a question on -- following up on the retailer platform income. The NOI this year was like $116 million in the year. Last year, it was $195 million.

So is this some of the volatility that you're talking about? And just curious what drove that mark? And if I can do a footnote for a sort of quasi second question, you mentioned something about the value brands in your retailer platform, having trouble, but the other brands were doing well. Maybe just a little bit more comment on that..

Yes. Look, Alex, it was $0.19 for the quarter. So we can spend a lot of time on it. But the reason I went through with you is because we have no cash investments in these businesses. So I'm happy to go through it, but let's put it in perspective, please. The point is -- yes. So let's just talk about SPARC.

SPARC, Nautica, Brooks Brothers, Lucky did great, above budget. Eddie Bauer, above budget, so on. The only softness we really saw was a little bit in the team market at Arrow, a little bit in the fast fashion business in F21 and a little bit in JCPenney.

We -- and we also -- as we told everyone at the beginning of the year, we had significant integration costs at SPARC with respect to the Reebok transaction. So that -- and obviously, that closed, and we saw some of that in the second quarter. So that's the status.

Everything -- we also had a management change in F21, which we think will be for the better. That happened, I believe, at the beginning of the year. We've got our -- we also had our new CEO at Penney, which also happened last year. So they're absolutely greatly positioned.

We've got all the confidence in the world and it's a retailer and there'll be ups and downs, $0.19 added $2.96, okay? That's the math and no investment -- no cash investment, okay? So I think I answered it, but if there's something you'd like me to dwell on more than I did, I'm happy to do.

Well, I guess that's the one question, right? So it's over, right? Go ahead, Alex. I'll let you -- because I like you, go ahead.

What else you got?.

Well, then I'll ask you one other question. You guys are always financially savvy and you buy back stock.

I'm imagining that buying back debt is not attractive just given where your outstanding debt coupons are or has the disruptions in the debt markets giving you opportunity to buy certain pieces of paper?.

Well, we unencumbered -- the reason we have lower interest expense is because we unencumbered assets. We have that flexibility. So we don't like the mortgage market, unlike some others.

We just write a check, and we -- that's why we have lower interest expense compared to last year, and I did the Q-over-Q because we can write a check and just unencumber it..

At a lower cost..

At a lower cost. So we look at that all the time. And that may not be buying debt back, but it's more or less the same thing. Ends in the same result..

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

David, I was wondering if you could provide a little bit more color on the leasing pipeline. It was nice to see the occupancy up as much as it was from Q1 to Q2.

But could you talk a little bit more about the pipeline, the types of tenants? And when you sort of look at the demand, if you sort of were to try and bifurcate the portfolio maybe by sales, I guess, how different is the demand for the really strong centers versus maybe centers in the middle and the lower end of the portfolio?.

Well, again, our lower end is just not -- just to get -- it's a good question because we don't put these numbers in, but our EBITDA weighted -- this excludes TRG, but our EBITDA weighted sales are $954 a foot. Our average base rent actually increased 70 basis points -- at 73, 41 versus 70, 287.

So -- and that's what's driving our NOI, right, because it's the bigger properties. Look, it is across the board. It's also across the retail type. It's restaurants. It's entertainment. It's obviously the high-end folks, but it's a -- and I don't like naming retailers. Rick does, but bother me, and he's not here to do it.

So -- but we have value-oriented retailers that are on very much aggressive opening program. So it really is across the board. Only the best properties get the high-end folks. We're seeing a big rebound in Vegas. Florida is on fire. California spying the sea legs. Westchester and Roseville Field are all coming back as the suburb.

So Midwest has been stable. So we're seeing it across the board by retailer, by price point, by geography, by mix pretty much across the board. And -- so I mean I'm not -- it's not really granular and you probably wanted names. But -- and we have not seen, thankfully, even with the -- with what's going on in the world.

We really haven't seen anyone back out of deals of note at all. And I said this last quarter, I said it this quarter in my prepared remarks. The U.S. is the -- let's hope the U.S., we don't screw it up. But the U.S.

is the bastion of growth for the world compared to -- because we know China is with the way COVID is dealt with there, that's going to have ebbs and flows. And I think our economy is still pretty healthy. Consumers in good shape. I think the growth will continue in the U.S., and I think the future is bright here..

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

I just wanted to drill in a little bit more on capital allocation. Obviously, raised the dividend here again was active on the buyback in the quarter in just a couple of months. Put out these kind of press releases as well about some of the kind of the new and renewed development projects.

So I just wanted to kind of maybe hear you kind of maybe rank or just kind of discuss the different options for capital allocation here. And I know external growth is always maybe an option as well. You talked about it last quarter, but maybe if you could just kind of rank the different options here with your capital and excess free cash flow..

Well, look, as a REIT, it will always be the dividend. So that would -- I mean, it's hard to rank it. But I think clearly, the dividend we have to pay out 90% to 95% of our taxable income. There's a difference to you pay out 90% technically versus 95%. But you got to pay out 95% of our taxable income.

We're fortunate to be highly -- we had taxable income. So we pay out close to -- we're at 100% of our taxable income. That's growing. So that's going to be paid out in cash. Obviously, we've modified that twice in our history. One was COVID, obviously, when we were shut down and two was in The Great Recession. So that always will rank number one.

Two is we -- our stock is just -- we look at other REITs. We look at other S&P 500 companies. We look at our balance sheet. We look at the fact that we're a cash flow company that generates cash, return on equity, we make deals like SPARC that gets all our money back, and we have free cash flow. We can't figure out our value.

So the reality is the market -- we have refuted e-commerce, taking the malls down. We have still COVID. Our business is strong, growing in the enclosed mall business. In the enclosed mall business is strong, yet we have naysayers out there that don't believe it, but we believe it. So our stock is cheap, and we're going to keep buying stock back.

And then I think we have a duty to make our properties as efficient and as attractive as we can to the consumer. I mean, obviously, we have to do it with a remind -- we had to do it with a return on investment methodology, i.e., if we had a property and we spent all this money on and got no return, we wouldn't do it.

But where we can do that, that's what we should do and we will do that and then the external stuff I don't really care about. And if it's there and it makes sense, we'll do it. We have the flexibility to do it.

But I'd rather do the dividend, buy our ridiculously cheap stock back, make our existing portfolio better and then every once in a while, we'll have great new development to do they'll do it because that also is a core competency of ours that we'll do. And that's how I look at it..

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

Yes. So on real estate, Phipps Plaza, slated for an October open or relaunch, let's say. So David, I believe you took roughly a and NOI offline to develop.

So upon stabilization, what NOI contribution from this project is expected? And really, should we look at this as one of the key earnings accretion blueprints looking ahead with other mixed projects?.

Yes. Thank you. I'm happy to talk on real estate. And look, I mean, Phipps is fantastic story because we took an old department store. It had was an underperformer, had 14 acres. We couldn't redevelop it. We're going to spend around $350 million, and we're going to get about a $35 million of NOI just on that.

But more importantly -- well, I shouldn't say more importantly, in addition to that, -- and eventually, we'll show everybody what we did, but we -- the leasing momentum that we have created there in terms of retenanting, re-leasing Phipps is staggering. So Phipps, again, we don't really disclose that.

But my guess is the existing property will increase by roughly 30% NOI when we're done with it, if not more without that -- not including the incremental that's what I just mentioned. But because of all the retenanting and more importantly, we will have all of the best brands when we're done with it, and that's ongoing.

That won't all be done probably until '24 because some of the other existing retailers have leases, and they're coming over after that. But we're taking a quiet mall and making it -- and it's going to be, I think, the hub of activity in a great area in Buckhead and a lot of good stuff is happening in Atlantic at the same time.

But yes, the simple answer to your question is I would hope to do that in Brea, Ross Park, go down the list. But yes, we have a ton of those opportunities and the mixed use -- most of our real estate is really well located and adding the mixed-use components, especially residential really does add a lot of synergy, a lot of mojo of the property.

So we hope for that to continue..

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

David, hopefully, easy two-part for you.

But how is the broader economic environment adjusted the process for adding projects to development pipeline, then how it increases in construction costs and labor shortages impacted pipeline returns and time lines?.

Let me talk time lines. The only -- the biggest issue that we're having on time lines is in what I call in the restaurant industry in that some of the equipment required to open restaurants does have a backlog. This -- the storefront improvement is increasing.

Obviously, tenants are very, very focused on that, not affecting timing, but it is something that we're watching has not affected deal flow or deal economics. And I do think the good news when it comes to at least materials, we are at a lower level than we were a few months ago. So on a timing side, it's really just equipment for restaurants.

On our return development, nothing -- yes, we have a little bit more here and there, but nothing that is going to ultimately decide to go from a go project to a negative. If anything, in a lot of these cases, we're planning on higher income, so they seem to be getting basically the same returns.

But we're not -- nothing has changed dramatically that would suddenly scratch the project..

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

I think we can do both. I think we -- and again, I mean, some of these things, we really want folks to focus on others in our sector. When you put us in perspective, we're buying stock back. We're not issuing equity, and we're raising our dividend.

I don't -- there are very few and you can define the sector anyway you want, and I don't want -- but there's not many -- we're just built a little bit differently even though we may be in the same industry, we were built differently, okay.

And so that's the important point, and that's why we really try to emphasize it much like we emphasize SPARC about some of the mathematical differences about our company beyond just we're in the same business. It is math. At the end of the day, you got to run your business, so the math works. But yes, I'd like buying our stock back.

But like I said, I do think we have a duty to continue to invest in our portfolio as long as we see the right return on investment on that..

Our next question is from Mike Mueller with JPMorgan. Please proceed with your question..

The year-over-year ABR per square foot looks pretty strong at about up 5%.

Is there anything out of the ordinary driving that?.

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

Our next question is from Floris Gerbrand Van Dijkum with Compass Point. Please proceed with your question..

Last quarter, you indicated that your signed not open pipeline was around 200 basis points, I believe, and it was a little bit higher in the malls than the outlets. I was curious if you can give an update on that. And also maybe, David, you've got these retailers.

Are you -- everybody has been talking about a glut of inventory, will you create outlet stores for some of your retailers? And where else are you seeing some of the demand for the outlets coming from? Is there more luxury potentially that's coming to the outlets or homewares? Or where -- what other segments do you think will expand into the outlet business?.

I'll let Brian answer the -- it was very clever to get two questions. I'll let Brian answer the first, and then I'll take a shot at the second part..

Floris, we're still hovering right around 200 basis points in the second quarter..

And then I would say -- the big, big retailers had a glut of inventory. We -- the luxury guys do not have a glut of inventory, okay? So that's not happening. And to the extent that -- the SPARC brands, by and large, are already in a lot of outlets, some of ours. A lot or not ours. There's really no change in plan.

Maybe there's been a few -- some of the brands, not just SPARC but elsewhere had a few pop-ups. But net ebbs and flows, I don't think, Floris, there's any interesting dynamic going on that. And there's not a lot of folks with a glut of inventory as far as I can see, I mean, obviously, some bigger folks.

But most of those guys want to plug through their existing system, and there is no -- the higher-end folks, there's no glut of inventory that we see..

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

Could you drill down a little more on sales trends during the quarter? Did sales start to slow down at all in the back half of the quarter as inflation accelerated and recession period increased?.

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

That's good to hear. That's helpful. And then just maybe 1 follow-up to that.

Are you seeing any difference in tenant sales performance between the higher end and luxury tenants versus the more three brands, presumably the latter would be more impacted by the inflation issues?.

I would absolutely -- we definitely have seen that where the value-oriented retailers or -- there's no question the consumer that is pressed on discretionary income is dealing with a very difficult situation with food, obviously, gas and dwelling. So -- and they're reining in their spend. So there's no question about that.

But we're -- but we haven't really seen that at all in kind of the better brands. And like I mentioned earlier, SPARC, like the Brooks Brothers, the luckies of the world are doing very well. But where you do see it a little bit is in the value-oriented retailer or the younger consumer that suddenly gas has taken a lot out of the pocket book..

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

Domestic same-store NOI was up 3.6% compared to 7.5%. It looks like a lot of it was due to the tougher comps in second quarter. And in that case, it seems like the comps only get more difficult third and fourth quarter.

Is that why the same-store number might actually be going down for the second half of the year? Or is it the macro factors?.

No. I mean, Craig, we were really clear. We're actually outperforming what we thought. We -- Q1 of last year had the big benefit of going up against COVID, right? So now we were really, really clear what we saw overall, and we've been outperforming.

And I think we'll outperform our initial guidance of 2%, but that's nothing other than that or normal seasonality of the business, Craig. Yes. I mean this is better than our plan and is consistent with our plan, even though the trend is above our plan..

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

Well, I've said that several times. Yes, the answer is we have not -- our pipeline is as strong as it's been. We're doing a bunch of new deals. Now Craig, you know when you sign a lease, the store doesn't open tomorrow in a lot of cases.

And this is really, really important for everyone to understand, we're very optimistic because a lot of the leasing that we've done really doesn't open until '23, '24.

So not only are we outperforming our budget this year off a strong last year, but we actually feel really good that as we get these stores open that we leased to over the last 6, 9 months. That will continue to fuel positive comp NOI. Thank you, Craig..

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

On the guidance, the low end of the range has come up, the high end relatively flat at a time when you're seeing softening of sales at your lower income brand.

So my question is, what's implied for the performance of the base business in the second half kind of relative to what you saw in the domestic and international operations in the second quarter? Maybe said another way, how sensitive is your performance to the macro environment? And what's the outlook for percentage rents?.

Well, it's a very -- look, I think we feel really positive about the portfolio, the results that will generate from the portfolio. And again, the higher income consumer is still spending money. And if anything, I think if you go back in history and actually, Tom did a very good piece on that. If any of you're interested, you can call Tom.

He'll go through it with you. Our business and our industry actually tends to outperform during recessionary environments to the extent that we get there and maybe we're in one, maybe we're not, I'll stay out of that political definition primarily because the big ticket items suddenly go toward kind of what we sell at our product.

So -- and that's kind of somewhat of an insurance policy and it's historically always proved to be very positive. So even in every recession, other than COVID when we were told to shut down, our cash flow from our properties was flat. It did not decrease. So Tom has a great paper on it.

If you're interested, we'll charge you, but we'll give you the data. I think the same case will be here. We'll -- if we do get into a full-blown recession, our cash flow will be positive. It won't maybe grow is high.

We'll have some exposure on sales, but we do see the big tickets kind of go away and they move toward the items that we sell in our properties. And again, I think you asked something about SPARC -- again, it's really just a couple of the brands. It's also going against a great year. And again, let's have a bigger picture view of that business..

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

Just wanted to ask with regards to the month-to-month leases that are still on the books are a little bit higher than the historical average.

Should we expect that to stay there? Or are you still comfortable kind of for higher rents? Or how are you thinking current context?.

Yes. I think that's more a function of documentation than dealmaking in that we don't put that done until signed and a lot of our bigger renewals have been done over the last 2, 3, 4 months, and all that's being documented. So I would expect that, that number would continue to go down, but we have no fear in that number..

Our next question is from Haendel St. Juste with Mizuho. Please proceed with your question..

Dave, I guess a question on -- a follow-up on the seasonality of NOI in the first half of this year. Second quarter NOI was lower than the first quarter based on supplemental in both periods, which is unusual.

How are operating expenses impacting typical seasonality? And what's embedded in the profit this year?.

Yes. We didn't gather your first question.

Could you please repeat it?.

First question on the impact of seasonality and the sequential NOI for 1Q to 2Q. 2Q looked lower than 1Q, which is unusual. And so I was actually asking how operating income.

I think -- I don't -- see, I don't think the NOI was lower quarter over -- sequentially quarter-over-quarter. You think -- we do have a lot of companies hit in overage rent in the first quarter because their leases end in January 31. And so you pick some of that up in Q1, but that's not -- that would be the only reason..

And on OpEx, any color on how the impacting seasonality or perhaps what's your expectation embedded in the 2% in sort of mentioned.

Again, I'm sorry, but your connection is really not so good..

We're not really seeing much inflation just yet in operating expenses. As you think about us, we've got long-term contracts that protect us from material increases..

And we did increase our operating expenses $0.05. We did have a negative $0.05 for the quarter there..

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

Just a follow-up on Haendel's question. Your NOI from Klepierre and HBS also increased pretty significantly in 2Q over Q1.

Also curious about how much of that is sustainable in a run rate perspective or if there's some onetime items?.

Well, no. Klepierre was shut down last quarter. So this is kind of more -- I mean, last year this quarter. So this is -- they're still not firing on all cylinders, so we'd expect future growth here. So comparing to Q2 of '21 compared to Q2 of '22, Q2 of '21, they were under a lot of restrictions and in some places closed. And HBS is so small.

It's insignificant. But there's no real change there. We -- it's a lease that pays a certain amount of rent every month. So it's -- there's no very little growth other than like the normal step-ups. Very small, but the change is..

I actually meant sequentially. That sequentially -- I actually meant that sequentially, it increased by, I think, $10 million as well..

Well, we did a restructuring. So that's part of it..

And they're doing better, quite honestly. They're announced results in strong results. So I think you're seeing that starting to come through our results as well..

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

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

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

On the guidance, original guidance was domestic NOI of 2% growth and year-to-date, it's 5.6%.

So is there any update to the 2%?.

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

And then can you talk about what you're most focused on from an ESG perspective in 2022? And what are some initiatives where we might see some progress?.

Well, we -- I mean that's a -- I don't have enough time to go through it. But obviously, we're -- it's across the enterprise. And obviously, from an operating point of view, a lot of it continues to be focused on reducing our carbon footprint, but -- and giving back to the communities, which we do in a lot of different ways.

But it's a -- that's a very long. Please read our report. If you don't have it, there's a link, I'm sure, Tom can give it to you. But it's certainly focused on -- the big item is focusing on reducing our carbon footprint..

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

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

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