Simon Property Group, Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Simon Property Group, Inc. earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call 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.

Thank you, Robert, and thank you all for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer, and President. Also on the call are Brian McDade, Chief Financial Officer, and Adam Roy, Chief Accounting Officer. 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 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. 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 and one follow-up question So we might allow everyone with interest the opportunity to participate. For our prayer remarks, I'm pleased to introduce David Simon.

Good evening, and thank you for joining us this evening. Before I turn to our second quarter results, I really just want to again express my gratitude to the entire Simon team for their tireless work they continue to do for our shoppers, communities, and retailers. As we said previously, the safety of our communities in which we serve is our top priority, and the team has managed unprecedented circumstances in dealing with the pandemic, certain recent natural disasters, obviously the unfortunate rioting that also occurred. So we've been dealing with obviously a lot. and frankly, I'm extremely proud, grateful for the dedication and commitment of our team as they've demonstrated during these challenging times from opening, from closing to opening to securing our buildings. They've done a heck of a job. So let's go to the numbers. Second quarter reported funds from operation was $746.5 million or $2.12 per share. I'm pleased with the resiliency of our portfolio and the solid profitability and positive cash flow we achieved in the second quarter. Keep in mind, please, our profitability was achieved despite our US portfolio being closed to the public for nearly 10,500 shopping days during the second quarter. Our domestic and international operations in the quarter were negatively impacted by approximately $1.13 per diluted share, primarily due to reduced lease income and ancillary property revenues as a result of the COVID-19 disruption partially offset by approximately $0.36 per diluted share from cost reduction initiatives or a net $0.77 per diluted share in the second quarter. Now, let me walk you through the components of the year-over-year change in the context of our portfolio NOI. I think the best way to do that is if on page 17 of our supplement that we issued today, this will help you understand the impact of COVID-19. First of all, total portfolio NOI or net operating income decreased from $1.5 billion in the second quarter last year to approximately $1.2 billion This year a decrease of 21% or approximately $315 million. The year-over-year decline for the second quarter was due primarily to the following. Approximately $215 million from domestic rent abatements and a higher provision for credit losses. Given the lack of local, state, and federal government support for our industry, we went out of our way to event rent for thousands of local small businesses and entrepreneurs and restaurateurs and other retailers for the period they were closed. Approximately $145 million from lower sales-based rents short-term leasing, and Simon Brand Venture income solely due to the fact that our properties were closed, and approximately $60 million of lower income from our international outlet portfolio, again, due to the fact that they were closed as well during the second quarter. So that's $215 million, $145 million, and $60 million These decreases were partially offset by approximately $105 million from our cost reduction initiatives. As a reminder, the variances I just explained do not include the negative impact of $36 million from a straight-line increase deduction as straight-line impact has always been excluded from portfolio NOI. Our operating statistics metrics were as follows. Mall and premium outlet occupancy at quarter end was 92.9% down approximately 110 basis points from the first quarter of 2020. Tenant bankruptcies and lower specialty leasing during the second quarter due to COVID-19 impacted occupancy approximately 60 basis points. Average base minimum rent was $56.02, up 2.8% year over year, and our leasing spreads were essentially flat for the trailing 12-month period. Now, regarding collections, we have collected from our U.S. retail portfolio including some level of rent deferrals, approximately 51% of our contractual billed rent for April and May combined, approximately 69% for June, and approximately 73% for July with only de minimis deferrals. These percentages are not reduced for any of the abatement granted during the period that I previously talked about. Now, prior to reopening our properties, we implemented a series of robust safety protocols to ensure the highest possible safety and cleanliness standards. We reopened our U.S. properties starting in early May and our entire portfolio, the July 10th, has permitted, even with the ever-changing governmental orders that, frankly, have been in a constant state of flux in 37 states and 150 different counties, all with different protocols. On July 15th, the California governors issued a new restrictive order requiring us to close seven of our properties in the state. So we're all open except for the seven recent closings in California. We've been generally encouraged by the shopper response to our reopening, particularly in certain locations where there's been a steady improvement in traffic with many tenants reporting sales better than their initial expectations. Just a little color on that. In the centers that reopened in early May, Tenants who reported sales reported May was approximately 50% of their previous year volume for the same period and in June that increased to more than 80% of prior year volumes. Tenants continue to reopen and we currently have 91% of all tenants or nearly 23,000 Thank you very much. Internationally, all of our designer and international premium outlets are open and operating. 100% of all of those stores and our designer outlets are open and operating with shopper traffic and retail sales at approximately 90% of prior year levels. And we continue to see steady improvement in traffic and sales at our international premium outlets with all retail stores open and sales across that portfolio nearing last year's levels. With our partner, Cyan Palat, we opened Cyan Premium Outlets in Bangkok, our first premium outlet center in Thailand. The center is approximately 90% leased. It's extremely well located and has an unrivaled premium shopping experience featuring leading brands such as Burberry, Balenciaga, Coach, Ferragamo, and many more. We also completed several redevelopments, including phase four of Getemba Premium Outlets, which is 100% leased. Getemba Premium Outlets is the largest outlet center in Asia ex-China, and we project annual retail sales to be in excess of $1 billion. Our net investment focus continues to be on those projects nearing completion and our share of the remaining net cash funding required to complete the projects currently under construction is approximately $140 million through 2021. We have a track record on capitalizing on various value-creating opportunities. As you know, Spark Group, our 50-50 joint venture with Authentic Brands Group, submitted stocking horse bids to acquire Brooks Brothers and Lucky Brand Jeans under Section 363 of the Bankruptcy Code. Just a few things I think it's really important to keep in mind on these potential deal. First, Spark is buying them out of bankruptcy. So it is acquiring the inventory at or below cost. And to the extent we buy the intellectual property, we are doing so at attractive values. Second, when Spark integrates acquisitions in its platform, it reduces the acquired company's overhead significantly and third, Spark is able, because of the bankruptcy code and designation rights, able to reject any leases that do not meet its criteria and all stores are projected to have a four-wall EBITDA upon assumption of lease. These investments are expected to generate positive EBITDA soon after their integration into Spark We expect any equity investments should be returned within a year after integration of operations. And as I have mentioned previously, we have created real value already in our investments in SPARC and, of course, ABG. And we continue to look forward to other opportunities. Just a few words on the balance sheet. Again, active. As you might imagine, at the end of the quarter, our liquidity was approximately $8.5 billion, consisting of $4.9 billion of available credit facility borrowing capacity and $3.6 billion of cash, including our share of joint venture cash. As a reminder, the $8.5 billion of liquidity is net of the $700 million Thank you. Thank you. Thank you. Thank you. Both of those notes had maturity dates later this year. And I'm also pleased to note that our net debt has not increased by the end of the second quarter through this pandemic period. So, important to note, and our debt covenants remain well above the required levels with significant headroom. As you know, dividend we paid Our second quarter dividend of $1.30 per share in cash on July 24th. The Board will declare a third quarter dividend by September 30th, and we expect in total for 2020 to pay at least $6 per share in cash for dividends. Conclusion would be simply, again, I want to thank my colleagues for their continued resolve during this tragic set of events for the entire country. Our results are only possible through the ongoing ingenuity, flexibility, and dogged determination of the Simon team. We're proud to play our small part in helping local small businesses, entrepreneurs, and communities Thank you. And at this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone.