Simon Property Group, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the third quarter 2020 Simon Property Group, Inc. Earnings Conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Tom Ward, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Jonathan. 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 filing. Both the press release and the supplemental information are available on our 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 you might allow everyone with interest the opportunity to participate. For our prepared remarks, I'll please introduce David Simon.

Good evening and thank you for joining us today. Our results this quarter reflect continued progress in tenant reopenings, All of our U.S. retail properties are currently open with nearly 25,000 tenants across our portfolio open and operating and welcoming shoppers to this year's extended holiday shopping season. Collections from our U.S. retail portfolio have continued to improve. As of November 6, we have collected 85% of third quarter net billed rents. Second quarter collections are now 72%. And including the deferred amounts in the calculation, the second quarter collection rate increases to 78%. The details of our collection percentages are clearly laid out in our press release. issued this evening. While we've made significant progress in addressing, we still have some unresolved amounts with certain larger national tenants who unfortunately are refusing to pay their contractual rent even though they are open and operating. Let me turn to our results. Third quarter reported FFO was $723 million or $2.05 per share. I am pleased with the solid profitability of the quarter and $600 million in cash flow we generated for the third quarter. Our domestic and international operations in the quarter, however, were negatively impacted by approximately $1.10 per diluted share, primarily due to reduced lease income including sales-based rents or ancillary property revenues caused by the COVID action partially offset by 23 cents per share from cost reduction initiatives or a net 87 cents per diluted share and then another 5 cents from our international operations as well. In the third quarter, also includes, of our FFO, $0.10 per share of lower straight line rent, AM, $0.06 in litigation expenses, and $0.01 lower lease settlement income compared to Q3 of 2019. Now, like I did last quarter for Q2, let me walk through the components of the year-over-year change in the context of portfolio NOI presentation, which you can find on page 17, supplement issue today. And as a reminder, the following amounts are on a gross basis and are not at company share. Total portfolio NOI decreased from $1.5 billion in the third quarter of of last year to $1.2 billion this year, a decrease of 22% or approximately $338 million. The year-over-year decline for the third quarter was primarily due to the following, approximately $270 million in total from both domestic rent abatements and higher provisions for credit losses, primarily associated with retail bankruptcies. It is important to note we did not amortize any of the abatements granted. We recorded the abatement as negative lease income in the period in which the abatement terms were agreed with the tenant. The majority of the abatements that were granted were to the thousands of local small business Small businesses, entrepreneurs, and restaurateurs who have been suffering immensely with COVID. Our efforts to support local tenants in our centers were resoundingly appreciated as nearly 95% of our local tenants reopened their stores. An additional $165 million of the reduction was due to lower minimum rents and reimbursements, sales-based and short-term leasing due to the ancillary property revenues as a reduction from COVID as well as lease terminations from our bankrupt retailers and as I mentioned to you before, lower sales volume due to Thank you all for joining us. Tenant Bankruptcies, which caused 120 basis point reduction. Average base rent was $56.13, up 2.9% year-over-year, and we are pleased to report shopper traffic and total sales volume continue to improve with each sequential Thank you very much. The leasing environment is improving. In the third quarter, we signed 600 leases for nearly 2 million square feet, and we have a significant number of leases in our pipeline. We are pleased to see a continued long interest for spaces across our differentiated portfolio. Demand for space in our premium outlet portfolio has been really strong. With the space that has become available as a result of recent tenant bankruptcies, we are signing deals with the best new and exciting brands who want access to our highly productive outlets. And in ode to Rick, not here, but listening, I'm certain, we are executing both long-term and pop-up deals with leading brands, including names like Prada, Ferrari, Allbirds, and Uggs, just to name a few, and many, many more. During the quarter, we also resumed construction on the redevelopment of the Macy's Men's Store at Stanford Shopping Center with a RH mansion, and we started construction of a former Bloomingdale's store for the Falls and at the shops at Mission Viejo. The good news with this diligent focus on capital spend, all approved projects right now through 2020, our net cash funding is $140 million. Now let me turn to brand and retail investments. Spark, as you know, is our 50-50 joint venture with Authentic Brands Group, acquired Brooks and Lucky Brands out of bankruptcies. Both are storied and widely recognized brands with combined global sales of over $1.5 billion. We acquire companies cheaply. and we believe we can grow the EBITDA and achieve a significant return on our investment. Both brands have been integrated into the SPARK platform and we're very pleased with the progress we've made in such a short period of time. We recently partnered with Brookfield, as you know, and are in contract to acquire the operations, intellectual property and certain real estate of the JCPenney Company in a going concern transaction under Section 363 of the bankruptcy code. We believe in the Penny's brand. The company did over $9 billion in sales pre-COVID. We believe we can return the company to increasing sales and grow the EBITDA. The company has a loyal, core, diverse, and inclusive customer base concentrated in a moderate to higher aspirational category. This customer is important to the community, as is JCPenney, and to us. And we expect we will continue to grow this customer over time, and we're extremely proud to serve the community in that capacity. We believe that with us and Brookfield bringing focus, heat, Thank you for joining us. Thank you. Thank you. Thank you. for a total of 9.7. And this is, as a reminder, net of $623 million of quarter-end commercial paper outstanding. We've been active in the secure debt markets and have addressed all of our remaining loan maturities for the year, including a refinancing of the mills at Jersey Gardens through a single-asset CMBS station. Thank you for joining us. A common stock dividend of $1.30 in cash. And then finally, before we open it up to any questions, I again want to thank my Simon colleagues for their continued resolve in running our business under often trying circumstances, an environment that has been constantly changing. We have stood COVID. We have withstood government shutdowns. We have withstood lack of federal and state help, especially in real estate taxes. We have withstood fires in Northern California, hurricanes in Louisiana and elsewhere, and civil unrest. And we're pleased with the cash flow we're generating. and I want to thank my colleagues for busting their hump and things are looking up. We're ready for questions.