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.

Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one. As a reminder, please limit yourself to one question and one follow-up. Our first question comes in the line of Craig Schmidt from Bank of America. Your question, please.

Oh, great. Thank you. Just given the acceleration of COVID cases and the possibility of future mandated closings, I wonder if you're seeing greater consistency concerning store opening orders or store closing orders from state and local governments, particularly with regards to the demands made on standalone retailers versus mall-operated properties.

Well, you know, the only... The situation that we have right now is in El Paso where an enclosed mall has been asked to essentially shut down. That is up recent. That happened over the weekend. Again, I think enclosed malls are being treated unfairly and inconsistently. But, you know, we deal with what we deal with right now. That's the only one, Craig. We're hopeful that that will reopen. And listen, I think the consumer obviously is cautious. Our quarter over quarter sales decrease is only 10%. So, you know, the consumer is starting to come back. They're wearing masks and With all our protocols, we're hopeful that that trend will continue, but there's certainly no guarantees. And as far as predicting the government and state and local actions, I mean, obviously the level of inconsistency has been very frustrating. It's been state by state, city by city, county by county. It is a testament and often overlooked that we've been able to deal with this as well as we have. And we've done it when I've asked people to take pay cuts, and they've done it. They've shown up to work every day. You've seen the improvement in collections. I think we're making... basically all the right moves. But we can only deal with what we can deal with. I don't know if further restrictions will be in order. We have yet to see any evidence that our environment spreads anything. Obviously, the outlets and outdoor centers are doing better. But as you know, we have 50% of our portfolio and a lot dedicated to that. That's kind of why I think you see our performance the way it is. And, you know, the one line item that's up if you look at our financials is real estate taxes. When are local jurisdictions going to start giving relief to retail real estate taxes, you know, compared to distribution warehouses and the like? It's completely... It's completely opposite. We do more for the communities than other property types. And I am hopeful that at one point in the near future that these communities will recognize it.

Great. And then just as a follow-up, we've noticed the store closing cadence has slowed since Labor Day. I'm wondering if the occupancy number in 3Q20 is could be the trough, or do you still expect maybe some lower occupancy in first quarter 21?

Well, I think that'll be a function of, you know, whether we have further bankruptcies or not, Craig. I think based on what it is, we should be fine, but, you know, I mean, it is possible that we'll have further bankruptcies, and, you know, we'll have to, you know, when that happens, obviously we'll deal with that, but... There are certainly some bankruptcies that are potential out there in the next few months.

Okay, thank you.

Sure. Thank you. Our next question comes from the line. Rich Hill from Morgan Stanley. Your question, please.

Hey, good evening, David. Thanks for taking my question. First of all, thank you very much for the transparency on the bridge to rent collections. I think that's top-notch and best in class, so thank you for doing it. I want to ask a strategy question and maybe think about your portfolio. One of the things I think is misunderstood about Simon is that you own a diversified portfolio of retail real estate across property types and the quality spectrum. So I'm curious, as you think about your portfolio on the other side of COVID-19, Are you comfortable with having 46% to 49% of your total NOI coming from malls? Do you want less? Do you want more outlets? Do you want more international? I'm just really curious about how you think about your portfolio maybe over the next decade.

Listen, I think we're a strong believer in the outlet business, as you know, and especially with retailers and brands moving more and more toward Direct to Consumer. And so I think that plays well into that. And obviously the outdoor environment continues to be an advantage, certainly with the COVID very much part of our lives. So I like where we are. I think over time, our portfolio non-core assets will be shedded. Usually those don't have a material impact on our NOI or our cash flow. And so I kind of like where we are. We'll probably shed some more properties. I think international is intriguing now. There's value that we've added. The outlet business there that we have is very good. The outlet business in Asia is strong, so we're going to want to grow that. But I still kind of like the diversity by region, by product type, and certainly by domestic versus international. So our international results were pretty good. They were down, though. We had some new properties open up and some expansion, so it's hard to see that, but the core number was down a little bit, but they came back pretty strong. Obviously, there's a big wave going on now in Europe, so there are starting to be some more restrictions, but I think to direct the consumer from the brands is Really important, and I think that plays well in the outlet business. By the way, it's helping shop premium outlets. I spent an hour and a half with my partners, both at Rue La La Guilt and the Kinetic folks, going through a bunch of that want to be hooked up, so this vision That we had is actually going to come to fruition, I hope, knock on wood. So I like where we are, but we're always looking to add quality real estate and, you know, I look at the quality more, quality to me is more important than potentially the property type. And I think that's, you know, that's the big focus. There's going to be obsolescence in retail real estate, and so I think owning the best of the best is going to be a key to our success in the future.

Yeah, that's really helpful, David. And the reason I was asking the question is it just seems to me that on this other COVID-19 world, whatever it is, That the retailer itself is probably like you, agnostic on the type, and it's just looking for the best quality. So I'm curious, is that beginning to resonate with retailers as they think about their footprint and how Simon Property Group can help fulfill those footprints? Or is it still too early?

No, no, absolutely. And I would say that trend has happened completely. I mean, in the mall market, The mall has always competed with the guy across the street for the retailers. That competition still exists. It's certainly only going to be exacerbated by what's happened over the last six, seven, eight months. You've got to own quality. Today, it's somewhat irrelevant whether it's this kind of asset or that. Does it have critical mass? Is it well located? Does it serve the customer the way they want to be served?

Got it. Thanks, David. Look forward to chatting more.

Sure. Thank you. Our next question comes from the line of Alexander Gofarm from Piper Sandler. Your question, please.

Hey, good evening. Good evening out there in Indy. How's that, David?

You know, we're definitely out here, man. Okay.

Well, look, you're center of the biotech and health world, so we appreciate everything that the biotechs are doing.

Because when Lilly gets their vaccine, I hope, you know, my team's first in line just because they're across the street from us, okay? So we'll see.

Excellent, excellent. So two questions. First, again, appreciate the breakouts. and actually this provides clarity so that people can see the collections on a net basis or if you want to do collections on a gross basis, it's helpful. You had mentioned the abatements were basically expensed in the period granted. So on a go-forward basis, as we think about fourth quarter and the ramp-up, does this mean that we should see fourth quarter earnings jump by $200 million? or how should we think about the impact of the deferrals and the impact of the abatements on the go-forwards that we can think about the progression of Simon?

I'm not asking for guidance, but I'm just trying to get a ramp of how much... You're asking for guidance cleverly, but listen, I would... Everything is very still up in the air and obviously we had... The world's had this positive news today about the vaccine, but the fact is COVID is spiking, so we have to be very serious about that. I would hope, Alex, I mean, the big issue, the big thing that we've confronted aggressively in Q2 and Q3, and the way I look at it, frankly, is almost put the two quarters together, because you're right in a You know, we took the P&L hit when we granted the abatement. That's the right way to look at it. But I would say that the vast, vast majority of any abatements are behind us. That, though, to be clear, that's not to say that if there's an appropriate trade with a retailer That's a win-win for us that we won't do more. And what is that win-win? You know, it's New Deal's lease extent. You know, it's the normal stuff to do. But I would literally hope that the worst is behind us. But, you know, listen, I don't know what the new COVID cases today was. I was a little busy, but I'm sure it's well over 100,000. I can't guarantee that, but I would say between the credit provisions and the bankruptcies, I'm sorry, the credit provisions including the bankruptcies are kind of all melded in that number, and the abatements that we went out of our way to do, we weren't legally required to do, but we did for people that were You know, one, on the local front, very sensitive to their plight. And two, you know, there was a decent trade for us in the retailer, and we want them to prosper, frankly. I would hope that the vast majority of those two numbers, credit loss provisions as well as abatements, are behind us.

Okay. David, as you said earlier, the abatements were largely your local tenants, so they've either made it or they haven't.

I said the majority of it. We did grant abatements to others, so there's other abatements that have been in there. Again, it's a pretty big number in terms of that we didn't have to do. Like I said, I hope it's behind us. We'll have more in the Q4, but what we're projecting is a lot lower than what we've had in Q2 and Q3 together.

Okay, so correct.

So basically, you've taken the hard approach with both deferrals and abatements in the 2Q and 3Q, so hopefully going forward is less. Okay, I get it. The second question, David, is on the retailer front. Brooks Brothers, Lucky Brands, you did Aeropostale, now you're going to do JCPenney. You highlighted the sales. You highlighted this customer base that's loyal to the brand. What are the elements, without giving away totally the secret sauce, what are the elements that give you confidence when you look at troubled retailers and bankrupt ones? You know what? The core shopper for this brand is still there, despite that the retailers had trouble and is in bankruptcy. We feel that the core shopper is substantially still in place, that we've that we can recover? Because it's certainly not just buying something cheap enough. Anything can be cheap. There's got to be something tangible that makes you feel like you can get these customers to really come back and do it in a profitable way. So what is it that gives you that confidence?

Well, you know, first of all, we're, you know, we do, don't underestimate buying things cheap, okay, Alex? So, you know, that's always, it's always good to do that regardless. Listen, I just think based on the sales that we're seeing from the brands, we do a lot of brand research, and then we attack the problems with the profitability. I won't name names, but Brooks Brothers is a great example. It's got a great following. It had the strangest real estate footprint. They had single stores that were paying $3 million a year in rent. I won't name names. and the ability to reject those leases and create profitability there, get out of bad stores, reduce the overhead and then do all the special marketing with ABG has been a winning formula. In addition to that, we source it better and since we have this platform where we can leverage are based off of. It's just like it's been a very profitable thing. I will tell you one day Spark will be worth, you know, I mean, this isn't my style, but, you know, it's going to be worth, you know, we're going to make a plus on that investment without question. And it's just we know the brands. We do a lot of research. ABG has been a very good partner. They know how to blow out the license aspect of it, which we're a partner in. We get out of bad stores. We buy the inventory at a discount. We right-size the overhead, and we're just with better business judgment, and lo and behold, you suddenly have a business that's got significant positive EBITDA, and you haven't paid much for it. and I think when you put it all together, we'll have something that will have great positive eva dots and we'll end up making a billion plus out of it. My partner thinks a lot more, but I'll give you that number.

Well, look, we look forward to the exit and seeing that billion dollars crystallized.

Well, I mean, it's been a good... Thank you.

Our next question comes from the line of Caitlin Burrows from Goldman Sachs. Your question, please.

Hi. Maybe just following up on Alex's question more on the near to medium term then. So you've mentioned that your investments in the retailers have been at and many more. Thank you. Thank you. Thank you. Thank you.

It's a little, the only thing, Caitlin, it's a little, you know, obviously it's more volatile than, you know, than the rent aspect of our business, but because it's getting a little bit bigger, not materially bigger, but a little bigger, we decided to outline that separately so you can look at it, you know, as a standalone on its own. and then obviously don't forget, you know, they do pay us contracted rent to SPARK is a rent payer to Simon Property Group and its properties. So, you know, we get the added benefit of the cash flow from running the business operate and then obviously we get the added benefit of The rent that's collected from the entity with the stores that we have.

Okay. And then maybe on the dividend, I know it's up to the board, but given the $1.30 per share dividend for a 3Q, the historical dividend rate, current FFO and cash flow, what metrics or drivers will be most important in establishing the 4Q dividend and that of future quarters?

Well, listen, I think we still are very cautious in the sense of the dividend just with respect to COVID. So, you know, once we, you know, I mean, I feel like at least that the worst is behind us, but we don't know for sure. So I think we'll continue to be conservative in that. Obviously, you see our cap spend way down. You know, a new development or redevelopment that may pick up a little bit next year. So we'll balance that. Obviously, we've got to deal with our taxable income as well, but I can't give you a real true run rate yet. I think we'll be in a better position 21 to explain that when we do our You know, our earnings guidance, which we will reinstate in our earnings call. I mean, we have a pretty good idea what we expect from next year, but we'd like to go ahead and finish the year as well, given all the volatility out there. But, you know, we're confident of dividend and the cash-paying aspects of it. and the cash flow generation from our company. And I think if you saw that in the Q3, you know, a reasonably healthy pickup from Q2 when we were really in the midst of, you know, trying to figure out COVID.

Okay. Thank you. Sure.

Thank you. Our next question comes from the line of Michael Billerman. Your question, please.

Great. Thank you. Good evening, David. I was wondering if you can talk a little bit about the leasing pipeline. You talked about the leasing that you accomplished in the third quarter, that 2 million square feet, and a very large pipeline that you're working on. And I was wondering if you can provide us maybe with some a little bit more granularity about that pipeline, how much of it is new leasing for vacant space, new leasing for tenants that are going and also potential renewal activity. and within that, maybe you can sort of just highlight the changing nature of maybe the leases. I don't know if there's differences in term or TIs or anything, just to give us a little bit more flavor for what the current environment is like.

Well, again, I'm not going to get into as much as you want. That's not really the purpose of the call, to go through the granularity of all the leases. But I would say generally the lease terms have not changed. TAs have not really increased. And we're seeing more box activity. There's a number of retailers that want to grow their footprint in the outlet business. A number of the better and the higher brands. We're also seeing that the parkers of the world wanting to grow their footprint. and the internet-oriented companies. Then you see companies like American Eagle and others that are growing their footprint. There's a well-known retailer that has their casual wear business that's growing their footprint significantly. I think we've got 20 Deals in the Works for Them. So it's across the board. And I would say we're mostly replacing spaces that we got back from bankruptcies, leases that have terminated. And the renewals are, you know, a lot of the renewals we're doing now, we're doing as part of our COVID initiation. So To the extent that we did a deal in abatement, you know, we may have addressed 20 and 21 renewals. And it's a judgment retailer by retailer. And, you know, we're working it. I mean, obviously, you know, the nation's aren't easy because, you know, I mean, COVID has made them nervous and obviously there's a lot of excess capacity in our retail real estate industry. But I think we'll hold our own. And, you know, and look, I think the cash flow, you know, we'll see improvements for cash flow next year. And that will be a nation of Lease renewals, new business, better sales. You know, we lost a lot of income just because we were shut down with all of our Simon Brand Venture income. All the stuff that's traffic driven. So I think we'll make a rebound along all those lines. And no, we're not doing just percentage rent deals. The outlet business has had Historically, some of the lead anchors have had percent rent deals only. To the extent that we do it, we have a four in there and a clearly defined definition of sales, but it's all over the board. What we're trying to convey to you, Michael, is that we are open and doing new business. That's important. I think we'll have a better We'll get more granular next quarter, but we're open to a new business. And the retailers are, sure, there are a number of closing stores, there are a number of bankruptcies, but the ones that are out there are looking to grow their footprint.

That's helpful, Culler. And just as a follow-up on capital deployment, obviously the big focus of yours has been a lot of these innovative projects Transactions, buying some brand-named retailers. But you also talked on the call in response to a previous question about buying high-quality real estate. And I wanted to better understand what sort of opportunities may be out there, either buying from your joint venture partners, which may want to reduce their retail, or maybe they don't and they want to go further in. But you also have a transaction that you're – I'm just trying to understand how all of this fits together.

Well, Michael, again, I respect you immensely. I'm not going to get into the Taubman situation. Obviously, you saw our litigation expense with it. But, you know, we're not out of, I'd say if there is quality real estate, we're going to look at it. And much like, you know, but there's got to be bargains that can be had. And, you know, so we'll see, you know, what that transpires. But nothing really... You know, I also want to be, because we've been at this, I mean, we're not between the penny and closing of Brooks and Lucky. There's really nothing else on the Spark or the retail front that we see right now clearly for the rest of the year. So that business is all about integrating Brooks and Lucky into Spark. and then obviously we have a tremendous amount of work to do with our partner Brookfield and the management team at Penny to sustain their turnaround. Our plate is full in that category. There won't be anything going on on that front. Right now we haven't really looked at anything external. because obviously we got our hands full. But it is a testament to the company that we can do penny, we can do our debt deal, we can shut down our properties, open them up, deal with – we've done 14,000 lease amendments, right, Brian? Yes. We've collected rent. That hasn't been easy. Okay. Okay. You know, it's not like they just suddenly said, okay, I'm going to send you a rent check. It hadn't been that easy. So, I mean, we've been, you know, we've been, you know, we've been busy. Obviously, we've done a lot of refinancings on the security front. We've been doing just about every shutdown the pipeline in terms of redevelopment. Development brought it back up to some extent. So, I mean, We got our hands full. I think we've been executing unbelievably with all of the things that have been thrown at us. So we're really not looking externally at this moment.

Sounds like Brian has less hair now.

By the way, I think between Tom and Brian and Adam here, I'm the only one Thank you. Our next question comes from the line of Derek Johnson from Deutsche Bank.

Your question, please.

Hi, everyone. Good evening. Allied Sports, Parm, Pinstripes, Soho House, and Nobu Hotels How do you guys view these earlier pre-COVID investments and or partnerships, and do you still believe them to be a viable path forward post and as we emerge from the pandemic, or in effect, has the merchandising approach actually changed?

No, look, obviously we wish, good question, and we obviously wish that the pandemic hasn't, didn't hit us, but and hit those businesses. But Soho has a great brand and ultimately will be stronger and gets everything back online. So the reality is very comfortable and they actually brought in some new capital at the price that we did a couple of months ago I think. So Soho is great. We actually have Woodbury and Burlington opening next year. I think Woodbury is opening in January and Burlington in the spring. And my son and I, and if Jeff Zalaznik is listening, which I doubt he is, but we had a great carried out Dinner at Parm, so I'd encourage everybody to go eat there. It was really good. Chicken Parm Dinner. I think it's a great brand. Lifetime will be the survivor in that industry. I have all the confidence in the world. A great CEO, entrepreneur, great brand, great customer base. So, I think by and large, you know, we feel like we're a pretty good spot. I don't think, you know, I think what's changed there, because I don't think we'll do the little, you know, venture deals the way we did, even though we've had some recent pops in those, meaning we've got some, you know, we're going to, we're selling our interest in MeUndies at a profit and and there's some new capital that's come into some of those businesses at prices higher than what we came in. But I don't think we'll do those little deals anymore. I think we've got too much to say grace over. But I think all that we've invested in, we feel generally pretty good. Though they've all, frankly, they all fit the flywheel that we were creating. We just didn't anticipate You know, the black swans of black swans. But all of those companies are alive, and I expect them to come out of it okay.

Okay, great. And sticking on some larger brands, are some of the brands you recently made lifeline investments? I know they were mentioned briefly. Lucky, Brooks Brothers, Forever 21. Will any merchandising additions, and perhaps with Authentic, drive a focused re-merchandising mix at JCPenney in hopes to accelerate sales? Is that on the table?

Great insight, and the answer is absolutely. So that's one of the interesting things that we found is we do think that... The combination of our relationships with direct-to-consumer crowd as well as all the brands that either we control or that ABG does, those products will find a home in penny. And there's a lot of intense discussions going on. So we would expect to enhance the penny vendor matrix with the brands that ABG controls as well as ours. So very, very astute, and the answer is without question.

Thank you. Thank you. Our next question comes from the line of Mike Mueller from J.P. Morgan. Your question.

Thanks. Can you tell us what the pro rata uncollectible reserve is that's in minimum rent for the quarter? Sure.

The pro-rata minimum rent in our joint ventures?

No, the pro-rata, the uncollectible reserve, what it is on a pro-rata basis in the quarter.

We're really doing this on a gross basis because that's how we look at it.

Okay. And can you talk about how similar or different traffic and sales are at the outlets versus the malls?

The outlets are performing. I don't want to necessarily get into the specifics, but the outlets are performing better. What we've seen across the board, though, whether it's an outlet or an enclosed, if it does cater to tourism, those are ones that are... continue to underperform our average. So whether it's an Orlando enclosed or outlet, in Orlando we have an enclosed mall there and we have the outlet centers. That market, both are underperforming with because of the lack of tourism and obviously Universal and Disney operating at much less than full capacity.

Got it. Okay.

That was it. Thank you.

Thank you. Our next question comes from the line of Flores Van Dykem from Compass Point. Your question, please. Thanks for having my question, David.

Sure. I had a question on... Authentic Brands, you suggested they're going to step into the JCPenney deal with Brookfield and yourself. Would they be an equal partner, and what pricing would they step in at the same price you guys bought?

Yes, the same price. They will not be an equal partner, but they'll put in, you know, we're reducing our investment, both us and Brookfield, based upon the contribution they make.

Great. And so how do you look at authentic brands, particularly, I mean, you talked a little bit about having their brands, selling their brands exclusively through the JCPenney outlets and, you know, increasing the JCPenney private sales, it sounds like.

Well, I didn't say that's exclusive, but, you know, they have a They control a number of brands like Juicy Couture, as an example. Juicy Couture is not in JCPenney. We're going through the vendor matrix now. Eventually, I think Penny will end up distributing those kind of brands that ABG controls JCPenney department stores. So it'll be a win-win for everybody.

Okay. Maybe my follow-up question with some of those brands as well, particularly as it relates to the outlet business. So you mentioned your outlet business is doing quite well. Obviously, they're open air, so they don't have quite the same restrictions. Maybe if you can talk a little bit about how you think the outlet business could – Is it still going to be as reliant on apparel going forward? And how does Authentic Brands fit in? And is Authentic Brands a tenant right now or a large tenant in your outlet business? And could they be in the future?

Authentic Brands is not really – I mean, they have some brands that we're not invested in, but they do have outlet stores. Now, they don't necessarily operate those stores, but take an example, Volcom – were there a partner with Volcom. We're not, Simon Property is not an investor in that, but they own the IP and they own part of the operations. But it's really Volcom used to be owned by Caring Group and then sold it. But they operate, Volcom itself operates outlet stores in our portfolio. So they are not an operator, quote, They do own intellectual property of certain brands that do operate stores in our outlets. And that will continue, but that's been that way for years. So again, but we're not involved in everything that ABG does. and others. I mean, I do think a number of their brands do have store potential and they'll either operate or find an operator to operate those stores. And what was your other question? I'm sorry, I forgot it.

Yeah, no, the other question, David, was in regards to the apparel industry. The prevalence of apparel and apparel, do you see that changing over time?

Look, I think generally we're seeing a lot more interest in home furnishings and the like. We're doing a lot more deals in the outlet sector with the, you know, without naming names, but all the home Furnishing and Furniture folks. And so I think as you've seen that shift, generally speaking, I think we're seeing a lot of that pick up in the outlet business as well.

Those typically would have the lower sales. Is that a concern for you or do you think it's all about driving the traffic at the center?

I think it's all about driving the traffic. I have no concern about that at all. And usually those are little big boxes so that the rent that's leaving versus the, you know, would I rather have a dress barn or, you know, an RH, you know, okay, that's it, right? So would I rather have a, so it's those kind of trade-offs that I think are available to us. I think the mix actually will Thank you. Our next question comes in line of Linda Tsai from Jefferies. Your question, please. Hi.

Your overall leverage is much better than your peers, but net debt to NOI is up a turn, understandably, since 2019. What sort of leverage do you want to target, and how would you expect this to trend in 2021?

Well, you know, our leverage should decrease, right? So, you know, we're generating cash. Our development spend is modest. and the excess cash other than dividend will ultimately go to reduce our indebtedness. And we'll also sell assets. So we're still looking to essentially maintain our balance sheet. I mean, that's an advantage that we've worked very hard to achieve. It hasn't been easy, and we're not going to blow that. Brian, you want to add anything? No, it'll naturally come down next year, Linda, just given the recoup of NOI relative year over year. So you will see us come back down to a more normalistic or a level consistent with prior periods is our expectation.

Thanks. And then in terms of the non-core assets that will be shedded, albeit not a material impact, over what time frame would this happen? Like would you wait for some stabilization in NOI?

Well, I just think it's going to, in fact, we've got an asset now. We're about to market. I mean, we're going to try and do it. I mean, we'll see. It's not, you know, this is not earth-shattering big projects, but, you know, there's, you know, we expect to shed, you know, some non-core assets that won't have a, not going to have a material impact, but it just, it'll help us run the company better because we won't have to focus on it.

Thanks. And then just one last one. In terms of the 85% collections 3Q, do you think this will stay neutral in the neutral territory in your term, or would you expect bigger improvements?

Well, I would expect it to be hopefully better in Q4. But we're just, you know, we're similar in October, but obviously I would hope that, as I mentioned to you before, we've still got some bigger accounts that we have not made a lot of progress with. I'm hopeful that something positive will happen there. So once that happens, then it will jump up.

Thanks.

Sure.

Thank you. Our next question comes in the line of Endel St. Joseph. from Mizell. Your question, please.

Hey, good evening. Thanks for taking my question. So, David, I was hoping you could talk a bit more about the environment for larger anchor box space specifically. I'm curious where it's coming from and how this spreads compared to the rest of your overall leasing. And are you able to provide any commentary at all whether you've leased any of that space to Amazon? Thanks.

Believe it or not, there's still deals to be done. We're talking to a department store to take a couple of boxes over. There's not going to be 30 to 40 deals, but there'll be 15. I think our retail community is generally the healthier companies are Looking toward the future and believe in having the right footprint and we're going to shrink the bad stores, but I think they're going to look at new opportunities. We still believe in the mixed use effort that we're undertaking. Obviously, we don't have to be in a rush to do it. and, you know, we're not going to build, you know, we're looking at plans that maybe had 60, 70, 100,000 square feet of new retail small shop space. We're not going to program that but, you know, we'll make it up with boxes and lower investment and, you know, still manage the appropriate returns. There's still opportunity to release the space. Fact of the matter is we still don't own a lot of it that we want, you know, but we're not going to pay, you know, appropriate prices for it. And, you know, there's certainly a gap between the bid and the ask. We're really not bidding, and they're really not asking, but, you know, If we were to bid and they were to ask, it would be a big gap, but good real estate will survive, but it's going to take capital, great operator, and it's not going to be for the faint of heart, but it's going to be reprogrammed. Something that jumps out, like at Brea, we'll probably have We always had two anchors, but we had, you know, this is the old Sears store that we control. We'll still do the two anchors there, but we probably programmed 100,000 square feet of restaurant small shops, and we're not going to do it. We'll probably do 20, 30, but the cost will go down, and we still think we'll have the appropriate returns on investment. There's still stuff to do to improve our portfolio. And there's still some decent demand on, you know, just box for box.

Got it. Got it. That's helpful. Are you able or willing to say if any of that leasing has been with Amazon specifically?

Are you well? Could you repeat it, please?

Apologies. I was curious if you're able... are willing to share if any of that leasing has been specifically with Amazon.

We have no signed deal with Amazon, no.

Okay. And a follow-up on the leasing spreads in the quarter, down another 400 basis points sequentially to minus 4% second quarter in a row. Was there anything having a disproportionate in that calculation during the quarter? When do you think that trough and I guess more broadly, how important do you think having a vaccine effectively at hand will be during your ongoing lease negotiations and the near-term trajectory of leases as we build back to pre-COVID cash flow? Thank you.

Yeah, I think the spread is really mixed because we had some boxes that rolled out last year compared to this year. So I wouldn't, you know, that's a number I wouldn't, you know, jump up and down whether it's really good or not. You know, not so good as in this quarter. It's really a mix issue because we had a lot of box activity last year that we rolled out, and this year it's 12 months later, so it's really more of a mix issue. And you can see that in our base rents increasing, which is probably a little more important stat.

Okay.

Okay, thank you.

Sure. Thank you. Our next question comes from the line of Vince Timbo from Green Street. Your question, please.

Hi, good evening. I have a few questions related to co-tenancy clauses. When an anchor is temporarily closed, like some movie theaters today, could that trigger a co-tenancy clause at your center? And then also, more broadly, just can you help us understand what impact co-tenancy clauses have had on financials this year, if any?

Very little events this year, and we don't expect it to be, you know, meaningful or immaterial. Let me restate it and say it better. It'll be immaterial next year.

Okay. And then on just the temporary point, like if a theater is temporarily closed, is that potentially an issue on that front?

I know it's hard to... No, no, no. It's an appropriate question. I think... You know, I think of all of the theater closures, one deal, and I can't remember which one, that it may affect a co-tenancy at one of the mills for a few of the boxes. It's essentially immaterial.

Okay. Thank you for that. Now that you've controlled JCPenney and you're clearly bullish on the future there, but how are you thinking about the pace of potential store recaptures there at some of your better centers in order to pursue redevelopment opportunities over the next few years?

Well, it hasn't closed, and in fact there was a hearing today which I did not hear. I did not hear what happened. It's still not done yet, so it hasn't closed. Assuming it gets approved, it'll be sometime later in the month. Look, it's complicated the way it's split up between what the operating company owns in real estate and what the PropCo owns. We have rights, we being Simon, have rights to recapture certain assets. So does Brookfield. But I think we're going to be patient about it because I think the most important thing right now is just to get it stabilized and positioned for the future. But eventually, there's certainly some stores that probably are not maybe properly positioned with us where we do want to recapture the space. and I think that's an opportunity, but you're not under, we don't feel the pressure to do that anytime soon. But that'll be, you know, next year's business. And then when that happens, I get to negotiate, I guess, I don't really know with who, maybe Rick, maybe our guy, maybe Brookfield. I'm not really sure how it works, but we will appropriately do it, Do it fairly with all the constituencies involved.

Okay. Thank you for that.

Sure.

Thank you. Our next question comes from the line of Juan Sanabria from BMO Capital Markets. Your question, please.

Hi. Thanks for the time. I was just wondering how discussions are going with grocers, given how strongly they've performed in kind of their space to date with the COVID and how that's transpired. Have you seen traction in the various different formats? What are they most attracted to from the different types of assets that Simon owns and controls?

We opened one in a specialty grocer in Boca just recently that's doing very well. We just made a deal that I don't know that I can announce it that We just signed the lease this week to replace the Fairway Market grocer in Manuette with a great grocer. What we're really focused on is the specialty grocers as opposed to the big mammoth ones. I think there'll be a handful of deals. It's not going to be 50, but I think over the next couple of years, there's no way we can't get 10 to 20. The specialty ones, like the one we did at Boca is great. It's at an end cap of kind of the lifestyle center that we did at Boca. And, you know, high-end grocer, come in, get your prepared foods, quality. You still have the Eataly's of the world that are out there looking to do business. I had a conversation with them recently. That's the same kind of category, prepared foods, specialty grocer, not necessarily a place I guess you could pick up milk, but more of prepared foods, dine-in, or get your special consumables. So I do think that'll continue to grow.

Great for me. He kind of talked about acquiring some assets, high quality retail. Have you looked at or any interest in some of the Westfield centers given what they're trying to do at the corporate level?

No, I mean, they're doing what they're doing, so nothing there to report.

Thank you.

Thank you. Our next question comes from the line. Your question, please.

Thank you. You provided a helpful bridge looking at the portfolio NOI from last year to this year. One of the biggest components of that was the $270 million you mentioned. It's a big number. I was just wondering if there's any kind of breakdown you can provide on the call?

Well, it's a combination, as I said, of abatements and credit provisions. The credit provisions are mostly bankruptcies. You know, how is it split? You know, it's, I don't know, 60-40, somewhere in that range. If that's helpful to you, you know, again, I view this as kind of a, you know, this is not going to be routine, but it's kind of a one-time thing. It's a COVID impact, so to speak, between Q2 and Q3, but it's split roughly between abatements and credit provisions, which are mostly bankruptcies and abatements, and maybe it's 60-40 in that range, if that's helpful.

It is. And are you incorporating...

You know, credit provisions include lots of things beyond just, you know, pre-petition rent or anything else associated with a bankruptcy.

Okay. And just given the news today about the vaccine from Pfizer, does that make any kind of impact in terms of your mentality when it comes to these negotiations? I know it's early, but just curious.

Not really. I mean, listen, I, you know, before the news or today, I mean, we were feeling better that we had dealt with a lot of crap in Q2 and Q3 and we're, you know, we're here to, you know, to, you know, and we're here and our cash flows dramatically up and our collections are up. and we're getting our business back to normal. So we were headed that way anyway, but obviously it just, you know, I mean, this situation is a black swan times, you know, two or three and, you know, it's been sad for, you know, all of us to have to see what's happened to, you know, the country, you know, You know, good, solid businesses beforehand that we've had to deal with, our employees, obviously, all the people infected. I mean, I'm just, you know, maybe there's a little more of a, what's the phrase, a pep in the, what's it?

Pep in your step.

Pep in the step. You know, I just think it's good news. Let's hope we can, you know, let's hope we can get out and get done. But no, it's not going to... It's not going to affect us because we're mostly dealing with, you know, COVID-oriented shutdowns or impact of those shutdowns. And listen, I hope it gives our, you know, client base more confidence in that, you know, that's fine. That's good. It should. You know, it should. And hopefully we'll see some benefits from that into 21 and beyond.

Okay, thank you. Sure. Thank you. This does conclude the question and answer of today's program. I'd like to hand the program back to David Simon for any further remarks.

Okay, thank you, and thanks for staying late on a Monday night. Be well.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.