Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2020 Simon Property Group Incorporated Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. 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 for joining us today. Presenting on today's call is David Simon, Chairman, Chief Executive Officer and President. Also, on the call are Brian McDade, Chief Financial Officer; and Adam Reuille, Chief Accounting Officer. 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 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 prepared 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 want to 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, and the unfortunate rioting that also occurred. So we've been dealing with a lot. And frankly, I'm extremely proud and grateful for the dedication and commitment of our team as they've demonstrated during these challenging times, from closing to opening to securing our buildings. They've done a tremendous 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, 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 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, leading to 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. Total portfolio NOI 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 primarily due 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 abate rent for thousands of local small businesses, entrepreneurs, restaurateurs, and other retailers for the period they were closed. Approximately $145 million came from lower sales based rents, short-term leasing, and Simon brand venture income due to the fact that our properties were closed, and approximately $60 million of lower income from our international outlet portfolio, again due to closures during the second quarter. These decreases were partially offset by approximately $105 million from our cost reduction initiatives. 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. Standard bankruptcies and lower specialty leasing during the second quarter due to COVID-19 impacted occupancy by 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. Regarding collections, we have collected from our US retail portfolio approximately 51% of our contractual rent for April and May combined, approximately 69% for June, and approximately 73% for July with only minimal deferrals. These percentages are not reduced for any of the abatements granted during the period that I previously talked about. 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 US properties starting in early May and our entire portfolio as of July 10 has permitted, even with the ever-changing governmental orders that have been in a constant state of flux in 37 states and 150 different counties, all with different protocols. On July 15, the California Governor issued a new restrictive order requiring us to close seven of our properties in the state. While we remain open except for those seven recent closings in California, we have been encouraged by the shopper response to our reopening, particularly in certain locations where there's been steady improvement in traffic, with many tenants reporting sales better than their initial expectations. In centers that reopened in early May, tenants reported that May was approximately 50% of their previous year's volume for the same period, with that increasing to more than 80% of prior-year volumes in June. Currently, we have 91% of all tenants, or nearly 23,000 tenants across our US portfolio, open and operating. The remaining tenants that have not reopened are largely closed due to restrictive governmental orders limiting operations, including movie theaters, fitness facilities, and some restaurants. Internationally, all of our designer and international premium outlets are open and operating, with shopper traffic and retail sales at approximately 90% of prior-year levels. We continue to see steady improvement in traffic and sales at our international premium outlets. We recently opened Siam Premium Outlets in Bangkok, our first Premium Outlet Center in Thailand, which is approximately 90% leased and features leading brands such as Burberry, Balenciaga, Coach, Ferragamo, and many more. We also completed several redevelopments, including phase IV of Gotemba Premium Outlets, which is 100% leased. Gotemba Premium Outlets is the largest outlet center in Asia outside of China, and we project annual retail sales to exceed $1 billion. Our net investment focus continues to be on projects nearing completion, with our share of the remaining net cash funding required to complete projects currently under construction being approximately $140 million through 2021. We have a strong track record of capitalizing on various value-creating opportunities. We were involved in a joint venture with Authentic Brands Group that submitted stalking horse bids to acquire Brooks Brothers and Lucky Brand jeans under Section 363 of the Bankruptcy Code. First, Sparc is buying them out of bankruptcy, acquiring inventory at or below cost, and when they purchase intellectual property, they do so at attractive values. Second, when Sparc integrates acquisitions into its platform, it significantly reduces overhead costs. Third, Sparc can reject any leases that do not meet its criteria. These investments are expected to generate positive EBITDA, and we expect equity investments to be returned within a year after the integration of operations. We have created real value already in our investments in Sparc and ABG and look forward to other opportunities. Regarding our balance sheet, at the end of the quarter, our liquidity was approximately $8.5 billion, consisting of $4.9 billion of available credit facilities and $3.6 billion of cash including our share of joint venture cash. This liquidity is net of $700 million of US commercial paper outstanding at quarter-end. Subsequent to the quarter-end, we paid down a total of $2.5 billion under our credit facilities. We also completed an optional redemption at par of $500 million in 2.5% notes and €370 million in 2.3% notes, both maturing later this year. Importantly, our net debt has not increased by the end of the second quarter through this pandemic period, and our debt covenants remain well above the required levels with significant headroom. As you know, we also paid our second quarter dividend of $1.30 per share in cash on July 24. The board will declare the third quarter dividend by September 30, and we expect to pay at least $6 per share in cash for dividends in total for 2020. 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 determination of the Simon team. We're proud to help local small businesses, entrepreneurs, and communities get back on their feet. With that, we're ready for questions.

Thank you. First question we have on the line will be coming from Caitlin Burrows with Goldman Sachs. Your line is open.

Hi. Good evening, everyone. I guess as of August 9, you mentioned 91% of tenants were reopened but then July collection was around 73%. So just wondering if you could go through kind of why that amount isn't closer to 91%. Obviously, it's better than the previous few months and how quickly you think you could get to a point where rents being paid is more similar to the amount of stores open?

Well, July is at 73% and the reason is that certain tenants haven't paid rent. They have contracts they're obligated to, but certain tenants haven't paid.

Okay. And I just – when you think about the amount that hasn't yet paid, I know, on the May call you had a good sense of just making that point that those who have leases unless they're bankrupt you expect them to be paying. So, I guess could you just go through the status of the portion from Q2 that weren't paid whether it sounds like there are minimal amounts of abatements, kind of what portion is still under discussion versus rent deferrals you did give or other categories?

We're in active negotiations with all of our retailers. We did provide abatement for primarily the local businesses, entrepreneurs, restaurateurs during the closure period, and we are finalizing a number of our remaining open issues with our retailers. We've taken a hit of $215 million, which is a combination of abatements and write-offs from bankrupt tenants, etc. We're not going to disclose the percentages of each category primarily because we're still in negotiations with tenants regarding April-May, and we don't think – that information is proprietary and puts us in an awkward position during negotiations. We've done over 9,000 amendments. I think we're in very good shape. We took the hit that we think is going to show up in Q2, and we're processing the balance but hopefully that will all be behind us here in the near future.

Okay. Thank you.

Sure.

Next question will be coming from the line of Alexander Goldfarb with Piper Sandler. Your line is open.

Hey. Good afternoon out there. David, how are you?

I'm good, thank you. Out here, I'm optimistic about the resurgence of the Midwest, my friend. Go ahead.

By the way, careful what you wish for because all the fleeing New Yorkers will end up moving in next door to you in Carmel. So just be careful what you wish for about the Midwest. So two questions. Just following up on Caitlin's, I understand your hesitation but still, if we look at your accounts receivable, it definitely jumped from first quarter to second quarter meaningfully. So it sounds like you probably had not that much straight-line rent write-offs and you think that most of this is money good. So is there a way for one...

Remember that's quarter-end. A lot of collections. We made a lot of collections in July which relates to Q2, but just know we're continuing to finish a number of deals. So, don't draw conclusions based just on that one snapshot. We expect roughly 85% of Q2 to get collected, possibly 93% for July, and hopefully get back to the normal run rate of 97%-98%.

Okay. But still can you just give us some flavor even without the numbers but just like percentages, just some color? You had a bunch of tenants who weren't paying. Then they started to pay. Your tenants who asked you for deals, some of those were flat out rejected, some you worked with. Can you give us a framework around that, just to help us understand better?

I have a philosophical difference. If I say I deferred half a guy's rent, the guy I didn't defer rent might say, 'Why didn't you do this for me when you did it for others?' It’s proprietary information. The deferrals in July were minimal, and those in June were less than April and May. We're moving in the right direction.

Okay. That's helpful, the 28% still to be done. The second question is about your hallmark which is cash flow and I see that a few rating agencies have you on negative. How do rating agencies view these transactions? Are they favorable and comfortable or have you had to alter some of your plans based on maintaining your current rating?

We're not concerned about that. Despite all the closures, we were cash flow positive this quarter, aggressive in cost reductions, and our covenants remain above required levels with significant headroom. The equity in both Lucky and Brooks Brothers investments is not material to our financial situation, and we wouldn't disclose it if it was. So, no worries.

Understood. Thank you, David.

Sure.

Next question will be coming from the line of Richard Hill with Morgan Stanley. Your line is open.

Hey, David. Good afternoon. I wanted to discuss the return to normal from a cash flow standpoint. What does that return to normal look like and how long does it take to get there?

It's a fair question, but I don't have an answer. The pandemic has had a dramatic impact, more volatility than during the Great Recession. The number of bankruptcies in our sector is tremendous and like what we dealt with in the early 1990s. It will take time but certain variables are tied to medical conditions, and it's hard to pinpoint when things will normalize.

Thank you. I would hope for more but I completely understand that. One follow-up question, please.

Sure. No worries.

Next question will be coming from the line of Haendel St. Juste with Mizuho. Your line is open.

Hello out there.

How are you?

Hey, David. I'm curious about your thoughts on Amazon potentially taking up space at malls and former anchor boxes. Do you think it would work from a practical sense? Would it add value to the centers, and could it work from an economic perspective?

I'm really not in any position to respond to market rumors or speculation. Generally, more retailers are distributing their e-commerce orders from their stores, so they're fulfilling from their stores as well as providing curbside pickup. That’s a positive trend long-term for us, but I won't comment on specifics about Amazon.

Fair enough. My second question is about the spreads turning flat in the quarter, implying a meaningful decline. How do we think about the leases signed during the quarter? Any big deals of note?

In Q2, we did not do a lot of new business. We were in triage mode. We hope to stabilize our tenant base and our new business is expected to surface primarily in 2021, and we expect to see potential pop-ups in our outlet business, especially since they have excess merchandise. We're focused on getting our retailers open and traffic back, not too focused on spreads this year.

Thank you for the thoughts. Good luck out there.

Sure.

Next question will be coming from the line of Mike Mueller with JPMorgan. Your line is open.

How much of the second quarter cost reductions should we see continue in the second half?

It’s hard to say. There will be some operating expenses that won’t see much benefit as we have to adopt new standards. From a corporate level however, not many folks have shared their reductions in costs, but we took out $105 million of costs across corporate and the portfolio. Expecting some challenges ahead due to standards.

Thanks. And as a follow-up, what percentage of ABR is tied to entertainment, dining, and fitness?

That's a good question, but I don't have that exact number off the top of my head. Probably around 5%.

Next question will be coming from the line of Ki Bin Kim with Truist. Your line is open.

I wanted to go back to the high-level rent collection data you provided. About 57% of rents in 2Q. Without going category by category, high level, what percent of the rent that you did not collect, did you write off or reserve for?

We’re probably in the 15% to 20% range, okay? I'm reluctant to go too deep into details because all of this will come out, and you know we have new rules this year-end.

Do you have data on what percent of your tenants you deem to be local? Will you provide loans for these tenants besides abatements or deferrals?

We don’t disclose local numbers, and we don't provide loans. We may do tenant allowances for retailers and restaurants but not full loans to the point that it’s a non-event for us.

Okay. Thank you.

Sure.

Next question will be coming from the line of Linda Tsai with Jefferies. Your line is open.

In terms of buying out bankrupt retailers, how do you go about picking and choosing? How do you consider the opportunities?

ABG is a fantastic intellectual property group. We work together to understand where there is value in the brand. We're very selective and only pursue brands that we feel have potential without trying to hit a home run. We're hopeful to buy into opportunities that provide positive EBITDA while saving jobs.

Thanks for that. Could you discuss how COVID impacts varied across your different property types, say the Mills, Premium Outlets, and enclosed malls regarding rent collections and traffic upon reopening?

It varies by location. The consumer generally feels more comfortable in outdoor environments, and it depends on where COVID cases ebb and flow. Our outlets are doing reasonably well, but tourism-dependent businesses are still struggling. We're optimistic that people will return to shopping once comfortable.

Did rent collections vary at all across property types?

Our retailers are paying us across the portfolio, so we don’t see a differential in collections between property types, though there may be trends for others.

In terms of the $215 million in abatements and write-offs, how do you expect that number to trend in Q3 and Q4?

My guess is it will be unpredictable. August and September we'll engage with some more issues. There are still risks we might involve abatement.

Next question will be coming from the line of Nick Yulico with Scotiabank. Your line is open.

I'm trying to reconcile a couple of numbers. The cash flow statement is showing that your quarterly cash flow from operations was down over 90% if you just try and figure out what the quarter number is. Is there anything more you can explain as we're looking at these items?

You may have a hard time with our income statement. If you need help, we can talk offline. Our numbers are collected in July for Q2. We have some retailers that haven't paid, but we haven't pressed the issue yet.

Okay. Yeah, I can follow up offline.

Sure.

Next question will be coming from the line of Derek Johnston with Deutsche Bank. Your line is open.

What was your process in determining the level of abatements granted? Could you take us through the decision process in granting abatements?

We made judgment calls and handled all local retailers universally by abating them during closures. Decisions were made based on credit assessments and relationships. We've been in business for nearly 60 years and tried to do our best with the unique circumstances.

What is the return to development plan at Phipps Plaza? Can you quantify the likely timeline or what you need to see happen in order to resume construction?

We are getting close to resuming and finishing the hotel. We're currently evaluating our options on the anchor building. The office building will be market-dependent, and construction could resume within the next two to three months.

Thank you.

Sure.

Next question will be coming from the line of John Kim with BMO Capital Markets. Your line is open.

You provided the monthly trajectory of both rent collections and deferrals which have been improving sequentially. Could you provide the same details about how rent abatements have been trending in the past months?

Rent abatement would be way down as we are essentially open, other than the California situation. I hope we can see a return to normal on that front.

So this is not a case where the collections were favorably reported because of an increase in abatements?

No, our collections reported were based on our rent roll, which excluded abatements.

Next question will be coming from the line of Vince Tibone with Green Street Advisors. Your line is open.

Could you share how shopper traffic and tenant sales at your domestic centers were in July compared to the prior year?

We don't have July numbers until late August, but overall traffic is location-driven and varies a lot. In states with COVID cases rising, traffic is down. We saw a strong initial response from consumers in the early reopening phase.

Is there any color you could provide on which regions are performing closer to normal and which are slower?

Tourism areas have struggled the most, but regions like the Southwest and West, outside of tourist areas, are more stable. The Northeast was late to open, so we don't have a lot of data there yet.

One more quick one for me. What percentage of your contractual rent is currently in bankruptcy in the second quarter occupancy?

Around 4% was in bankruptcy during the second quarter.

As you look forward, how do you envision your malls and outlets changing? Will you implement more grocer anchors or reduce apparel presence?

I'm a big believer in the outlets. Outlets across Europe and Asia are doing well, and we're not overly worried. As for malls, there's a need to densify because of the number of department stores. We will evolve the product and explore adding grocery stores, but our core outlets are also strong vehicles for revenue.

And does this potentially include enhanced or increased grocery exposure in malls?

Yes, I am hopeful that we can do more business with that category.

Given the evolution of your business and potential vertical integration, how do you think about being a REIT versus not?

We study that once a year. There are limitations based on the REIT structure. We have plans to remain a REIT, especially since we pay a meaningful dividend. I believe we have a compelling opportunity to create value for our shareholders without changing our structure.

Why hasn't there been widespread government support for the retail industry?

I believe we don't need federal support, but we face challenges with local tax rates and economic assessments of retail. There's a need for policymakers to consider our contributions to job creation and industry stability. It's a combination of factors, but every jurisdiction handles retail differently and some states are restricting our operations.

How does competitive pressure from other retail landlords impact your negotiations?

I focus on our own operations and don't worry about what others are doing. We aim to maintain a healthy tenant base and focus on creating value for our shareholders.

Thank you for the call. We are finished for today. You may now disconnect.