Good day, ladies and gentlemen, and welcome to Simon Property Group's Fourth Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to turn the conference over to the Senior Vice President of Investor Relations. Please go ahead.

Thank you. Apologies for the delay in getting started this evening, and thank you all for joining us. 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 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, allowing everyone the opportunity to participate. For our prepared remarks, I’m pleased to introduce David Simon.

Okay. Good evening. As we all know, 2020 was a difficult year for all who were affected by COVID-19, including our company. Even with the unprecedented operating environment, we accomplished a great deal. We earned $9.11 per diluted share and funds from operation for the full year, which includes $0.06 per share dilution from our recent equity offering in November. We generated over $2.3 billion in operating cash flow. We acquired an 80% interest in The Taubman Realty Group, made strategic investments in several widely recognized retail brands at attractive valuations, and have made significant progress in repositioning each brand and increasing their operating cash flow. We raised over $13 billion in debt and equity markets, opened two new international shopping destinations, expanded two others, completed three domestic redevelopments, abated rent for thousands of small and local businesses, regional entrepreneurs, and restaurateurs who frankly needed our help to survive. We paid $700 million in real estate taxes, which was an increase from 2019 despite losing approximately 13,500 shopping days in our domestic portfolio during the year due to restrictive governmental orders placed upon us. That's roughly 20% of the whole year, to put it in perspective, and we returned $2 billion in cash to our shareholders in dividends. These results and accomplishments are a testament to the entire team at Simon for their resilience, relentless focus on operations and cost structure, and the safety of the communities we serve. We also focused on giving back to the communities in terms of what we did from abatement and real estate tax point of view. Now, let's go to the fourth quarter and then we'll turn the page. Fourth quarter FFO was $787 million, that’s $2.17 per share, which was obviously affected by the dilution from our equity offering. I'm pleased to report that with the solid profitability and the $900 million in operating cash flow generated in the fourth quarter, our domestic and international operations in the quarter were negatively impacted by approximately a net $0.95 per diluted share, primarily due to reduced lease income, including sales-based rents and other property revenues caused by COVID-19 disruption, and $0.06 also from the international operations due to various restrictions placed upon those properties. Collection from our U.S. retail portfolio continues to improve. As of last week, we've collected 90% of our net billed rents for the second, third, and fourth quarters combined. We made significant progress in the fourth quarter addressing previously unresolved amounts with certain large tenants. We still have a handful of large tenants with whom we have yet to resolve their receivables and we are hopeful, and we anticipate resolving those in the next few weeks. You can review the collection details in our press release. Now, let me walk through the year-over-year change for the fourth quarter in the context of our portfolio NOI presentation, which you can find on Page 17. Again, to remind you, these are on a gross basis and not a company share. Last year, our NOI was $1.6 billion in the fourth quarter. This year it's $1.2 billion, a decrease of 23.9%, or approximately $380 million. Here are the components of the decline: $220 million in aggregate from domestic rent abatements and higher uncollectible rents, primarily associated with retail bankruptcies. As a reminder, we do not amortize any of the abatements even though through FASB, you could; we chose to write those off in the period granted. Hence, they affect our lease income in the period that we decided to grant the abatement. Approximately $205 million from lower minimum rents reimbursement short-term leasing, ancillary property revenues, and terminations associated with bankrupt tenants and lower sales volume due to COVID-19 disruption, with significant government restrictions on restaurants and the number of people allowed in the properties. Just as a reminder, we have significant seasonality in the fourth quarter. The card kiosk overage rent was similarly impacted by restrictions on operating our portfolio due to government mandates. We offset some of that decline with diligent cost reduction initiatives. Operating metrics in the fourth quarter were essentially flat compared to the third quarter of 2020, while we were down year-over-year. The average base minimum rent was $55.80, up 2.2% for the year. Leasing spreads declined primarily due to mix. We had some boxes last year that rolled out and are no longer in the 12-month reporting period. The good news is leasing momentum is continuing. We signed over 1,400 leases representing 6 million square feet and have a number of significant leases in our pipeline. That's a testament to the quality of our real estate. I believe we're starting to see our retailers return to what they do best, which is operate stores. We opened two new outlets, in Spain and Bangkok, of which we're proud. We have an outlet under construction in England which will open this spring. As previously mentioned, we completed several properties, including an expansion in Gotemba, Japan, adding 178,000 square feet, and another property adding 110,000 square feet. So look for those to add to our cash flow in future years. We're also densifying our centers with the opening of a multi-family residential complex and hotel. We have three hotels under construction and we completed the redevelopment of another Northshore mall and we started construction on an expansion in Naples. We are focused on continuing improvements across our worldwide portfolio. We also have a redevelopment and new development pipeline under consideration. Now, let me turn to our retail investments. I hope this puts all of this in a proper perspective. We have an outstanding track record in capital allocation, making significant returns on investment. During the year, we capitalized on buying four recognized retail brands in bankruptcy at attractive valuations. They include Forever 21, Lucky Brands, Brooks Brothers, and J.C. Penney, each of these brands present interesting repositioning opportunities. Each investment was completed at attractive valuations and we’ve made significant progress improving the positioning and operating results of the company. Let me give Forever 21 as an example. We purchased it in February pre-COVID, well before we knew the pandemic would have such an impact on 2020. Despite all of that, Forever 21 generated a positive EBITDA, pre-royalties, of approximately $75 million in 2020, and we paid $67 million for that. Our share of that is around $30 million, which provides a noteworthy return on investment in 2020. If you consider all of our retail brand investments, we have approximately $330 million remaining invested capital net of cash distributions and the appreciation of our ABG investment, which has just had a recent trade. As we mark that to market, our net investment in these activities stands at $330 million, while all of these brands will generate approximately $260 million of EBITDA in 2021. This equates to significant returns on investment. We do not add back depreciation associated with these retailer investments to our funds from operation because it's not real property, so the contribution of that from an earnings perspective will be much less than the EBITDA. Another important point regarding these retail investments is that all of these brands generate $3.5 billion in digital sales. We must look at how e-commerce brands are being valued today, and here's hoping that you conclude we've made some wise investments. Regarding Taubman, I'm delighted we completed the transaction for 80% of the Taubman Realty Group and their premier retail asset portfolio. Our teams have started working together, and I'm looking forward to the partnership. Recently, we filed a Form S-1 with the SEC to raise $300 million through a Simon-sponsored SPAC. We are currently in a quiet period regarding the proposed offering and cannot discuss it at this time. We've been active in the debt and equity capital markets, raising $13 billion in the last year. Some highlights include amending and extending our credit facility with a $6 billion facility that included a $2 billion term loan used to fund the Taubman transaction. We issued $3.5 billion of senior notes, including a recent $1.5 billion offering in January. We addressed all of our 21 unsecured maturities. We have also completed seven secured loan refinancings for $2 billion. In November, we completed a common stock issuance of 22 million shares for $1.56 billion, which funded the Taubman deal. Our net debt was flat compared to last year when excluding the properties added through the Taubman transaction and the term loan drawdown. By the end of the fourth quarter, we had liquidity of $8.2 billion including about $1 billion in cash and $6.7 billion available in our credit facility, net of $623 million in outstanding commercial paper. We paid our fourth-quarter dividend of $1.30 per share, totaling $6 for the year. In total, we returned over $2 billion in 2020, and we have paid more than $34 billion in dividends throughout our history as a public company. We've maintained our dividend while many other companies either suspended or eliminated it entirely or dramatically reduced their dividend. Now, let's move on to 2021, as I want to turn the page on 2020, which I believe we all want to do. We feel confident that we've turned the corner and expect growth in cash flow and earnings in 2021. Our guidance is $9.50 to $9.75 per share, which includes about $0.15 to $0.20 per share from our retailer investments. Keep in mind that we do not add back depreciation for those investments. This represents growth of 4.3% to 7% compared to our full year of $9.11. Our diluted share count will be approximately 3.76%, with no significant acquisition or disposition activity or additional government-mandated shutdowns of our domestic retail properties included in that guidance, even though we are currently facing shutdowns in Europe. In conclusion, we had a challenging year and don't want to repeat it, let's turn the corner. I want to thank my Simon colleagues for their continued resolve in running our business under these trying circumstances, as well as our shareholders for their support. Everyone out there, be well, and we are ready for any and all questions. However, I know people want to go home and warm up because it's cold.

Our first question comes from Steve Sakwa with Evercore.

Thanks. Good afternoon, David, or good evening.

Good, good.

I guess, first, I just wanted to talk a little bit about the leasing momentum and pipeline you discussed. Given that things are moving forward, the economy seems to be improving, and vaccines are being rolled out, what discussions are you having with retailers about unresolved leases and new leases to backfill vacancies created over the last 12 to 18 months?

Well, I think we’re expecting to grow our cash flow. Are we back to normal? Not yet, but we're working our way back. Generally, it's still a very serious negotiation on renewals. Retailers are cautious, but those eager to grow are excited. We hope to increase our occupancy in 2021, but it will take time to get back to our 2019 levels. The healthy retailers that believe in their business and plans are making deals, and with our high-quality portfolio, we will secure our fair share of opportunities.

Okay, thanks. And as a follow-up, I appreciate your comments around guidance and its tightness given the uncertainties. Is there anything else you can provide regarding same-store growth, occupancy, or lease spreads to give a better feel for the recovery of deferrals or abatements in 2021?

The abatements better not repeat, okay? So that's step one. I’d say our portfolio NOI growth will be around 4% to 5%. We've taken a further reserve, but I'm not going to provide specifics on that. We’ve done our best with what we can, and I would expect occupancy to edge up. The sales are variable, making it hard to predict a precise number. We put everything into the blender to arrive at these estimates, but we are cautiously optimistic.

That’s great. Thanks.

Sure.

Thank you. Your next question comes from the line of Rich Hill with Morgan Stanley.

Hey, good evening, David. Thanks for your time this evening. I want to spend more time on the line item where Taubman and other investments are held. Could you walk us through how to think about that line item relative to the full FFO guide for 2021 and how you think you can grow that line item after 2022 and beyond?

It flows through our equity. We show a couple of different things. We do separate out our retail NOI in our supplemental information for visibility. TRG will be included in our property NOI next year. We did not take financial implications for TRG in Q4 since it was only owned for a short time. From a GAAP standpoint, it will be bundled with other equity investments, but we’ll have TRG in our portfolio NOI and the retailer will be in that separate line item.

No, that’s precisely correct. You’ll see retailer results in the NOI from retailers in our line item.

Okay, I understand that.

Yes.

David, 2020 has been an abnormal year, but you've been positioned well to buy retailers and negotiate with them. Can you walk through lessons learned about the types of tenants you want and how to negotiate with them?

When it comes to bankruptcy, it reflects many mistakes, not just one. Generally, the retailers we acquire in bankruptcy take considerable time to negotiate. Our experience in retail real estate allows us to make efficient, cash-flow-oriented decisions. We want to work with retailers that understand this balance. The retailers that we purchased in bankruptcy often have significant issues, compressing valuations for landlords like us. We need to ensure operators honor our contracts and we intend to be firm in our negotiations.

Thanks, David.

Sure.

Your next question comes from the line of Alexander Goldfarb with Piper Sandler.

Good evening, David. Hope you're enjoying the snow.

It's pretty. It gets less pretty when it gets closer to March, let me assure you.

Yes. The skiing gets better. Two questions here. In the fourth quarter, it looks like on your rent collections you have a 90% collection rate. It seems like bankruptcy and deferrals have leveled off. You guys took about $141 million of abatements in the quarter and had a large straight-line write-off. Should we interpret this as a cleanup process at year-end?

When it came to abatements, we took it in the period when we made the deal. If we had done everything in the second quarter, we would have accounted for it there. It simply took an extended period to finalize agreements with significant accounts which settled in Q4. We aimed to end 2020 as clean as possible, but those abatements were recognized at the time the deals were made.

Should we expect lingering effects into this year based on the fourth quarter?

There are still negotiations to handle, but we addressed many issues throughout 2020 based on where we stood at that time. We used our discretion at year-end for a few cases, but completion hinges on cash coming into our accounts.

So cash will reflect in the balance and state of affairs?

Correct, you got it.

Second question, you maintain a solid balance sheet, but Moody's already downgraded you ahead of earnings while S&P is on negative watch. How do you think about your balance sheet given the debt trading wider than ratings would indicate?

The last debt deal indicates where we've seen spreads and how they have evolved. The market supports us and reflects confidence in our growth. We remain in close talks with rating agencies and they view our ability to raise capital as a testament to our balance sheet strength.

Yes. There’s no way we’re going to get downgraded; that’s not happening.

Our next question comes from the line of Derek Johnston with Deutsche Bank.

What have you learned about traffic, tenant demand, and centers with less government restrictions? Are there any insights for areas with tighter restrictions?

Florida is a strong example of increased domestic traffic and sales, despite missing international tourism. It's vibrant economically. Texas is another example, but varies widely across the state. Overall, those restrictions imposed have hindered us, but successful areas show promise.

Reflecting on the last quarter before the pandemic, redevelopment buzz was at an all-time high. How has the pipeline and redevelopment priorities changed, and what are your thoughts on prioritizing redevelopment spend?

The pipeline remains intact; we put it in a freezer during lockdown and are thawing it out now. However, we believe in mixed-use developments significantly more than before and will be looking to create more suburban-centric real estate.

Our next question comes from Michael Bilerman with Citi.

Can you provide your insights on vertical integration strategies and what you’re seeing with your retail investments?

We evaluate investments based on returns and growth potential. While we're in a REIT format, we aim to generate revenue in diverse areas consistent with our business model. We've been effective in making solid investments in the past.

How should we think about the guidance in broader terms, especially the comparisons with historical data?

The biggest point is to not replicate the abatements and bankruptcies we faced in the previous year. We lost $1 billion in portfolio revenues, but we anticipate regaining that over time. Our comp NOI might be slightly positive—we have our reserve in place.

Our next question comes from Craig Schmidt with Bank of America.

What are your ideas around redevelopment in the U.S.? What possible anchor replacements are you considering?

We’re looking to reduce the new retail additions and will focus more on restaurant and mixed-use plans with new deals in interesting suburban locations. We’re continuing discussions with a variety of potential anchors.

How is your interaction with Taubman management, especially on COVID-related and new business issues?

Interaction has been positive. Our leasing team is engaged on both COVID-related issues as well as new opportunities. We’re discussing engaging exciting operational initiatives with promising retailers.

Our next question comes from the line of Caitlin Burrows with Goldman Sachs.

Could you clarify whether the Taubman debt is included in the debt metrics you presented?

No, it is not included. The only debt included relative to Taubman will be a $2 billion term loan that we drew down before closure.

Will it be reflected more like other joint ventures going forward?

Yes, it absolutely will.

You previously shown debt NOI metrics. This quarter, it seems to be absent, but appears around seven times using the net debt and NOI. Could you clarify if it would be higher including Taubman?

This is a metric we need to evaluate more carefully, especially as many properties are non-recourse, which can overstate leverage. We should refine this information to clarify our financial position moving forward.

We will ensure clarity and show appropriate metrics, separating recourse and non-recourse debts.

Considering your leverage, what are your thoughts on property-level acquisitions?

Currently, we have no need to raise additional equity. Our balance sheet is solid, and the rating agencies seem comfortable with the capital strategy, given COVID impacts. If we find a strong opportunity, we'd be open to looking at acquisitions.

Our next question comes from the line of Juan Sanabria with BMO Capital Markets.

On sources and uses, you continue to pay a dividend but at a lower rate. Can you discuss your thoughts on dividends moving forward along with capital uses?

As per our retail investment, we've seen our cap rates trend down. We’re currently below our historic averages and optimistic for the future. Dividend policy reflects earnings as we approach recovery, and if history holds true, we should see dividends trend upward just like in the past.

Assuming we can overcome COVID and recover, we will likely see increases in earnings leading to higher dividends. Our history suggests a positive outlook.

Thanks.

Sure.

Just my follow-up on lease terms. Can you share how lease terms have changed during recent months during discussions with retailers?

Lease terms have shifted to more short-term arrangements—two to three years—but this may work in our favor, allowing us to negotiate again sooner rather than later. Many retailers are still adjusting but open to the possibility of growth.

Your next question comes from the line of Floris van Dijkum with Compass Point.

Could you discuss your mortgage profile given its shorter maturity than unsecured debt and the overall health of your mortgage partners?

Most mortgages will be straightforward. We’ve refinanced when possible and have seen no signs of concern from banks regarding mortgage renewals for many of our valuable partnerships.

Our unsecured debt benefits from the ability to issue long-term debt, helping lengthen our duration.

What are your thoughts on cap rates through the malls in your portfolio?

Cap rates should align with our valuation. As active buyers, we're setting the pace for what’s significant within our real estate portfolio. We’re the only buyer in this space and we should reflect this reality accurately.

If the market is pricing cap rates based on recent deals, can we assume that you have a valuation as the leader?

When we acquire a property, we take market trends seriously, and those transactions set benchmarks for expected cap rates. It’s vital to consider ourselves the arbiters moving forward.

I appreciate that context.

You’re welcome. You've gone over time. Thank you for the engaging questions, and let’s wrap up.

Your next question comes from Michael Bilerman with Citi.

Could you elaborate on the retailers you now own and how you're considering their sales impacts in your lease structures?

We're not seeking a share of their e-commerce sales. However, we want to ensure the store remains fundamental to their sales strategy. The interaction between store and online sales is essential, and our rigorous negotiation reflects this need. We'd like to work together to drive traffic and sales.

Thanks for clarifying.

Thank you. Happy New Year, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.