Greetings and welcome to the Simon Property Group Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Operator instructions: As a reminder, this conference 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, sir.

Thank you, Hector. Good evening 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. 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. 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. Our conference call this evening will be limited to one hour. For those who would like to participate in the question-and-answer session, we ask that you please respect the request to limit yourself to one question. I’m pleased to introduce David Simon.

We had a very busy and productive quarter to end a very successful year. We recorded occupancy gains, record retail sales, and demand for our space from a broad spectrum of tenants is robust, and our other platform investments had strong results. We generated nearly $4.5 billion in funds from operations in 2021, or $11.94 per share. The $4.5 billion is a record amount for our Company for the year, and coming off a difficult year of 2020, these results are a testament to our relentless focus on operations, cost structure, active portfolio management, smart investments coupled with coherent strategy. Fourth quarter funds from operations were $1.16 billion or $3.09 per share. Included in the fourth quarter results was a net loss of $0.10 per share from a loss on extinguishment of debt and a write-off of predevelopment cost, partially offset by an after-tax gain on the sale of equity interest. Our domestic operations had another excellent quarter to conclude the year. Our international operations improved in the quarter. Domestic property NOI increased 22.4% year-over-year for the quarter and 12% for the year, including our share of NOI from TRG and our international properties. Portfolio NOI increased 33.6% for the quarter and 22.3% for the year. Mall and outlet occupancy at the end of the fourth quarter was 93.4%, an increase sequentially of 60 basis points and 260 basis points year-over-year. Average base minimum rent was $53.91; add $8 to that if you included variable rent. For the year, we signed more than 4,100 leases for a total of more than 15 million square feet. This was the highest amount of leasing activity we have done over the last six years. Retail sales continued in the fourth quarter. Mall sales for the fourth quarter were up 8% compared to the fourth quarter of 2019, and up 34% year-over-year. Reported retail sales per square foot reached a record level for 2021 at $713 per foot for our mall and outlet business and $645 for the mills. These results obviously are impressive, particularly given the lack of international tourism for 2021. Occupancy costs at the end of 2021 are the lowest they’ve been in five years at 12.6% year-end. We opened two new developments in 2021, one in the U.K. and a premium outlet in South Korea. Construction continues on our tenth outlet in Japan, opening this fall, and Normandie, France opening in the spring of 2023. We completed five significant redevelopments. We added densification components with the opening of two hotels and the completion of an NHL headquarters and practice facility. Progress continues on the densification of Phipps Plaza which will open this fall. We have a significant pipeline of redevelopment projects, which will be funded from our internally generated cash flow. Let me turn to our other platform investments; they produced terrific results in 2021, namely JCPenney, SPARC, ABG, and RGG, which is Rue Gilt Groupe. JCPenney’s results were impressive. Their liquidity position is growing, now $1.6 billion. The company delevered their balance sheet and has no borrowings on their line of credit. CEO Marc Rosen strengthened his management team with a new CIO and Chief Digital Officer. RGG, including our ShopPremiumOutlets.com marketplace, continues to grow, and we expect continued investment in 2022 to drive customer acquisition and sales growth. SPARC Group will be the operating partner for Reebok in the U.S. There’s a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach. TRG, Taubman Realty Group, which we own 80%, posted great operating metrics and results, which also beat our underwriting. Reported retail sales were $942 per square foot, a 31% increase year-over-year. Occupancy also increased 210 basis points for the year. Now, turning to the balance sheet. We’ve been active in the debt markets. We amended and extended our $3.5 billion revolving credit facility with a lower pricing grid for five years. We issued $2.75 billion of senior notes and €750 million notes, completed the refinancing of 25 property mortgages for a total of $3.3 billion at an average interest rate of 3.14%. We paid more than $4 billion in debt and delevered by $1.5 billion. And with the recent January notes offering, our liquidity stands at $8 billion. Now, just to turn to dividend, we paid out $2.7 billion in cash common stock dividends last year. Today, we announced a dividend of $1.65 per share for the quarter, a year-over-year increase of 27%. This dividend is payable on March 31. Now, just to go through guidance for 2022. Our FFO guidance is $11.50 to $11.70 per share. When looking at our 2022 FFO guidance, it is important to note the following items as compared to 2021 actual results. Approximately $0.32 per share gain related to the reversal of a deferred tax liability at Klépierre, approximately $0.32 per share in gains related to our investment in Authentic Brands. These gains were partially offset by approximately $0.14 per share in debt extinguishment charges, resulting in an adjusted FFO of $11.44 per share for 2021. 2021 also included a significant increase in overage and percentage rent compared to prior years and lease settlement income of approximately $0.10 higher than historical average. Our guidance reflects the following assumptions: domestic property NOI growth of up to 2%; approximately $0.15 to $0.20 drag on FFO from additional investments in RGG and SPARC, JCPenney and the Reebok integration costs at SPARC, all to fund future growth; the impact of a continued strong U.S. dollar versus the euro and yen compared to 2021 levels; continued muted international tourism; and no significant acquisition or disposition activity. Finally, I really want to thank the entire Simon team for their tireless work that they continue to do for our retailers, shoppers, and communities every day and for bouncing back in 2021 after a very difficult 2020. Make no mistake about it, 2021 was a great year. And I think — Tom knows, but I think our FFO guidance was— which was consistent with basically the analyst community around $9.60 per share, and we reported $11.94 per share. So that’s a heck of a year. I’m very excited about our plans for 2022 and the future growth prospects of our Company, and we’re ready for any questions.

Operator instructions. Our first question comes from the line of Steve Sakwa with Evercore ISI.

Thanks for the detail or at least the additional disclosure on the guidance. I guess, just sort of tying back to the leasing comment you made about the 15 million feet being kind of a record year for the last six years, what are your expectations for leasing activity in 2022? And how might that tie into further occupancy gains? Also, I noticed that the leasing spread information that you used to provide in the supplemental wasn’t there anymore. Can you comment on pricing trends that you’re seeing? Thanks.

We’re very optimistic about 2022 leasing. A lot of new business with a lot of new tenants is the goal. We expect to increase occupancy compared to year-end 2021. Over the last couple of years with COVID, we’ve been working with our retailers, so we haven’t had the level of pricing power we’d like. We’re starting to see that strengthen and we’re still looking for win-wins between us and our clients. We feel better that we’ll continue to drive rental growth over time. As you know, we took a bet that bricks and mortar was not going to end. When we dealt with many renegotiations because of COVID, we tried to make it back on sales because we believed in our business. That’s why you’ve got to look at what we’re achieving on either percentage or overage rent, which historically we haven’t taken into account in our spreads, and one of the reasons we have done away with spreads is the lack of industry uniformity. More importantly, very few retail real estate companies are doing it. We bet on our company. It produced the results we wanted to see in 2021, frankly above our expectations. The strength of our portfolio and the demand is there, so now we just have to execute. It still takes a while to get stores open, and with all the activity, we’ll see some of that in 2022, but we expect a tremendous amount of great new stores in the 2023 time period.

Our next question comes from Caitlin Burrows with Goldman Sachs.

Maybe just a question on the guidance and the retailer contribution part. David, you mentioned the 2022 guide includes the $0.15 to $0.20 drag from additional investments this year. Could you go through what contribution the retailers had in 2021, what the guidance assumes for 2022, and any more background on what’s causing that drag? I realize it’s for future growth, but what is the impact in 2022 and what’s specifically driving it?

The drag is all about future investments. We outlined a bit on the call, but we’re in growth mode with Rue La La Gilt and ShopPremiumOutlets.com. We’re acquiring customers, marketing more, and building the technology to serve those platforms with sales and marketplace growth, but that takes investment. Second, JCPenney is building out its beauty business as well as its digital business, and we believe in the brand and will invest to create unique opportunities. Finally, the Reebok integration will reduce the operating earnings from SPARC temporarily in 2022 as it consolidates operations. The deal hasn’t closed yet; it will close at the end of the month. We have excess real estate and have to work through that. The return for 2023 on that will be much more than the investment. The payback on RGG is about 16 months; they track it closely. You need to invest for future growth. Outside of that, operationally we’re budgeting roughly similar EBITDA and NOI levels for our other platform investments.

Got it. Just one quick thing. You mentioned the Reebok integration will reduce SPARC earnings in 2022. Did you mean Q2?

I meant 2022. I’m sorry, 2022.

Our next question comes from Rich Hill with Morgan Stanley.

I want to talk about the dividend for a moment. You’ve raised it for three consecutive times. I know we’ve discussed in the past that it’s well below where you were in 2019, despite free cash flow being similar to where you were in 2019. Can you elaborate on why you didn’t increase the dividend more here? I recognize you mentioned being in growth mode and investing in businesses, but is there a trajectory to get back up to $8.30 where you were prior to COVID?

My expectation over time is that we’ll reach those prior levels. I think it’s an abundance of caution. Quarter-over-quarter the dividend is a 27% increase. Historically, we tend to be conservative in Q1. We measure taxable income and as earnings percolate we tend to raise with taxable income. Our payout ratio is low and our liquidity is strong. I would expect that we’ll continue to see dividend increases. There was a dramatic increase from 2020 to 2021, and I hope we’ll continue a very positive trend.

One more question. If I think back to this time last year, you initially guided to $0.95 to $0.975. You put up a really healthy number this year. What would give you confidence that 2022 could surprise to the upside like 2021, or do you view this year as more baked than 2021?

There’s always uncertainty. The big variable is sales because we still have some COVID-oriented leases that have not rolled over and we remain somewhat dependent on sales. That’s why we’re cautious—we can’t predict sales with certainty. When we talk to retailers, they feel good about the economy, but there’s a lot of volatility in the world. We’re building off a terrific 2021, and I’m hopeful we’ll continue to produce growth if external conditions hold together. There’s no certainty, but I feel good about where we stand.

Our next question comes from Michael Bilerman with Citi.

David, I wanted to come back to the growth from the investments you’re making and how it ties back to this year’s earnings forecast and future growth. You gave a couple of pieces, but they’re a little different. I’ll start with one. If you look at your FFO from investments on page 28 of the supplement, which includes Klépierre and others, you’re looking at 2021 at about $550 million, about $1.46. You’ve now thrown out for this coming year the $0.15 to $0.20 drag from these investments being made. I’m trying to reconcile how much is in the $11.50 to $11.70 for all of these, both retailer investments and Klépierre—what range are we thinking about gross and then netted down by $0.15 to $0.20? I’m trying to put it all together.

The NOI from investments is primarily Klépierre and includes our small interest in HPS, which is de minimis. Other platform NOI would include RGG, SPARC, JCPenney and our share of ABG. That line is there for your information. The NOI from investments is distinct from other platform operating NOI. It’s essentially an EBITDA-like number for your review. The tax effect is below that line. Again, we’ve made money in these investments and are happy to walk you through details offline.

We’ll connect offline, Michael.

I’m just trying to get clarity. On page 28 you list the FFO contribution, right? $550 million from everything, or $1.46. I’m just trying to triangulate what you earned in 2021 and how that compares to the $11.50 to $11.70 in 2022. You gave a couple of nuggets like the $0.15 to $0.20 drag but it doesn’t net out to what’s in guidance for these investments.

Our math is straightforward. We’ve made money in all these investments. Remember, FFO is after interest and other items; the NOI lines are pre-interest. Retailers have depreciation we don’t add back and so on. The team will be happy to walk you through the specifics offline.

Okay. I’ll follow up offline. David, can you speak generally—your opening comment and the press release were about unlocking value and you’ve done some through transactions. How do you think about initiatives to focus on this year and what value is sitting in this platform for Simon shareholders?

Given our level of cash investment, if you looked at it on a private equity basis, we’ve realized very strong returns on our investments and they’re continuing to grow. SPARC and RGG are good examples of platforms that can continue to lead. Ultimately, the market will determine if and when we monetize these or highlight the value; it’s embedded at multiples that external markets may value differently than today.

Right, and that’s why we ask for more disclosure to ascribe that value. This is coming from a positive place. Usually, I’m good at the math, but—

I never suggested you aren’t. I’m just having a hard time hearing you earlier. The team is happy to walk you through it so you can better understand what we’re doing.

Our next question comes from Derek Johnston with Deutsche Bank.

In 4Q 2019, the redevelopment pipeline was $1.8 billion at its peak. Now it’s $944 million in 4Q. That’s a modest increase from 3Q. Given record FFO and healthy cash flow, how are you looking at capital allocation priorities going forward? Should we expect ramping redevelopment, more transformational projects, more retailer investments, dividends, buybacks? You mentioned no acquisitions. How do you view the priorities?

Our pipeline is back to where it was in 2019, though in 2019 we finished some projects. We expect steady progress and to add to the pipeline this year, mostly in mixed-use. Priority one is investing in our existing platforms like SPARC, ABG, and RGG. We’ll continue to invest in updating the technology aspects of our shopping centers. We expect to raise the dividend over time. We’ve been quiet on acquisitions, which is fine; if something fits, reasonably priced, we’ll consider it. We’re also working through opportunities to build another platform that’s not necessarily retail—stay tuned.

Our next question comes from Alexander Goldfarb with Piper Sandler.

I’m torn because you had one question first, so I have two, but I’ll restrain myself and ask one. You made a lot of headway on your brands and added $160 million of NOI from the retailer platform last year. Does it surprise you how quickly these brands have turned around, given other retailers who’ve tried to restructure and haven’t been as successful? Second, does this give you better insight into tenant negotiations, so you have a more informed view of their true potential versus what they may be telling you?

The fast turnaround is partly because we bought many of these in bankruptcy, which gives you a cleaner slate to grow from. The management team at SPARC is excellent at integration. However, their performance has no direct relevance or special insight into our negotiation posture with other retailers. Each brand is unique and malls and market rents vary widely, so you can’t generalize that way.

Tom, will you allow me a second question, or are there many questions?

He’s got a puppy dog look toward me. Based on that, we will allow you. Thank you. Go ahead.

Big picture: there are headlines about crime and retail. From your conversations with the industry and local officials, is the view that the industry needs to beef up security and solve this, or do local authorities need to do more?

We are top notch in this area, though unfortunately we cannot avoid what’s happened; we’re all subject to this. I don’t think it’s an industry-only issue; it’s a local jurisdiction and nationwide issue. I believe the tide is turning. The safety of our consumers and retailers is priority number one. We have a very sophisticated operations center and intelligence center that deals with this. If you asked retailers, many would say we’re number one in this area, but we’re not immune. We have to address it at local and national levels and hold everyone accountable. We are all over it, but some incidents are very difficult to avoid. What you don’t hear from us, Alex, is all the ones that we forwarded—dozens and dozens of incidents—and we do an excellent job, but we have to deal with some unfortunate consequences of these acts.

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

Just hoping to ask a little bit about rents and leasing spreads again. The base rent was flat sequentially at just under $54. Do you think that’s now bottomed or stabilized and headed upwards from here? On re-leasing spreads, I think you mentioned $8 being in the number for deals signed in the fourth quarter—when will that translate into baseline rent? How are you thinking internally about the spread number you no longer disclose? What did you generate in 2021 and what’s the expectation for 2022?

We focus on NOI growth and we expect NOI growth. The $54 is the base minimum rent our portfolio averages and does not include overage or percentage rent. If you included that based on 2021 results, the $54 would be $62. That relationship is material and is why we pointed it out. Re-leasing spreads and increases in base minimum rent depend on lease expirations. When leases with overage or percent rent expire, we try to capture as much as possible in base minimum rent, though you don’t always get all of it. It should pick up over time and is a function of when big overage rent payers’ leases expire.

And so, when do you think that $8 comes into the number?

It’s a function of lease expirations as I said—some in 2022, some later. We raise rents as leases come up and percent rents are converted. Timing depends on each tenant’s expiration schedule.

Our next question comes from Floris Van Dijkum with Compass Point.

David, you mentioned NOI growth and I still think there’s a lot of value in the business. Walk me through the 2% NOI growth assumption for 2022. If you have fixed bumps in leases typically around 3%, and occupancy stays the same, shouldn’t you get around 2.5% to 3% NOI growth? Why only 2%?

The simple answer is sales. We do a sophisticated, tenant-by-tenant model. If sales levels are above this year, we will overachieve the number. We’re cautious and have increases in costs to consider—security expenses, wage inflation, janitorial, and real estate tax increases. Those pressures offset some upside. The percent overage sales number remains an unknown and we’re baking conservatism into the process.

A lot of your costs would be recaptured through CAM. You don’t have CPI adjustments; you have fixed bumps, so if costs go up 6% and your bumps are 3% you lose 3%. On specialty leasing, you have 6.8 million square feet of leases longer than a year but temporary tenants at an average rent around $17—10% of your small shop portfolio at roughly a third of your average rent. What happens when those leases go to market or become full tenants—should we expect a big rent increase?

That’s a great opportunity. Many of those are flex or specialty leases and as permanent tenants come to market, that’s an opportunity for higher income. Much of that transition will occur across 2022 and into 2023 because store build-outs can be six to nine months. We still have a transition year in 2022 as retailers who were on the sidelines in 2020 returned and only started building in 2021. Re-leasing specialty space to permanent retailers will generate more income, but it won’t all fall in 2022. 2021 and 2022 are transition years, but 2021 was an exceptional rebound.

Our next question comes from Haendel St. Juste with Mizuho.

David, I’ve got a question on OCR. You mentioned OCRs earlier, something we haven’t talked about in a while. At 12.6% year-end, that’s the lowest in five years. How important is OCR today in tenant conversations? Are tenants willing to pay or even consider some of these look-back OCRs? Any color on where OCRs might go near term, or do we ever get back to mid to upper teens?

OCR is a good indicator. We’re starting to see a bit more pricing power as demand increases and the overall business improves. Retailers in our portfolio are producing positive results. We don’t want to push them to the edge, but after taking some lumps over the last few years we’re balancing things more thoughtfully. It’s a sign we have room to go.

Follow-up: are you still doing those shorter-term leases you did during COVID with lower upfront rent but a low percentage rent threshold so you can benefit if sales improve, or is that mostly in the past?

It’s essentially in the past. There may be isolated cases where a retailer is not ready for a full-term lease in 2023, so we’ll have a short-term extension in 2022 while we finalize the full lease for 2023. That’s part of the specialty and transition leasing dynamics I discussed earlier.

Our next question comes from Vince Tibone with Green Street.

You mentioned that if tenant sales repeated 2021 levels, you would likely exceed the 2% guidance for domestic property NOI. What sales levels have you baked into current guidance? It seems like the base case might be a decline in sales compared to last year. Can you provide color?

We model tenant sales tenant by tenant. If sales are above 2021 levels and expenses were flat, we’d see more robust NOI growth. We’ve baked some conservatism into the number. When we speak with retailers, they’re planning sales up versus 2021, which is positive. The sales forecast is an art more than a science.

So is it fair to say you’re forecasting sales to be negative, or is the base case relatively flat?

Around flat, roughly in that area.

One more quick one: can you give a sense of how much percentage or overage rent was as a percentage of total lease income for the last year?

We don’t disclose that exact percentage. I would say it’s similar to what we saw when we had big international tourism in our larger international properties a few years ago. It’s come back to something like the levels we saw four to six years ago.

Hector, we have time for one more question.

Our final question comes from Mike Mueller with JP Morgan.

A quick one. Rent per square foot was lower year-over-year in malls and outlets, but it was higher in the mills. What’s driving that dynamic?

In the mills, we include all of the boxes in the calculation, whereas in the outlet mall calculation we may only include interior space. There are a few big tenants that may be driving the increase in the mills. That business has been very healthy and we’re pleased with the results there.

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. I’d like to turn the call back to Mr. David Simon for closing remarks.

Thank you. I know there are a few that are still looking to get some questions answered. Brian and Tom will be available, of course, and I am as well. Thanks for participating in the call today.

This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.