Greetings. Welcome to the Simon Property Group Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Tom Ward, Senior Vice President, Investor Relations. Thank you, you may begin.

Thank you, Sheri. And thank you for joining us this evening. 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 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. 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 our request to limit yourself to one question. I'm pleased to introduce David Simon.

Good evening. And I'm pleased to report our third-quarter results. Third quarter funds from operation were $1.2 billion or $3.20 per share. Let me walk you through some of the highlights for this quarter. Compared to the same quarter of 2022, domestic and international operations had a very good performance this quarter, and contributed $0.17 of growth, primarily driven by higher rental income. Non-cash after-tax gains of $0.32 in the third quarter were related to the partial sale of our ownership interest in SPARC and ABG as a result of ABG selling primary shares in the quarter. Higher interest expense was a setback of $0.07 year-over-year. We had a $0.15 lower contribution from our other property investment platform compared to Q3 2022, and a $0.02 loss on the mark-to-market of publicly traded securities. FFO from our real estate business was $2.91 per share in the third quarter compared to $2.83 in the prior period last year. So far, our real estate has produced $8.55 per share for the first nine months compared to $8.40 from last year. We are pleased with the transaction SPARC completed with SHEIN during the third quarter, which demonstrated the value that we have created in that business. The transaction was significantly above our basis, and as a result, we recognized a gain in the quarter. The transaction ultimately reduced our ownership interest in SPARC from 50% to 33% as we have managed SHEIN as a partner. Given our lower ownership interest and the backend weighting profitability in the fourth quarter, we now expect a $0.05 lower FFO contribution from SPARC in the fourth quarter of this year. During the third quarter, the Taubman family exercised their put right on a portion of their interest in TRG. We exchanged 1.725 million partnership interest units for an additional 4% ownership interest. We now own 84% of TRG. Domestic property NOI increased 4.2% year-over-year for the quarter and 3.8% for the first nine months. Portfolio NOI, which includes our international properties at constant currency, grew 4.3% for the quarter and 4% for the first nine months of the year. Mall and outlet occupancy at the end of the third quarter was 95.2%, an increase of 70 basis points compared to last year. Our third quarter occupancy is higher than the fourth quarter of last year, which has not occurred historically. The mall's occupancy was 97.4%, and occupancy is above all year-end 2019 levels for all of our platforms. Average base minimum rent for malls and outlets increased 2.9% year-over-year, and the mall's was 3.6% year-over-year. Leasing momentum continues across our portfolio. We signed more than 970 leases for approximately 4.3 million square feet in the quarter. Through the first nine months of 2023, we signed more than 3,500 leases for 15 million square feet, which is expected to generate over $1 billion of revenue. We have an additional 1,100 deals in our pipeline, including renewals for another $400 million in revenue. We are seeing strong broad-based demand from the retail community, including continued strength in many categories. Reported retail sales per square foot in the third quarter was $744 for the malls and outlets combined and $676 for malls. We continue to be active in redevelopment and new development. During the quarter, we started construction on a significant redevelopment at Brea Mall, and a new upscale outlet center in Jakarta, our first Premium Outlet in Indonesia. We completed the refinancing of 11 property mortgages during the first nine months of the year for a total of $960 million at an average rate of 6%. Our balance sheet is strong with approximately $8.8 billion of liquidity. Today, we announced a dividend of $1.90 per share for the fourth quarter, which is a year-over-year increase of 5.6%. The dividend is payable on December 29th. We also purchased approximately 1.27 million shares of our common stock for $140 million. We are increasing our full-year 2023 guidance from $11.85 to $11.95, to $12.15 to $12.25 per share. This is an increase of $0.30 at the midpoint. To conclude, I'm pleased with our third-quarter results. Our business is performing well and is ahead of our plan. Tenant demand is strong. Occupancy is increasing. Base minimum rent levels are at record levels. We are very experienced at managing our business through volatile periods. As you all know, this is when we do some of our best work. We're now ready for your questions.

Our first question is from Ron Kamdem with Morgan Stanley. Please proceed.

Great. Thanks so much. Just one on some of the guideposts you've given in the past. As we're flipping the calendar to 2024, you talked about sort of 3% organic growth as achievable. Just wondering how you're thinking about that and how we should think about potential interest costs, and headwinds as debt sort of rolls? Thanks.

Sure. Look, I think we feel good about that kind of comparable NOI growth. Our debt is reasonably laddered. So yes, we'll have some interest expense headwinds, but we still think we'll end up growing our business next year with that said.

Great. Thank you. I was just going to say if I could ask a follow-up just on the $0.30 cent guidance raise. I think you talked about $0.32 cent gain and then $0.05 cents lower from the retailers. Just wondering if there are any other sort of puts and takes that we should be mindful of? Thanks.

Sure. We're expecting a reduction of $0.05 due to the SPARC-SHEIN deal. We also experienced a slight decline in our market valuation of some public securities last quarter. The real estate sector has been a major contributor to our growth, and while we still need to see how the fourth quarter unfolds, I believe that 97% of our business will exceed our initial expectations.

Thank you.

Sure.

Our next question is from Caitlin Burrows with Goldman Sachs. Please proceed.

Hi, good evening everyone. David, I know you gave some numbers on recent leasing activity which sounds really strong. I was wondering if you could give some additional context maybe to how that leasing activity compares to recent and pre-pandemic years, maybe what that means for pricing and how that could impact permanent occupancy?

Well, thank you, Caitlin. Let me try to address your questions in no particular order. Year-end occupancy will be obviously higher than it is today. I don't know if it will be our highest ever, but it'll be pretty close. Even with all the volatility in the world and the market, we still expect to see demand very strong. Frankly, we're cautious, we're waiting for the other shoe to drop, but we haven't seen it on our new deals, whether it's F&B, entertainment, high-end luxury tenants, athleisure, just to name some categories. We are still seeing a lot of demand on that front. From a pricing element, we feel comparable to how we felt in 2015, 2016, 2017, in terms of the era. I guess that was almost seven, eight years ago, but a lot has happened over those seven or eight years. We still feel like we're in a good shape where we're driving rents up, and it's okay for the retailers. They're making deals, and supply is being driven in our favor. Obviously, we cycled through a lot of poorly performing retailers due to COVID, and the ones that we are doing new deals with are excited to do business with us. So pricing is for sure going in the right direction. Occupancy is going up, and tenant demand is pretty strong across the whole spectrum. Even in certain categories, just to take luxury, yes, there are some that are being more cautious, but plenty are growing new stores. It's really retail-specific. Bricks and mortar through the pandemic to today has proven its value to retailers. I'm sure you hear that on the conference calls from retailers. So we are making a lot of good progress. Brian, do you have something on the occupancy?

I was just going to say we continue to see about 30% of our deals being new deals in the quarter. So that's consistent with the prior quarter as well. There is definitely a lot of activity on a new deal basis.

Great, sounds encouraging. Thanks.

Thank you.

Our next question is from Samir Khanal with Evercore ISI. Please proceed.

Good evening, everyone. David, could you provide color on how your malls are performing versus outlets, maybe from a regional standpoint, coastal, non-coastal, Sun Belt, just trying to see if there are any differences from a leasing standpoint? Thanks.

Sure. It's interesting. I would say we're seeing pretty good tenant sales growth on the tourism properties, whether they're outlet or malls. Most of our pure tourist properties are really the outlet centers, and we're seeing good growth in that category. Traffic is generally slightly above last year, still slightly below 2019, but obviously conversions are way up because our sales on a per square foot basis are much higher than in 2019. I would say generally whether mall or outlet, the Sun Belt area has produced pretty good results in terms of sales year-to-date. We saw a decent pickup in California, which was encouraging, but really good growth in Woodbury Common that is finally getting the tourism back to where it is. Prairie has been strong in the outlet business. There's no question people are looking for a little more value or maybe they're looking for a lot more value given the higher inflation that consumers have had to deal with. There is not a huge bifurcation between malls and outlets. It's very property-specific. The different as you know, we reported flat sales basically quarter-over-quarter, and there's no real difference between outlets and malls in that number. Luxury probably, well it didn't flatten out in the third quarter of this year for sure, but it wasn't across the board. It was retailer-specific. Jewelry, malls may have a little more exposure to jewelry, which was a category that took a little hit. Yet some of our higher-end retailers in the jewelry category performed well. So it was not a real trend. The most important thing is that the Sun Belt continues to perform well, and we are seeing the tourist centers make a nice comeback. They have been lagging a little bit longer than the others over time, and we saw a little bit of flatlining in the luxury category. Tom, Brian, anything you want to add?

No, I think you covered it, David.

Okay. Thank you.

Our next question is from Alexander Goldfarb with Piper Sandler. Please proceed.

Hey, good evening. David, as you gain leverage with the tenants, are you seeing tangible ability to get more favorable terms? One of the issues with retail over time has been the tenants, especially the larger tenants or the more anchorage or more fashion, like the hot tenants of the day, traditionally driving lease terms. Curious if you're seeing a change in that which would translate to an ability to accelerate rent growth, NOI growth, etc.

Thank you for the question, Alex. We're not that far away. But put that aside, it's not a question of leverage over the retailers. What we have going for us is a great diverse portfolio. It's the best in the industry from mills to our outlets to our full-price malls. That's unique; its size, its scale, and its quality that we’ve built up over many years. As you remember, I don't think it was last quarter, maybe it was, Tom, but when we went through the transformation of the portfolio, was it last quarter? So we've done a lot to improve the quality of the portfolio. Obviously, there's not a lot of new retail being built. There are not many retailers closing stores or going bankrupt. Most retailers today know the good malls and the good properties versus the not-so-good ones. Adding it all up, supply and demand is in our favor, and we are generating market rents. It's neither here nor there. Importantly, and I think I'd like to address this with you, and I’m sure retailers have a different point of view, the most interesting thing we have going for us is that they know we're going to be around. When we say we're going to redevelop something, we do it. When there are opportunities, we tend to get our fair share or more because of the quality and scale, but also the fact that they know we're going to get the job done. There have been a lot of changes in mall ownership over the years. Balance sheet and quality of operations is a two-way street. It's both. As we look at retailers, we assess that. They certainly assess us, and I think that gives us an advantage that we've worked very hard to achieve. If you look over the last 5, 10, 15, 20, 25 years, we’ve dramatically outpaced our peer group.

Thank you.

Thank you. No follow-up. I stumped you. I love it.

Our next question is from Jeff Spector with Bank of America. Please proceed.

Great. Thank you. Good afternoon. David, just want to tie in some of the leasing comments, the momentum you're seeing, the deals in the pipeline, the high occupancy levels to the redevelopment pipeline. How are you thinking about that pipeline and the ability to increase that? How are you going to satisfy some of the needs out there and continue to capture that market share maybe even more?

Thank you, Jeff. So look, I think we have the ability to develop and redevelop because we are not capital constrained the way some others might be. Our ability to invest in our portfolio is unmatched. We intend to do that. At the same time, Jeff, rates are up. Returns for us have to be up. You haven't seen a big change in our redevelopment, but that takes time. When we build something new or redevelop, we have to do a better job of leasing and returns to warrant that capital because we want to maintain our leadership position, but every amount of capital we spend, I have to measure against buying our stock back. We've started buying back our stock, so we want to redevelop, we want to build new, but we have a high hurdle to jump over. We expect to find the right balance between maintaining our leadership position, investing in our properties for the benefit of shareholders, communities, and retailers alike, while also being economic animals.

Our next question is from Michael Goldsmith with UBS. Please proceed.

Good evening. Thanks a lot for taking my question. David, you specifically mentioned the performance of the real estate business several times, which has been strong. At the same time, this quarter you sold off some of SPARC. How can you continue to refine some of the ancillary parts of the business so that the strength that we're seeing and that you're talking about on the core business can continue to shine through?

It's a very good question and it's less and less of our business. As you know, it's under 5% of our earnings. When we add it to our FFO, it's net income, which in many cases you don't add back depreciation. So EBITDA and our FFO contribution are much different. These have all been profitable endeavors. But we understand that this small amount of earnings in comparison to our total earnings power is volatile. People don't like the volatility. Like we did with SPARC earlier, we're going to continue to harvest our investments over time. If you ask me today, we'll monetize things over time, and we're going to buy back our stock because it's accretive. If you understand what I trade at as a multiple of FFO and you know I have investment value in these investments, but they give us very little earnings because of GAAP. If you do the math, you can see the accretion we would get on a buyback.

Our next question is from Floris van Dijkum with Compass Point. Please proceed.

Hey David. Thanks for taking my question. I was curious about TRG. I noticed the occupancy dipped a little bit. You essentially want to increase your ownership by 4% by issuing some OPUs. What price was the stock issued at, and what yield are you buying? What's the implied cap rate on the TRG business, and how should we think about that also as it relates to other potential opportunities in the market and how much flexibility was there in terms of the timing of the next sort of puts or hurdles that you have for increasing your interest in that business going forward?

Yeah, let me just talk about the exchange a little bit, and then Brian can give you an idea. The occupancy is no big deal, but I'll let Brian go through that. So Taubman has the right to put their interest, their 4% interest for the next five years, and it's basically at appraised value. It's either a negotiation or we engage appraisal firms. We decided to negotiate in good faith, made a deal, then issued the stock. The reality is Simon Property Group is trading below appraised value. One reason we bought back stock is because, I'm not a fan of issuing stock at this moment, so we'll use our capital to offset the dilution. The Taubman family said Simon Property Group stock is undervalued; I like the dividend; why not? I don't know what will happen next year. It could be the same thing. At this point, they have 16% left in TRG. We're happy to own 100% of TRG, and I think they're happy to do what they’re doing, and we'll manage that over time. Nothing can happen the rest of this year, and it’s sometime next year that this will play out. I hope that answers your question.

Nothing on that, but Floris, on your question about their occupancy, it is back 110 basis points. There were really two major spaces that they had to take out of commission that will come back online in the fourth quarter. So you will see that come back on and then some in the fourth quarter, it’s just timing.

Got it. If I may ask, was the implied cap rate at the time of the deal around six percent? Is that how we should interpret the appraised value for TRG?

This was a negotiated deal. Their view of appraised value started much higher than that, but we settled on a deal that if you go back in time to Taubman pre-COVID would have attributed Taubman's per share number in the $51 range. We ended up doing COVID at $43 a share. Their NOI today is higher than it was in 2019. Portfolios change here and there, so it's challenging to compare apples to apples. I think they would argue the appraised value is much higher than what they exchanged, but we ultimately did not go through the appraisal process.

Thanks, David.

Thank you.

Our next question is from Vince Tibone with Green Street. Please proceed.

Hi, good afternoon. Minimum base rents were about 3% year-over-year, which matches the level of contractual bumps. I'm trying to get a sense of leasing spread economics here. Does that mean leasing spreads are also in the low single-digit range, or are there other factors influencing this metric one way or another?

Just remember, this is the total portfolio, so moving this takes a lot. Leasing spreads are moment-to-moment; leases come in and go out. You can't really look at it that way. For us to move the entire portfolio gives you a view on leasing spreads. Look at the materials we provided; you'll see that some of these are driving the rent. The new leases are driving that base minimum rent up.

We typically only touch about 10% of our leases a year, Vince. You have to factor that in as well. Renewals are about 10%, but the balance is our new leases, which drive the higher average base minimum rents.

Was my statement fair that contracts still bump for base rents around 3%, or are they lower than that across the overall portfolio?

No, they're right in that range, Vince.

Is there any color you can share about renewal spreads? I know it's hard to move the overall portfolio with 10%, but this conversation suggests they're not too far from the average contractual bumps. So I'm trying to get more insight on renewal economics.

In order to have the average base minimum rent go up for 20,000 leases of 3%, you need to outperform much more on what's rolling over. We'll walk you through later, but that just can't drive that number up. So we would say that is not reality because to drive up average base minimum rent for 20,000 leases, you'd have to outperform much more than the 3%.

We can take this offline. I appreciate your time.

Thank you.

Our next question is from Greg McGinniss with Scotiabank. Please proceed.

Hey, good evening David and Brian. I'll keep this to 1.5 questions for you. Last quarter you spoke about potentially being more active with asset recycling or reallocating real estate capital. Have the challenges facing the financing market changed those expectations at all? Or how are you thinking about that today? And how are higher interest rates impacting your customers and tenants?

Higher interest rates and inflation are clearly affecting a portion of consumers out there, particularly those focused on moderate income. There's no question that's having some impact. The good news is employment and wage growth counterbalance that, but consumers are being more cautious. That did not affect a higher-income consumer significantly. We obviously monitor that every day. Our cost of capital is up, and any investment we make is measured against buying back our stock. I don't expect this to change. You'll see more of that trend continue.

Great. Thank you.

Thank you.

Our next question is from Mike Mueller with JPMorgan. Please proceed.

Yeah. Hi, just a quick one here. I know this is a hypothetical, but do you think you would have bought back stock if you didn't issue the shares to Taubman?

To the extent that we have additional liquidity events with Taubman or dealing with dilution, there's no question we're going to buy back our stock. To the extent that we don't, I don't have an answer for you yet on whether we would have done it absent the issuance or liquidity from asset sales. Our development/redevelopment pipeline must be measured against the stock buyback. I would be happy to sell assets at the right price to buy back our stock. That could be real estate or otherwise.

Was there any change to the OPI guidance that's embedded in your current FFO outlook?

Yes, we've lowered it, about $0.20 in the fourth quarter. If you take out the $0.05, we've lowered it by roughly about $0.15 for the year.

Got it. Okay, thank you.

Thank you.

Our next question is from Craig Mailman with Citigroup. Please proceed.

Thanks. It’s actually Nick Joseph here with Craig. David, you've talked a lot on the share buybacks and it sounds like in your answer to the last question, you're open to asset sales and other monetization opportunities. What are you seeing in the transaction market today in terms of those asset sales? Where are cap rates? What's the buyer pool like? Are you seeing an opportunity to crystallize some of that disconnect between the stock price and where you'd hope to sell an asset?

Look, I think domestic retail has not many transactions, but we have assets throughout the world. Domestic assets, other than maybe some of our residential and hotel stuff, there's just not a lot happening. We might see some activity, but I don’t think domestic assets will drive the activity we anticipate.

Our next question is from Linda Tsai with Jefferies. Please proceed.

Hi, thanks for taking my question. About 6% of ABR is on month-to-month leasing and then 12% expiring for 2024. How much of the month-to-month is getting converted to permanent, or should that number grow? And in terms of the 12% expiring in 2024, what's been addressed from a renewal standpoint from where you stand today?

There are a number of leases in 2023 that are basically agreed to. We're finalizing the documentation. Generally, we're more than halfway through 2024 on a negotiated, not papered basis. Brian, want to add anything?

You see a material change, Q2 to Q3. We've cleared about 2.2 million square feet out of that category. We do expect that to continue.

Thank you.

Our next question is from Haendel St. Juste with Mizuho. Please proceed.

Hey, good evening out there. Dave, I just had a quick follow-up on the consumer retail sales line of questioning from earlier. I think you noted your portfolio sales were flattish during the quarter. We've heard from other sectors, storage, apartments, which seemed like the consumer hit a bit of a wall during the third quarter in September. Did you see anything within the quarter, maybe in September? What are your expectations for retail sales for your portfolio and the consumer as we head into the holiday season next year? Thanks.

Generally, we expect to be more or less flat. We feel pretty good about the higher income consumer. Some of our value-oriented centers will play a more important role for our consumer today that they might not have otherwise played. We're cautious, flat. We don't anticipate a downturn, but not robust sales growth for the fourth quarter.

Got it. Appreciate that. If I could squeeze in a follow-up, I think you mentioned earlier as well that you started around $960 million of redevelopment at 6% yields, and you talked about a higher hurdle rate, maybe some color on perhaps what that hurdle rate today is and where the next batch of redevelopment yields could migrate to? Thank you.

It's a little dependent upon the real estate and the benefits of that real estate. For instance, when we build a new residential apartment, we look at the market. If we’re building to a 6% asset, we need it to create value. If we have an 8% asset, we can't proceed if it's at 6%. There’s no uniform answer; it's based on what we're trying to accomplish with that real estate. We have raised thresholds. We have to push higher because our cost of capital is up.

Thank you.

Thank you.

Our final question is from Juan Sanabria with BMO Capital Markets. Please proceed.

Saving the best for last. I love it. Thanks for the time. I'm just curious if you could comment on the watch list you've mentioned about the consumer, but maybe what the bad debt has been here to date with the historical levels is in your perspective as you think about 2024.

The watch list on retailers? It's relatively low. There are a couple that were there today that probably weren't there last year. Obviously, I'm not going to name those. It certainly hasn't grown much, but there are one or two retailers that we're paying close attention to. It's not a large list—just a couple. Brian, you want to add anything?

It is certainly expanded, but only by two or three names. It is at a relatively low point relative to history.

As you look at our top tenant list, it certainly does not include any from our top 10 or top 20. Our department store segment doesn't pay all that much.

Thank you.

Thank you.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Mr. Simon for closing comments.

Thank you, and we finished a little early. Enjoy the rest of the evening.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.